Hello, and welcome to Alkami's Second Quarter 2022 Financial Results Conference Call. My name is Andrea, and I'll be your operator for today's call [Operator Instruction]. Please note, this event is being recorded. I will now turn the call over to Steve Calk. Please go ahead.

Thank you, operator. With me on today's call are Alex Shootman, Chief Executive Officer; and Bryan Hill, Chief Financial Officer. During today's call, we may make forward-looking statements about guidance and other matters regarding our future performance. These statements are based on management's current views and expectations and are subject to various risks and uncertainties. Our actual results may be different materially. For a summary of risk factors associated with our forward-looking statements, please refer to today's press release and the section in our latest Form 10-K and 10-Q entitled Risk Factors and Forward-Looking Statements. The statements made during the call are being made as of today, and we undertake no obligation to update or revise any forward-looking statements. Also, unless otherwise stated, financial measures discussed on this call will be on a non-GAAP basis. We believe these measures are useful to investors in the understanding of our financial results. A reconciliation of comparable GAAP financial measures can be found in our earnings press release and in our quarterly filings with the SEC. I'll now turn the call over to Alex.

Thank you, Steve, and thank you all for joining us today. I am pleased to report another quarter of strong performance. In the second quarter of 2022, Alkami grew revenue 38%, once again ahead of expectations. We also exited the quarter with 13.3 million live registered users on the Alkami Platform, up 2.6 million users compared to the prior year. This past quarter, we continued to make progress on our key priorities, which we shared with you at the beginning of the year. The first 2 are to become the digital banking provider of choice for banks, which is similar to our position with credit unions; and increase our add-on sales. In the first six months of 2022, we have outperformed our expectations in both of these areas. We signed 7 new platform logos in the quarter, including 2 more banks. This brings our first half new logo wins to 6 banks and 6 credit unions. The 6 bank wins so far this year outpaced the 5 wins we had during all of 2021, and our momentum continues to build. Our qualified pipeline for the next 12 months remains at an all-time high, and almost 30% of the pipeline is with banks. In Q2, add-on sales reached an all-time high as a percent of new sales. Customers want to add products to their banking platform that allow them to offer differentiated digital experience for their customers, and they demand ease of integration into their platform and fast implementations. This has been a focus of Alkami, and our add-on sales results indicate that we are meeting the market's requirements. Our results are evidence of the continued passion our Alkamists have to help create the greatest digital bankers on the planet and serve their members and their customers with a flawless experience.…

Thanks, Alex, and good afternoon, everyone. Second quarter results were strong across all our key metrics. For the second quarter of 2022, we achieved revenue of $50.5 million, which outperformed the high end of our financial guidance by approximately $2 million and represent a growth of 38% compared to the prior year. This was driven by continued strong performance across all our primary revenue drivers, combined with Segmint's revenue contribution of just $2 million -- just over $2 million, which was in line with our expectations. We implemented 8 new logos in the quarter, bringing our digital platform client count to 182 compared to 161 in the prior year. We now have 39 new logos in implementation, representing 1.4 million digital users. And during the remainder of 2022, we expect to implement 24 financial institutions from our backlog that represents approximately 900,000 digital users, an expected acceleration from the front half of 2022. We exited the quarter with 13.3 million registered users live on our digital banking platform, up 2.6 million or 24% compared to last year and up 520,000 digital users sequentially. Over the last 12 months, digital user growth continues to be driven by 2 areas. First, we implemented 28 financial institutions supporting 1.2 million digital users. And second, our existing clients have increased their digital user adoption by 1.4 million users or 11% growth. Offsetting our user growth was churn of 61,000 digital users. We continue to maintain a very high gross retention rate at 99%, measured in terms of ARR and digital users retained over the last 12 months. We ended the quarter with an RPU of $15.33, which is 14% higher than last year. This compares to our blended market opportunity of approximately $57 per user per year, which includes the Segmint revenue opportunity. The…

[Operator Instructions] And our first question will come from Bob Napoli of William Blair.

Nice solid and stable results. I appreciate that. Just on, I guess, the new modern platform, if you would, what material differences are there in the new platform versus the prior platform?

Are you speaking to the mobile platform question?

Yes.

So historically, we built our mobile application both to an iOS operating system and an Android operating system. And that was great. But as customers became more and more sophisticated with their needs for the mobile application, it became difficult to keep those two platforms in sync and continue to roll out features at the pace that the market wanted. So we took a decision to rebuild the platform on a technology called Flutter, which comes from Google. And that platform allows us to have one code that's running across both Android and iOS. So now basically, we're able to make one mobile application across both of those platforms. The other thing that it allows is it creates more capability for the customers to customize the user interface, the user experience, if you will, for their own customers. So it allows them to tailor it more for their branding, if you will. And then the other thing that it does, it's probably too much detail for you, but it allows us to create a more friendly software development kit that allows our customers, once again, to have more flexibility. So in summary, we now basically write once to one platform. It allows us to deploy technology more quickly, and it's giving our customers both a bigger feature set and more ability to tailor the platform to the experience that they want to deliver for their members.

And then, Bryan, a follow-up on the gross margin on your target of 200 to 300 basis points year-over-year. I mean you're obviously -- for the reasons you mentioned, you're kind of flat year-over-year on gross margin. Do you still expect to be able to -- as we end the year to be within your target range for gross margin expansion? And are you on track, I guess, and how confident are you in your long-term total operating model, if you would?

Bob, on the gross margin front, as it relates to achieving 60% to 65% gross margin on our target operating model, we're very confident in that. Most of that is going to come through revenue scale. As we've talked about in the past, when we renew clients, we have a gross margin expansion that occurs at a unit economic level. So that's another area for gross margin improvement. And then we're also investing in the platform that provides efficiency as it relates to hosting expense, as it relates to our ability to more efficiently implement clients. So those are other areas of gross margin expansion in the future. As it relates to 2022, the guide of 200 to 300 basis points a year, that's an average over a longer period of time for the reasons that I described in the call, and I've spoken to in the past as it relates to implementation investments to support our large backlog as well as the MK Decision acquisition being a headwind to gross margin in 2022, we're not going to achieve the 200 to 300 basis points expansion this year. We expect to return back to that level of expansion in 2023. But in 2022, that will be compressed somewhat.

I'd just sneak in one last one, if you would. The add-on products, you seem to have a lot of momentum with, which products are most attractive or driving that -- the growth of add-on, which are most...

Bob, we're seeing great adoption across almost each of our product family categories. We have eight product family categories, and we're seeing significant adoption in six of those. And then the other -- and I'll mention those here momentarily. And then the other two product family categories, those typically include products on the initial MSA. For example, our SDK kits and extensibility, that's typically an MSA product, the original MSA. And our card management solutions are original MSA products. So where we're seeing a lot of traction in our top 3 from a cross-sell perspective is our money movement product family category, which includes our crypto product, instant account verification and bill pay products. We're also seeing a lot of traction in our client service product family group, which includes chat and conversational AI products. And then fraud security is -- I would say, rounds out the top 3, which includes account takeover and, of course, ACH Alert. But those are the areas where we're seeing the greatest adoption so far in 2022.

The next question comes from Mayank Tandon of Needham.

I wanted to just ask you about these new wins. Maybe Alex, could you give us a sense of the size and scope of the banks that you're winning? Just want to get a better feel for the opportunity set there versus the credit unions that you're winning as well?

Yes, if you look at the bank market at the very top of the market are some very large institutions that serve a very complex commercial banking capabilities of large multinationals. That is not our target market. And so if you look at banks in terms of the target market, we are winning banks that serve SMB customers and mid-market customers. And that makes up -- in terms of total number of institutions, we can target probably 99% of the institutions in the United States.

And then maybe, Alex or Bryan, just want to get a sense of with rates moving up and clearly banks seeing better profitability, how much of that is playing into their ability to spend maybe more aggressively on digital transformation? Or is it just more of the same? I wanted to get a sense again of how much of that incremental impact are you benefiting from near term and then over the medium term potentially?

Well, I'll speak to -- I just spoke to a CEO of a community bank on Friday afternoon, right? And this is a decent size regional community bank. And what he told me was that they've been having conversations about continuing to invest in digital and creating a better digital experience for their commercial customers. And then really I know you've heard this 100 times, but during COVID, their customers went from, hey, I'm pretty interested to, I have to do it this way. And then that convinces him and the Board that they really needed to upgrade the experience that they were delivering to their commercial customers. So I think that's a microcosm of what we're seeing that once again, digital transformation has been a buzzword, but this has become a mandatory innovation for these institutions. And at the Board level, they're all talking about the need to provide the type of retail experience that their commercial customers have gotten used to in either retail banking or entertainment or shopping, and they've got to provide it in their commercial offerings or they're going to start to lose those customers.

Next question comes from Raquel Betesh of JPMorgan.

Congrats on a great quarter. I'm curious if you guys can speak a little bit to your end market and the demand environment? And specifically, if you have any insight into forward indicators like RFPs?

I just lost the last couple of words. I heard the question about insight into the end market. And then I think there is a question about RFPs maybe.

Yes, specifically if you have any insight to forward indicators like RFPs?

I still missed again, but maybe if the question is on like the demand environment, I mean, that's certainly -- I've learned one thing in the last few years is I can't predict what the economy is going to do. But we have not seen any softness in demand over the last couple of quarters, even though the macro environment, as you know, is super volatile. I don't know if you want add anything to that, Bryan.

No. I mean, Alex mentioned this in the last question. But really to maintain competitiveness in an up or down market, this is a mandatory innovation. That's how our clients view it, that's how we view it. And expanding the platform and offering even a greater digital banking experience is a must. And as a result of that, what we're seeing is a sales pipeline that's really as strong as it's been in the company's history. And that's coming off of a couple of quarters of pretty good new sales activity, which generally means you have to rebuild your pipeline, but we maintain a very strong pipeline. Our new sales in the first half of 2022 is significantly higher than the same 6 months of 2021. So that gives us a lot of encouragement. We're seeing a lot of adoption in add-on sales that's increasing the average number of products that our clients subscribe from us today. So all of these are indicators to us that the end market is still strong and an expectation that even moving into a tougher economic environment even creates a greater need for our solutions.

And maybe the one thing I would add just, when you mentioned RFPs, we're fortunate that we're a fairly well-known entity on the retail side of the industry and in credit unions. And so we do tend to get invited into those opportunities. What we have seen is that -- and as we've had some continued bank wins and as the markets become aware of the investments that we've made in the software specifically for banks that have commercial customers, we are now getting invited into more RFP opportunities in banks than we were maybe a couple of years ago.

And our final question comes from Pat Walravens of JMP Securities.

This is Joe on for Pat. Just related -- given you have very long contracts in this end market, do you have any sort of inflationary price escalators that are built into those contracts?

Our contracts are structured more for increasing the minimum commitment throughout the term of the contract. Our contracts on average are 70 months. And so each year, there will be a step-up in the minimum commitment from our clients. Now that generally comes at a lower cost per user for each incremental user for a client. So how we're increasing the contract value over time or in any one year is a step-up in minimums.

So there is no component that's increasing ARPU along with your CPI or anything like that built in?

Not generally. We do have some contracts that possess that. But the normal contract is more of a step-up in the minimum contractual users across each product.

So the ARPU growth in the quarter is not a result of pushing through inflationary price increases.

And I was thinking more just over a longer period of time, more on the go forward. Just curious how they're structured, but thank you for that. And then I guess you called out 30%...

Just one more comment on this. What we are seeing is we're seeing price increases at the time of renewal. So the five contracts that we've renewed in 2022, we've been able to increase the ARR on those contracts 10%. They represent about $4 million of ARR. About two thirds of that 10% comes from cross-sell of additional product, and the remaining 1/3 is a price increase that occurred at the point of renewal.

And then, I guess, my next question is just, of the 8 product categories or families in your portfolio, where is the most kind of ARPU to go out and unlock on the road map?

We're not very penetrated in any of our product family category. So there is an opportunity for significant cross-sell into our base. We're less than 30% penetrated into our base. The products that we're seeing higher ARPU additions really come through in some of the money movement products that I mentioned earlier. Like our crypto product, for example, has a fairly high revenue per user opportunity. And then also in the client services area, our chat product and our conversational AI product has a very high ARPU opportunity that comes with it. And then even in our security and fraud products as it relates to ACH Alert, that has a very high ARPU along -- or associated with it. So really, it's those individual products within each product family group has some significant opportunities. And the six areas that I mentioned in the earlier question, that's really what's driving the cross-sell in 2022. And that's ultimately resulting in the success in the back half of 2021 and the success that we had early in 2022 is driving the 8% organic ARPU expansion so far in 2022.

Our next question comes from Andrew Schmidt of Citi.

Apologies if this is redundant, but just wondering if you could talk about just your discussions with banks in the pipeline. Obviously, some competing factors with NIMs going up versus kind of some increased uncertainty. But just if you take your temperature on just the appetite for digital banking transformation, that would be great.

So far, we have not seen any diminished appetite for investing in digital banking transformation. These folks that run these banks are really smart. They understand what's going on. And they truly have got their head wrapped around the fact that the digital channel is becoming the primary channel. And just as they've looked at their investment portfolio in terms of new bricks and mortar, they're looking at this in the same fashion and they're putting it as a priority. So I mean, could it drop off sometime in the future? I'm not Nostradamus, but so far, we have just not seen any drop in demand for having -- I mean another CEO that I talked to two weeks ago, with he and his entire senior team, and the discussion was we have to have the best-in-class digital experience for our customers or we're not going to be competitive. So there's just a pretty broad-based conviction in terms of the need to invest in a really good digital experience. We have not seen a drop in demand.

Very clear. And then…

Where it's gone from, if you think about it a couple of years ago, you had kind of -- you had early adopters, you had people that understood before others what needed to happen. We are in the bell curve of the market right now. The broad market understands what needs to happen. And they really do know that this is not a mobile application, this is the front door to their bank.

No, very clear. That's very constructive. I appreciate that. And then it's a little bit too early to talk about 2023. But given the long implementation pipelines and the ARR growth here, it seems pretty constructive setting up in next year, obviously, some blocking and tackling into next year. But what's the right way to think about visibility growth into next year? I know it's a little bit early, but if you can give us a framework, what's locked in, what's left to go after, things like that, that would be helpful.

Andrew, I mentioned a couple of key metrics in my prepared comments. The first one is the exit ARR of $225 million to $228 million. That's, at the midpoint, 34%. Total ARR growth in organic growth of 28%. So that should provide you some visibility into what we're thinking in the first half of 2023. And we're not providing guidance on this call because it is early, but we did want to provide a perspective of where we expect to exit the year. Now we sit in a very -- in a good place. I mean it's a very predictable revenue model with 95% of our revenue subscription, with $38 million of ARR in backlog. So it's those two items that are key in providing us the confidence and visibility to provide an exit run rate or ARR number that can then provide investors and analysts the ability to have pretty good precision as they're forecasting our first and second quarter 2023.

And then just if I could sneak one more in just on the competition. Any changes when you're going up for new deals either on a smaller credit union side or anything like that across the spectrum to call out, or has it been relatively stable over the past six to 12 months? Just curious if there's any changes you're seeing in the market.

On the credit union side, I'll give you a high level, then I'll let Bryan answer. No real change on the credit union side. I think -- self-servingly, I think we've become a little bit more competitive in the bank market. And so our win rates have come up some in the bank market. Bryan, I'll let you go into any more detail.

Yes, I mean in terms of the marketplace and our pricing and the type of financial institutions that we're seeing in our pipeline and what we're actually selling, the trend continues to be, we're selling more product on the initial order. We're selling at higher RPU on the initial order. The contractual term is continuing to benefit our revenue model and being extremely long-term contracts. We're still averaging 70 months. And then when you introduce banks into the mix, banks tend to have -- because of the business, banking component tend to have a much higher RPU. So where if you look at our backlog today of new logos that represent 1.4 million digital users, well, the credit union average is around $20 of RPU. But the banks that are in our implementation backlog are closer to $27, just under $30 of RPU. So that's a nice advantage that we're seeing as we begin to have more success penetrating the banks out of the market. In terms of the size of the financial institutions, we cover a pretty broad spectrum of the market. The average bank in terms of assets that we're adding is around $4 billion to $5 billion. But we've added a bank that had $35 billion in assets. We've added banks that have had high teens in turn and billions of assets under management. So we're really seeing that opening up the banks out of the market is providing even a broader size financial institution that we serve.

Our last question comes from Josh Beck of KeyBanc.

Maybe just following along the line of banks. Obviously, that's been a success story in terms of them coming into the funnel, obviously, the ARPU elements of it. Just when we look at this year, it seems pretty even, at least in the first half, between banks and credit unions. Obviously, that's a step-up from prior years. So as we think about future years, is there more likely to be that balance between banks and credit unions could eventually tip the gross adds, the new customers are becoming more so banks? Just curious how we should frame that up.

Look, long term, so this is not next quarter or next year, if you look at the market, the market is half credit unions and half banks. And so if we're competitive in banks and if we're known in the market, so if we're doing our jobs well there, then our expectation long term would be that we have a balanced new client win portfolio between banks and credit unions. Obviously, we've got a pretty large installed base with credit unions. So it would be quite a while before the entire installed base, if ever, was balanced between the two. So the fact that midyear, we're balanced between the two, that is great, that's fantastic. But that balance between the two in terms of winning new logos is something that we expect in the longer term, not something that we would expect to happen in the next couple of quarters.

Josh, I mean, we expect to continue to win 30 to 40 new logos that are credit unions a year. Last year, we had five banks already. Through the first six months of this year, we have six banks. We started the year off with a goal of somewhere between 10 to 15 banks. It looks like we'll probably land somewhere in the range of that goal for 2022. And then as Alex mentioned, we'll continue -- we expect to continue to create awareness in the marketplace, continue to gain momentum in banks. It's still -- banks represent 30% of our sales pipeline today. And we will reach a point four, five years out from today, where we'll each year originate an equal number of banks as we do credit unions. We think the market can absorb that. We think that there are other very good players in the space that they will win their fair share of business as well. But we think we're on a trajectory where we can achieve that over the next multiyear period of three to five years.

And just looking at Segmint, I think the growth in ARR ending the year was 30% to 50%. Obviously, that would be accretive to the high 20s organic growth that you discussed. So when we think about synergies and sustainability of the Segmint growth, how should we frame that up?

So the Segmint ARR that you're speaking to, the 30% to 50% growth, that's contracted ARR. So that would include the implementation backlog for Segmint. We've only owned the asset since April. And what we don't fully have our arms around at this point is the speed at which we can go from executed order to implemented client. And so that's why we provided that guidance in terms of contracted ARR. But we expect Segmint to be a significant contributor to RPU expansion, much like it was this quarter. And we expect Segmint and other tuck-in acquisitions to provide an ability for us to continue to cross-sell and have organic revenue growth in the future and sustain our 25%-plus organic revenue growth rate. And Segmint is -- we're seeing a lot of progress. I mean post quarter-end, we had our first cross-sell of an existing Alkami client where we cross-sold Segmint into that client, which is very encouraging this quickly after the acquisition to see that our client sales team is finding opportunities to cross-sell into our base.

This concludes our question-and-answer session. The conference has now also concluded. Thank you for attending today's presentation, and you may now disconnect.