Good afternoon, ladies and gentlemen, and welcome to the Alkami Technology First Quarter 2024 Financial Results Conference Call. [Operator Instructions] I'd like to turn the conference to Steve Calk, Vice President of Investor Relations. Steve, 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 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 materially different. For a summary of risk factors associated with our forward-looking statements, please refer to today's press release and the sections in our latest 10-K entitled Risk Factors and Forward-Looking Statements. Statements made during the call are being made as of today, and we undertake no obligation to update or revise these 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 the comparable GAAP financial measures can be found in our earnings press release and in our filings with the SEC. I'd now like to 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 first quarter of 2024, we grew revenue 27% and delivered $3.8 million in adjusted EBITDA, both above the high end of our expectations. We ended Q1 with 18.1 million live registered users on the Alkami platform, up 3 million compared to Q1 2023. Our results are a combination of being in a vibrant market and continuing to execute on our priorities. Since our last earnings call, I've had 32 face-to-face client meetings in 4 different regions of the country and common themes emerged across those conversations. First, we are in a growth market. Second, our clients are seeing the benefits from our platform investments. Third, there is a large opportunity for our data platform to drive AI. And fourth, multiple opportunities exist long term for Alkami. Today, the average U.S. adult has 1.9 financial accounts, which represents almost 480 million user accounts. That's up from 1.65 accounts per adult or 370 million users at the time of our IPO. User accounts are growing, and our clients have a growth mindset. Every client I met with has a growth strategy. Some are growing geographically, some are establishing virtual beachheads. Others are extending into commercial banking or building certain types of loan specialties, but they are all thinking about growing, not playing defense. A lot gets written about the contraction of regional and community financial institutions but the reality is the number of FIs has contracted a consistent 3% per year over 30 years, which means there will still be over 6,000 institutions a decade from now. Our clients tend to be at the top of food chain and are the ones consolidating. When a merger happens, they don't…

Thank you, Alex, and good afternoon, everyone. During the first quarter of 2024, we continue to deliver strong financial results and continue to see healthy demand in our sales pipeline for both new clients and for additional products among our existing clients. For the first quarter of 2024, we achieved total revenue of $76.1 million, which represents year-over-year growth of 27%. Subscription revenue also grew 27% and represented approximately 96% of total revenue. We increased ARR by 26% and exited the quarter at $303 million. We currently have approximately $52 million of ARR in backlog implementation the majority of which will occur over the next 12 months. We implemented 8 new clients in the quarter, bringing our digital banking platform client count to 244. We now have 42 new clients in our implementation backlog representing 1.3 million digital users. We exited the quarter with 18.1 million registered users live on our digital banking platform, 600,000 digital users higher than year-end 2023 and up 3 million or 20% compared to last year. Over the last 12 months, we implemented 38 financial institutions supporting 1.5 million digital users. In addition, our existing clients increased their digital user adoption by 1.5 million users. In terms of churn, we did not experience any digital banking client churn over the last 12 months, and we expect to lose 3 clients in 2024, representing less than 1% of ARR. This compares to our expected long-term average churn of 2% to 3%. We ended the quarter with an RPU of $16.71, which is 5% higher than last year, driven by add-on sales success and the addition of new clients who tend to onboard with a higher average RPU. We continue to see healthy demand across our product portfolio. Our first quarter of 2024 new sales performance outpaced…

[Operator Instructions] Your first question comes from the line of Patrick Walravens from Citizens JMP.

Great. So Alex, a question for you. Thank you so much for the introduction and the tone of business and what's driving it. That was super helpful. One thing -- one comment you made kind of later in your remarks was about the investments that you've made to open up the platform. Can you talk about that a little bit more? What are they? And what's driving that?

Yes. It's 2 things, Pat. Today, we have APIs into the platform, and we have a software development center or an SDK. And the feedback that we had gotten from our customers is they like being able to access the platform both through APIs and through the SDK. But they found that the way that we supported the SDK was too fragmented for them across the company and the process by which they would provision the SDK was challenging. And so we rebuilt the entire provisioning process of the SDK, and we built a developer site as well that's got the consolidation of the -- all of the ways that they would find code snippets, get access to help and support with respect to the SDK. And so that's an area that we've worked on. We -- longer term, from an API perspective, there's things that we're doing in the platform that will make the entire platform more API-centric. So rather than just having a set of APIs that you can use, the APIs would allow for more access into the application to allow customers to do various different things that they'd like to do. So think of the second piece is a final transformation of Alkami into an API-centric platform.

Right. Okay. Great. And then, Bryan, can I ask you, so 600,000 net adds in Q1, how should we think about that throughout the rest of the year?

Yes. You should think about user growth in 2024 to be reflective of the same user growth that we had in 2023 in terms of the quarters. Across Q2, Q3 and Q4, it will be a little bit lower in the second quarter compared to Q3 and Q4 and then Q3 and Q4 would be somewhat even, but for the full year, we'll have user growth in terms of implementations comparable to what we had in 2023.

Your next question comes from the line of Mayank Tandon from Needham.

Alex and Bryan, congrats on the quarter. So Alex, I think the slide on Page 5 is very helpful. I just wanted to dive into that a little bit more. So as we look at that base of 210 million users with the legacy providers. How fast would you expect to capture that market? And realistically, do you have a number in your mind that you could share with us in terms of how much you think you can penetrate the portfolio that you have today with your products?

Yes. So the way that we think about our growth algorithm is we expect to grow users between 18% and 20% a year and user growth is the result of 50% coming from implementation, so new client sales and the remaining 50% coming from our existing base. Our existing base today is growing about 10%. And then the other side of our growth algorithm is ARPU expansion. And ARPU expansion is occurring from us bringing on new clients with more products and a richer RPU as well as cross-selling into our base additional products because today, our clients only possess about 13 products on average when we 32 products to sell them. So you should expect between 5% and 7% ARPU expansion from quarter-to-quarter.

Great. And then as a quick follow-up, I wanted to just get an update on your success in the bank space. I think in the past, you've shared some metrics around your pipeline, how much of that breaks down between banks versus credit unions. So if you could give us an update, your progression there? And if that's resulted in any kind of change to your go-to-market strategy drive that success?

No. So our sales force -- the way that we're arranged go-to-market is our sales reps are really pretty strong and adept at selling both credit union as well into a bank client. So at this point, our go-to-market rhythm, there's no change in that. But just a step back as it relates to banks, there's really 4 areas that we're focused on. The first area is we need to ensure that we have strong product market fit. And as we mentioned on our last quarter call, we had a third party come in evaluate our product against the market. And the view was that we covered 92% of the businesses in the United States that are utilizing a treasury management platform. So we have pretty strong product market fit. The second area is around core integrations. And today, we have 16 clients in backlog that are banks. We have 15 that are live and they represent about 7 core integrations. So by the end of the year, in 2024, we're going to implement in total, 13 banks, and we'll have multiple core integrations with each core that we integrate into. So that's a proof point for us as well. Third, we need market awareness. We need greater brand recognition as it relates to commercial banking in the space. And if you look back over the last 12 months, we've competed in about 70 commercial bank RFPs, and our win rate is in, call it, the mid-teens as it relates. So we're making progress and being out in the number of deals that are being presented in the market. Now it's a push to use core integrations and product market fit to drive a higher win rate. And then finally, it's about having additional resources internally at Alkami from a product, from a client success, from an implementation perspective that truly move well and interact well with commercial banks because we have a legacy a history of credit unions. And we have a couple of new hires that we'll be announcing over the next 30 to 45 days for individuals who have accept positions that will help when we announce those roles, it will evidence our commitment and investment in the space. So we feel like we're making a lot of progress on those 4 foundational areas that will ultimately result in our goal of having about 50% of the new clients we win each year coming from banks by 2026.

Your next question comes from the line of Jacob Stephan from Lake Street.

Congrats on the quarter. Maybe just touching on kind of that win rate that you referenced. I think last quarter -- last call, you had mentioned that kind of came down as a result taking more shots on goal. But maybe you could just kind of give us a sense for how that's been trending kind of since the last call here, I guess, into 2024?

Yes. I mean the way that we evaluate win rates is we evaluate it over a longer continuum of time of any 1 quarter. And we've been consistently on a trailing 12-month basis. being in the mid-teens, kind of executing in the mid-teens level as it relates to banks compared credit unions where we're in more like the mid-30s in terms of win rates on a historical basis, looking at 12-month periods of time. We feel that, again, by 2026, we can push our win rate to be more commensurate with the credit union space with success in the 4 areas that I just outlined in my last question.

Okay. Got it. And I guess maybe the 1.4x sales efficiency kind of ARR divided by sales and marketing expenditures. Obviously, that's nice, that's high, but maybe you could just kind of touch on a question, why won't you spend more if you kind of getting that at such high efficiency rate?

Great thing about our market is that the customers are very well known, and there's a lot of data about the customers. If you think markets where you have to spend a lot of money on sales and marketing, it's either because you're trying to stimulate the market. You've got a product that's a new product or a new concept and you have to stimulate demand or the market is very, very large, and you have to be found by people that have a need. The great thing for us is we don't have to do either one of those things in terms of the regional and community financial institution market. Digital banking is a known solution. People have it. It's a budgeted line item, so you're not having to spend sales and marketing dollars to stimulate demand. And then the great thing about this market is because it's regulated, there's a tremendous amount of information that's published about all of the financial institutions. What that results in is our ability to create territories that are pretty precise in terms of when people are going to be coming up on their contract, and it allows us to spend marketing dollars that is -- that's very precise. So for us to all of a sudden double our sales and marketing expense, we don't think would be prudent because of the nature of the market itself. And so the nature market allows us to maintain the spend envelope that we have on sales and marketing and still drive the business performance that we have.

Yes. And I'll make a couple of more comments to what Alex just -- how he just answered. We are investing more in sales and marketing. I mean we're growing sales and marketing just at or slightly below our revenue growth rate. And we expect to maintain between 14% and 15% of revenue for sales and marketing. But what that really does for us is that allows us to then take the sales and marketing dollars we otherwise would have invested in and allocate those to our platform. And that really provides more value for the end market. It provides more value for our client base versus spending more, investing more heavily in sales and marketing. And that's the way the companies always approach go-to-market is best platform wins, and by having a very efficient sales and marketing ratio and result allows us to invest more in our platform.

Your next question comes from the line of Alexei Gogolev from JPMorgan.

This is Elyse Kanner on for Alexei Gogolev. So my first question was regarding gross margins. You kind of talked about how it was largely driven by this focus on containerization and reducing hosting costs. I was wondering what you see is the exit rate for the year and kind of the cadence of margin expansion we can expect here? And if there's any upside to the 2026 target that you mentioned you'd likely exceed?

Yes. So we're still committed to the 65% gross margin for 2026. So we're not making a move from that and the way that we have described our progression to 65% is on average gross margin expansion of 200 basis points per year. It just so happens in Q1. We did far better than that. And I would expect in 2024, we're going to do a bit better than 200 basis points per year. And the factors that are going to drive that will be continued success and becoming more efficient with our hosting cost per user as well a lot of the activities and initiatives we have around implementation and other post-sale operations, but more efficiency in those areas.

And I would just add from a commentary perspective, we're really pleased with the results that we're getting from the investment in the platform. That's not just delivering improved gross margin, which is important, but it's delivering increased customer satisfaction and attractiveness to Alkami. And we're really pleased with what the services team is doing in terms of how they're onboarding customers and how they're thinking about the roles and responsibilities when they're onboarding customers where they've just turned out to be doing some things that allow us to scale as we continue to onboard, we think more customers than anybody else. So Alkami is really pleased with what the implementation teams are doing and what the platform teams are doing in terms of both business results and customer satisfaction.

Got it. And then as a quick follow-up, you were talking about how a lot of your RPU expansion comes from new customers adopting more products. Do you have any breakdown between how banks versus credit unions are adopting new products if there are trends with maybe one adopting more than the other?

No. It's about the same, but when a couple of products are included in just about... .

[indiscernible] difference between banks and credit unions.

Yes. But the product adoption is about the same, except for a couple of the different products that banks will always take. In general, about 85% of the commercial banks that we sell, will take our ACH Alert product, which is a high RPU product. And then they always take our commercial banking product, which is also a high RPU product. So I'll give you some ideas of what I mean by higher RPU and how those products can drive a higher RPU. When you look at our backlog today, we have 42 clients in backlog. Of those 27 are banks and 17 -- 15 of those are of those are -- 27 of those are credit unions and 15 of those are banks. The credit unions had an average RPU of $22 and the banks have an average RPU of $27. So our overall backlog is about $24 and banks are driving up the higher average. Compare that to our company average of $16.71. So as new logos are coming on, they're coming on at a much higher RPU than the existing base today.

And the great news for us is that higher RPU for both credit unions and banks coming on board. Certainly, a contribution to that is we've got a really excellent sales team. But also the surface area of what people want to do with digital banking has grown. And so there's a demand pull in terms of number products that people are purchasing today versus, call it, 5 or 6 years ago.

Your next question comes from the line of Jeff Van Rhee from Craig-Hallum.

A couple on the product side. First, I guess, as banks are really struggling and credit unions, too -- and focused on asset gathering, I want to correlate that into the analytics. I mean, since you bought segment, can you just talk about whether and how it's met or not met your expectations. Just curious, your overall thoughts on analytics as it relates to the segment. And then also in terms of recent deals, maybe I missed it, but any update in terms of attach rates to deals?

Yes. Well, first of all, let me just give you a commentary on the attracting assets because the really interesting thing that's happening with our customers is they're trying to navigate 2 different competing pressures. One is they want to offer very convenient items like digital account opening, right? So really convenient capabilities for folks like digital account opening. But the more that the more that they enable digital account opening, the more that they can suffer from fraud attacks. Several of the customers that I talked to had anywhere upwards of 70% to 75% of the accounts that were open with digital account opening were fraudulent accounts. So I would just say, overall, and then I'll get to the discussion on analytics. But overall, we see this really interesting intersection between what customers want to do is have a great digital account open experience. They want to have very easy and intuitive money movement. But the more that they press on those than the more that they're challenged by fraud. So that's a great place for somebody like an Alkami to be both a strategic provider and a product provider to help a customer navigate. I mentioned in my opening comments that we're seeing -- we're seeing demand in the Alkami data platform, which is what is able to drive analytics. And so that product is something that's creating great business results for us. And Bryan, I know we don't break it out separately, but you may have some commentary just in terms of that product line.

Yes. In terms of the contribution, both segment and ACH Alerts, so 2 of our acquisitions, they contribute a little over 20% our new sales bookings, both in Q1 of this year as well as full year of 2023. So that's been pretty consistent for the last 15 to 18 months. And each of those contributing about 10% each. So it's not really weighted more one towards the other.

Very helpful. And then I guess just when you do see the existing base come back for up-sells or additional product, and you think about the next year or 2, it's a variation of the last question. But curious, where you see the greatest white space -- the greatest opportunity to upsell value-wise into your existing base by product?

Jeff, right now, on average, our clients are taking 13 of our products, and we have 32 products that we offer. So the white space is significant. And it depends on the financial institution strategy of what they're trying to accomplish on the areas that they'll choose to invest in. We called out in our prepared comments a few areas that we saw greater adoption in the first quarter of 2024 and those were around marketing and data insights, which that's predominantly segment. Also in the fraud area, because fraud is top for financial institutions, and that covers ACH Alert, and account takeover in some of those type products. And then other areas where we saw some nice adoption was within our customer service area. So that's where AI starts to come into play through chats and other types of products and then finally, financial wellness, which is around credit scoring and those types of subproducts.

One thing I would -- so if you translate that to customer conversation, it's always about can I get transactional data that I can either analyze with your models or drive into the data stack that I have internally help me manage fraud, either keeping bad guys out or keeping money from leaving, help me make money movement easier and then a tremendous amount of demand on I want to be able to do a digital card issuance and then I want to be able to push that card to a digital wallet. So anything that you think about that you read in terms of creating a really great digital experience for a customer and a member, that's driving demand for our products.

There are no more questions at this time. Thank you for attending the Alkami First Quarter Earnings Call. You may now disconnect.