Alkami Technology, Inc. (NASDAQ:ALKT) Q4 2023 Earnings Call Transcript
Alkami Technology, Inc. (NASDAQ:ALKT) Q4 2023 Earnings Call Transcript March 2, 2024
Alkami Technology, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon ladies and gentleman and welcome to the Alkami Technology Fourth Quarter 2023 Financial Results Conference Call. At this time all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday, February 28, 2024. I would now like to turn the conference over to Steve Calk, Vice President and Head of Investor Relations. Please go ahead.
Steve Calk: Thank you, operator. With me today 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 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 Form 10-K entitled Risk Factors and Forward-Looking Statements. Statements being made during the call today 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 understanding 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 like to now turn the call over to Alex.
Alex Shootman: Thank you, Steve. Good afternoon and thank you all for joining us. I'm pleased to report that Alkami delivered strong financial performance in the fourth quarter of 2023. This contributed to a great year on several fronts, including progress towards the multiyear revenue and profit guidance we discussed at the beginning of the year. In the fourth quarter, Alkami revenue was 29%, once again ahead of Street expectations. We exited the quarter with 17.5 million live registered users on the Alkami platform, up $3 million compared to the prior year. And we generated approximately $3.1 million in adjusted EBITDA. In the full year of 2023, we delivered excellent results, including 30% revenue growth, exceeding positive adjusted EBITDA a quarter earlier than projected, and making progress on key initiatives that will deliver on our future revenue and profit targets.
Some highlights for the year include the following: we won 39 new logos with a total contract value of 21% last year, representing the best year in our history for investing in financial institutions and total contract value sold. We demonstrated the growth opportunity in our client base by delivering total contract value from add-on sales at the highest level in our history. Our culture of treating the client as our North Star produced results, as Alkami did not lose a single client on the platform during 2023. In Q4 alone, we renewed 20 clients who averaged five new products added and extended without coming for another five years. In February 2024, we renewed our largest client, which is a top 10 credit union, more than doubling the original total contract value and extending the relationship for another five years.
Execution on the band market continued as we nearly doubled our bank clients under contract and implemented clients on two new bank cores that are key to our long-term strategy. We also signed our second largest total contract value new logo transaction in our history, which is a bank line platform investment for long-term scalability that began to deliver results for our clients and our economics. And we added executive talent in two important areas of our business: engineering and client experience, which includes all post-sales activities. One of the most reassuring outcomes of 2023 is the resilience demonstrated by our end market, which contributes to the confidence we have in our longer-term financial guidance. Our market consists of over 9,000 regional and community financial institutions that are rarely public entities; they are focused on their communities and operate with very diverse strategies.
This results in a lower risk profile, which was evident in the months after the spring liquidity event that impacted a handful of superregional banks. Throughout 2023, we saw stability within our clients' deposit balances, the number of customer accounts, and strengthen the buying behavior of our target market. We're optimistic, as that momentum carries over into 2024, and our optimism is supported by some recent market research. We just completed an independent survey of our market, in which 90% of banks and 89% of credit unions said they were optimistic about their financial future over the next 18 months, and 67% of banks and 72% of credit unions anticipate increases in their technology budgets in 2024. Alkami's target market considers a modern digital banking platform to be a non-discretionary investment.
Our clients and prospects tell us that to remain competitive with megabanks, they must have a great digital sales and service channel. As one industry analyst recently wrote, we believe the demand for digital transformation remains more robust than ever, particularly as many of these FIs need to invest in technology to attract deposits in what is now a more dynamic deposit-gathering environment with higher interest rates. Companies that convert to and stay with Alkami tell us that the investment we've made in a cloud-native single-code base, multi-tenant system with a superior user experience, extensibility as a philosophy, and data as a long-term advantage helps them compete against megabanks, which is why more people said yes to Alkami in 2023 than any other provider in the market.
We continue to focus on the priorities that we shared with you since becoming a public company. win in the bank segment of the market, drive growth through add-on sales, engineer our technology platform for scale, become the employer of choice in our market, and use M&A opportunistically. These objectives will continue to drive our multiyear revenue and profit goals. In 2024, we believe if we do four things well related to our long-term priorities, we will create distance between us and the rest of the market that will be difficult for others to overcome. Number one: continue to invest in client satisfaction throughout the client journey. Our clients want to move with speed in bringing new capabilities to market. We are investing in our platform to make it easier to integrate other technologies into Alkami and allocating engineering resources to reduce the time it takes to implement new capabilities for existing clients.
Number two: accelerate the momentum we’re building in banks. During 2023, we had external experts benchmark our commercial offering against market requirements, and they found that Alkami now meets 92% of client expectations in commercial banking functionality. We have allocated product and engineering resources to fully close the remaining product gaps in 2024. And as we implement the 17 banks in our backlog, we will continue to strengthen the capabilities of our commercial offering. Our sales pipeline remains strong, and we expect continued success in this market segment. Number three, maintain excellence in launching new clients. Each year, as we grow, we continue to ramp up the number of new clients we launch. It’s one thing to launch a few clients a year, but Alkami plans to launch 40 new clients in 2024.
We believe that the ability to successfully launch clients is a sustainable competitive advantage for Alkami. And during 2024, we intend to build upon our strengths in this area while improving productivity. Finally, we’re going to build leadership at all levels of Alkami. As we grow past 1,000 employees and are on our way to serve 25 million or more digital users on our platform, we need leadership infrastructure just like we have technology infrastructure. We have a leadership development program within Alkami that’s helping our top 50 leaders become great software executives, understand how to create value for our clients and our shareholders, and maintain the culture that’s been critical to our success. In closing, 2023 was a great year for Alkami.
We continue to add more digital users and lose fewer clients than any other digital banking provider in the market. This is a result of the people we have, the culture we thrive in, the market we serve, and the technology we build. For too long, our market has suffered with outdated technology, and we intend to bring great technology to this market and be the number one digital banking provider. As we look towards 2024, I’m proud to be part of one of the fastest-growing bank technology companies, and I’m excited to drive even more value for shareholders, clients, and employees. I’ll now hand the call to Bryan.
Bryan Hill: Thanks, Alex, and good afternoon, everyone. 2023 has been another successful year for Alkami. We achieved $265 million in revenue, representing 30% growth, and improved our adjusted EBITDA loss from $18 million in 2022 to $1.6 million in 2023. Our Q4 results contributed significantly to our full-year performance and allowed us to exit the year with positive momentum. For the fourth quarter of 2023, we achieved revenue of $71.4 million, representing growth of 29%. Subscription revenue grew 30% compared to the prior year quarter and represented approximately 97% of total revenue. We increased ARR by 29% and ended the year at $291 million. We currently have approximately $52 million of ARR in backlog for implementation, the majority of which will occur over the next 12 months.
We implemented 7 new clients in the quarter and 37% for the full-year, bringing our digital platform client count to 236. We now have 44 new clients in our implementation backlog, representing 1.3 million digital users. We exited the quarter with 17.5 million registered users live on our digital banking platform, up $3 million or 20% compared to last year. Over the last 12 months, registered user growth has continued to be driven by two areas. First, the 37 financial institutions we implemented in 2023 represent 1.5 million registered users and just over $27 million of ARR, both of which exceeded the full year of 2022 by approximately 35%. Second, our existing clients increased their registered users by $1.5 million, demonstrating the market's focus on driving customer retention and growth through the digital banking platform.
In terms of churn, for 2023, we did not experience any digital banking client churn, and we expect to lose only 3 clients in 2024, representing less than 1% of our ARR. This compares to our expected long-term average churn of 2% to 3%. We ended the year with an RPU of $16.63, which is 7% 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. During 2023, we signed 39 digital banking platform clients, of which 16 were signed during the fourth quarter. Our new client wins reflect solid representation from banks, which 12 signed during 2023. In addition, 14 of our signed new clients adopted ACH Alert, while 22 adopted segments, demonstrating the importance acquisitions can play in building out our platform and creating a competitive advantage.
Our add-on sales focus continues to yield results, representing 35% of total new sales for 2023. In addition to add-on sales, our client sales team is responsible for client contract renewals. During the year, we renewed 31 client relationships, raising the ARR run rate to 6% through a combination of new product sales and committed client growth. And finally, our remaining purchase obligation or contract backlog reached $1.1 billion, almost 4 times our ARR and 28% higher than a year ago. Now turning to gross margin and profitability. For the fourth quarter of 2023, non-GAAP gross margin was 60.3%, representing 390 basis points of expansion when compared to the prior year quarter. Gross margin expansion resulted from improvements in our hosting cost per registered user combined with operating leverage across our post-sale operations, such as our implementation, support, and site reliability engineering teams.
We continue to scale post-sale operations while delivering the previously mentioned higher level of output. As a reminder, our 2026 target operating model is a non-GAAP gross margin of 65% as we continue to scale our revenue. Moving to operating expenses. For the fourth quarter of 2023, non-GAAP R&D expense was $17.3 million, or 24% of revenue, 530 basis points lower than the year-ago quarter. We are achieving operational scale while investing in our platform to drive future efficiency, best-in-class reliability, and innovation in new products and functionality. Our target operating model is to leverage R&D for 20% of revenue by 2026 while we continue to invest and expand our platform. Non-GAAP sales and marketing expenses is $10 million, or 14% of revenue, in line with the prior year.
We continue to achieve a high level of sales team productivity and go-to-market efficiency. For example, in 2023, we increased our ARR by just under $65 million while investing $41 million in sales and marketing, representing an efficiency ratio of 1.6 for ARR creation to sales and marketing investment. We expect to maintain or slightly improve our go-to-market efficiency as we scale the business and gain market share. As you consider 2024, keep in mind that we will host our annual client conference in the second quarter, which results in approximately $2 million to $2.5 million of higher spending than other quarters of the year. Non-GAAP general and administrative expenses were $13.5 million, or 19% of revenue. In the prior year quarter, G&A was approximately 21% of revenue.
The margin expansion is primarily attributable to revenue scale. As we closely manage G&A expenses, we expect to achieve 10% to 12% as a percentage of revenue as we move towards our 2026 profitability objectives. Our adjusted EBITDA for the fourth quarter was $3.1 million, which is an improvement of over $7 million when compared to the prior year quarter. We are very pleased with our 2023 adjusted EBITDA progression. As a reminder, we've established a 2026 adjusted EBITDA margin objective of 20%. We expect our path to 20% will occur at a pace of roughly 700 basis points of adjusted EBITDA margin expansion per year. Now we are moving to the balance sheet. We ended the quarter with just over $92 million in cash and marketable securities. During Q4, we retired our term debt of just over $82 million.
Our credit facility revolver remains undrawn and provides $60 million of borrowing capacity. Now turning to guidance. For the first quarter of 2024, we are providing guidance for revenue in the range of $74.5 million to $76 million and adjusted EBITDA of $2.5 million to $3.5 million. For the full year of 2024, we are providing guidance for revenue in the range of $327 million to $333 million, representing growth of 24% to 26% and adjusted EBITDA guidance of $20 million to $23 million. Additionally, because of the impact of expense timing, such as our client conference, as I mentioned earlier, we expect the second quarter to be the low point of our adjusted EBITDA in 2024, modestly lower than the first quarter of the year and consistent with the long-term seasonality of our second quarter expenses.
In summary, 2023 was a great year for Alkami, a year of strong performance where we achieved a record level of new sales from both new client wins and add-on sales. added a record number of digital users to our digital banking platform and meaningfully improved our profitability profile by ending the year with a gross margin over 60% and continuing a trend of positive adjusted EBITDA. We remain confident that we are well positioned to achieve our 2026 financial objective of a 20% adjusted EBITDA margin. Our confidence is derived from exceptional visibility and a track record of execution and scale across all areas of the business. We exited the fourth quarter with strong momentum and look forward to delivering another great year in 2024. With that, I'll hand the call to the operator for questions.
Operator: Thank you. And ladies and gentlemen, we will now begin the question session. [Operator Instructions] And your first question comes from the line of Mayank Tandon from Needham. Your line is open.
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