ALKAMI TECHNOLOGY, INC. Q3 FY2024 earnings call

• Alkami grew revenue 27% in Q3 2024 and expanded adjusted EBITDA to over $8.3 million. - Added nine new digital banking clients including three banks and launched 12 clients on the platform. - Recognized by third parties as a leading digital banking platform, e.g., FI Navigator listed as top in credit union mobile users, named FinTech Top Solution Provider by IDC, etc. - Data and marketing products contributed to over 70% of new client wins in 2024 and over 20% of add-on sales. - Digital banking market is seeing acceleration of digital revenue generating strategies, with data being crucial. - Alkami's data platform has 29 million deposit accounts with 20 billion historical transactions and ~20 million new transactions daily. - Ended Q3 with 19.5 million registered users on the digital banking platform, up ~900,000 sequentially. - Remaining performance obligation was just under $1.3 billion, 3.7 times ARR and up 27% YoY. - Operating expenses in Q3 were 46 million, 53.6% of revenue, showing 490 basis points of operating leverage. - Plan to transition offshore activities to a captive offshore subsidiary model starting Q4 2024.

In the third quarter of 2024, Alkami achieved total revenue of $85.9 million, representing a year-over-year growth of 27%. Subscription revenue also grew 27% and accounted for over 95% of total revenue. ARR increased by 24% to $342 million. The RPU was $17.54, up 8% year-over-year. Non-GAAP gross margin for the third quarter of 2024 was 62.8%, which was a 400 basis points expansion compared to the prior year.

• Fourth quarter 2024 revenue guidance: $89 million to $90 million (25%-26% growth). - Fourth quarter 2024 adjusted EBITDA guidance: $8.5 million to $9 million. - Full year 2024 revenue guidance: $333.2 million to $334.2 million (26% growth). - Full year 2024 adjusted EBITDA guidance: $25.2 million to $25.7 million.

Q: Where do you currently see the AI adoption curve and what will it take for customers to become more comfortable incorporating AI-based solutions and how dependent is this on industry regulation?

A: Thanks for the question. The adoption curve is such that AI has been used in financial services for a long time, but using it for predictive models around revenue generation is in early stages. Customers need to cleanse and normalize their data to use AI models effectively. Industry regulation is a factor but the main step is customers getting their data in a state to run models.

Q: What do you think drove the really strong AR uplift at renewal?

A: What we're seeing now is there's a greater appetite for more innovation and technology through the platform. On average, client base averages between 13-14 products, new sales cohorts average around 19 products. Renewing clients need more innovation to reach the new sales cohort product level. Also, a client facing account management team has been in place for a couple of years, establishing relationships and executing strategic workshops for multi-year digital transformation journeys.

Q: With the kind of 50 basis point rate cut and some of the long yields rising, what impact do those things have on your business and are you feeling any change in kind of the attitude from clients?

A: The demand for digital banking has remained consistent through interest rate changes. The main difference is the mix of add-on products based on the interest rate environment. Long-term market sector transformation isn't impacted by short-term interest rate changes, but mix of add-on products may change.

Q: Can you talk about the long-term savings opportunity for the offshoring and I understand 2026 and beyond, but can you frame the opportunity there at all?

A: Presently, 110-120 FTEs are through third party outsourcing for engineering. Offshoring will benefit in terms of innovation through the platform, gross margin, and cost of sales. Post sale operations may also be offshored in the long term. Adoption within the company has been great and productivity is good, expecting more benefit as moving to captive model.

Q: How much education has to happen on your side of the equation to get FIs to understand the value and the security that you bring them here versus them sort of proactively coming after the opportunity?

A: Last three years has moved from an evangelical position to executives understanding the value. The market is bifurcated between sophisticated customers with their own data tech stack wanting Alkami's data to feed in, and customers struggling with talent wanting a pre-built data and marketing capability. Attachment rate of data products has increased from ~50-55% a couple of years ago to ~75% in 2024.

Q: On the revenue growth algorithm, could you maybe comment on how that could work over the medium term in terms of user growth versus ARPU growth as it pertains to overall revenue?

A: The Alkami revenue model isn't overly dependent on user growth or ARPU growth alone. User growth is tied to backlog implementation timing. ARPU expansion is due to client sales team success in cross-selling. User growth is expected in 15- high teens range and ARPU expansion can continue beyond current rates.

Q: On the captive offshore model, could you kind of help us understand what the weighting of the margin impact will be?

A: The 1% margin investment will be ratable throughout 2025, starting in Q4 2024, and the benefit will be felt more in 2026. Initial focus is on increasing engineering capacity, not a cost cutting play, but to absorb growth and drive new product development while balancing profitability.

Q: On the loan origination product, do you feel like customers are more willing to essentially explore new solutions at this point with the interest rate environment where it's at?

A: Most customers have a workable back of house application for loan origination, but they want a better end-to-end digital experience for front of house. Alkami's focus is on the front of house digital experience related to buying new products or onboarding, not replacing back of house mortgage application platforms.

Q: Thoughts on M&A and the M&A environment?

A: Seeing increased number of available targets. Alkami has internal M&A focus individuals. Multiple expectations of targets are coming in line. Alkami is a disciplined buyer, looking for functionality to continue growth trajectory without sacrificing profitability. Pipeline for M&A is becoming more attractive and is a growth driver. Sales cycles haven't been impacted by upcoming election as digital transformation trajectory in the market hasn't changed due to macroeconomic/geopolitical situations