Hello and welcome to Alkami's Fourth Quarter 2022 Financial Results Conference call. My name is Marise and I'll be your operator for today's call. Please note, this event is being recorded. I'll now turn the call over to Andrew Vinas. Andrew, please, you may begin.

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 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 and 10-Q entitled risk factors and forward-looking statements. The statements made in 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 will now turn the call over to Alex.

Thank you, Andrew, and thank you all for joining us today. This afternoon I'm going to provide highlights of our fourth quarter operating results, observations on the demand environment, and recap our five key initiatives with some comments related to engineering our technology platform for scale before turning the call over to our CFO, Bryan Hill. I am pleased to report another quarter of strong performance as we continue to make progress on our key initiatives. In Q4 2022, Alkami grew revenue 31%, once again ahead of our expectations. We exited the quarter with 14.5 million live registered users on the Alkami platform, up 2.2 million compared to the prior year, and we achieved a $4 million adjusted EBITDA loss in line with the high end of our guidance for the quarter, an important milestone on our path to adjusted EBITDA profitability, which we continue to expect to occur in 2023. These results reflect continued execution on all five of the five key initiatives I outlined at the beginning of 2022. Two of these initiatives were fundamental drivers to our performance for the year; first, to become the digital banking provider of choice for banks, similar to our competitive position with credit unions, and second, to drive growth by increasing add-on sales. For the full year of 2022, we've outperformed our expectations in both of these areas. We signed 37 new digital banking platforms, platform clients for the full year of 2022, of which approximately 30% were banks, and our bank wins increased by 100% compared to 2021. As we expected, new logo sales were higher in Q4 2021 than in Q4 2022. However, 2022 was a more balanced year in terms of new contract signing throughout all quarters of the year, with Q4 being the high point of our new logo signings. We continued to gain add-on sales momentum in 2022, with add-on sales representing 37% of total sales for the full year of 2022, up from 24% in 2021. In addition, we renewed 11 client contracts during Q4 and 22 client contracts during the full year. Our results continue to demonstrate Alkami's passion and motivation to become the preferred digital banking provider in the industry, and I am personally energized by the opportunities ahead. Next, I'd like to share some thoughts on our end market based upon observations and client interactions since our last earnings call. Despite the volatility in the macro environment, including challenges experienced by other FinTech providers, we still see healthy demand for Alkami's digital banking platform and add-on offerings. Our new logo sales team continues to see normal RFP and vendor evaluation activity as well as normal conversion timelines from evaluations to signed contracts. Our client sales teams, which generally see shorter sales cycles are also experiencing steady activity, renewal conversions, and cross-selling opportunities. Overall, the factors I discussed in last quarter's call continue to drive demand. First, our clients require modern banking solutions, and they consider investments in Alkami to be mandatory innovation in what is effectively their most important channel. Second, digital user accounts continue to rise and we are experiencing double-digit user growth amongst our clients. Third, financial institutions are realizing that the data they have in their own core and digital banking systems is the best data available for them to target and deliver personalized and relevant communications and offers. And fourth, our target clients need to attract deposits and they are investing in digital onboarding technologies and a great digital banking experience, including business banking to attract new customers. These themes are why we expect to continue to see healthy demand and growth. Our qualified sales pipeline continues to grow at a strong pace, and there are few digital banking companies who can provide a modern, cloud-based solution along with the capacity and track record to manage nearly 2 million digital user implementations at a time. Alkami is proud to be a leader, one of the fastest growing companies in the market. One year ago, I shared with you our five company priorities. First, to become the digital banking provider of choice for banks, while maintaining our market leadership with credit unions. Second, is to grow our add-on sales. Third, is to engineer our technology platform for scale. Fourth, is to become the employer of choice in our market, and fifth, is to use M&A opportunistically to enhance our market position. On recent calls, I've discussed our first two priorities, and on this call, I'd like to provide some comments on our third priority, engineering our technology platform for scale. In 2022, Alkami implemented 30 new clients representing 1.1 million registered users at launch, and if you go back to the beginning of 2020, until the end of 2022, Alkami grew our live registered users by 103%. We believe our ability to execute complex implementation projects at this scale and engineer a technology platform that can sustain this growth is a significant and sustainable competitive advantage. When we think about engineering our technology platform for scale, it is not only about expanding the platform but also injecting innovation that allows Alkami to continue to be a technology company that provides financial solutions. Our focus is on expanding the platform while we reduce the incremental unit cost of serving a user and evolving the platform so that it serves the future needs of the market with speed and quality. Our clients tell us that they've grown tired of trying to make their legacy systems work. They want to focus their core banking application on back office accounting and invest in a new operating platform that can scale and become their primary digital sales and service system. We believe Alkami can be that platform, and to make this happen, we're driving innovation in three areas. First, the Alkami platform, from inception, is a cloud-based single-instance multi-tenant SaaS system with security as a foundation. Because of this, we have the opportunity to rapidly adopt new advances in storage, database, and compute architectures and technologies such as Kubernetes, messaging layers, and federated schema to slow the growth of our compute cost while increasing the reliability, quality, and performance of our platform. Second, we will innovate in the technology necessary to connect Alkami to the myriad of legacy systems that exist in the market. This is the most time-consuming portion of our implementations, and the planned innovation will result in faster projects for our clients and lower costs for onboarding new clients. Third, as our clients mature, the use of their digital sales and service channel, they will want increased data capabilities for their customers. This is why we made the Segment acquisition. We are integrating the data capabilities of Alkami and Segment into a modern financial data platform that provides for the data collection, persistence, transformation, and actionable insights necessary for Alkami clients to make data-driven decisions to grow their business. With this as a backdrop, I am pleased to announce that we just welcomed Deep Varma as Chief Technology Officer of Alkami. Prior to Alkami, Deep was Chief Technology Officer of Varo Bank, where we built the technology infrastructure for one of the nation's fastest growing neobanks. Prior to Varo, Deep was part of the Zillow Group technology leadership team where he led all engineering functions across the Trulia business, successfully migrating to the cloud and creating the data platform that presents the unified view of customer home information, including search and personalization. He's also launched two successful start-ups and held leadership roles at Yahoo, ABB, and IBM. Besides his experience, Deep is genuinely a good human being who cares about culture and community, and this is why we're excited to have him join Alkami. The platform efforts I've just discussed are expected to benefit our long-term gross margin profile and will positively impact growth, client retention, and R&D productivity. But to be clear, these efforts are not necessary to achieve our 2023 gross margin objective and should be thought of as upside to our goal of reaching non-GAAP gross margins of 65%. In closing, thank you all for joining the call to hear about Alkami's Q4 results. We are proud of the quarter and we are energized by the opportunity in front of us. And with that, let me turn the call over to Bryan to provide more detail on our financial results and walk through our 2023 financial outlook.

Thanks, Alex, and good afternoon everyone. Fourth quarter results continue the momentum we experienced during the rest of 2022 across all our key metrics. For the fourth quarter of 2022, we achieved revenue of $55.5 million, which outperformed the high end of our financial guidance and represented growth of 31%. This was driven by strong performance across our primary revenue drivers. We implemented nine new clients in the quarter, bringing our digital platform client count to 199 compared to 177 in the prior year. We now have 44 new clients that are in implementation backlog, representing 1.6 million digital users. We exit the quarter with 14.5 million registered users live on our digital banking platform, up 2.2 million or 18% compared to last year, and up sequentially 810,000 digital users over the last 12 months. Digital user growth continues to be driven by two areas. First, we implemented 30 financial institutions supporting 1.1 million digital users. Second, our existing clients increased their digital user adoption by 1.4 million users. Offsetting digital user growth was churn at just over 300,000 digital users, of which the majority is represented by a single client that transitioned off our platform during Q3 of 2022. We continue to maintain a very high gross retention rate at just over 97% measured in terms of annual recurring revenue or ARR and digital users retained over the last 12 months. We ended the quarter with an RPU of $15.55, which is 14% higher than last year. This compares to our blended market opportunity of approximately $58 per digital user. The Segment acquisition contributed $0.91 or 7% of ARPU expansion along with ARPU expansion of $0.96 or 7% driven by add-on sale success and the addition of new clients who tend to onboard with a higher average RPU. Subscription revenue grew 33% compared to the prior year quarter and represents approximately 96% of total revenue. We increased ARR by 34% and exited the fourth quarter at $226.1 million. In addition, we currently have approximately $49 million of ARR in backlog for implementation over the next 12 months. Our 2022 exit ARR and implementation backlog combined provide visibility into a successful year in 2023, which I will outline later in our financial guidance. We continue to see healthy demand across our product portfolio. Our 2022 new sales performance outpaced 2021 by 30%. Keep in mind, 2021 new sales were overweight to the fourth quarter. As I said on last quarter's call, new sales for 2022 occurred more evenly throughout the year. We signed 37 new digital banking platform clients for the full year, of which 15 signed during the fourth quarter. Our add-on sales focus continues to yield returns, representing 37% of new sales for 2022 compared to 24% for 2021 and 17% for 2020. In addition to add-on sales, our client sales team is responsible for client contract renewals in 2022. We renewed 22 client relationships representing 11% of our live ARR and added over $143 million to our clients' remaining purchase obligation or client contract backlog. Our client contract backlog is now 38% higher than a year ago. Now, turning to gross margin and profitability for the fourth quarter of 2022, non-GAAP gross margin was 56.4% compared to 57.1% in the prior year. Quarter margin dilution was primarily driven by higher costs from our client implementation team and our third-party IT partners. Previously, we highlighted investments in our client implementation team that would constrain margin expansion for a few quarters. We have now bent the project concurrency curve that resulted in gross margin dilution in 2022. Also during Q4, we renewed early a significant IP partner agreement resulting in certain end-quarter costs that will provide future gross margin benefit for 2023, a more evenly distributed project. Concurrency, combined with our recently amended third-party IP partner agreement, we expect will put us back on track to our gross margin expansion objective of 200 basis points per year. Our target operating model is a non-GAAP gross margin of 65%. As we scale our revenue, we expect to achieve our target gross margin at a pace of roughly 200 basis points of expansion on average per year, reaching the 65% level by 2026. In addition, reaching 65% gross margin is not the final destination. It is simply the next milestone in our journey. We expect to continue to drive gross margin above 65% for purposes of discussing gross margin expansion. The most important factors for us, in addition to revenue scale, are first, we are investing in our platform to enable scale well beyond our current level of 14.5 million digital users. These investments are expected to reduce our cloud hosting infrastructure at a unit economic level, improve implementation efficiency, and lower the ongoing cost of supporting our platform. Second, we expect to further improve the cost structure associated with third-party IP integrated into our digital banking platform. These arrangements are typically structured as revenue share agreements, which are generally diluted to our gross margin but typically very accretive to adjusted EBITDA. As we scale our business, our opportunity to improve gross margin for these arrangements increases, and third, continued success renewing client agreements will improve our gross margin. The accounting for implementation revenue and cost requires us to amortize both for each new implementation over its first contract term. As clients renew their contracts, our gross margin no longer possesses this headwind at a unit economic level. We renewed 22 clients in 2022 and expect to renew a similar amount in 2023. Moving to operating expenses for the fourth quarter of 2022, non-GAAP R&D expense was $16.4 million or 29.6% of revenue. A year ago, R&D represented 27.8% of revenue, with margin dilution primarily driven by higher headcount, consulting, and cloud infrastructure costs, as we have invested in our technology platform for scale. However, for the full year 2022, we did experience operating leverage in margin expansion of 180 basis points. As a reminder, our target operating model is to leverage R&D to 20% of revenue while we continue to invest and expand our platform; we currently expect to achieve our objective. During 2023, non-GAAP sales and marketing expenses were $7.9 million, or 14% of revenue. In the prior year quarter, sales and marketing represented 14% of revenue as well. Our go-to-market efficiency outperforms our FinTech peers and the majority of high-growth SaaS company comparables. We expect to maintain or slightly improve our go-to-market efficiency as we scale the business and gain market share. In terms of the progression of sales and marketing expenses throughout 2023, bear in mind the second quarter is when we will hold our annual client conference, which results in our highest quarterly sales and marketing expense, with approximately $1.5 to $2 million of higher spend than other quarters of the year. Non-general and administrative expense was $11.6 million or 21% of revenue, and in the prior year quarter, G&A was approximately 27% of revenue. The margin expansion is primarily attributable to revenue scale. We have reached a sustainable level of G&A spend as the majority of our public company investments are behind us. We expect to leverage G&A expense as a percentage of revenue as we move towards our profitability objectives with an expectation of 10% to 12% of revenue during 2026. Our adjusted EBITDA loss for the fourth quarter was $4 million, which is in line with the high end of our expectations and 10% better than the prior year quarter. As a reminder, our target operating model is to exceed an adjusted EBITDA margin of 20%. We now expect to achieve this target for the full year 2026, which also coincides with the achievement of our 65% gross margin goal. Similar to our gross margin goal, a 20% adjusted EBITDA margin is not the final objective, but the next milestone after we move to positive adjusted EBITDA in Q4 2023 and continue to scale our business along the journey to 2026. We believe these high-level targets achieved on the timeline provided afford a balanced approach to profit and cash flow generation, while also allowing Alkami to responsibly invest to take full advantage of our attractive market position and large addressable market opportunity in digital banking. Before moving on from the income statement, I want to provide some commentary on stock-based compensation, which we understand is becoming a topic of increasing importance among software investors. In 2022, we had a significant anomaly in our stock-based comp expense, which was a result of our former CEO's retirement. This accelerated the vesting of his shares and therefore impacted our accounting for stock-based compensation. As we look forward to 2023, we expect stock-based compensation to be approximately 9% of revenue beyond 2023, and as we scale revenue, we expect stock-based compensation to decline to 10% to 12% of revenue during 2026 and to normalize to a long-term high single digit percentage of revenue as we continue to scale. Now moving on to the balance sheet, we ended the quarter with just over $196 million of cash and marketable securities and just over $84.5 million of debt. We are comfortable with our net cash position as it represents several multiples of capital necessary to reach free cash flow positive occurring shortly after becoming adjusted EBITDA positive for the fourth quarter of 2023. Now turning to guidance for the first quarter of 2023, we are providing guidance for revenue in the range of $58 million to $59 million and an adjusted EBITDA loss of $4.5 million to $3.5 million for the full year 2023. We're providing guidance for revenue in the range of $255 million to $260 million and an adjusted EBITDA loss of $7 million to $4 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 trough point of our adjusted EBITDA losses in 2023, modestly lower than the first quarter of the year, and we expect to exit 2023 with Q4 adjusted EBITDA modestly positive. To summarize, we are executing across all areas of the business. We are improving our already attractive position in the marketplace with increasing momentum among banks and a growing contribution from add-on sales in concert with our top-line strength. We are focused as an organization on crossing into adjusted EBITDA profitability in 2023, and we are on track to achieve meaningful gross margin expansion in 2023 and beyond. As a final comment, we expect to crossover into 65% gross margin and 20% adjusted EBITDA margin objectives in 2026. With that, I'll hand the call to the operator for questions.

Our first question comes from Bob Napoli from William Blair. Bob, please go ahead.

Good afternoon. Really nice to hear the very specific guidance for 2026 on trends to 2026 and maybe just what do you see as kind of the biggest challenges? What gives you the confidence to put out that specific guidance for 2026, and what do you view as the biggest challenges to getting there?

This is Alex. I'm going to start, we'll kind of talk about two things. One confidence and then two, where do we have to continue to do work. As I stated in my comments, we continue to talk to customers who believe that a digital banking platform investment is a mandatory innovation for them. They continue to understand that this digital channel can become for them not just a service channel, which it has primarily been, but with the appropriate use of data and other capabilities, it can also be a sales channel for them that allows them to grow their top line as well. And so the confidence side comes from really from market signals about how important this investment is to financial institutions' futures. Bryan kind of mentioned the thing for us to manage, which the best product wins in this space. There's no real victory in cutting costs to your future, and so we need to be wise about how we balance the investment in the product along with the investments to continue to get to gross margin targets that we want to get to. So in short, confidence comes from the market signals of the hard work that we have to do is continue to build a great product and invest in the platform, as I talked about, to be able to scale out that platform for the future growth. Then do you have any comments, Bryan?

Yeah, a couple things, Bob, and look, we felt it was important to provide more constructive comments in this area given the economic environment that we're in, given some of the investor conversations that we're having. Alex and I, we have a lot of confidence in where we're headed over the next three years, but let me give you a couple. First off, we still have healthy demand. We feel that we can continue to compound the business each year at a minimum of 25%. The guidance speaks to that for 2023 and the live ARR that I have coming into the year as well as the implementation backlog rises a tremendous amount of visibility into that. Second, we're starting to see momentum among bank wins. We're seeing momentum among the number of bank deals that we're participating in, and we're seeing a rising win rate as it relates to banking. So that provides us some confidence. Second on the revenue front is also our add-on sales momentum. Now add-on sales contributes 37% of our total TCV of new sales in 2022, and we expect that to continue and even out to potentially a 50% level in future years. So that provides us even further confidence in achieving the 25% revenue growth as it relates to achieving a 20% adjusted EBITDA margin. It starts with hitting a 65% gross margin. We did have a slowdown in our gross margin expansion in 2022 for the reasons that I described in this call. I described on previous calls as it relates to implementation project concurrency. We're through that now. A more evenly distributed new sales in year 2022 has resulted in the ability for us to better manage those investments as it relates to implementation and then really exit 2023 with a gross margin in 60%, maybe slightly ahead of 60%. So that gives us great visibility in achieving a 65% gross margin by 2026. And then as you work your way down through operating expenses, we already have in sales and marketing a very efficient go-to-market. Efficiency as it relates to sales and marketing is a percent of revenue. G&A, we've already made our public company investments, and revenue scale will continue to provide operating leverage and that line item of OpEx we saw a 500 basis points for the full year of 2022 and over 600 basis points in Q4 year over year. So, lots of momentum there and then it really comes down to what I view as controllable investment in R&D, but still investing in the platform for efficiency gains and investing in the platform for bringing more products to market. We expect to bring somewhere between three to four new products to market in 2023. So all these items come together for Alex and I to have a tremendous amount of confidence in providing more of a multi-year guide on when we will reach really a more acceptable level of profitability.

Great, thank you. That's super helpful. And just to follow up on the cross-sales and what is working in particular on cross-sales, how is Segment and how is that working? It seems like a big opportunity. So just some color on cross-sales and as it relates to revenue per user, do you expect to see a steady growth in revenue per user with cross-sales?

Sorry. Hey, Bob, this is Alex. The first thing I'd tell you is, I'm really proud and encouraged about the sales team that's in place that covers our existing customers. It's a highly professional sales team. They understand the industry; they understand their customers. They do the right thing by their customers, and that is obviously a key contributor to the success. Segment was really exciting for us. We had 13, what I would call synergy deals that would be either add-on deals or deals that were new customers, and then we had 40 new deals besides that. I think that we're just, I think we're just barely scratching the surface with Segment. If you think about what Segment is, it really is a self-contained marketing tech stack, if you will, for a bank that comes alongside existing investments and allows that bank to have a walled garden where they have the best data possible, the data that comes out of their core system, their digital banking system, and then use that data to understand amongst tens of thousands of key lifestyle indicators what micro-segments they have within their customer base, and then be able to target offers to those micro-segments and deliver that content in-channel. All of this is the holy grail of marketing, and the financial institutions are just beginning to understand that this is what they need in their digital channel. So I'm really excited about what's happened with Segment so far. I'm excited about the synergy, and I think that as the market continues to understand what they need to be able to interact with their customers in the digital channel, this is going to create a pretty big uplift for us.

Yeah, and Bob, just in terms of the product categories that contributed to the majority of our add-on sales effort, the theme in Q4 did not really change from the themes for the first three quarters of the year. The money movement product family category was a significant contributor. Our client services account category, which includes chat and chatbot and conversational AI products, fraud and security, which includes ACH alert, which was an acquisition from 2020 that was a pretty significant contributor, and then finally the marketing and analytics product family category, which includes Segment. So those four product family categories really are, I would call, 75% of our add-on sales success came through those areas. If you step back and give some consideration to those products, those are really some of the newer products in the market. Our install base averaged nine to 10 products from several years ago when we were bringing in new logos; these products either were not available or certainly not available through Alkami, and now they are, which is what presents that back cross-sell opportunity.

Great. Thank you. Thank you very much. Appreciate it.

And now we'll proceed with a question from Andrew Schmidt from Citi. Andrew, please go ahead.

Great, thank you so much. Hey, Alex. Hey Bryan. Good results here. Thanks for taking my question. I wanted to dig into the demand environment a little bit. It's good to hear the resilience and obviously, a great step up in terms of the wins in the fourth quarter. Maybe talk a little bit about based on top-of-funnel pipeline, how you're thinking about just the environment for net wins or net logo wins and additions to the user backlog for 2023, because clearly, we're back at an elevated rate, and it's great to see, but I'm curious how you're thinking about the setup for the coming year. Thanks a lot.

Yeah, Andrew? This is Alex. As I mentioned in my comments, we continue to see a strong pipeline. That pipeline is evenly balanced between banks and credit unions. And as I've said on other calls, we can't predict the future, so maybe sometime in the future that demand drops off, but over the last couple of quarters, we just have not seen that drop off. We've seen consistent growth in the pipeline, consistent movement in the pipeline, and consistent balance between credit unions and banks.

Yeah, and Andrew, the way that the pipeline works through the year, because even though sales were more evenly distributed in 2022, there still is an overweight to Q4. It just wasn't as pronounced in 2022. So when you go into the year, your sales pipeline is most likely at one of the lowest levels, and then you're building it up as you continue through the year. But our Q4 exit sales pipeline in 2022 was larger than Q4 from 2021, 2020, 2019, as far back as you want to go. So we feel very confident in our sales numbers that we need to put up this year in order to continue to achieve our revenue aspirations. Now, Alex did make a comment that our pipeline is evenly distributed between credit unions and banks. That is a change from where we have been, I would say from the previous quarters when banks contributed about a third. So we're seeing more activity from banks; we're participating in more deals as it relates to banks, and we're winning. Our win rate is increasing among banks, and our win rate among credit unions is staying very constant as it has in previous years. All this speaks to the resilience of the need for innovation in this space, particularly through the digital banking channel.

Got it. Makes a lot of sense. And then the comment in terms of just banks being a larger part of the mix, does that suggest that when we think about the growth outlook for 2023 and beyond, that we'll see more of a lean towards ARPU as you're maybe onboarding banks that perhaps consume more products and perhaps have lower users relative to credit unions? Just curious about how the build-up might change as we think about the model going forward. Thanks.

Yeah. Well, our thoughts on the mix is we will remain competitive in the market leading position in adding credit unions and our focus on credit unions has not changed. What has changed is we understand the importance of our addressable market consisting of about 50% of bank financial institutions. Now as when we look out several years, our view is we will sell into and originate an equal number of banks as credit unions. That's our longer-term objective, and we think we can achieve that over the next three to four years. How that will change the characteristics of our client base is exactly what you were suggesting. Generally, for the same ARR opportunity between a bank and a credit union, the bank will have fewer users but will also have more products as a result of the business banking platform, resulting in a higher revenue per user. And then one thing that I would add, Andrew, that's interesting is there is an increasing understanding amongst banks that they have to provide a great modern digital experience. I just got off a video call with the president of a bank right before we had this earnings call, and he told me, Alex, the first time we looked at Alkami, we couldn't afford you. The second time we looked at Alkami, we couldn't afford you. This time we decided that we can't afford not to afford you because we need to be able to give our customers a modern user experience. So I think that the other thing that we're seeing in banks is a realization that it is really important to have a great user experience for a bank. I think that will provide us tailwinds because that's been our D&A; our DNA has been to build a great user experience.

Yeah, that makes a lot of sense. And since you said that, I just want to tap on your one question. Obviously, the big opportunity is potentially when some of this inertia breaks down, more kind of RFPs up for grabs each year. Are you starting to see that at all? It sounds like, based on your commentary, we're at the beginnings of seeing banks be a little bit more focused on having best in breed versus more cost and full platform solutions such. But just curious if you're seeing any indications that way. I'll leave it there, guys. Thanks.

I think the only thing I would, yeah, the only thing I would just point you back to is the comment that Bryan made, which was through most of last year, the pipeline was a third banks and two-thirds credit unions, and right now it's probably closer to half and half. So I think that the objective evidence that we have right now.

Right. And we competed in roughly two times the number of bank opportunities in 2022 that we competed in in 2021. So we're seeing rising pipeline, rising actual real opportunities that we're competing in. It's not just for business banking. These are full platform deals, retail and business banking, and we suspect that that will continue now that our pipeline continues to pivot more towards banks.

We will now have a question from Mayank Tandon from Needham. Mayank, please go ahead.

Hey guys, this is Sam on for Mayank today. Thanks for taking the questions and nice results here. I wanted to ask a question on the growth algorithm for '23; how should we think about revenue growth in the year and the balance between ARPU gains and user growth because ARPU this quarter was obviously still strong at 14%, but it did decelerate and dip to touch sequentially, so just trying to get some color into how we should think about that for this year. Thanks.

Yeah, the way that we think about the growth algorithm is 7%, 5% to 7% revenue per user growth. This quarter was 14%. Half was really from having the Segment acquisition, so that would be an inorganic component. But the other 7% came through just cross-sale activity as well as onboarding clients with a much higher RPU than the average of the company for existing clients. So we don't suspect that that'll change, which means 18% to 20% digital user growth. And that will roughly come half from our backlog of new logos that we'll be implementing this year and the other half will come from just our clients growing. We generally think about our clients growing at a clip of 100,000 users a month.

Got it. Okay, that's helpful. And then just one quick housekeeping item. Last quarter you guys provided this segment contribution for the quarter. Did you guys give that for Q1 this year that I might have missed? Because I think you acquired them in March of last year.

We acquired Segment in April and we adjusted our guidance to $9 million at the point in which we added them. So $9 million for the remainder of 2022 and Segment came in right at that $9 million of revenue contribution.

Our next question comes from Charles Nabhan from Stephens. Charles, please go ahead.

Good afternoon and thank you for taking my question. Just a couple quick ones for me. First, does the deceleration in the M&A environment have any impact on user growth or your expectations for the next year for revenue?

So the user growth for us generally is coming from our clients growing organically. We have benefited from some consolidation. In fact, we had a renewal in January and February of 2023, which was a result of a merger, and it's going to bring in a significant number of users at a level in 2024. So we do benefit from that, but generally, it's more from organic growth within the financial institution.

Got it. So it's good to see you're winning in the market and some very constructive positive commentary, but just curious in terms of the feedback you hear from your new banks and credit union clients, where are you, I'm just curious where you're specifically differentiating on these RFPs. Is it technology, is it service? Is it all of the above? What I'm getting at here is just curious where you're winning specifically.

Yeah. The reasons why a customer chooses Alkami are, number one, they have a commitment to provide a great user experience for their consumer. We continue to rate at the very top of the app scores in the app store on user experience that's known in the market; that's understood by buyers. And so it starts with are you an available, performant, secure system that I can count on? Do you provide my consumers a great user experience? Are you on a modern technology platform that allows you to innovate? And allows me; the other thing that our customers have come to understand is, 200 billion dollars spent on FinTech by venture capitalists in the last 18 months or so has created products that their consumers want. So they want to understand; can I take a product that my consumer wants to use and integrate it into my digital banking? What I would all begin to call not just an application, but our digital banking platform. Then there's one that's an intangible that is really, really important to customers, which is, are you a down-to-earth, approachable company that's humble, that's customer-focused that we're going to be able to work with because they understand that they're getting into a seven, eight, or nine-year relationship. A lot of the customers that are looking to make a decision actually will spend multiple days at our headquarters visiting with 40, 50 different Alkami employees across the organization. Because like I said, they understand they're not just buying a product for one year's worth of use; they're getting into a long-term relationship with a company. So those are the things, when people make a decision to buy Alkami, they make a decision to buy Alkami for those reasons.

Got it. I appreciate that color. And if I could sneak in one last quick one, and apologize in advance if you touched on this, but how should we think about the growth rate for the Segment component of the revenue base over the next year?

So we haven't provided specific outlook as it relates to Segment, but we do have a lot of excitement and confidence on where it is in the market. Segment, since we acquired Segment in April, created 50 new client relationships. 37 or so, of those 40 of those came from their standard go-to-market motion that they had prior to us acquiring them. Over the last couple of quarters of 2022, we started gaining quite a bit of momentum, including Segment in new logo opportunities as well as cross-selling back into our base. So we're in the very, very early innings of gaining traction there, and we expect Segment to continue to be a fairly significant contributor to our RPU expansion.

Our next question comes from Josh Beck from KBCM. Josh, please go ahead.

Hey guys, you have Maddie on for Josh. Just wanted to say thank you for all the granularity you're giving on guidance and in the quarter; it's been super helpful. Just in terms of the healthy backlog and implementation timeline that you guys mentioned, how are you thinking about the penetration that you're at for the total market opportunity is my first question. And my second question is, how should we be thinking about margin expansion going forward? Obviously, you mentioned the 200 basis points expansion. Should that all just naturally come from the scaling of revenue or are there any additional cost-cutting initiatives that you guys need to take? Thanks.

Yeah, I'll take the first one. Let Bryan touch the second, but I would say we don't have cost-cutting initiatives, so I'll start with that. I'll let, so I'll let Bryan kind of talk to the gross margin expansion. We think we're in really, really early innings of a pretty large market. I think we said that we're at 14.5 million live registered users. The overall market is 280 million plus users, of which a third of those might be owned by a small number of mega banks and mega credit unions. If you just kind of think of two-thirds of that being a market where everybody already has a digital banking platform and that market is very fragmented with a significant number of those digital banking users being on legacy platforms that are not a great experience. We feel like we're in pretty early days of a pretty large total addressable market that we can go after. And I'll let Bryan talk about gross margin expansion.

Yeah. And just before I move on to gross margin expansion, back to the market penetration. Today we're less than 8%, 7% penetrated in the overall market. As Alex mentioned, at the most penetrated level of the market, it's certainly higher than where Alkami is at, but Alkami's adding more digital users than any other provider in the space to our digital banking platform. So we see a market opportunity where over the next three to four years, there's no reason why we would not have doubled our users based on the pace in which we're adding users today. We don't feel there's a market saturation issue, and we think the market is hungry for innovation and innovation that can be added quickly and provides flexibility through an extensible platform, which is where Alkami sits today. From a gross margin perspective, I provided quite a bit of constructive narrative in my prepared comments today on gross margin. But to Alex's point, we're not going to achieve our margins through cutting costs. We're going to continue to invest in our platform. We're investing our platform to provide more products to our clients as well as to have the ability to scale our platform more efficiently, which will add to our gross margin profile. All the while we will also leverage our R&D spend while we're doing this. I also mentioned how renewals can impact our gross margin. So at a unit economic level, when we renew a client, which we have a very high success rate at renewing clients, we achieve a 300 basis point to 500 basis point gross margin expansion at the contract level. And then finally our third-party IP partners, that's an area we had some success restructuring an arrangement in Q4 of 2022. We suspect as we continue to add more digital users to our platform, we'll be able to continue to leverage the economies related to those arrangements to Alkami. But that, that's kind of the near-term areas in addition to revenue scale that will provide us gross margin expansion.

Awesome. And I appreciate that additional color. If I could sneak one last one in, just wondering if you guys are seeing any differences in the willingness of IT spend between banks versus maybe credit unions, kind of looking towards 2023 IT budgets in general?

Yeah, the conversations that I have with bank presidents and credit union CEOs is that obviously because of the environment, they're scrutinizing the full stack of their IT budget and the full stack of their IT spend, but they prioritize their digital banking channel, right? So that's where you've heard me talk about an understanding that this is a mandatory innovation for them. So, I don't want to speak for any other industry other than digital banking, but I could imagine that on the fringes of a full stack of a bank's IT budget that there would be things that they would be shaving. But so far, we have not seen that on the digital banking investment in the digital banking channel.

We have a question from Patrick Ravens from JMP. Patrick, please go ahead.

This is Owen on for Patrick, and thank you for taking the question and for the congrats on the good results of this quarter. So I was wondering a little more on kind of combining two of the previous questions on the add-on versus net new logo additions versus its effect on gross margins. And kind of philosophically, how do you guys think about going and pursuing those two different lines of business considering its effects on the gross margin?

I'll let you answer the effect. I would start by saying when Bryan talked about, look, when we think out into the future, we think that a healthy enterprise SaaS software company that's got a product that people like and it's a company that people want to do business with ought to shape their business where they're getting about half of their new TCV growth from new logos and about half of their TCV growth from add-on sales. By the time you've acquired a customer and have a good relationship with a customer, and you've got a professional account team that is engaged with that customer and understanding their business and really has a front-row seat to how they're thinking about their digital banking platform, what that gives us is real insight into what their priority areas are, where they would invest. That allows us, it's kind of a virtuous cycle that then feeds back into our product management organization and gives us the views of the products that we should build or the partnerships that we should have or the acquisitions that we should make. So we think of, first of all, begin with the end in mind: a really healthy enterprise SaaS software company has about half of their new TCV that comes from add-on sales. If you've got a really good account team between your sales team and your customer success team, you've got really good insight with these customers about where their investment priorities are, and that gives you great feedback into the product management organization. So that's how we think about the business in general. Let Bryan talk about how we think about it in impacting the gross margin.

Yeah. A couple of benefits from add-on sales. The first one, maybe even the most important, is an add-on sale is significantly less effort in the implementation process. What I mean by that is a new logo today for Alkami has on average 20 system integrations that occur in order to launch the platform. The add-on sale effort from an implementation perspective is still somewhat complicated, but it's able to leverage those integrations that occur once when the platform has been integrated, resulting in a lower implementation effort in terms of cost which helps the gross margin profile. Secondly, an add-on sale, the speed to revenues, going from order to revenue is much quicker. To the extent that we're having success with add-on sales, it can be an acceleration to our organic growth profile.

Great. Thanks so much for that, and that's it for me.

Thank you, and this concludes our question-and-answer session, and it also concludes the conference. Thank you for attending today's presentation. You may now disconnect.