Good afternoon, ladies and gentlemen, and welcome to the Alkami Technology’s Third Quarter 2024 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded today, Wednesday, 30th of October 2024. I’d like to turn the conference over to Steve Calk, Vice President of Investor Relations. Steve, go ahead.

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 in 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 will now turn the call over to Alex.

Thanks, Steve. I am pleased to report another quarter of outstanding performance. In the third quarter of 2024, Alkami grew revenue 27% and expanded adjusted EBITDA to over $8.3 million, both ahead of expectations. We added nine new digital banking clients including three banks and launched 12 clients on the Alkami platform, which ties a previous record number of client launches in a quarter. In addition, during the quarter we were recognized by several third parties as we continue to establish ourselves as the leading digital banking platform. FI Navigator listed Alkami as the top digital banking provider in credit union market share based on the number of enrolled mobile users. We were named as a 2024 FinTech Top Solution Provider by IDC and included on CNBC's 2024 World's Top FinTech Companies list. Tearsheet named Alkami Best Banking App, and Alkami became the first digital banking solution company to be certified by JD Power for providing clients with an outstanding mobile banking platform experience. User experience, extensibility, availability, and broad functionality are reasons why clients have selected Alkami. More recently, our ability to create value with our data technology is becoming a differentiator for Alkami. With our data and marketing products included in approximately 60% of our new client wins in 2023, moving to over 70% so far in 2024. These products have also generated over 20% of our add-on sales to date in 2024. During this call, I'd like to spend a few minutes describing why data is becoming a differentiator and a growth driver for Alkami. Digital banking has been a service platform for consumers who did not want to go into a branch to manage their money. It also served to reduce costs for a financial institution by shifting interactions from human to digital. Today, we are seeing our market accelerate the adoption of digital revenue-generating strategies in addition to using digital banking as a service channel. As these financial institutions implement digital revenue efforts, they’re realizing that data is the oil that makes the revenue engine run. For example, our research shows that deploying modern data capabilities along with predictive AI grows two times faster than financial institutions that don't apply these technologies. Our market knows they have relevant data to drive revenue strategies, but their data is difficult to access and analyze. For instance, in a 2024 Deloitte Banking & Capital Market Survey, 92% of financial institution data users and leaders say that data is unavailable or takes too long to retrieve, and over half responded that when the data is there, they don't have the technical capabilities to make use of it. Data must be cleansed, maintained, normalized, and curated. Alkami's data and marketing solutions have these four characteristics at scale. Our data platform contains 29 million deposit accounts with 20 billion historical transactions, and about 20 million new transactions are added each day. Financial institutions early in their data journey can use these data capabilities to close the gap against megabanks who are already investing in data technology and data science teams. Financial institutions starting on a path to predictive AI can use one of our 12 AI models to generate revenue, improve engagement, or retain customers with models built for the compliance requirements of our industry. And financial institutions that need marketing technology in addition to data and models can use Alkami's full funnel marketing technology stack that covers digital channels including the digital banking channel, web, and email, and measures ROI for each campaign. Alkami offers three plans within our data marketing solutions: data insights, predictive AI, and full funnel marketing. These plans are designed to meet the needs of the regional and community financial institution market and help these institutions achieve their growth strategies such as driving new deposits, loans, and non-interest income. In 2023 alone, Alkami's data and marketing clients generated $4.5 billion in CDs, $525 million in money market accounts, and $391 million in savings accounts. In addition, our clients used these capabilities to generate $1.8 billion in home equity loans, $1.7 billion in mortgages, $1.4 billion in consumer auto loans, and $983 million in commercial loans. It's been exciting for me personally as I've sat through executive meetings in which we show clients revenue opportunities with their live data including deposits; we can identify transfers where investment dollars are going. Trial deposits show when new accounts are opened elsewhere or track tax refunds so that the financial institution can keep those in their institution. For lending, we can identify where account holders pay their mortgage, auto loan, and credit cards. Merchant processing, commercial lending, and payroll can all be identified and placed in the hands of commercial relationship managers to drive new business opportunities. Beyond our current capabilities, we see a future in which we can combine our data technology with digital banking to provide real-time revenue opportunities. For instance, if a financial institution's customer attempted to digitally move money from the financial institution to a brokerage account, the financial institution could insert a targeted offer for a high-interest-rate account complete with preapproval and instant account activation. Or if their customer tried to establish a new bill payment for a recurring subscription, the financial institution could prompt the customer to use a rewards-based debit card instead, generating new interchange revenue and transforming bill payments from a cost item to a revenue source. The more financial institutions reduce friction and revenue generation, the more they worry about fraud, and we've also run successful experiments in which we use our data scale to provide real-time insights into proactive fraud detection. The success of our data and marketing solutions so far, combined with an increased awareness within our market of the power of data to drive revenue activity, gives me confidence that our data capabilities can be a long-term differentiator and driver of growth for Alkami. In closing, Q3 2024 was another quarter in which Alkami demonstrated continued execution towards our target operating model and the long-term goal we have to be the number one digital banking platform. I'll now hand the call to Bryan to take us through the numbers.

Thanks Alex and good afternoon everyone. In the third quarter, we continued to outperform on the top line and profitability. We achieved total revenue of $85.9 million, representing year-over-year growth of 27%. Subscription revenue also grew 27% and represented over 95% of total revenue. We increased ARR by 24% and exited the quarter at $342 million. We currently have approximately $46 million of ARR and backlog for implementation, the majority of which will occur over the next 12 months. We implemented 12 new clients in the quarter, bringing our digital banking platform client count to 266 clients. Also, we have 36 new clients in our implementation backlog representing 1.3 million digital users. We exited the quarter with 19.5 million registered users on our digital banking platform, up approximately 900,000 sequentially and up 2.6 million or 15% compared to last year. Over the last 12 months, we implemented 37 financial institutions supporting 1.2 million digital users. In addition, our existing clients increased their digital user adoption by 1.4 million users. As a reminder, because of the long-term nature of our contract, we have three to four quarters visibility into upcoming client attrition. We expect churn of less than 1% for the full year 2024, all of which will occur in the fourth quarter. Over the long term, we model digital banking ARR churn at 2% to 3% per year. We ended the quarter with an RPU of $17.54, up 8% compared to a year ago, driven by add-on sale success and the addition of new clients who tend to onboard with a high average RPU. We are seeing broad-based demand across our product portfolio. Our 2024 new sales performance continues to outpace 2023. Year-to-date, we signed 23 digital banking platform clients including 8 banks, and our add-on sales effort represented approximately 46% of 2024 new sales. In addition to add-on sales, our client sales team is responsible for client contract renewals. We expect to renew over 30 client relationships in 2024. During the first nine months of 2024, 26 client relationships increased the ARR run rate by 16% at the time of renewal, outperforming prior year cohorts. And finally, our remaining performance obligation was just under $1.3 billion, representing 3.7 times our ARR and up 27% compared to a year ago. Now turning to gross margin. For the third quarter of 2024, we delivered non-GAAP gross margin of 62.8%, representing 400 basis points of expansion compared to the prior year. We achieved gross margin expansion through continued improvement in our hosting costs and platform investments as well as operating leverage across our solutions. As a reminder, our 2026 gross margin objective is 65%. Moving to operating expenses. For the third quarter of 2024, operating expenses of $46 million or 53.6% of revenue represented year-over-year operating leverage of 490 basis points. We derived operating leverage across each operating expense but primarily in R&D where we continue to realize operational scale while investing in our platform. Investment-focused areas include initiatives to drive quality and cost efficiency of the platform, expand our product offering, improve extensibility, and enhance the product market fit of our commercial banking offering. As for non-GAAP sales and marketing expenses, we continue to achieve a high level of sales team productivity and go-to-market efficiency. For the last 12 months, we increased ARR by $67.1 million while investing $48.5 million in sales and marketing, representing an efficiency ratio of 1.4 to 1. We believe this ranks among the very best in SaaS in terms of sales and marketing efficiency. Our adjusted EBITDA in the third quarter was $8.3 million, better than the high end of our expectations. Our adjusted EBITDA margin for the quarter was 9.7%, and when combined with our revenue growth rate results in achieving the rule of 36; our operating strategy of balancing revenue growth and profitability will continue, and we expect to achieve the rule of 40 on a run rate basis as we exit the fourth quarter of 2025. As we are now approaching 2025, I want to provide some additional color on the path to our 2026 adjusted EBITDA margin target of 20%. As we previously mentioned, during 2023 we began to build a base of offshore talent through a third-party outsourcing model. This has been a positive experience for us, allowing us to expand engineering capacity during a period of rapid growth while focusing on profitability. We are now preparing to transition these activities to a captive offshore subsidiary model. We expect to invest in this capability starting in the fourth quarter of 2024, continuing throughout 2025 with the goal of completing the transition during 2026. We do not anticipate any impact on our 2026 financial targets, although we do expect to see a positive impact on margins beyond 2026. During 2025, the incremental investment to affect the transition will represent approximately a point of margin for the year. We are very excited that we are maturing as an organization, and we look forward to the positive operational and financial impact this can have as we scale the business beyond 2026. Related to our balance sheet, we ended the quarter with approximately $101 million of cash and marketable securities. Our revolving credit facility remains undrawn and provides $125 million of borrowing capacity. In the third quarter, we produced operating cash flow of $11 million and free cash flow of $8.7 million. Now turning to guidance. For the fourth quarter of 2024, we are providing guidance for revenue in the range of $89 million to $90 million, which represents total revenue growth of 25% to 26%. For adjusted EBITDA, we are providing fourth quarter guidance in the range of $8.5 million to $9 million. For the full year 2024, we are providing guidance for revenue in the range of $333.2 million to $334.2 million, representing total revenue growth of 26%. We are also providing adjusted EBITDA guidance of $25.2 million to $25.7 million. In closing, I am very pleased with our continued progress. Our team delivered a strong quarter with profitable growth, continued operating leverage, and a level of go-to-market efficiency that places us among the very best performers in SaaS. And with strong industry tailwinds combined with our multiple growth drivers, we have a clear path to our longer-term operating and financial targets. With that, I'll hand the call to the operator to take your questions.

Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Alexei Gogolev from JPMorgan. Please go ahead.

Hi, this is Elyse Kanner on for Alexei Gogolev. My question is about 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?

Thank you for the question. AI has been utilized in the financial services sector for quite some time. For example, activating a card through a voice response unit has involved natural language processing for years. However, when it comes to leveraging AI for predictive models related to revenue generation, we are still in the early stages. As I mentioned in my prepared comments, it is essential for customers to cleanse, normalize, and manage their data effectively. The best data for AI models often comes from transactional data that customers possess in their mobile banking applications and core systems. Ensuring that this data is in a suitable state for model implementation is the first significant step for them.

Got it, thank you. And then my second question would be, what do you think drove the really strong AR uplift at renewal?

What we're seeing now is there's just a greater appetite for more innovation and technology through the platform. And so on average, if you look at our client base, they average between 13 and 14 products. And then when you analyze the new sales cohorts that are coming in, they're averaging around 19 products. So what we're renewing today are clients that typically have somewhere between 9 to 14 products, but for them to be on par with where new sales cohorts are coming in, they need more innovation; they need to be more at the 19 to 20 to 22 product level. So it's really the cross-sell opportunity that's occurring at the time of renewal.

We'd like to add to that, and we've mentioned this on a couple of calls, is that several years ago we started building out a client-facing account management team. That account management team has now been in place for a couple of years, and because of that, they're able to establish relationships and execute strategic workshops with our clients where they lay out a multi-year digital transformation journey which leads to strategic adoption of the products that Bryan was just talking about.

Got it. Thank you so much.

Your next question comes from the line of Patrick Walravens from Citizens JMP. Please go ahead.

Hey there, this is Austin Cole on for Pat. Appreciate you taking my questions and congrats on the results. So I recognize some of the kind of longer-term demand drivers don't really change day-to-day, right, but with the kind of 50 basis point rate cut and some of the long yields rising, I mean, what impact do those things have on your business and are you feeling any change in kind of the attitude from clients?

What I would say is the demand for digital banking has remained consistent from a low interest rate environment to a high interest rate environment, to the recent interest rate changes. So this is a long-term market sector transformation in which the customers aren't making decisions to accelerate the investment one quarter or decelerate it another quarter. The main difference that we see is the products that they add on based upon the interest rate environment. So are they adding on products like instant account verification to drive deposits, or if this market changed a little bit and their balance sheets were able to change and they could make more loans, then are they going to be buying products that help more with loan generation. But the summary is the long-term change in investment isn’t impacted by short-term interest rate changes. The mix of add-on products sometimes changes, and that's good for us because we've got products that are useful for either side of that equation.

Okay, thank you.

Your next question comes from the line of Cris Kennedy from William Blair. Your line is now open.

Good afternoon. Thanks for taking the question. Bryan, 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?

Well, we're excited about the opportunity. I mean presently we have maybe 110 to 120 full-time employees that are coming through this third party, and they're exclusively engineering. And one of the secrets to our success has always been the best platform wins. And so there's this desire to continue to innovate through the platform, create new products, and provide innovation to the end market. Well, to do that profitably, we have to find areas in which we can do that at the right price point. And so engineering is definitely an area where this is going to benefit us. But also this is going to benefit us within gross margin and cost of sales because over the longer term there will be opportunities for some of our post-sale operations to offshore, some of those at least the growth in those areas to bend the cost curve. So we're extremely excited. The adoption within the company has been great. The results that we're seeing and productivity have been really very good as well, and we think that will only improve as we move more to a captive model versus a third-party outsourced model.

Great, thank you for that. And then just a follow-up on the data platform and the opportunity. Can you talk about how open banking in the US will impact that opportunity? Thanks for taking the questions.

Yeah, this is Alex. I think the rate and pace of open banking is still pretty much unknown. So the customers right now we just saw the directive that was handed out a week or so ago from the CFPB. The investments that the customers are making right now in data really have nothing to do with open banking. And so if open banking were to accelerate, that might provide more tailwinds in terms of the data investment. The investment that the customers are making right now in data is really realizing the advantage some of the mega banks have in terms of the investments they've made in their data platform and their models and since that tends to be the competition focus on the most, their current investment is about current capabilities with the current market conditions and really doesn't have to do at this point in time in open banking. Like I said, that might be an increasing tailwind for us, but the rate and pace of that, when I talk to customers, is largely unknown.

Great. Thanks for taking the questions.

Your next question comes from the line of Jeff Van Rhee from Craig Hallum. Please go ahead.

Thanks for taking my questions. This is Daniel on for Jeff. Just in terms of you've discussed the mindset, obviously with interest rates of financial institutions changing toward attracting deposits. Just any additional thoughts on how that's been translating into new logos and additional add-on products?

Yeah, as I said earlier, the change in interest rate environment doesn't really impact the rate and pace at which we're closing new logos. If you go back a little bit to some of the comments that Bryan and I have made in the past, these contracts are five, six, seven years. A customer will have to make the decision to begin a conversion process a year before their contract is up for renewal, which means they'll start the decision cycle maybe even a year before that. And so any change in interest rate that might happen in that decision cycle doesn't really change whether or not they're going to make a decision because they're making a decision for the next five to seven years. The biggest impact that it has for us is the mix of add-on products that we sell. There's a certain set of products that are useful for a low interest rate environment and another set of products that are useful for a high interest rate environment. And so we've seen that mix shift starting what that was almost 24 months ago when the interest rates started going up and it might shift back if the interest rates start going down.

Thanks for that. And then just on the credit union add pace in 2024, fairly similar to 2023, should we expect credit union adds to remain relatively flat around this level of call it 30 credit unions a year just based on that regular cadence of credit unions that come up for renewal and the limited number of deals that can be pursued in any given year, or should we be thinking of any ways that that add count should be showing acceleration?

You should expect the credit unions that we add from year to year to remain pretty consistent in the 25 to low 30 range. We're working towards the same rate and pace as it relates to banks as well, and we're showing some progress there. But a lot of it is framed by the structure and cadence of the market. As Alex just mentioned, five to seven year contracts, we focus on the top 2500 financial institutions. Those top 2500 financial institutions represent over 200 million digital users, and so there's a rate and pace in which those come to market. We continually win our fair share of credit unions and we're starting to see more at-bats and more opportunities as it relates to banks. We believe two to three years out we'll be at the same rate and pace with banks as it relates to credit unions.

That helps. That's it for me. Thanks guys.

Next question is from the line of Adam Hotchkiss from Goldman Sachs. Please go ahead.

Great. Thanks so much for taking the questions. I guess first to start in your experience on some of these data-related add-on sales, how much education has to happen on your side of the equation to get financial institutions to understand the value and the security that you bring them here versus them sort of proactively coming after the opportunity? I guess I'm just trying to understand how knowledgeable and educated some of these bank decision-makers are around the AI opportunity and the data opportunities.

Yeah, it's been interesting to watch over the last three years. I would say three years ago we would be in evangelical mode about data, and now almost every executive that I talk to knows that they have to become a data-first digital. So we're no longer in an evangelical mode in terms of, boy, you should think about the fact that data will drive personalization in the digital banking channel. These are all smart executives and they all get it. So that change has happened in the last three years. We do have two different sides of the market, so we'll have a part of our market that is pretty sophisticated from a data perspective. They might have created their own data capability through something like a snowflake or something like that. They've got their own marketing technology stack and what they want to do is figure out how to use Alkami's cleansed and curated data to feed into their data tech stack and then to be used into their marketing tech stack as well. And then we'll have another set of the market that has just been hard for them to get that talent in their organization, and so they want essentially a shrink-wrapped capability where the data platform, the models that are already built right on top of those models, and then has essentially a walled garden marketing technology stack that sits right on top of the data and the model. So in summary, last three years has moved from an evangelical position to a position where the executives get it and they're asking us how we help. And the market is bifurcated between sophisticated customers that have built their own data tech stack and models and they want our data to feed it, and customers that struggle getting access to that skill set and want a pre-built capability for data models and marketing.

We're seeing it in our results as well. So if you look back a couple of years ago, where we were seeing success with our data products was really when a digital banking platform sale was occurring. So we would see maybe a 50% to 55% attachment rate. But when C-level executives of financial institutions were involved in making a decision, we tended to have more success in selling our data product. Now when you look at the attachment rate in 2024, we are closer to 75%, so that's good news. But what gets me excited is a couple of years ago it was really hard from a client sales team go-to-market motion where their penetration point in the market generally is a bit lower than the C-suite to get traction with the data sale. Well, flash forward to 2024, now our data products are one of our leading cross-sell products back into our base. So not only are we seeing strong attachment at the point of a new client win, we're also now seeing some very nice progress in our client sales team cross-selling back into our base.

Okay, great, that's really helpful. And just to follow up on that, in terms of bank win rates, do you think that data and AI just more broadly when you talk about that 70% attach, is that helping you improve bank win rates? And I think you've given some color on where you are there in the past. Have you been making progress there? Generally, just any update there would be helpful.

Our data product is a key differentiator for us in the market, no matter the type of financial institution. Therefore, I wouldn't link the movement in bank win rates solely to that. However, we are experiencing some success with banks. As we enter a newer market, creating market awareness is essential. Currently, we are competing in the same number of bank deals as credit union deals over the past year, which is very exciting for us. We are also bringing in talent to enhance our commercial banking product. One notable addition is our new Chief Product Officer, Gagan Kanjlia, who has experience in commercial banking. There are many positive developments regarding banks, and we see this as a key growth driver for 2025, 2026, and beyond.

Really helpful, thank you both.

Question comes from the line of Charles Nabhan from Stephens. Please go ahead.

Thank you for taking my question, and congratulations on another strong quarter. My question is about the revenue growth algorithm. It has performed very well this year, but I've noticed that ARPU growth has accelerated while user growth has slightly slowed. This makes sense if you think about the increased revenue coming from banks and cross-selling. As we look ahead, could you provide some insights on how this algorithm might evolve in the medium term regarding user growth versus ARPU growth and its impact on overall revenue?

The strength of the Alkami revenue model lies in its balanced approach to various factors. We are experiencing growth by acquiring new clients, which leads to an increase in users. Our clients are effectively encouraging their customers and businesses to adopt our digital banking platform, resulting in more digital users. The new clients bring in a significantly higher revenue per user compared to our overall average. Our implementation backlog is around $23, while our average is $17.54, showcasing the multiple avenues available for generating revenue. In any given quarter, the importance of one approach may surpass another. User growth is primarily influenced by our backlog at the beginning of the year and the timeline for implementing new clients. This year, we've noticed digital user growth declining from the high teens to the mid-teens. However, this decline is accompanied by an expansion in average revenue per user due to the efforts of our sales team engaging with existing clients. Moving forward, we expect to see user growth remain in the range of 15 to high teens, with continued expansion in average revenue per user beyond the current 7% to 8%.

Got it. Super helpful. And as a follow-up, I wanted to ask about the gross margin target in light of your comments around the offshoring strategy. If I understand things correctly, you're expanding gross margin by 200 to 300 basis points a year. Those investments will be about 100 basis points negative, but that still gets you to something north of 65% by 2026. So I guess my question there is, are there any other puts and takes we should consider with respect to the gross margin, or is that just an element of conservatism built into that target?

So we provided the 65% gross margin target a couple of years ago, and what Alex and I suggested, we would achieve that target somewhat ratably from where we were at that point in time, which would indicate a couple hundred basis points of gross margin expansion a year. We've actually outperformed that, as you're pointing out, but we're still standing on our 65% gross margin in 2026. Now, the point of margin that I mentioned in my prepared comments related to establishing our offshore subsidiary that’ll actually come through R&D. That's not a cost of sales or gross margin factor, but you should continue to expect that gross margin in 2026, a target of 65%. We could get there faster. We're only a couple hundred basis points away, so potentially, we achieve that as we exit 2025, but once we get closer and have visibility in the quarter in which we'll actually go over 65% gross margin, then we'll reestablish a longer-term gross margin target.

Got it. Thank you for the clarification and appreciate the responses. Thanks again guys.

Next question is from the line of Mayank Tandon from Needham. Please go ahead.

Hey guys, this is Sam on for Mayank. Thanks for squeezing me in. Just a couple quick questions. One, touching on those renewals you guys mentioned, could you talk about exactly which products you guys are seeing the strongest add-on momentum with these renewals that are coming up?

Yeah. So the success that we're seeing in not just renewals but just in cross-selling more broadly or within our fraud and security products, the data products which we've spent a lot of time discussing on this call, as well as our client services products which includes things like chatting and anything that can intercept a call from going into a financial institution contact center, so some more self-servicing type products, and then finally financial wellness. If you look at our client base and with a large percentage of our clients being more retail-focused, many of them have a charter of trying to build financial wellness and financial soundness within their customer community, and so our financial wellness products have been a nice uplift for us as well.

Got it. Okay, that's helpful. And then kind of in a similar vein, just wanted to switch over and get your comments on the product roadmap and what that looks like. Any areas that are of particular interest for you guys? Obviously with the rise of gen AI solutions and capabilities and then I know you guys also brought on a Chief Product Officer earlier this year in the summer, I think. So just any comments around that would be helpful as we kind of shift focus into 2025.

The best way to understand this is to consider client demand. When we engage with our clients or potential clients, they are primarily concerned with a few key aspects. Firstly, they are looking to enhance their digital experience, particularly in their banking applications, and to expand that experience. They want to determine how to effectively sell new products to existing customers or attract new ones, all while creating a seamless digital experience like the one they've already established in banking. Customers are highly interested in fraud and fraud management as well. There's a challenge in balancing reduced friction in the digital banking channel with increased opportunities in that channel. Therefore, they seek to implement more real-time fraud management capabilities that span their entire platform, allowing them to streamline customer interactions. The topic of data and marketing is crucial to every customer's strategy; they are keen to develop effective data platforms. From a payments standpoint, the introduction of FedNow and real-time payments, along with innovations in peer-to-peer payments, has prompted our clients to reassess how they can improve the user experience for their customers regarding payments. They are considering how to integrate FedNow and real-time payments into their overall strategies. Consequently, our opportunities lie in these areas since they clearly reflect client demand. To summarize, our focus is on payments, enhancing the digital end-to-end experience for onboarding or introducing new products, and improving fraud management alongside data platforms.

Yep, okay, that's helpful. Makes a lot of sense. Thanks, Alex. Thanks for squeezing me in guys.

Your last question is from the line of Jacob Stephan from Lake Street. Your line is now open.

Hey, thanks for taking the questions. Congrats on the results. Maybe just following up on a question asked about the captive offshore model, but maybe you could kind of help us understand what the weighting of the margin impact will be. Will we see kind of more of an impact or more expense in kind of the first half followed by improvement in the second half, or maybe just help us think about that?

The 1% margin investment will be spread out more evenly throughout the year. It will begin in the fourth quarter of 2024, smoothing out through 2025, with more noticeable benefits expected in 2026.

Okay, got it. Does this help to speed up the implementation timeline for new logos, or is this more focused on internal software development?

Yeah, the initial focus is continuing to increase engineering capacity. This isn't a cost-cutting play. This is about absorbing growth in the organization and continuing to deliver engineering capacity and new product development capacity while we balance that with profitability objectives that we have. Once we establish the offshore subsidiary, which will happen throughout 2025 and early into 2026, then we can start exploring other areas within Alkami where we can absorb continued growth. But that’s further into the future, and right now the focus is primarily on engineering capacity.

This is Alex; this is the decision point. If I go back to the previous question. We have 360° of product opportunities if you look at customer demand, and what we need to do is figure out how to get more product out the door and continue to drive balanced revenue and profit growth. That's the real driver behind the establishment of Alkami India; it's the opportunity that sits in front of us, and our desire to add engineering capacity so that we can build those new products.

Okay, got it. That's helpful. Maybe just one last one. Just on the kind of the loan origination product, obviously mortgage lending has been down, also personal loans; there's been some softness in that vertical. 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, or do you find that not really a factor?

Well, think about loans as front of house and back of house. So most of our customers have a workable back of house application for their loan origination, but what they want is they want a better end-to-end digital experience for the consumer or for the business that's coming in. So as Alkami thinks about its future, not necessarily should we replace a back of house mortgage application platform. In our customer, we kind of own the front of house experience and what could we build onto that front of house experience that would give their customers a better onboarding into the entity or a better purchase of a new product. So, in summary, think about the digital experience on the front end of buying a new loan product and think about the back of house administrative activities necessary to underwrite that loan and book that loan and produce the documentation associated with that loan. Anything that Alkami does would be associated with the front of house digital experience.

Okay, got it. That makes sense. I appreciate it, guys.

The last question comes from the line of Andrew Schmidt from Citi. Please go ahead.

Hey, Alex. Hey, Bryan. Thanks for having me on here. Sorry if I missed this, but I just want to dig into the M&A, our thoughts on M&A. Obviously, the equity valuation coming up presents a nice currency to do transactions. You've been pretty successful with M&A in the past in terms of adding capabilities on. Sounds like prices out there are starting to become more reasonable. Just want to take your temperature on just the M&A environment as you see it now. Thank you.

Thanks, Andrew, for asking the question. We're seeing, as you would expect, an increased number of targets that are becoming available. We have a few individuals internally at Alkami whose job is, if not exclusively close to exclusively, focus on M&A activity. So we're seeing the multiple expectations of the targets seem to be now finally coming more in line from where they were maybe 18 months ago. We're seeing the quality of assets improving, but we're a disciplined buyer. We're not just buying revenue; we're buying functionality that can continue our growth trajectory for many years into the future, but we're also not going to take a step back on our profitability objectives. So as you put more and more requirements in the filter, it starts narrowing the field, but we're pretty disciplined when it comes to those items. And then as it relates to capital available for us, as I mentioned, we have $125 million remaining or available on our credit facility because it's presently undrawn. I have the ability to continue to borrow more beyond that; equity capital is attractive as a potential source of capital. We'll always seek the lowest cost of capital possible to achieve greater returns as it relates to M&A activity. But I think the takeaway is it's been several years since we've acquired a business. Organizationally, we're in a position to where we could absorb another business. The pipeline for M&A is becoming more attractive, and it's definitely a growth driver, a growth area for Alkami.

Yeah, I agree, Bryan. And maybe the summary is new organic product build and M&A are two parts of our growth strategy.

Got it. Makes a lot of sense. Thank you for that. And then I believe you mentioned that the sales momentum continues, but I do want to ask about the fourth quarter. We do have an election here coming up right in the middle of the quarter, and the fourth quarter tends to be a big bookings quarter. Just curious how the sales cycles are shaping up, seeing any hesitation in terms of bookings; any thoughts there will be helpful.

Yeah. Andrew, this is Alex. As I said before, to date, none of us can predict what businesses are going to be thinking about in the next couple of months. But I would say to date, we haven't seen any macroeconomic or geopolitical things occur over the last several years that have impacted the steady rate and pace of digital transformation in the regional and community financial institution market. So I think it would be a lot of hubris on my part to predict what's going to happen 48 hours after an election. But to date, economic situations, political situations, and geopolitical situations have not changed the trajectory of the digital transformation in the market that we serve.

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.