Earnings Call Transcript - ALKT Q2 2023

Operator, Operator

Hello, and welcome to Alkami's Second Quarter 2023 Financial Results Conference Call. My name is Sarah, and I will be your operator for today's call. All participants will be in listen-only mode. After today’s presentation there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Steve Calk. Steve, you may begin.

Steve Calk, Chairman

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 entitled Risk Factors and Forward-Looking Statements. The statements made during the call are being made as of today, and we undertake no obligation to update or revise any forward-looking statements. Also, unless otherwise noted, 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 filings with the SEC. I will now turn the call over to Alex.

Alex Shootman, CEO

Thank you, Steve, and welcome, everyone. I am pleased to report another quarter of strong operating and financial performance. In the second quarter of 2023, Alkami grew revenue by 30%, once again ahead of our expectations. We exited the quarter with 15.8 million live registered users on the Alkami platform, up 2.5 million compared to the prior year, and we achieved a $2.5 million adjusted EBITDA loss, better than the high end of our expectations for the quarter. During the second quarter, Alkami continued to execute with a consistency that has characterized our business for over a decade and recently as a public company. Since our IPO in the second quarter of 2021, the number of registered users on our digital banking platform is up almost 50%, our quarterly revenue is up 79%, and our ARR is up 78%. Our consistent growth in operating improvement has occurred quarter-after-quarter to both low and rising interest rates and various economic and political cycles during the spring banking crisis, in which three mid-sized US banks failed and during and after the global pandemic. This consistency gives us confidence in our revenue growth targets and our ability to achieve a 20% or better adjusted EBITDA margin by 2026. Alkami is able to achieve a level of consistency in performance that is superior to most enterprise SaaS companies because of the unique attributes of our business. These include the mandatory nature of our products, size and health of our TAM, client engagement, innovation, the levers that we have in our growth model, and the culture of our company. The first reason for our consistency is that our target market considers digital banking to be a mandatory innovation. In every piece of research we conduct, the number one decision criteria for selecting a new financial institution is the quality of the digital experience. The top 2000 financial institutions in the United States understand this and are aggressively pursuing a modern digital sales and service channel because mobile banking adoption is growing faster than computers, mobile phones, or the internet. When I talk with clients or prospects, they tell me three things are driving the increased pace in which they are investing in digital banking. First, the pandemic forced virtually 100% of their customers to become familiar with digital banking; second, there are new entrants in the market funded by billions of dollars of venture capital that showcase modern, easy to use technology; and third, our market is aggressively pursuing millennial and Gen Z consumers who have grown up with a digital-first mindset. The closest analogy for what is occurring is what we saw in the mid to late 2000s when companies finished major back office investments in ERP systems like SAP and began investing in customer relationship systems like Salesforce and marketing platforms such as Adobe. The average financial institution in our TAM is 80 years old, and their technology investments have historically been allocated to their legacy back office systems. They are now rotating that investment into a modern operating platform that integrates with their core back office system that allows them to interact digitally with their customers to sell, serve, and improve their customers’ experience. A modern digital sales and service platform is seen as a basic requirement for a regional or community financial institution that intends to be a healthy ongoing business. Based upon our research over the past year, the digital banking platform is the most important item to a consumer selecting a bank or credit union and ranks above customer service, convenient ATMs, and convenient branches. It is the most highly correlated attribute to overall bank or credit union customer satisfaction, it is the top reason a small or medium business is likely to consider their bank or credit union as its primary financial institution, and it is directly correlated with higher consumer product penetration. For these reasons, 71% of regional and community financial institutions find a digital sales and service platform like the one offered by Alkami to be appealing. The second reason for our consistency is that our market is healthy and growing. When we became a public company, we stated that our market consisted of 185 million digital users of which, even with our growth, we are today serving less than 10%. That market has continued to grow in the mid-to-high single digits as each of us has multiple financial institution relationships. Consider just one aspect of our market; until about 10 years ago, if you moved to a new city and that city didn't have a branch of your existing financial institution, you probably opened a new account and closed your old one. Today, when you move, you might open a new account and you probably keep your old account. Our research shows that the average consumer has 1.7 banking relationships for debit card or checking account. Among Gen Z, that number increases to 1.9. This creates growth strategies for our target market that never existed before. It's also evolving the primary financial institution as defined by consumers; a few years ago that was determined based upon where the consumer had a checking account. Our research shows that it's shifting to where the consumer does most of their digital banking. As a result of these dynamics, many of our clients are creating digital-first growth initiatives where in the past they would have led with a branch investment. In addition to the growth of the market, spending on digital banking technology remains resilient. Even in the wake of the banking crisis in the spring, 89% of our target market expects technology budgets to remain the same or increase over the next 12 months. The full reason for our consistency is that we exist to help our clients compete with the digital capabilities of megabanks, and given the criticality of this element of their business strategy, we have the ability to meet with any level and any function on our client base. This level of intimacy gives us first-mover advantage in developing new market opportunities, which is why our ARPU has grown 20% since our IPO. An example of this is our entry into the commercial banking market. Over five years ago, several of our larger credit union clients were expanding into business banking, and they asked us to develop capabilities for them. Today, we can deliver a business solution to 99% of potential bank clients, and so far in 2023, we added another six banks to our client roster, including the largest bank win in our history. In addition to converting to the Alkami digital banking platform, this bank is deploying a full suite of Alkami products, including settlement, digital account opening, and ACH alert. We now have 25 banks under contract. Another example is the segment acquisition. From our inception, Alkami has captured anonymized transactional data because we believe in the power of that data to help our clients interact more personally with their customers and members. But for many years, only a handful of early adopters took advantage of this capability. Recently, the combination of digital transformation and financial institutions that are pursuing a digital-only growth strategy has moved the use of the data from early adopters to the broader market. For example, last Tuesday, I met with the executive team of a prospect that historically was focused on five counties in one state in the Northeast and now has a growth strategy to expand nationwide through a digital-first approach. The main topic of conversation was their desired use of data to attract and grow customers digitally. In fact, our research shows that 84% of regional and community financial institutions want to leverage the data in their digital banking platform for more sales growth. Why? Because 73% of consumers say that personalized product recommendations would make them more likely to trust, try a new product from, and/or recommend a financial institution. But as the broader market began focusing on their data strategy, they provided us feedback that our legacy data platform was challenging to adopt. They also let us know about a smaller technology company that had mastered the ability to simplify the use of data analytics and marketing for regional and community financial institutions. That company was Segment, and we were very pleased with the acquisition and the pace at which we were adding new standalone clients, as well as the bundling of our data capabilities with new logo wins. Here's how added innovation plays out in terms of add-on sales. If our average client is halfway into a six-year contract, that means the initial solution was proposed in 2019. When you consider the innovation that's occurred in the last three to four years, and their need to compete, we don't have to force an add-on product conversation. In fact, within our target market, lack of awareness of new products is the top barrier to a financial institution adopting add-on products. Good account management, executive relationships, and product education go a long way towards driving our continued growth. That is why our cumulative ARR expansion is two times among the 2018 and 2019 cohorts. The growth equation for Alkami is simple: registered users times revenue per user. The fourth reason for our consistency is that we have multiple levers to work on this equation. First, we can grow by adding clients. We've been doing this for years in the credit union market and are now making progress in the bank markets. We win as our clients win, meaning our revenue grows as our clients expand their customer account base and add registered users to their digital banking platform. Regional and community advisors continue to add customers, and our clients tend to grow faster than the industry average. In addition, once elected as the digital banking provider, we are starting a long-term relationship with our clients on average of 70 months. This long-term relationship reduces our attrition rate and equally as important, provides us an opportunity to expand relationships with our clients adopting additional products. This occurs during the contractual term and at the point of renewal, both driving a higher ARPU. Finally, since our clients tend to be on the acquiring side of M&A transactions, we benefit from M&A in the marketplace. The result of our growth algorithm is a model with multiple levers that can work at different tempos, affording a high degree of visibility, and supports continued growth performance. The final driver of our consistency is the Alkami culture. You don’t sell a six-year highly complex, user-disrupting solution to an eight-year-old financial institution unless you have values deeply embedded in your organization, values of client-first orientation, long-term orientation around innovation, and conservative business practices that are aligned with your clients. Our commitment to culture is how we established a leadership position among credit unions over the course of a decade. We built our business the same way they built theirs, serving and innovating on behalf of their customers and members, rather than our own agenda, and it's why we're now winning among banks. In closing, I'm proud of our continued consistency in the second quarter. It's a result of good people, good products, and good execution in a business where the market considers our products to be a mandatory innovation. It also helps that we have a large TAM that continues to grow, client relationships that give us a front-row seat to see new market opportunities, a business model with multiple growth levers, and a culture that understands the client is the North Star. And now I will hand the call to Bryan to take us through the numbers.

Bryan Hill, CFO

Thank you, Alex, and good afternoon everyone. During the second quarter of 2023, we delivered another quarter of strong financial results. We continue to see strong demand for digital transformation, including a higher adoption rate of the products offered through our platform to serve our clients’ end users. For the second quarter of 2023, we achieved revenue of $65.8 million, which outperformed the high end of our financial guidance and represents growth of 30%. This was driven by balanced performance across our primary revenue drivers. We implemented 12 new clients in the quarter, bringing our digital banking platform client count to 218. We now have 40 clients in our implementation backlog representing 1.5 million digital users. We exited the quarter with 15.8 million registered users live on our digital banking platform, up 2.5 million, or 19% compared to last year, and up sequentially 730,000 digital users. Over the last 12 months, digital user growth continues to be driven by two areas: first, we implemented 38 financial institutions supporting 1.5 million digital users; second, our existing clients increased their digital user adoption by 1.3 million users, offsetting a decrease in digital user growth, which turned to just over 300,000 digital users, the majority of which was represented by a single client that transitioned off our platform during the third quarter of 2022. We continue to maintain a very high gross retention rate of approximately 98% measured in terms of ARR and digital users retained over the last 12 months. We ended the quarter with an RPU of $16.20, which is 6% higher than last year, driven by add-on sales success and the addition of new clients who tend to onboard with a higher average RPU. Subscription revenue grew 28% compared to the prior year quarter and represents approximately 93% of total revenue. We increased ARR by 26% and exited the second quarter at $257 million. In addition, we currently have approximately $48 million of ARR in backlog for implementation over the next 12 months. We continue to see healthy demand across our product portfolio. Our new sales performance for the first half of 2023 outpaced 2022 by over 75%. In the first half of the year, we signed 16 new digital banking platform clients, of which 10 were signed during the second quarter. Our new logo clients reflect strong representation from banks with six signed so far in 2023. Our add-on sales focus continues to yield results as well. Compared to last year, our add-on sales effort resulted in 27% higher total contract value as our client base adopts additional products across our 10 product family categories. In addition to add-on sales, our client sales team is responsible for client contract renewals. During the first half of 2023, we renewed five client relationships where we raised the ARR run rate just over 11% through a combination of new product sales and a higher minimum contractual commitment. We expect to renew over 20 clients during 2023. And finally, our remaining purchase obligation or contracted backlog represented $967 million as we exited the second quarter, which is 39% higher than the year-ago quarter. Now turning to gross margin and profitability. For the first quarter of 2023, non-GAAP gross margin was 58.7%, representing 70 basis points of expansion when compared to the prior year quarter. Improvement in our gross margin results from operating leverage across our post-sales functions, such as our implementation, client success, and site reliability engineering teams, offset by a higher mix of revenue from our third-party IP partners. Our near-term operating model is a non-GAAP gross margin of 65% as we scale our revenue. We also expect to achieve a gross margin of approximately 60% during Q4 2023, as we exit the year. Moving to operating expenses. For the first quarter of 2023, non-GAAP R&D expense was $16.9 million or 26% of revenue, 200 basis points lower than the year-ago quarter. Margin expansion was primarily driven by revenue scale, as we've increased R&D expenses at a slower pace than our revenue growth. As a reminder, our targeted operating model is to leverage R&D to 20% of revenue while we continue to invest and expand our platform. Non-GAAP sales and marketing expenses were $12.1 million or 18% of revenue. In the prior year quarter, sales and marketing expenses represented 18% of revenue as well. Our annual client conference, Co:lab, occurred during the second quarter of both years, driving a higher expense-to-revenue ratio than other quarters of the calendar year. For the full year 2023, we expect our sales and marketing expense-to-revenue ratio to fall below 16%, a slight improvement from full year 2022. Non-GAAP general and administrative expenses were $12.7 million, or 19% of revenue. In the prior year quarter, G&A was approximately 24% of revenue. The margin expansion is primarily attributable to revenue scale. As we closely manage G&A expenses, we expect to further leverage expense as a percentage of revenue as we move towards our profitability objectives. Our adjusted EBITDA loss for the second quarter was $2.5 million, which is better than the high end of our expectations and less than half of the loss we incurred in the prior year quarter. We expect to be adjusted EBITDA positive starting in Q4 2023. As a reminder, we've established a 2026 adjusted EBITDA margin objective of 20%, which coincides with the achievement of our 65% gross margin goal. Now moving on to the balance sheet. We ended the quarter with just over $176 million of cash and marketable securities and just under $84 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, which we will achieve a few quarters after becoming adjusted EBITDA positive. Related to our capital structure, during the second quarter we amended our existing credit facility. The amendment, among other things, increases the amount of the revolving loan commitment by $20 million, with Citibank joining as a new lender and extends the maturity date from one year to April 29, 2026. We filed an 8-K on June 28 that provides additional information regarding the amendment. Now turning to guidance. For the third quarter of 2023, we're providing guidance for revenue in the range of $66.5 million to $67.5 million and an adjusted EBITDA loss of $1.25 million or $250,000. For full year 2023, we're raising our revenue guidance to a range of $261.5 million to $264.5 million, representing revenue growth at 28% to 30% and an adjusted EBITDA loss of $4.25 million to $2.25 million. This compares to an adjusted EBITDA loss of $17.6 million for the full year of 2022. In closing, we are thrilled with our continued progress and the solid financial performance we are delivering. We are well-positioned to capitalize on our unique business model, attractive market, and exceptional product offering, and we believe these will continue to fuel our success going forward. With that I'll now hand the call to the operator for questions.

Operator, Operator

Thank you. We will now begin our Q&A session. Our first question comes from Patrick Walravens with JMP Securities, please go ahead.

Patrick Walravens, Analyst

Oh, great, and congratulations on the continued execution. I have two questions related to the demand environment for you and your customer. Alex, the survey sounded really interesting. Could you repeat that and break out for us how many were up versus flat? Secondly, I'm curious about what the customer base is thinking regarding the demand for Gen AI driven solutions.

Alex Shootman, CEO

One point I mentioned earlier, Pat, is that despite the banking crisis, 89% of the target market anticipates that technology budgets will either stay the same or increase over the next year. There are numerous data points supporting this, but essentially, we haven't observed any decrease in the commitment to digitizing the front-end operations of financial institutions, which remains a top priority. Customers are particularly interested in three areas regarding AI in financial institutions. The first is security; we are collaborating with customers on new threat vectors related to account penetration and account takeovers. Solutions that aid customers in recognizing patterns to identify new threats are particularly appealing. Additionally, tools that analyze transactional data to uncover opportunities for increasing revenue or improving customer retention are also valuable. We’ve recently launched a tool that enables institutions to benchmark their data usage against industry peers. Finally, call centers represent a significant cost and investment for financial institutions, and there is ongoing interest in improving efficiencies in this area. Thus, the three focal points are security, data utilization, and customer interactions.

Patrick Walravens, Analyst

That's super helpful. Thank you.

Sam, Analyst

Hey, guys. It's actually Sam on for Mayank. Thanks for taking the questions this afternoon and nice results out here. Can you guys dig in a little bit more into the add-on sales success you had this quarter and maybe talk a little bit about how that stacks up relative to last quarter, if that changed at all?

Bryan Hill, CFO

Sure. So the add-on sales team, as you're probably aware, that was a team that was created in 2019 and our ultimate goal from our add-on sales team, which we refer to as client sales, is to deliver 50% of our total contract value year-in year-out from that team. Presently, we've been running in the, call it, mid-30% of total contract value, maybe as high as 40% of total contract value originated. So that's occurred year-to-date in 2023. From quarter to quarter, the production from that team has been pretty even and consistent. What can cause some variability from that team is the number of renewals they may have in any one quarter. Year-to-date so far through 2023 we've had five renewals, as we mentioned in our prepared comments, but we expect to have 15, maybe as many as 20 renewals in the back half of the year. So we expect a lot of productivity coming from this team in the back half of the year. Areas where we're seeing some good cross-sell adoption from our client base continue to be, and this is true for 2023 as well as 2022, our money movement products, our security products, and our marketing and analytical products.

Sam, Analyst

Great. That's super helpful. And then just a quick follow up on M&A. I know it's been a little while since you guys did the Segment acquisition, and that's worked out pretty well for you guys by the sounds of things. So I guess just curious what the appetite is for M&A today and maybe any potential areas you guys would look to target?

Bryan Hill, CFO

So we view M&A as a part of our strategic product roadmap along with some of our third-party IP partners. And so we're evaluating what's available but it has to fit within our product roadmap, it has to meet our financial model requirements. And then also, it's a capital allocation decision; it has to be a good return on capital. What we're finding today in today's market is while it's starting to occur, the evaluation expectation for M&A is still yet to catch up to where the public equity markets are at. Meaning, we think deals out there that are attractive are still fairly expensive. So we're just demonstrating a lot of discipline as it relates to M&A where we evaluate our third-party partner pipeline, which can be a source of M&A for us. A couple of our acquisitions actually came from that group of partners that we've completed so far, but that's the way we think about it and where the market is today, and would it yield the right capital return. Areas where we focus on really fit into some of the same areas where we're seeing some add-on sales success, so the fraud security area would be of interest for us, some continued extension of products within financial wellness would be interesting for us, as well as marketing and analytics.

Chris Kennedy, Analyst

Good afternoon, and thanks for taking the question. Alex, you've talked about the data platform that you have, but can you just go into a little bit more about what the opportunities are, as you think about your roadmap, your product roadmap, over the next couple of years?

Alex Shootman, CEO

If you consider a bank's efforts to engage with customers digitally, it parallels any other industry seeking digital interaction. Achieving this requires various elements of a platform. A robust customer data platform, content creation and distribution capabilities, integration with automated messaging delivery, and the ability to report on campaign results are all essential. These aspects are crucial for a regional or community financial institution to engage through digital channels just as effectively as they do in physical branches, and this is recognized in the market. The market is looking for technology that can be easily adopted by the existing skill levels within these institutions. This highlights the numerous opportunities we have to provide technology solutions for financial institutions. Ultimately, these institutions thrive due to their personal relationships with customers or members. They realize the growing significance of digital channels and aim to replicate the quality of in-branch personalized interactions online. Importantly, this is not a hard sell; they are aware of this need and are eager to pursue it, presenting a broad range of opportunities for us to explore.

Chris Kennedy, Analyst

Fantastic. Great. Thank you for that. And then just one last one. You talked about the renewal outlook for this year. How does the renewal outlook for 2024 look compared to 2023? Thanks for taking the question.

Bryan Hill, CFO

If you look out over the next several years, our renewal pipeline is about 10% of ARR each year. It's pretty consistent for the next two to three years; depending on the size of the clients that are renewing in those years, it could be more or less than the 20 clients or so that will renew this year, but it is around the 10% of ARR.

Jacob Stephan, Analyst

Yeah, hey, guys. Thanks for taking the questions. Congrats on the quarter. I just kind of want to touch on the two times ARR sanction among the 2018, 2019 cohorts. With the 2020 and 2021 cohorts, are you seeing the similar kind of trajectory that you've seen with solution uptake within the 2018, 2019?

Bryan Hill, CFO

We are; in fact, the increase in each of the individual cohorts is really being driven by two things. And this is the beauty of our financial model because we're not overly dependent on any one lever. But what's driving it historically has been our clients growing their users. And as I mentioned earlier in the Q&A session in 2019, we created our client sales team and they're gaining a lot of momentum cross-selling into our client base, which is now adding another component driving ARR expansion within each individual cohort. But if you look at 2020 and 2021, there are between 150% and 200% expansion from their original contractual minimums.

Saket Kalia, Analyst

Okay. Hey, guys, thanks for taking my questions here. Hey, Alex. Hey, Bryan, how are you guys doing?

Alex Shootman, CEO

Good.

Bryan Hill, CFO

Great, Saket.

Saket Kalia, Analyst

Excellent. Alex, maybe for you. Maybe building on that last question, great to see the bank wins so far this year, and just that come through in the pipeline? Maybe the question is, can you just remind us how the profile of a bank win compares to the profile of a credit win, for example? Is it maybe higher users with a bank contract, or is it higher ARPU? Anything on sort of how the profile of a bank contract win versus a credit union contract win that would be really helpful to understand?

Alex Shootman, CEO

Yeah, I would just generalize it to say that the contract value between a bank and a credit union is likely not that different. In the credit union, you are going to have a lower ARPU and more users because of the retail focus. And then in a bank win because we add in some of our higher-priced products, we will end up with a lower number of users but a higher ARPU. And Bryan, I don't know if you have any specific examples, but just generally think about it across the TAM; the ACV or the ARR per customer is going to be pretty consistent; credit unions will have a lower ARPU and higher number of seats; banks will have higher ARPU and lower number of seats.

Bryan Hill, CFO

Yeah. And if you look at our implementation backlog, which today, as I mentioned in the last question, is 40 financial institutions, 15 of which are banks, the RPU for all 40 financial institutions in the new logo backlog is around $24. Credit unions are at $22 and banks are at $30. So that gives you a sense of the RPU difference. In some respects, that's because 100% of the banks generally have commercial banking as a product. On average, about 60% of the credit unions may have commercial banking. And as Alex mentioned, generally, banks will have fewer users. But Alex did call out in his prepared comments that we signed our largest contract value bank client this quarter, and it just so happens that client has over 150,000 digital users. So that's a little bit of an exception, in terms of the number of users that a bank will have. This was an eight-year deal. They took 21 products, and it was a competitive deal with a few names that you would be very familiar with that we compete against and we won that deal, and we're super excited about it.

Saket Kalia, Analyst

That's great. That's great, and congrats on that win. Bryan, maybe for the follow-up for you. How do you think about sort of the user adds here in the back half? And maybe just the different components in terms of how many are coming from backlog, how many are coming from growth, and whether there was any sort of seasonality that we should think about in that net add trajectory?

Bryan Hill, CFO

Yeah, so every year, I mean, it's very different. There's not really seasonality to our business; it is more about the timing of when the new logo wins occur about 9 to 12 months before the implementation. But year-to-date we've implemented from new clients just under 700,000 digital users. We would expect unless we have an implementation that could slip out because it happens from time to time, we should be somewhere around, call it, 800,000 to 850,000 digital users that will implement in the back half of the year with a lot of concentration in Q3. As it relates to our clients growing their digital user base, I would continue that at 100,000 digital users a month is the way that we think about it. We're a little over that year-to-date. Through June 30, I would expect we will add somewhere in the neighborhood of 600,000 to 650,000 the back half of the year.

Charles Nabhan, Analyst

Good afternoon, and thank you for taking my question. My question is on M&A and the impact it could have on your business over time. Obviously, consolidation activity is pretty slow right now. But as we near an end to the rate hike, and presumably a soft landing, I was curious if that's become a topic of conversation with your clients? And if so, could it potentially be a catalyst for investment in technology as some of your clients prepare for another M&A cycle?

Alex Shootman, CEO

Fortunately for us, our customer base consists of clients that are more digitally advanced. An Alkami customer has chosen to adopt best-of-breed technology as part of their growth strategy. These customers typically lead in mergers and acquisitions. From what we've observed, the M&A transactions that have taken place have benefited us because our clients are the ones making the acquisitions. There are nearly 10,000 financial institutions in the United States, and we focus on the top 2,000, which tend to acquire smaller, less competitive institutions. Overall, we view M&A activity in our market as advantageous. Additionally, we price our services per seat. The total number of seats remains steady or even grows, regardless of M&A activity, because when a financial institution acquires another, it is often to pursue growth rather than to consolidate existing customers. Our pricing model, which is based on the number of seats rather than a large platform fee, also works in our favor during M&A situations. In summary, M&A activity is beneficial for us.

Charles Nabhan, Analyst

Got it. And I apologize for missing your comments earlier; I hopped on a little late. I apologize in advance if you've addressed this one, as well, but wanted to get your comments on the competitive landscape with private fintechs more focused on profitability and funding drying up. Curious if you're seeing anything different in the competitive landscape and, conversely, if you're seeing any different behavior from the larger guys to compete against as well?

Alex Shootman, CEO

Not really. We think about it this way: entering the market is essentially about replacing existing technology. We never approach our customers with new ideas about digital banking and get a surprised reaction. The main victories are against outdated technology that fails to meet the digital, sales, and service needs of the institution. By the time an organization starts evaluating new options, they have already recognized that their current legacy technology is inadequate for their business requirements. This realization triggers their review process. There is healthy competition in our industry, and we all compete fairly, but our primary role is to replace outdated technology. As we stated during our IPO, our target market comprises 185 million users, and that number continues to rise. Even as we grow, we serve less than 10% of this market. The positive aspect is that there are several players capable of thriving in this space, given the significant amount of legacy technology that needs to be replaced.

Bryan Hill, CFO

I'll add a few comments to Alex's earlier remarks. Over the past two and a half years, in terms of our win rate, we have consistently secured about 34% to 35% of the annual recurring revenue we are competing for. This trend was evident in 2022 and has continued into 2023. Notably, with respect to credit unions, our performance has been strong, and we are likely achieving a win rate closer to 40% in 2023. Additionally, our win rate for banks is on the rise, alongside an increase in the number of bank deals we're competing for. We are dedicating significant marketing efforts and energy to amplify our presence in the marketing sub-segment we are targeting. This gives you a sense of how we are performing in terms of our win rate related to the annual recurring revenue we are pursuing in these opportunities.

Daniel Hibshman, Analyst

Thank you, everyone. This is Daniel standing in for Jeff. To start, regarding the sales approach for banks, how refined do you think our go-to-market pitch is? Is it solidified, or does it still require further refinement? Additionally, looking ahead, we've had around six bank signings in the first half of 2023, similar to the first half of 2022. What are your thoughts on the bank adoption curve? Is it a steady, gradual increase, or do you anticipate a moment of significant momentum or change? How should we interpret the adoption rate?

Alex Shootman, CEO

Yes, this is Alex. I'll address the first part of the question and then Bryan will handle the second part. Regarding our sales strategy, in the first quarter, we pinpointed 12 essential skills that are not easily acquired. We made headway in the banking sector by engaging with potential bank clients and starting to secure partnerships. This experience taught us valuable lessons, not only about sales but also about the entire process from sales to implementation. We realized we needed those 12 specific skills within our team, set a goal to acquire them in the second quarter, and successfully brought them on board. Now, Bryan, as you noted, the second part of the question concerns our outlook on bank adoption moving forward. Are we expecting the current ratio to remain the same, or do we anticipate changes in that ratio?

Bryan Hill, CFO

In the long term, we anticipate maintaining our current competitive position with credit unions, allowing us to continue winning between 30 to 35, and possibly up to 40 credit unions each year. Looking ahead to 2026 and beyond, we expect to win a similar number of banks. Last year, we secured 11 banks; so far this year, we've signed six, supported by a solid sales pipeline. I believe we will perform significantly better than the 11 banks we acquired last year, and we expect this upward trend to continue next year. By 2026 and afterwards, we aim to be winning around 30 banks annually, which will align with our credit union winning numbers. Yeah, we don't really disclose the number of sales reps that we have. In terms of total sales team, we're in that kind of 60 to 65 FTEs, and so that includes sales support, sales engineers, as well as direct sales reps for new logo and client sales. But when we do go to market, we do have a hunter and farmer mentality, meaning we have a new logo team and we have our client sales team that's responsible for renewals and cross-sell. And then as relates to some of our acquisitions, we'll have a few sales reps that are more of a specialty sales rep variety as it relates to those individual products because they may have some uniqueness to them and then it also helps support and drive sales through those other teams by having the sales specialists involved.

Alex Shootman, CEO

I'll say just want to add-on comment with Bryan. One of the things that we really like about this business model is if you look at a company like an Alkami versus generalized SaaS company, in a generalized SaaS company, you have to spend maybe 30%, 35% of revenue on sales, because you have to stimulate the market with your sales organization. As you're growing revenue, you're actually having to add sales expense ahead of time to make sure that you're pushing the market, for lack of a better term. But obviously, in a highly verticalized SaaS target industry, and then if you go deeper than that, the thing that's great about our industry is it's really an industry where you can really do account-based marketing. Because think of all of the data that's published about every single one of these institutions, what they have to publish to the government. And so what you would normally have to do to leverage your marketing organization to drive demand, in a lot of cases is really hard because of the lack of data about the industry. But here the data is there and so it allows us to utilize the marketing organization in a much more targeted manner than in other kinds of go-to-market situations, which allows us to keep sales headcount, frankly, lower than a lot of other SaaS models.

Operator, Operator

This concludes our question-and-answer session, and our conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.