Earnings Call Transcript - ALKT Q4 2025

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to the Alkami Technology Fourth Quarter 2025 Financial Results Conference Call. This call is being recorded on Wednesday, February 25, 2026. I'd like to turn the conference over to Steve Calk. Steve, go ahead.

Steve Calk, CEO

Thank you, Natasha. With me on today's call are Alex Shootman, Chief Executive Officer; and Cassandra Hudson, 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 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 in this call will be on a non-GAAP basis. We believe these measures are useful to investors in understanding our financial results. A reconciliation to the comparable GAAP financial measures can be found in our earnings press release and in our filings with the SEC. I'd now like to turn the call over to Alex.

Alex Shootman, CEO

Good afternoon, and thank you all for joining us. I am pleased to announce a strong fourth quarter performance, which caps off a great year for Alkami. For both the fourth quarter and the year, Alkami exceeded consensus revenue and adjusted EBITDA estimates. In the fourth quarter, we grew revenue 35% and increased adjusted EBITDA to $19 million. And for the full year, we achieved revenue growth of 33% and adjusted EBITDA of over $59 million, which is more than double the adjusted EBITDA we delivered in 2024. The fourth quarter was a strong sales quarter with 16 new digital banking clients, including 6 banks and 33 new MANTL clients, including 18 credit unions. In 2025, we matched the best year in our history in terms of digital banking new logos with 39 new clients, and MANTL had the best new client booking year in its history. Our MANTL origination platform now has 161 clients live, of which 26 are digital banking clients, and we now have 436 clients live on one of our 2 strategic platforms. In addition to our overall performance, there are 3 areas of our business to call out: the performance of our MANTL acquisition, progress in the bank market, and our ability to integrate digital banking, deposit origination, and data and marketing to improve our win rates. The performance of MANTL accelerated since we brought the 2 companies together. In addition to a full record full year new logo performance for MANTL, Q4 was a record revenue activation quarter. A competitive advantage of MANTL is the combination of digital and in-branch originations, and MANTL is now powering over 1,000 bank and credit union branches across the U.S. It was also exciting to see 2 loan origination clients go live and 13 new loan platform clients signed in Q4. We continue to make progress in the bank market, with Q4 being our 2nd best bank new logo quarter in our history. In 2025, we brought 16 banks live on our Digital Banking platform and now have 50 banks under contract with 37 logged on the Alkami platform. We released a new suite of treasury management features with a follow-on feature bundled planned for the second quarter, all of which are intended to improve win rates. We are also seeing more banks separating online banking from their core provider, creating a long growth horizon for Alkami, as 78% of banks on dominant bank cores use the legacy core provided online product versus 43% of credit unions on dominant CU cores who use the legacy online product. Part of the MANTL acquisition thesis was the creation of the Alkami Digital Sales and Service Platform, or DSSP. This is the integration of our Digital Banking, Account Origination, and Data and Marketing platforms with the intent to provide a financial institution with capabilities rivaling Chase and Chime. In the second half of 2025, we demonstrated outcomes like the ability to bring on a new account holder and have them in Digital Banking with multiple products and services in less than 5 minutes. The Alkami DSSP had a positive impact on our second half performance. When we acquired MANTL, 11 clients had all 3 DSSP products. At the end of 2025, we had 45 clients that have bought all 3 products. In the second half, 58% of new digital banking deals resulted in DSSP clients, and our win rates against all our competitors improved. In addition to improved win rates, we enjoy a 30% uplift in ARR when clients buy DSSP and increase the contract legs for origination and data and marketing, resulting in a total contract value uplift. The MANTL acquisition, progress in the bank market, and initiation of our DSSP all contributed to a strong business performance in the second half of 2025. I'm often asked about the impact of AI on Alkami. I believe that AI's impact will be significant, but not uniform across enterprise SaaS companies, and AI will be a net positive for Alkami. Let me remind everyone about key aspects of the Alkami business model. Alkami primarily prices our products by the number of digital account holders at an institution, with secondary pricing tied to metrics like money movement usage or asset size. In addition, our clients typically sign 5- to 7-year contracts. Alkami employees have a deep understanding of the bank and credit union industry and technology. This expertise has been developed through thousands of customer engagements and is used in areas of our business like the system conversion process. These conversions last 9 to 12 months, of which only about 2 to 3 months is actual configuration time. Our clients are highly risk-averse and regulated by agencies such as FDIC, OCC, NCUA, and CISA. Their Digital Banking, deposit, and Loan Origination platforms embed thousands of regulatory requirements, including decisions on how they've implemented KYC, AML, OFAC, Reg E, D and Z, audit logging, examiner workflows, data retention, and explainability requirements. Our platforms have to integrate into over 450 different financial technology systems, few of which have publicly available integration specifications and all of which have the potential for imposing legal liability. Customers use Alkami as a system of record to codify items like their fraud mitigation practices, money moving thresholds, business logic for products, funding, and interest rates. They memorialize customer due diligence, enhanced due diligence, and decision logic such as approvals, outcomes, and supporting reasons. On top of Alkami's business model, AI creates revenue opportunities in the form of current and coming AI products. Segmint, the AI engine that powers our Data & Marketing platform, helps financial institutions deliver the right product to the right account holder at the right time based on behavior, transaction patterns, and life events. This technology was attached to all but 2 of our new logos this year. One of the fraud products we sell uses AI to analyze how a user interacts with digital banking, identifying signals that distinguish legitimate account holders from fraud attacks even when log-ins appear valid. This technology was attached to 67% of our new logos this year. At our April Client Conference, we plan to show a new product called Alkami Code Studio. Today, clients use our SDK to extend the Alkami platform for their unique requirements. We built an AI-native closed-loop development agent optimized on over 6 million lines of SDK code from across our ecosystem. This agent will enable prop-driven deployment of our SDK, and what used to take clients months will now take days. AI models run on data. Our clients want to deploy AI, but they need a dataset unique to their industry to feed their models. We spent the last 18 months building a data lake that ingests cleansed core data, digital banking data, usage patterns, and other information that can be used for AI. We have the opportunity to turn this data into products that our clients can use to deploy through their own AI models. Finally, AI will create leverage within Alkami. Over the last year, we've introduced Gen AI models and agents into our organization. And while we are not yet ready to change assumptions on our long-term financial models, early results are promising. We're using specialized AI agents in our development organization that in December alone changed over 1 million lines of code, leading to an 18% increase in developer productivity. We have proof of concepts underway in AI-driven test case generation, proactive anomaly detection to minimize downtime, and we are auto-running agents to accelerate incident resolution. Within our customer support and implementation organization, we're also seeing results that are encouraging. Members of the implementation team are seeing on average, almost 2 hours a day, and we've been able to slow the growth of our support organization while still achieving a 9% increase in the speed of ticket closures. In addition, questions routed to the engineering organization have been reduced by 29%, freeing up engineering capacity. The pace of AI disruption will be relentless. And for a specialized vertical software provider in a highly regulated industry like Alkami, it will create new opportunities. In closing, I'm energized as we start 2026. Within our ideal client profile, there are over 900 credit unions and 1,000 banks that are not using modern technology like Alkami. We continue to see steady demand for digital banking transformation. Our sales pipeline remains consistent with recent years, and Alkami has a superior position with differentiated products designed for scalability and populated with proprietary data. More than 1,200 Alkamists remain committed to our clients as our North Star and know that doing it right is as important as getting it done. Thank you, Alkamists, for who you are and for building the company where I get to work. I'll now hand the call to Cassandra to discuss our financial results.

Cassandra Hudson, CFO

Thanks, Alex, and good afternoon, everyone. 2025 was a standout year for Alkami. We delivered robust revenue growth while meaningfully expanding profitability and cash flow, demonstrating the durability and leverage of our model. For the full year, total revenue reached $443.6 million, up 33% year-over-year. Subscription revenue grew 32% and represented 95% of our total revenue. Adjusted EBITDA more than doubled to $59.1 million compared to $26.9 million in 2024, and our adjusted EBITDA margin expanded 530 basis points to 13.3%. Our performance built throughout the year and positioned us to exit 2025 with significant momentum. In the fourth quarter, revenue was $120.8 million, up 35% year-over-year. Subscription revenue grew 34% and again represented 95% of total revenue. We increased ARR by 35% and exited the quarter at $480 million. Importantly, we have approximately $71 million of ARR in backlog pending implementation, which includes 42 new clients, representing roughly 1.6 million digital users. We expect the majority of this backlog to launch over the next 12 months. Our results are reported inclusive of MANTL. At this point, the businesses are functionally integrated and distinguishing between organic and acquired contributions is increasingly arbitrary. In fact, more than half of our new logos in the second half purchased Digital Banking, Origination, and Data & Marketing together. That's a direct reflection of the success of our Digital Sales and Service Platform strategy. DSSP strengthens our competitive position, particularly with banks, and extends contract durations across our origination in Data & Marketing products. In the near term, we anticipate that a DSSP deployment may take longer than a stand-alone origination or Data & Marketing implementation, which would shift some revenue out by a few quarters. However, that short-term timing impact is more than offset by stronger long-term economics, including higher retention, longer contract duration, and greater customer lifetime value. We believe this integrated platform strategy represents a structural competitive advantage. We exited the year with 301 clients and 22.4 million registered users, an increase of 2.4 million users or 12% year-over-year. Over the past 12 months, we implemented 35 clients, supporting 1.3 million digital users, and existing clients increased their digital adoption by 1.5 million users. Our contracts provide strong visibility into attrition, typically 3 to 4 quarters in advance. In 2025, we churned less than 1% of our Digital Banking ARR. For 2026, we currently expect to churn 4 Digital Banking clients, which again represents less than 1% of ARR. This speaks to the mission-critical nature of our platform and the strength of our long-term client relationships. Revenue per user increased to $21.44, up 20% year-over-year, driven primarily by MANTL's contribution, strong cross-sell execution, and increased user adoption among existing clients. Remaining performance obligations were approximately $1.7 billion or 3.6x live ARR, up 26% year-over-year, providing strong visibility into long-term revenue. Fourth-quarter non-GAAP gross margin was 63.4%, up 30 basis points year-over-year. Expansion in the quarter was more modest, primarily due to higher database technology costs. We view this as a temporary increase and expect these costs to decline by the end of 2026. Full-year non-GAAP gross margin was 64.1%, expanding nearly 140 basis points and driven by continued optimization of hosting costs, platform modernization, and operating leverage across post-sale functions. Fourth-quarter operating expenses were $57.9 million or 48% of revenue, representing 420 basis points of year-over-year expansion, primarily within R&D and G&A as we scale efficiently. Adjusted EBITDA in Q4 was $19.1 million, above the high end of our expectations, with an adjusted EBITDA margin of 15.8%. We have largely completed the initial investment phase of our captive offshore capability in India and expect incremental margin expansion as this facility reaches operational maturity in late 2026. We ended the quarter with $99.1 million in cash and marketable securities. For 2025, operating cash flow was $42.9 million, up from $18.6 million in 2024. Free cash flow was $34.2 million, driven by our enhanced profitability in the year, and we repaid $45 million on our revolving credit facility. Now turning to guidance. For Q1 2026, we expect revenue of $124.7 million to $125.7 million, representing growth of 27.5% to 28.5%, and adjusted EBITDA of $21.1 million to $21.9 million or 17.2% margin at the midpoint. As a reminder, we closed the MANTL acquisition on March 17, 2025. This timing will contribute approximately 8 percentage points of year-over-year growth to Q1 2026. Growth rates will become fully comparable beginning in Q2. For full year 2026, we expect revenue of $525.5 million to $530.5 million, representing growth of 18.5% to 19.6%, and adjusted EBITDA of $93.5 million to $97.5 million or 18.1% margin at the midpoint. Our revenue outlook reflects several underlying assumptions. We expect continued cross-sell momentum across the platform and a consistent level of ARR launches throughout the year. We also expect high single-digit ARPU growth, which incorporates a slight moderation in user growth among existing Digital Banking clients. In addition to those core drivers, we expect a 75% decline in termination fee revenue, which will reduce reported growth by a few percentage points in 2026. This impact is partially offset by the timing of the MANTL acquisition, which contributes modestly to our full year growth as mentioned previously. Turning to profitability. We expect a full year non-GAAP gross margin of approximately 65%. In the back half of 2026, we expect adjusted EBITDA margin to be north of 19%, weighted toward the fourth quarter and in line with our typical seasonal patterns. Overall, our nearly 500 basis points of margin expansion reflects leverage in the model, efficiencies from our offshore operations, and continued operational discipline. In addition, we expect stock-based compensation to be between 14% and 15% of revenue. As we look ahead, we wanted to provide insight into our long-term model. These represent what we believe are achievable targets based on our long-term contracts and the current structure of our business. We remain confident in our long-term trajectory and expect to achieve a Rule of 45 by 2030. The key drivers of which include revenue growth fueled by a gradual increase in new logo wins in the bank market driven by our DSSP offering and continued leadership in the credit union market, consistent performance from our add-on sales effort and volume growth from existing customers that moderates in line with market growth, both of which we expect to drive continued RPU expansion and dollar churn of roughly 2% to 3% per year. Our long-term outlook does not assume incremental M&A. From a profitability perspective, we expect non-GAAP gross margin approaching 70% as we improve execution on bank launches over time and become more efficient at supporting our clients. Average annual adjusted EBITDA margin expansion of approximately 300 basis points driven by efficiencies from our offshore efforts in India and operational improvements from achieving greater scale, particularly in R&D and G&A. Lastly, we expect stock-based compensation to decline to approximately 10% of revenue. In closing, 2025 demonstrated the strength of Alkami's platform, the leverage in our model, and the durability of our growth. We delivered best-in-class revenue growth, expanded margins meaningfully, generated strong cash flow, and positioned the company for long-term value creation. We believe our Digital Sales and Service Platform strategy uniquely positions Alkami at the center of digital transformation for financial institutions, and we remain confident in our ability to deliver durable growth and increasing profitability in the years ahead. With that, operator, please open the line for questions.

Operator, Operator

Your first question comes from Andrew Schmidt with KeyBanc Capital Markets.

Andrew Schmidt, Analyst

I just wanted to start off on the 2026 outlook. Cassandra, you mentioned a few of the moving parts. Maybe if you could just walk through those? I think term fees were mentioned, DSSP implementation time frames, perhaps we could take a finer point there? And if there’s any other factors to consider in the outlook because it does seem like the underlying demand trends are really strong, as you outlined. So important to parse out the moving parts in '26.

Cassandra Hudson, CFO

Sure. Thanks, Andrew. Thanks for the question. I think you're exactly right. The underlying dynamics of our business remain strong. And the items that we were commenting on regarding our 2026 guide are really timing related. The termination fees, in any given year, we have some amount of termination fees, and 2025 happened to be a bit of a higher year as it related to that. And I think 2026 is just a smaller amount of those fees, and it is impacting our growth by a few percentage points in the year. In addition to that, it's very early days for DSSP, but just given the fact that we're selling 3 products together, and our clients certainly have the optionality of how they will implement those on their side and what works best for them, we've been modeling slightly longer implementation cycles kind of closer to that 12-month period, which is more typical for digital banking. On a stand-alone basis, we would typically see our origination and Data & Marketing products being implemented more around 6 months on average. So for those 2 products, in particular, when they're sold as part of a DSSP, we're modeling that revenue shifts out for 2 months as of now. Again, it's early days, and that may change over time, but felt that it was prudent to call out on the call.

Andrew Schmidt, Analyst

Got it. That's super helpful. And I guess just a couple of follow-ups. Any other considerations in terms of implementation timing shifts outside of DSSP? And then I guess, just the second one. It sounds like as these implementations come online, they sort of lap or you sort of move past the elevated term fees, the growth could step up potentially as we go into '27. Maybe talk about that a little bit. And then I guess, what's the right baseline for pro forma growth this year? Because I know there is a little bit of MANTL that's baked in. So just as kind of a jumping off part. I know I baked a lot in there, but any help there would be helpful.

Cassandra Hudson, CFO

No worries. Yes, I would say those are the 2 big call-outs, along with what I think we've talked about over the past several calls and the trend that we've seen with the growth from our existing Digital Banking clients normalizing over time, right? So I think that is a factor as well for our revenue guidance that everyone should be aware of. Not ready to guide to 2027 at this point. But I think if you really isolate the term fees and the small impact from the timing of the MANTL acquisition, it should give you a good sense of where growth would be in 2026.

Operator, Operator

Our next question comes from Jacob Stephan with Lake Street.

Jacob Stephan, Analyst

Nice quarter. I just kind of wanted to touch on some of the milestones you hit here in 2025 and maybe kind of what you're seeing as you look at 2026 in the early kind of the first half here. Maybe if you could just kind of start with the loan activation. I know you said 2 go-lives in Q4, 13 signings in the same quarter. But maybe what are you seeing in the first half here with regards to MANTL and maybe overall DSSP?

Alex Shootman, CEO

Well, first of all, we've been really encouraged in terms of how DSSP helps with our win rate. What we're doing is creating a situation where instead of only focusing on a great user experience, which is really important. The integration of these 3 technologies actually creates a differentiated business outcome for the client. So the first integration that we're able to deliver increases the conversion rate of deposit originations, which is critical for these institutions. So what we're seeing on DSSP is our ability to connect to positive business outcomes is helping our win rate. So that's been super helpful. On the loan side, what we've talked about since the MANTL acquisition is that there is a project underway to build a loan capability. And that was driven by deposit origination clients who wanted to have an integrated front end, if you will, with both deposit origination and loan origination. The product build strategy has been to assemble a collection of lighthouse accounts, if you will, where those lighthouse accounts understand that they're participating in the build process and they're coming online as the product is becoming mature. So we're still not yet at the point where we've taken this product and are making it generally available for our entire sales force to sell. This is still something that is sold very carefully with the right type of account and knows the situation that they're getting into. And we'll be very public with you and the rest of the investment community when we consider that to be a full product in our portfolio.

Jacob Stephan, Analyst

Got it. And maybe just kind of touching on the full suite and bank clients specifically. We've obviously been talking about banks and their higher ARPU kind of nature to them. But now it feels like you're really starting to gain some traction with banks. Maybe you could kind of give us like a forward-looking, what's in the pipeline in terms of banks? And how do you see the mix evolving over the next 12 months?

Alex Shootman, CEO

One of the things I mentioned was that our pipeline remains consistent with previous years. The significant shift in the pipeline occurred about 18 months to 2 years ago when the ratio was roughly 70-30 between credit unions and banks, and it has now moved to approximately 50-50. From my comments, you should understand that a consistent pipeline indicates this 50-50 split between credit unions and banks. The dynamic I discussed is crucial for our long-term growth, considering that banks tend to be suite buyers while credit unions prefer best-of-breed solutions. I pointed out that 78% of institutions using dominant bank cores still have a V1 legacy online banking application linked to their core systems. We are observing this gradually unwind. Our model assumes this unwinding will occur at a measured pace over the next few years. If it happens faster than we anticipate, that could create upside potential for our assumptions and increase the number of bank wins in our long-term model. Generally, what is working in our favor in the bank market is that our treasury roadmap is improving, our technical capabilities for bank conversions—especially for commercial data—are enhancing, and our understanding of dominant bank cores is progressing. These factors collectively reduce the risk for clients considering a shift from their previous suite purchases to a best-of-breed approach.

Operator, Operator

Your next question comes from Saket Kalia with Barclays.

Saket Kalia, Analyst

Cassandra, maybe just to start with you. We walked through some of the moving parts on the revenue guide. But we didn't talk much about ARR. And I'm just kind of curious, I know you wouldn't necessarily guide to ARR on an out-year basis. But I'm curious, how do you think about it kind of going into '26? How much growth do you think we get from users versus maybe ARPU as we think about the building blocks?

Cassandra Hudson, CFO

Well, I guess I'm not prepared to guide to ARR in that way. But if you think about the revenue guide, I think it translates pretty well to ARR. We expect high-digit growth in RPU. And I think we would see that flow through in the same way to ARR. And you can also see there's a pretty tight relationship in terms of the absolute dollar growth in revenue to ARR. So if you kind of look at that relationship, it should give you a good sense of how ARR will trend over time.

Alex Shootman, CEO

And then Saket, this is Alex. We're trying to share in terms of how we think about our model. If you go back 3 years ago or something like that and you looked at our customers' organic growth, it was pretty far above the general market. But all the way back at that point in time, what we were signaling is as Alkami grows and Alkami takes share, you would expect that our customers' organic growth would begin to match that of the rest of the market. And so that's one of the main things that we're trying to communicate to our investors is that which we told you several years ago, now that we've got 20-plus million account holders on the platform, that is becoming true for our company is that the customer organic growth is beginning to match the market.

Saket Kalia, Analyst

That makes a lot of sense. It's a great flag and just shows how much market share you've taken over the years. So maybe that's a good segue into my follow-up for you, Alex. I mean, during your prepared remarks, you talked a little bit about customers that are still using some legacy tools, and you had some great stats on certain banks versus credit unions. But if I assume out a little bit, I guess, how do you think about the runway left maybe in terms of registered users, right, that could potentially modernize to a solution like Alkami over the coming years?

Alex Shootman, CEO

Thank you, Saket. I was trying to convey this in my comments. We progress from total addressable market to serviceable available market to ideal client profile. Our ideal client profile includes institutions that are the best fit for Alkami. When we approach these clients, they usually recognize that what we offer meets their needs, and we also have experience with the core systems they use. I've shared some relevant numbers regarding this. Looking ahead, there are still 1,000 banks and 900 credit unions in our ideal client profile that are ready to transition to a more modern platform. We will be competing for their business with other strong companies that can also facilitate this transition, and we have the advantage of experience in integrating with their core systems. This ongoing opportunity shows us the sustainability of our growth moving forward.

Operator, Operator

Now have a question from Ella Smith with JPMorgan.

Eleanor Smith, Analyst

For my first one, I'm hoping to estimate organic ARR growth. If you assume that MANTL was about $40 million of ARR in the quarter, you get to about 24% organic ARR growth. Is that about right? Or does MANTL contribute more in ARR?

Cassandra Hudson, CFO

I guess, as I said on the call, it's a bit tricky to really parse that out, right? So with DSSP now, we're selling the 3 products in a bundled transaction. So it's a little bit arbitrary to determine the true organic contribution of MANTL. Kind of the math you were just walking through directionally makes sense as you think about the size of the MANTL business and how fast it's growing. But as I said, it's getting tougher and tougher to really parse that out.

Eleanor Smith, Analyst

That makes a lot of sense. And maybe for a quick follow-up. Your 2030 financial framework seems to imply your team's confidence that mid- to high teens revenue growth is achievable. And in this moment, there's a lot of uncertainty surrounding multiyear growth for software companies. Is there anything about Alkami or the market you would highlight that would give investors greater confidence surrounding Alkami's top line growth?

Cassandra Hudson, CFO

I believe that we have a solid foundation for our business model, supported by long-term contracts and a sticky product that is essential for many clients. This positions us well for consistent growth in the coming years. To clarify, we are not providing specific revenue growth guidance beyond 2026; our primary focus is on achieving the Rule of 45 and enhancing our adjusted EBITDA margin. Regarding margin expansion, we anticipate it will be more pronounced in the early years, aligning with the guidance for 2026 and reflecting the improvements we have experienced in recent years. We expect to leverage our platform's scaling, maintain disciplined expense growth, and continue shifting towards higher-margin revenue streams. As our model evolves, the rate of margin expansion is likely to slow down. For revenue growth modeling toward 2030, I suggest considering a more gradual approach, as we do not foresee sharp changes in our growth year over year. In summary, margin expansion will occur earlier, while revenue growth will progress in a steady and linear manner towards the long-term goals outlined in our framework.

Operator, Operator

Your next question comes from Cris Kennedy with William Blair.

Cristopher Kennedy, Analyst

I'd love to hear from you, Cassandra. What are the key things that you're focused on? And what do you see in the business that are your priorities now that you've got this role?

Cassandra Hudson, CFO

Thanks, Cris. I appreciate the question. Over my first 90 days here, I've gained considerable insights into the digital banking market. My main focus has been on supporting our growth, particularly in acquiring new customers, ensuring we activate them, and launching DSSP specifically. Additionally, it's important for us to rapidly deliver products, especially in the areas of treasury management and loan origination, which are our newer investments that will contribute to our long-term growth. These are my primary areas of concentration as we plan for the business, along with everything related to AI, which is a significant focus of our internal efforts.

Cristopher Kennedy, Analyst

And thanks for the 2030 framework. As part of that, is there any way to think about free cash flow conversion as you think into 2030?

Cassandra Hudson, CFO

Good question. We've been steadily expanding our free cash flow, particularly in 2025. I expect that our free cash flow conversion from adjusted EBITDA will continue to improve. A target for us would be a 90% cash free cash flow conversion by 2030.

Operator, Operator

Your next question comes from Adam Hotchkiss with Goldman Sachs.

Adam Hotchkiss, Analyst

Alex, I wanted to touch back on the 900 credit unions and your ICP. I think the 1,000 banks, very clear, there's the new DSSP offering, you're working on bringing that to market. And I'm sure there's going to be a sales effort around that. How do you think about the 900 credit unions? You've had a foothold in the credit union space for a long time now, catalysts for those folks moving on to more modern solutions that you think have been barriers over the last 3 to 5, even longer years?

Alex Shootman, CEO

There hasn't been a specific barrier. When considering contract expirations, there are a limited number of opportunities for clients to switch. For instance, if someone had an initial version of a product with a 7-year contract and experienced some disappointment, they might choose to renew for another 7 years, hoping for improvements rather than switching. As the product life of the contract nears its end after two contract cycles and 14 years, customers may realize they still lack the necessary digital platform and decide to transition to a new one. These dynamics show that we are in a replacement market focused on gaining market share, which is why we expect steady growth. Explosive growth in bookings from one quarter to the next is unlikely due to the nature of this market, which relies on customers reaching the end of their contract life cycle before choosing to switch. A significant factor that influences their decision is the presence of a reliable provider like Alkami, which has a proven history of successfully migrating customers. In just three years, Alkami has transitioned as many clients to a new platform as it did in the previous eight years. Prospects now have many references from clients who have undergone the conversion process and reported positive experiences, encouraging them to take the risk. In the credit union sector, there is still considerable market share to capture when contracts are up for renewal. Customers need confidence that the conversion will be successful, and the current market conditions support that confidence with strong products and satisfied clients. Therefore, we believe there is still significant potential for growth in the credit union sector.

Adam Hotchkiss, Analyst

Okay. Alex, that's clear. And then Cassandra, just on the EBITDA margin side for '26. Appreciate all the expansion that the company has had over the last 3 years, though I think the guide came in just a little bit light of expectations on the margin side. So anything to call out there, either on operating expenses or gross margin? Or is that maybe a little bit of conservatism baked in?

Cassandra Hudson, CFO

Thanks for the question. I think the one thing I tried to highlight on the call was the increased database technology costs that we started to incur in Q4. And those are pretty meaningful, a couple of million dollars that we've had to absorb. And so I think that's incremental to what we were expecting. And we do expect that cost increase to be temporary. And we will still expand our adjusted EBITDA margins by another 500 basis points in 2026 even with those incremental costs, but that would be the one thing that I would call out as a bit of an incremental or new thing that we're dealing with for this year.

Alex Shootman, CEO

I'm going to be less kind than Cassandra. If you go back to beginning of 2023, one of the guides that we gave was that in 2026, we'd be at 20% adjusted EBITDA. And then when we made the MANTL acquisition, we said that that would temper down to 19%. We've had a third-party vendor that we run their database who just doubled our license cost. And that is the exact difference that you see between the 19% that we told you and what Cassandra is guiding to right now. And so now we're going to convert off of that database because we're frustrated that we got hit with a 2x increase on the database cost, and that's why it's a short-term anomaly for us.

Operator, Operator

Your next question comes from Jeff Van Rhee with Craig-Hallum.

Jeff Van Rhee, Analyst

So Alex, just in terms of the mix of displacements when you're coming in and displacing legacy fabrics or frameworks, what are you displacing now versus, call it, 2 years ago, and what's changed?

Alex Shootman, CEO

In the bank market, the primary focus is on the digital platform provided by the core vendor. In the credit union sector, the positive aspect for us is that we are familiar with all the competitors in the field. There are about three modern players: one caters mainly to credit unions and another serves both credit unions and banks. We aren't replacing their technologies, nor are they replacing Alkami. Instead, we are all moving away from outdated technologies. In the bank arena, the emphasis is always on a digital banking application linked to the core system. In credit unions, there have been companies with strong technology in the past, but recently, over the last three to four years, they haven't been investing in their tech, and those are the ones we are taking over.

Jeff Van Rhee, Analyst

Okay. One brief question on the bank side. If I have it right, 10 bank wins, second half of the year versus 9 a year earlier. Just thoughts there, specifically with the go-to-market? I know you've been trying to through getting more integrations and other things that you think will improve the ability to go sell that. But I know it's been a focus. Just where are we in terms of figuring that out? And what has to happen for that really to start to accelerate for you?

Alex Shootman, CEO

One of the big changes that we made from a go-to-market perspective is as we announced in the middle of the year that Nathaniel moved into the Chief Revenue Officer role. And through the back half of the year, he made a decision studying the market, studying the team, that from a new logo perspective, we would have a bank sales team and a credit union sales team on the online banking side. So that's a big change for us going into this year. We've always had a blended sales team prior to that. And now we have a concentrated sales team and a concentrated credit union team. In terms of the core integrations, we have experienced with the dominant cores that we need to do the integrations into for a client. As I may have mentioned in the third quarter call, we structured a commercial relationship that really has turned out to be a fantastic relationship with one of the core providers where we jointly do things like performance modeling with them. We've got direct support with them. And so that's helped us quite a bit in terms of allowing customers to be confident. Remember, the essential situation that we have with a bank client is they want a more modern platform. They have never existed with a best-of-breed strategy, and they need to overcome their perceived risk and get into that best-of-breed strategy. So when we can come to them where we're working jointly with one of the core providers, we can help them see how that conversion is going to go. We can help them see what kind of support we're going to have. It really begins to derisk their decision. And Jeff, that's really what we have to do in the bank market is derisk a client's decision. Desire is to make a change, just whether or not they get comfortable with the risk.

Operator, Operator

Yes, I find this helpful. I have a question regarding whether you're noticing a lack of urgency among buyers, which seems to have increased around midyear last year. As I reflect on how the guidance evolved over the past year, it became clear that the results were more heavily weighted toward the end of the year, largely due to delays in go-lives. At midyear, my model indicated over 12 quarters of mid-20s organic growth, but in the third quarter, growth dropped to the mid-teens and upper teens, which was also the case for the fourth quarter. It looks like we are expecting similar performance in the first quarter. I assumed that if many of those go-lives scheduled for the second half of last year were deferred to this year, we would see some offset to these challenges, like a couple of points of termination and other issues. More broadly, is there a significant behavioral shift among buyers that has caused a lack of urgency either to sign contracts or, more specifically, to implement these solutions?

Cassandra Hudson, CFO

No, I wouldn't say so. I believe the underlying business fundamentals are in place. Assuming that there haven't been any changes and demand remains strong, if we implement a relatively consistent level of annual recurring revenue between 2025 and 2026, it suggests a certain level of growth.

Alex Shootman, CEO

It becomes a math equation when one part is getting bigger. But we did our research. So just on the research is that 2024 had a slight decline in market jump balls, and then 2025 came back up. So that would just be the one buyer behavior thing that we did see is a slight dip in 2024 on jump balls and pick back up in 2025.

Jeff Van Rhee, Analyst

Did you notice a change in the add-on sales as a percentage of bookings? I know you've been sharing that information every quarter. I'm just curious if there was any movement in that area this quarter.

Cassandra Hudson, CFO

Roughly the same, Jeff.

Operator, Operator

Your next question comes from Alex Newman with Stephens.

Alex Newman, Analyst

Could you provide more details about the capabilities of the MANTL LOS, particularly regarding the types of loans you can originate? I'm aware there are some consumer capabilities, but can you also originate commercial loans? And if that's not currently possible, is it part of your future plans?

Alex Shootman, CEO

Yes. Our current focus based on customer requests is on retail and HELOC. These engagements with customers are very selective at the moment. We will announce when this becomes generally available and when we are ready to offer it widely. For now, our attention is on retail and HELOC, and as we achieve success in this area, we will have the flexibility to develop additional capabilities and expand into the commercial market or other types of products.

Alex Newman, Analyst

Great. And then can you just provide an update on the progress of cross-sell activity between MANTL and the digital banking client base and vice versa and how that's progressing?

Alex Shootman, CEO

I think one of the things that I mentioned in my opening comments is there's 161 live clients on the deposit origination platform. And of that, there's 26 digital banking clients. I think the important one was when we put the 2 companies together, there were only 11 Alkami online banking clients that had all 3 products, that have our data marketing platform and had the origination platform. At the end of the year, under contract are 45 clients that have all 3 products. So I think that speaks to the progress that we've made on creating demand for the integrated platform.

Alex Newman, Analyst

Okay. Awesome. If I could ask one more question, do you have any updates on capital allocation priorities as we move toward 2026?

Cassandra Hudson, CFO

Sure. Well, you saw us pay down some things, that was a use of money.

Alex Shootman, CEO

Yes. I think we will continue to focus on reducing our revolving line of credit. We are consistently evaluating our capital allocation strategy. Opportunistic mergers and acquisitions remain a long-term priority for us, and we are always assessing that aspect. Additionally, we will continue to evaluate share buybacks. There are no changes to our capital allocation approach today, but it is something we always review.

Operator, Operator

Thank you for joining us, and you may disconnect now as there are no more questions.