Earnings Call Transcript - ALKT Q3 2023

Operator, Operator

Hello and welcome to the Alkami Third Quarter 2023 Financial Results Conference Call. My name is Betsy and I will be your operator for today's call. 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, Senior Vice President

Thank you, Betsy. 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 Form 10-K entitled Risk Factors and Forward-Looking Statements. The statements made during the call today are being made as of today, and we undertake no obligation to update or revise any forward-looking statements. Also, unless otherwise stated, financial measures discussed on this call will be on a non-GAAP basis. We believe these measures are useful to investors in the understanding of our financial results. A reconciliation of the comparable GAAP financial measures can be found in our earnings press release and in our filings with the SEC. I'd like to now turn the call over to Alex.

Alex Shootman, CEO

Thank you, Steve, and good afternoon, everyone. The third quarter was another good quarter for Alkami as we grew revenue 27% once again ahead of our expectations. In addition, we achieved positive adjusted EBITDA one quarter sooner than we committed and we are adding and keeping users at a better pace than any other digital banking provider. Over the last 12 months, we added 3.2 million digital users to our platform. And as we approach the end of 2023, we do not expect to lose a single client off of our digital banking platform this year. Q3 marks another quarter of progress in our plan to build Alkami into a primary provider of digital technology to banks and credit unions with healthy growth, solid profitability, a strong culture and satisfied clients. One of the questions many of you asked me is how our clients are navigating a very dynamic macro environment. During September and the first week of October, I slept in 18 different beds as I traveled the country meeting with clients and prospects and gained a perspective on how regional banks and credit unions are thriving in today's environment. In addition, last week, we hosted a dozen prospects at our headquarters for exchange with members of our client advisory board and got to listen to those executives discuss their current strategies and tactics. Every conversation on the road and in our headquarters started with some variation of the following narrative: in all my years in this business, I have never seen such a rapid change in monetary and fiscal policy. The meetings evolved into discussions on the volatility in interest rates, the rising cost of deposits, the speed at which they're rebalancing deposits and loans and most interestingly, the need to dust off playbooks they've not used since the mid-2000s. I had one CEO tell me, Alex, we have always talked about driving card usage and attracting direct deposits, but we really hadn't focused too much on it. She went on to say that none of my staff were here the last time we had to drive deposits, and we were having to teach strategies and tactics we have not used in years. I asked each CEO how this changed the way they thought about digital banking. And to a person, they told me that digital banking is a mandatory innovation in this environment. From digital onboarding to analytics to drive card usage to tactics to encourage direct deposits and technology to fight fraud, they were continuing to invest in digital banking and even something as routine as CD rollovers is on their minds. One CEO told me that we all offered short-term CDs and these products will roll over in 2024. We don't have enough people to handle them manually. We have to use digital capabilities to meet the demand. In addition to the personal meetings I conducted, we surveyed 215 financial institutions in September to assess their overall digital maturity by asking a series of questions related to digital adoption and investment priorities. We found that the most digitally mature organizations, which also reported higher revenue growth than their peers, are much more likely to say that digital banking is more important than branches or call centers. In addition, they are also much more likely to say that their top investment priority is improving customer experience technology. As one bank responded, from the top of the organization all the way down to the lowest levels, there's a constant reminder: if there's an opportunity, digitize it. Amidst all this change, our clients are proving to be resilient. While the U.S. banking industry deposits contracted 4.8% year-over-year, as the FDIC reported in June, when we evaluate our clients' data, we've seen almost a 1% increase in deposits since early July. Also since July, their user counts have increased, and the percentage of users with uninsured deposits remains virtually unchanged. Our clients' strategic use of digital banking and their ability to compete in this environment mirror the demand we are seeing in our new client wins and additional products being purchased by our current clients. For example, as part of one renewal in Q3, the client added 12 new products, including data and analytics, advanced business capabilities, biometric security, and card capabilities that allow them to provision digital cards. They're not alone. We continue to see earlier client cohorts add functionality. Our 2018 and 2019 cohorts are now at 2x their initial annual recurring revenue and our 2020 cohort is already at 1.8x initial annual recurring revenue. In addition to adding products, our clients continue to grow digital users faster than the overall market. In 2023, we will add more new clients and digital users to our platform than any year in our history. Our pipeline going into 2024 is the strongest ever and we continue to deliver on the commitments we made to our clients and our investors. To our clients, we committed to invest in expanding our product portfolio so they can compete with the digital capabilities of mega banks. Over the last six years, we've invested over $0.25 billion in research and development. And Alkami has consistently spent the most on R&D as a percentage of revenue compared to other large companies in our market. While this percentage will moderate as revenue grows, we will continue to grow R&D to keep our platform modern and competitive. The technology we deliver today includes fraud protection, digital account opening, advanced card services, commercial business banking capabilities and payment solutions. At the time of our IPO in 2021, our new clients on average used 34% of our product portfolio. And today, new clients onboard with over 50% of our product portfolio. This demonstrates that we are not just delivering new products but also developing the right new products. We committed to our clients that we would continuously deliver a world-class user experience for their end users. Today, we consistently hold one of the highest ratings in the App Store and, more importantly, by far the app that is most rated in our space. One of the biggest commitments we make to our clients is when we convert them from their legacy system to Alkami. This is nontrivial, as there are integrations to their back-office core systems, dozens of connections to third parties, and thousands of customer accounts to convert. Usually, the entire user base moves to the Alkami platform on the launch date. Our experience in launching new clients is a significant and sustainable competitive advantage. Among the many clients we launched in Q3, we accomplished a first for Alkami. We launched three clients in a single day. So it's not just about launching the client; it also has to be a great experience for our clients and their end users. Jerry Agnes, the President and CEO of Elevations Credit Union told me, Alex, implementing Alkami for our new digital banking platform has been better than any other conversion I've experienced. Over 88% of our members converted to Alkami with no assistance or intervention from our staff, and our members are thrilled with the new platform. A digital banking platform must have trusted availability and performance because our clients and users rely on it during critical life moments. We committed to continuously evolving our digital platform and over the last six months, have made great progress in transitioning to an event-driven architecture with advanced tools for observability and automation. We are now using auto-scaling and we support zero downtime upgrades. All of this while driving efficiency through transitioning to technologies such as containerization and Linux. Keeping our commitments to our clients has allowed us to keep our commitments to shareholders. We have consistently delivered on our growth targets while being prudent with our investments and expenses. We have delivered on a commitment to be adjusted EBITDA positive, and we have confidence in the longer-term revenue, gross margin and adjusted EBITDA guidance we have provided. In closing, we are proud of the results we delivered in the quarter and pleased with the progress we've made in 2023. I am confident in the long-term prospects for Alkami to be an indispensable technology platform for the financial services industry, a great place to work and a reliable partner for the investment community. And now, I'll hand the call to Bryan to take us through the numbers.

Bryan Hill, CFO

Thanks, Alex and good afternoon, everyone. During the third quarter of 2023, Alkami crossed several major milestones. First, we achieved our first quarter of positive adjusted EBITDA, which occurred one quarter earlier than originally expected at the beginning of 2023. Second, we increased the digital users on our digital banking platform by 1 million during the quarter. This represents the largest quarterly increase in company history, bringing us to just under 17 million digital users. And third, Alkami's remaining purchase obligation or contract backlog reached $987 million, representing 3.6x our live annual recurring revenue and 31% higher than a year ago. These achievements, combined with our 2023 financial performance, evidence our ongoing success and unique position to capitalize upon the strong secular trend of digitization in the banking industry. Let me unpack an impressive quarter for you. For the third quarter of 2023, we achieved revenue of $67.7 million, representing growth of 27%, which is slightly above the high end of our financial guidance. This was driven by balanced performance across our primary revenue drivers. We implemented 11 new clients in the quarter, bringing our digital platform client count to 229. So far in 2023, we have implemented 1.3 million users at just under $23 million of annual recurring revenue, both of which exceed the full year of 2022. Based on our near-term visibility, we expect to exceed last year's implementation production by 35% and 30% for digital users and annual recurring revenue. We now have 35 new clients in our implementation backlog representing 1.1 million digital users. We exited the quarter with 16.9 million registered users live on our digital banking platform, which is 3.2 million or 23% compared to last year. Over the last 12 months, digital user growth continues to be driven by two areas. First, we implemented 39 financial institutions supporting 1.7 million digital users. Second, our existing clients increased their digital user accounts by 1.4 million users, demonstrating an ability to drive client growth and digital adoption during a more challenging economic environment. This underscores the importance of the digital channel. Over the last 12 months, we have not experienced any client churn from our digital banking platform, and we expect the same for the full year 2023. We ended the quarter with an average revenue per user of $16.28, which is 5% higher than last year, driven by add-on sales success and the addition of new clients who tend to onboard with a higher average revenue per user. Subscription revenue grew 28% compared to the prior year quarter and represents approximately 96% of total revenue. We increased annual recurring revenue by 29% and exited the third quarter at $275 million. In addition, we currently have approximately $42 million of annual recurring revenue in backlog for implementation, most likely to occur over the next 12 months. We continue to see healthy demand across our product portfolio. So far in 2023, we have signed 23 new digital banking platform clients, of which 7 were signed during the third quarter. Our new client wins reflect solid representation from banks with 7 signed so far in 2023. Presently, based on the strength of our sales pipeline and visibility into fourth-quarter digital banking platform decisions, we expect the fourth quarter to be a strong quarter for new client wins. Our add-on sales success continues to yield results, representing 33% of total new sales for the first three quarters of 2023. In addition to add-on sales, our client sales team is responsible for client contract renewals. During the first three quarters of 2023, we renewed 11 client relationships, where we raised the annual recurring revenue run rate by 9% through a combination of new product sales and committed client growth. In total, we expect to renew over 20 clients during 2023. Now turning to gross margin and profitability. For the third quarter of 2023, non-GAAP gross margin was 59%, representing 190 basis points of expansion when compared to the prior year quarter. Improvement in our gross margin results from operating leverage across our post-sale operations, such as our implementation, client success, and site reliability engineering teams, offset by a higher mix of revenue from our third-party IP partners. We are scaling post-sale operations while delivering the previously mentioned higher level of output. As a reminder, our 2026 target operating model is a non-GAAP gross margin of 65% as we continue to scale our revenue. Moving to operating expenses. For the third quarter of 2023, non-GAAP research and development expense was $17.6 million or 26% of revenue, 240 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. However, we are achieving operational scale while investing in our platform to drive future efficiency, best-in-class reliability and innovate new products and functionality. Our target 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 $10 million or 15% of revenue, approximately 130 basis points lower than the prior year. We continue to achieve a high level of sales team productivity and go-to-market efficiency matched by many high-growth SaaS companies. We expect to maintain or slightly improve our go-to-market efficiency as we scale the business and gain market share. Non-GAAP general and administrative expense was $11.9 million or 18% of revenue. In the prior year quarter, G&A was approximately 22% of revenue. The margin expansion is primarily attributable to revenue scale, as we closely manage G&A expenses. We expect to achieve further leverage as a percentage of revenue as we move towards our profitability objectives. Our adjusted EBITDA for the third quarter was $826,000, which is over $1 million better than the high end of our expectations and over a $5 million improvement when compared to the prior year quarter. We are very pleased to have crossed adjusted EBITDA positive a quarter earlier than originally expected at the beginning of the year. We believe this demonstrates the leverage afforded by our financial model as well as the trajectory of our business. And as a reminder, we have established a 2026 adjusted EBITDA margin objective of 20%. We expect our path to 20% will occur at a pace of roughly 700 basis points of adjusted EBITDA margin expansion each year. Now moving on to the balance sheet. We ended the quarter with just over $178 million of cash and marketable securities and just under $83 million of debt. One final item on our third quarter results. In addition to crossing into positive adjusted EBITDA, we are reporting positive operating cash flow of approximately $3 million and free cash flow of $1.5 million. Now turning to guidance. For the fourth quarter of 2023, we are providing guidance for revenue in the range of $70.5 million to $71.5 million, representing growth of 27% to 29%. And adjusted EBITDA of $2.5 million to $3.0 million. For full year 2023, we are raising our revenue guidance to a range of $264 million to $265 million, representing growth of 29% to 30% and an adjusted EBITDA loss of $2.1 million to $1.6 million. This compares to an adjusted EBITDA loss of $17.6 million for the full year of 2022. In closing, we remain confident that we are well positioned to continue on the growth path we laid out over two years ago. During the last year, the resiliency of our model has been tested by industry and macroeconomic factors and we have continued to deliver both for our clients and our shareholders. We are carrying strong momentum into the fourth quarter and we look forward to delivering another great year in 2024. With that, I'll hand the call to the operator for questions.

Operator, Operator

The first question today comes from Bob Napoli with William Blair.

Bob Napoli, Analyst

Thank you. Impressive momentum. Appreciate the guidance and the trends and EBITDA margin expansion which obviously begs the question to get the kind of growth that you have and the momentum you have while driving that operating leverage. What are you giving up on the growth side or on the technology development side? Expanding by 700 basis points a year is pretty dramatic. So appreciate any color around that.

Alex Shootman, CEO

Bob, this is Alex. I don't feel like we're giving anything up in terms of our ability to grow the business in the future. We're pleased with a lot of the investments that we're making in the platform and we've got a lot of visibility on how those investments turn into leverage as the company grows. And we're also pleased with the leverage that we're beginning to get out of the implementation teams and the productivity that we're getting out of the implementation team. So we don't feel like we're giving anything up in terms of our ability to serve our customers and grow with the guidance that we've provided.

Bryan Hill, CFO

And Bob, I'll just add a couple of more comments to Alex's statement. I mean the beauty of our financial model is it provides visibility that allows us to invest and know when to invest and where to invest. So what I mean by that is we can grow our research and development, our engineering team, our product management teams just at the same pace as revenue, and we'll scale that organization. Sales and marketing. Again, we really have a best-in-class sales efficiency. We deliver about $1.60 in annual recurring revenue for every dollar of sales and marketing spend. There are very few SaaS companies that you'll find that are delivering sales efficiency at that level. And then when you look at G&A, coming out of our IPO now, it's been a couple of years. We've really made the necessary investments within G&A. So now you'll see some reasonable growth with the business between 7% to 9% a year over the next 3 to 4 years. And so we'll continue to scale G&A at the level that we've been scaling it during 2023. For the quarter, we had 10 percentage points or 1,000 basis points of adjusted EBITDA margin expansion which speaks to the leverage in the model and the visibility that we have that allows us to invest where necessary.

Bob Napoli, Analyst

Thank you. I have a follow-up question regarding the number of new customers you are acquiring. Has the win rate improved, considering you have not lost any customers? What is contributing to the increase in customer additions? Additionally, what kind of success are you experiencing with banks?

Alex Shootman, CEO

Yes. Our win rate remains steady. We were pleased with the seven new customers that we signed in the quarter and then the additional four new customers that we signed in the week or so after the quarter: two credit unions and two banks. So we're pleased with the new logos that we're winning, and our win rates remain high in the credit union space. I'll say we've got a mixed blessing in the bank space. The good news for us is that we are being invited to more opportunities, and I think we may have mentioned this in the past earnings call, where we had high win rates in banks but we weren't being invited to that many opportunities. So we are being invited to more opportunities, resulting for us right now in our win rate being slightly less in banks than it is in credit unions. But for us, that's really good news because we wanted our participation rate in banks to go up.

Operator, Operator

The next question comes from Andrew Schmidt with Citi Global.

Unidentified Analyst, Analyst

This is David for Andrew Schmidt. Can you guys speak in more detail regarding the cross-sell progress, what products you're seeing the most strength right now?

Bryan Hill, CFO

Yes. So we've mentioned this a couple of times but we created our client sales team in 2019. And once we created that team, they're responsible for two primary functions: one is cross-sell into the base and second is to renew new clients. When we renew a client, at least in 2023, what we're seeing is three to four additional products that are being taken upon renewal. So that is a great opportunity to cross-sell into the bases when renewal occurs. But we're not just dependent upon the renewal cycle. And what we're seeing from our client sales team is we're seeing a lot of progress in cross-selling our fraud and security products, our money movement products, and our client service products. That's where we're seeing the most traction from that team. In 2023, that team has represented 33% to 34% of total sales. Last year, that was a comparable amount as a percentage of total sales. Two years ago, it was less than 15% of total sales, so we're seeing a lot of momentum and progress within that function.

Alex Shootman, CEO

What I want to emphasize is that having our product portfolio is beneficial because we've noticed a change in customer purchasing behavior due to evolving strategies and tactics in the market. For instance, right now, there's significant interest in fraud management and advanced card capabilities, which enable the provisioning and issuance of digital cards. This contrasts with a couple of years ago when issues related to financial wellness were more in demand. The advantage of our product portfolio is that it allows us to adapt and provide customers with what they need as they navigate the substantial changes in interest rates and fiscal policies implemented by the federal government.

Operator, Operator

The next question comes from Sam Salvas with Needham & Company.

Sam Salvas, Analyst

Congrats on the adjusted EBITDA positive this quarter. Could you guys just talk a little bit about how customer conversations have changed from last quarter, if they have at all? And maybe just talk about the broader demand environment a little bit more and how you guys feel as we start heading into 2024 soon?

Alex Shootman, CEO

This is Alex. As I mentioned in my prepared remarks, personally, I've spent a lot of time with customers and prospects during Q3 because I wanted to understand the same thing that you're asking. And they're having to change their business strategies and tactics because of the shift in the interest rate environment and really the need to attract more deposits. So the conversation has moved to what can we do digitally to attract deposits? What can we do digitally to do things like promote direct deposits? What can we do digitally to market CDs and money market accounts? So all of that has shifted. What really hasn't shifted is the commitment to the digital channel. In most of our customers, it's the most important channel that they have, and they are leveraging it to try to address some of the things that I just talked about. So there's no discussion where people are saying, I'm not going to invest in a digital banking channel. That would be like airlines saying, I'm not going to have pilots or flight attendants or mechanics. It's just part of doing business. What's changed is how can I use digital to work on the business challenges that I have right now.

Sam Salvas, Analyst

Got it. That's helpful. And then just a quick follow-up. Good to see the seven new logos signed this quarter. Could you guys just talk a little bit more about those wins you guys had, and maybe any commentary into the size of these companies? Just trying to get a sense for, are you guys starting to try and go after some larger financial institutions out there? Or is it more just playing in your sweet spot right now?

Bryan Hill, CFO

Well, we continue to play in our sweet spot that tends to be the larger financial institutions in terms of average users per financial institution. Keep in mind that what feeds our revenue model is the number of digital users. And so we average 72,000 digital users per financial institution for the 229 live clients that we have. The next closest competitor to us is in kind of the high 50s, low 60s in terms of average users. So we're already focused on the top 2,000 financial institutions, which lends us to larger financial institutions. What we've seen so far this year is very similar sized financial institutions. We've had a few over 100,000 digital users. Last quarter, we signed our largest bank to date, so we're pleased with the success. We're pleased with the demand.

Operator, Operator

Looks like we've lost connection with our speakers. Please hold while we reconnect. Ladies and gentlemen, thank you very much for your patience. We've reconnected with our speakers.

Bryan Hill, CFO

Operator, we can move to the next question in the queue?

Alex Shootman, CEO

Unless there was a follow-up on that.

Operator, Operator

The next question comes from Adam Hotchkiss with Goldman Sachs.

Adam Hotchkiss, Analyst

I guess when you think about where you are today versus the beginning of the year, how much momentum would you say has been driven by an inflecting top of funnel versus an improved pipeline conversion rate? I think we're just trying to get a sense for whether this is more an influx of interest on the back of the rate environment and some of the tech investments you've made versus the historical top up on just converting at a higher rate than you've seen historically. Any color on that would be helpful.

Alex Shootman, CEO

Yes, this is Alex. I would say that the demand from the credit union side of the market is consistent with our normal experience. Additionally, the demand from the bank side of the market has increased compared to the same time last year. If I were to illustrate pipeline interest, it shows consistency in the credit union market, along with a higher demand from the bank market than we saw at this time last year.

Bryan Hill, CFO

And Adam, the demand on the bank side of the market is really from us being more active in the bank market, our product being more prepared, our roadmap around the core integrations that are necessary for us to be competitive in the bank market, and then a deliberate strategy around creating more market awareness. And that has resulted in a sales pipeline now that's 40% of our total sales pipeline related to banks.

Adam Hotchkiss, Analyst

Got it. That's really helpful. And I guess just to follow up on that point. When you think about being invited more to bank RFPs, would you say that's a function of just relative awareness? Is that folks from referenceability getting a sense for your capabilities versus some of your competitors? I know some of them call out having done many conversions off of some of the legacy core providers before. Just curious what in that RFP process with banks, some of the core differentiators you hear from customers on the Alkami value proposition and how that's changed?

Alex Shootman, CEO

This is Alex. I think it's two things. First of all, banks are realizing that their commercial customers are made up of people and that as the pressure has increased for anybody that serves a consumer market to deliver a really great digital experience, they're realizing that their commercial accounts, once again being made up of people, they have to deliver a really great digital experience. That's what Alkami is known for. So that certainly is wind at our back. We are getting more bank customers live on our platform. So that helps from a referenceability standpoint. And then those two things together create awareness that Alkami is an option that people should look at if they're a bank and they're considering making a digital transformation.

Operator, Operator

The next question comes from Pat Walravens with JMP.

Patrick Walravens, Analyst

Great. And let me add my congratulations. And so I know you're not at the point yet where you're ready to give guidance for 2024. But Bryan, any key points you want us to keep in mind as we think about that?

Bryan Hill, CFO

Pat, we'll provide guidance for 2024 official guidance in February, late February, when we announce Q4. I think the key point, though, is based on the guidance that we provided for Q4 of 2023, what you can derive from that is an accelerating revenue growth rate from Q3 of 2023. So a growth rate in the 28% to 29% range compared to us delivering at 27% in Q3 of this year. Second, what we have stated throughout the year is an expectation of being just right at 60% gross margin in Q4 of 2023. So you can see us building our gross margin from that as we move towards 2024. And in terms of visibility, I would expect once we exit Q4 of this year, we'll still have the same level of visibility in terms of a backlog of about 12 months of annual recurring revenue to be implemented over the next year.

Patrick Walravens, Analyst

All right. That's super helpful. And then Alex, for you sort of the same theme. So what are the top two or three things that you're going to be most focused on for 2024?

Alex Shootman, CEO

Well, certainly continuing the progress that we're making in the bank market is pretty critical for us. And so that is the continued build-out of the product capabilities, the skills in the organization, the number of cores that we're integrating into, getting the clients live with an excellent experience and referenceability. So that's pretty key. Creating capabilities in the platform itself that start to create distance between us and any other digital banking competitor in terms of the flexibility of the platform, the telemetry that we have coming out of the platform, and the extensibility of the platform. That will clearly be a priority for us. And then, really, Pat, we're successful because we've got a bunch of people that like working at Alkami and like serving our clients and doing a good job for them. So we have to continue to build Alkami into a place that people want to come to and people want to work and they want to be proud of their work and be passionate about what they're doing.

Operator, Operator

The next question comes from Jacob Stephan with Lake Street Capital Markets.

Jacob Stephan, Analyst

I just want to add my congrats on the quarter as well here. Maybe help me kind of understand the implementation backlog here. So 35 new clients and add-on sales orders. So the 35 new clients at a down quarter-over-quarter but ARR is not down as much as a percentage. So basically, is there a higher mix of kind of bank customers in there versus the credit union side?

Bryan Hill, CFO

No. I mean, in our new logo or client win backlog of the 35, we have roughly 14 of those as banks; the banks carry an average revenue per user of $30. So as we've always indicated, banks tend to carry a higher revenue per user. The 21 credit unions that are included in the backlog are around $23 of revenue per user. The annual recurring revenue split is fairly even between the two cohorts within the backlog. So it's very similar. I would not look at our backlog and suggest that the mix is significantly different than what it's been over the last several quarters.

Jacob Stephan, Analyst

Okay, that's helpful. And then maybe just kind of talk about the technological upgrade cycle of banks versus credit unions. Do you see banks upgrading quicker, adding new solutions quicker than the credit union side? Or how can we think about that?

Alex Shootman, CEO

Yes, it's not a significantly different process for either banks or credit unions. Both are engaged in long-term contracts and begin exploring their options a couple of years in advance. When a contract is approaching its end, they typically allow some time to ensure they have something new in place before the existing contract concludes. Generally, this involves a 9 to 12-month implementation phase alongside a decision-making period of around 6 to 9 months. The distinction lies in the implementation approach; for credit unions, which mainly serve retail customers, the transition often involves customers downloading a new app from the App Store. In contrast, banks, especially those with large commercial clients, tend to assist their customers in moving to the new platform. While the decision-making timelines are similar, the way we carry out customer implementations differs.

Jacob Stephan, Analyst

That's all I had. Best of luck going forward here, guys.

Operator, Operator

And our final question comes from Daniel Hibshman with Craig Hallum.

Daniel Hibshman, Analyst

This is Daniel on for Jeff Van Rhee. Yes, excellent quarter; the acceleration in user additions is very impressive. Can you provide some high-level insights into what is driving this? Is it due to the size of new clients, reduced churn, or the number of new clients joining? It seems the client count for the live digital platform is up by one or so, which indicates a significant year-over-year increase. I assume the main factor is the influx of new clients. Is this growth rate sustainable? Is there a recent increase in implementations? Please help us understand the recent rise in user additions.

Bryan Hill, CFO

So what's really driving our user adds, as we mentioned in the prepared comments is, first, implementation of new clients onto our platform. We added 1.7 million, 1.8 million digital users over the last 12 months. We have that visibility at any given time during the year, and that comes from our backlog of implementations. Then our clients are growing themselves. Our clients are growing at a rate of about 10%, and that 10% over the last 12 months resulted in 1.4 million digital users for 2023. So the three quarters of 2023, our clients have grown one million digital users. So what we find is since we focus on the top 2,000 financial institutions in the market, those financial institutions tend to be the more technology leaning in financial institutions. And as a result of that, they grow their digital platform communities at a fairly nice rate.

Alex Shootman, CEO

And certainly, I mean, to be in a position where we're not going to lose a single customer on our digital banking platform this year, that certainly helps. We may not be able to do that every year for the next 20 years, but that's a great result of our ability to take care of our customers.

Bryan Hill, CFO

Yes. I mean, we believe that there is no other provider in the space adding 3 million or more users over a 12-month period.

Daniel Hibshman, Analyst

And then maybe just one follow-on for me. Looking at the average revenue per user up about 5% year-over-year. I think the commentary was that our new customers in the backlog are around 24% versus the current average revenue per user around 16%. Just on a weighted average with all those new customers coming on at a high average revenue per user, I would have thought that you'd be able to get a little bit higher than the 5%, which I know is how it's traditionally grown around that current 5%. Is there any other sort of mix shift or pricing element that plays into the average revenue per user in the way that that's trending?

Bryan Hill, CFO

Our clients added 1 million digital users over the last 12 months. The way our pricing model operates is that as a financial institution brings more users to our platform, the incremental cost per user decreases. So, when we grow by 5%, this counters the challenge of the 1.4 million digital users who are being added at a rate below $10 per user. Consequently, the average revenue per user is expanding in the range of 7% to 8%. Additionally, we have to consider the dilution from the incremental users added by our financial institutions.

Operator, Operator

This concludes our question-and-answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.