Alkami Technology, Inc.

Hello and welcome to Alchemy'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. Should you need assistance please signal a conference specialist by pressing the star key then zero on your telephone keypad. After today's presentation there will be an opportunity to ask questions. To ask a question you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Steve Kalk. Steve, you may begin.

Thank you, operator. With me on today's call are Alex Schutman, Chief Executive Officer, and Brian 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. 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'd now like to turn the call over to Alex.

Thanks, Steve, and welcome, everyone. I am pleased to report another quarter of strong operating and financial performance. In the second quarter of 2023, Alchemy grew revenue 30%, once again, ahead of our expectations. We exited the quarter with 15.8 million live registered users on the Alchemy 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, Alchemy 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 and operating improvement has occurred quarter after quarter through both low and rising interest rates, in various economic and political cycles, during the spring banking crisis in which three midsize U.S. banks failed, and during and after a 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. Alchemy 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 insight that drives our 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 2,000 financial institutions in the United States understand this and are aggressively pursuing a modern digital sales and service channel. But because of this, mobile banking adoption has been faster than computers, mobile phones, or the Internet. When I talk with clients and prospects, they tell me three things are driving the increased pace at which they are investing in digital banking. First, the pandemic pushed 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 to their core back office system and allows them to interact digitally with their customers to sell, serve, and improve their customer's 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's the most highly correlated attribute to overall bank or credit union customer satisfaction. It's 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 Alchemy 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 have 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 FI, 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 a debit card or checking account. Among Gen Z, that number increases to 1.9. This creates growth strategies for a 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 this dynamic, many of our clients are creating digital first growth initiatives when 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 third 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 in our client base. And 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 Alchemy digital banking platform, this bank is deploying a full suite of Alchemy products, including segment, digital account opening, and ACH alerts. We now have 25 banks under contract. Another example is the segment acquisition. From our inception, Alchemy 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 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 FIs 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 new products from, and or recommend a financial institution. But as the broader market began focusing on their data strategy, they gave us feedback that our legacy data platform was challenging to adopt. And they let us know of a smaller technology company that had mastered the ability to simplify the use of data analytics and marketing for regional and community FIs. That company was Segment, and we were very pleased with the acquisition and the pace at which we were adding new standalone clients and 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 in new products is the top barrier to a financial institution adopting add-on products. Good account management, executive relationships, and product education goes 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 Alchemy is simple. Registered users times revenue per user. And 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 market. 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 EFIs continue to add customers, and our clients tend to grow faster than the industry average. In addition, when selected as the digital banking provider, we are starting a long-term relationship with our clients, on average, 70 months. This long-term relationship reduces our attrition rate, and equally as important, provides us an opportunity to expand the relationship to our clients adopting additional products. This occurs during the contractual term, and at the point of renewal, both driving a higher ARPU. And 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 Alchemy culture. You don't sell a six-year, highly complex, user-disrupting solution to an 80-year-old financial institution unless you have values deeply embedded in your organization. Values of client first, a 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'll hand the call to Brian to take us through the numbers.