Alkami Technology, Inc.

Hello, and welcome to the Alchemy's third quarter 2023 financial results conference call. My name is Betsy, and I will be your operator for today's call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. 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, Betsy. 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. 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 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.

Thank you, Steve, and good afternoon, everyone. The third quarter was another good quarter for Alchemy 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 Alchemy 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 ask 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 environments. In addition, last week we hosted a dozen prospects at our headquarters, performed a 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. Alex, in all my years of 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 you really didn't focus too much on it. She went on to say, none of my staff were here the last time we had to drive deposits and we are having to teach strategies and tactics we have not used in years. I asked each CEO if 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 are continuing to invest in digital banking and even something as routine as CD rollovers is on their mind. One CEO told me, Alex, we all offer 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 FIs in September to assess their overall digital maturity by asking a series of questions related to digital adoption and investment priorities. We found 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're also much more likely to say that their top investment priority is improving customer experience technology. As one bank respondent put it, 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 percent year-over-year, as the FDIC reported in June, when we evaluate our clients' data, they've seen almost a 1 percent 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 two times their initial ARR, and our 2020 cohort is already at 1.8 times initial ARR. 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 megabanks. Over the last six years, we've invested over a quarter billion dollars in R&D. And Alchemy has consistently spent the most on R&D as a percent 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 on board with over 50% of our product portfolio. This demonstrates 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, but maybe more importantly, we are by far the app that is most rated in our space. One of the biggest commitments we make to a client is when we convert them from their legacy system to Alchemy. This is non-trivial, as there are integrations to their back office core systems, dozens of connections to third parties, and thousands of customer accounts to convert. And usually, the entire user base moves to the Alchemy platform on launch day. 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 Alchemy. We launched three clients in a single day. It's not just about launching the client. It also has to be a great experience for our client and their end users. Jerry Agnes, who's the president and CEO of Elevations Credit Union, told me, Alex, implementing Alchemy for our new digital banking platform has been better than any other conversion I've experienced. Over 88% of our members converted to Alchemy with no assistance or intervention from our staff, and our members are thrilled with the new platforms. 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 Postgres 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 Alchemy 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 Brian to take us through the numbers.