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spk11: conference call. At this time, all lines are in a listen-only mode. Following the presentation, we welcome back a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, February 28, 2024. I would now like to turn the conference over to Steve Goerhead.
spk14: Thank you, operator. With me today 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 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 being made during the call today are being made as of today, and we undertake no obligation to update or revise these 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.
spk09: Thank you, Steve. Good afternoon and thank you all for joining us. I am pleased to report that Alchemy delivered strong financial performance in the fourth quarter of 2020. This contributed to a great year and demonstrated on several fronts progress towards the multi-year revenue and profit guidance we discussed at the beginning of the year. In the fourth quarter, Alchemy grew revenue 29%, once again ahead of street expectations. Exited the quarter with 17.5 million live registered users on the Alchemy platform of 3 million compared to the prior year, and regenerated approximately $3.1 million in adjusted interest. The full year of 2023, we delivered excellent results, including 30% revenue growth, keeping positive adjusted interest a quarter earlier than projected, making progress on key initiatives that will deliver on future revenue and profit targets. Some highlights for the year include the following. We won 39 new logos with a total contract value of 21% higher than last year, representing the best new logo in our history in terms of financial institutions and total contract value sold. We demonstrated the growth opportunity in our client base by delivering total contract value from add-on sales at the highest level in our history. Our culture of treating the client as our North Star produced results, as Alchemy did not lose a single client off the platform during 2023. In Q4 alone, we renewed 20 clients who averaged five new products added and extended with Alchemy for another five years. In February of 2024, we renewed our largest client, which is a top 10 credit union, more than doubling the original total contract value and extending the relationship for another five years. The execution of the new logo was a key step in our long-term strategy. We also signed our second largest total contract value new logo transaction in our history, which is a bank account. Our platform investments for long-term scalability began to deliver results for our clients and our clients. We added executive talent in two important areas of our business, engineering and client experience, which includes all post-sales activities. One of the most reassuring outcomes of 2023 is the resilience demonstrated by our end market, which contributes to the confidence we have in our longer-term financial guidance. Our market consists of over 9,000 regional and community financial institutions that are rarely public entities. They are focused on their communities and operate with very diverse strategies. This results in a lower risk profile, which was evident in the months after the spring liquidity event that impacted a handful of super regional banks. Throughout 2023, we saw stability within our clients' deposit balances, number of customer accounts, and strength in the buying behavior of our target market. We're optimistic as that momentum carries over into 2024 and our optimism is supported by some recent market research. We just completed an independent survey of our market in which 90% of banks and 89% of credit unions said they were optimistic about their financial future over the next 18 months. And 67% of banks and 72% of credit unions anticipate increases in their technology budgets in 2024. Alchemy's target market considers a modern digital banking platform to be a non-discretionary investment. Our clients and prospects tell us that to remain competitive with megabanks, they must have a great digital sales and service channel. One industry analyst recently wrote, we believe the demand for digital transformation remains more robust than ever, particularly as many of these FIs need to invest in technology to attract deposits in what is now a more dynamic deposit gathering environment with higher interest rates. Companies that convert to and stay with Alchemy tell us that the investment we've made in a cloud-native, single-code base, multi-tenant system with a superior user experience, extensibility as a philosophy and data as a long-term advantage helps them compete against megabanks, which is why more FIs said yes to Alchemy in 2023 than any other provider in the market. We continue to focus on the priorities that we have set for the future, win in the bank segment of the market, drive growth through add-on sales, engineer our technology platform for scale, become the employer of choice in our market, and use M&A optimistically. These objectives will continue to drive our multi-year revenue and profit goals. In 2024, we believe if we do four things well related to our long-term priorities, we will create a long-term strategy that will create distance between us and the rest of the market that will be difficult for others to overcome. Number one, continue to invest in client satisfaction in the client journey. Our clients want to move with speed and bring new capabilities to market. We are investing in our platform to make it easier to integrate other technologies into Alchemy and we are allocating engineering resources to reduce the time it takes to implement new capabilities for existing clients. Number two, accelerate the momentum we're building in banks. During 2023, we had external experts benchmark our commercial offering against market requirements and they found that Alchemy now meets 92% of client expectations in commercial banking functionality. We have allocated product and engineering resources to fully close the remaining product gaps in 2024, and as we implement the 17 banks in our backlog, we will continue to strengthen the capabilities of our commercial offering. Our sales pipeline remains strong and we expect continued success in this market segment. Number three, maintain our excellence in launching new clients. Each year as we grow, we continue to ramp the number of new clients we launch. It's one thing to launch a few clients a year, but Alchemy plans to launch 40 new clients in 2024. The ability to successfully launch clients is a sustainable competitive advantage for Alchemy, and during 2024, we intend to build upon our strength in this area while we improve productivity. Finally, we're going to build leadership at all levels of Alchemy. As we grow past 1,000 employees and are on our way to serve 25 million or more digital users on our platform, we need leadership infrastructure just like we have technology infrastructure. We have a leadership development program within Alchemy that's helping our top 50 leaders become great software executives, understanding how to create value for our clients and our shareholders, and maintain the culture that's been critical to our success. In closing, 2023 was a great year for Alchemy. We continued to add more digital users and lose less clients than any other digital banking provider in the market. This is a result of the people we have, the culture we thrive in, the market we serve, and the technology we build. For too long, our market has suffered with outdated technology, and Alchemy intends to bring great technology to this market and be the number one digital banking provider. As we look towards 2024, I'm proud to be part of one of the fastest growing bank technology companies, and I'm excited to drive even more value for shareholders, clients, and employees. I'll now hand the call to Brian.
spk10: Thanks, Alex, and good afternoon, everyone. 2023 has been another successful year for Alchemy. We achieved $265 million in revenue, representing 30% growth, and improved our adjusted EBITDA loss from $18 million in 2022 to $1.6 million in 2023. Our Q4 results contributed significantly to our full year performance and allowed us to exit the year with positive momentum. For the fourth quarter of 2020, we achieved revenue of $71.4 million, representing growth of 29%. Subscription revenue grew 30% compared to the prior quarter and represented approximately 97% of total revenue. We increased ARR by 29%, and exit of the year at $291 million. We currently have approximately $52 million of ARR backlog for implementation, the majority of which will occur over the next 12 months. We implemented seven new clients in the quarter and 37 for the full year, bringing our digital platform client count to 236. We now have 44 new clients in our implementation backlog, representing 1.3 million digital users. We exited the quarter with 17.5 million registered users live on our digital platform, and we have a new digital platform of 3 million or 20% compared to last year. Over the last 12 months, registered user growth continues to be driven by two areas. First, the 37 financial institutions we implemented in 2023 represent 1.5 million registered users and just over 27 million of ARR, both of which exceeded the full year of 2022 by approximately 35%. Second, our existing clients increased their registered users by 1.5 million, demonstrating the market's focus to drive customer retention and growth through the digital banking platform. In terms of churn, for 2023, we did not experience any digital banking client churn, and we expect to lose only three clients in 2024, representing less than 1% of our ARR. This compares to our expected long-term average churn of 2 to 3%. We ended the year with an RPU of $16.63, which is 7% higher than last year driven by add-on sales success and the addition of new clients who tend to onboard with a higher average RPU. We continue to see healthy demand across our product portfolio. During 2023, we signed 39 digital banking platform clients, of which 16 were signed during the fourth quarter. Our new client wins reflect solid representation from banks with 12 signed during 2023. In addition, 14 of our signed new clients adopted a CH alert, while 22 adopted segment, demonstrating the importance acquisitions can play in building out our platform and creating a competitive advantage. Our add-on sales focus continues to yield results representing 35% of total new sales for 2023. In addition to add-on sales, our client sales team is responsible for client contract renewals. During the year, we renewed 31 client relationships, where we raised the ARR run rate 6% through a combination of new product sales and committed client growth. And finally, our remaining purchase obligation or contract backlog reached $1.1 billion, almost four times our ARR and 28% higher than a year ago. Now turning to gross margin and profitability. For the fourth quarter of 2023, non-GAAP gross margin was 60.3%, representing 390 basis points of expansion when compared to the prior year quarter. Gross margin expansion resulted from improvement in our operating costs for registered user, combined with operating leverage across our post-sale operations such as our implementation, support, and site reliability engineering teams. We continue to scale 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 fourth quarter of 2023, non-GAAP R&D expense was 17.3 million or 24% of revenue, 530 basis points lower than the year ago quarter. We're achieving operational skill 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 by 2026 while we continue to invest and expand our platform. Non-GAAP sales and marketing expense is 10 million or 14% of revenue in line with the prior year. We continue to achieve a high level of sales team productivity and -to-market efficiency. For example, during 2023 we increased our ARR just under 65 million while investing 41 million in sales and marketing, representing an efficiency ratio of 1.6 to 1 for ARR creation to sales and marketing investment. We expect to maintain or slightly improve our -to-market efficiency as we scale the business and gain market share. As you consider 2024, keep in mind we will host our annual client conference in the second quarter, which results in approximately 2 million to 2.5 million of higher spend than other quarters of the year. Non-GAAP general and administrative expenses were 13.5 million or 19% of revenue. In the prior year quarter, G&A was approximately 21% of revenue. The margin expansion is primarily attributable to revenue scale. As we closely manage G&A expenses, we expect to achieve 10 to 12% as a percentage of revenue as we move toward our 2026 profitability objectives. Our adjusted EBITDA for the fourth quarter was 3.1 million, which is an improvement of over $7 million when compared to the prior year quarter. We are very pleased with our 2023 adjusted EBITDA progression. As a reminder, we've 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 per year. Now moving to the balance sheet. We entered the quarter with just over 92 million of cash and marketable securities. During Q4, we retired our term debt of just over 82 million. Our credit facility revolver remains undrawn and provides 60 million of borrowing capacity. Now turning to guidance. For the first quarter of 2024, we're providing guidance for revenue in the range of 74.5 million to 76 million and adjusted EBITDA of 2.5 million to 3.5 million. For the full year of 2024, we're providing guidance for revenue in the range of 327 million to 333 million, representing growth of 24 to 26% and adjusted EBITDA guidance of 20 million to 23 million. Additionally, because of the impact of expense timing, such as our client conference, as I mentioned earlier, we expect the second quarter to be the low point of our adjusted EBITDA in 2024, modestly lower than the first quarter of the year and consistent with the long term seasonality of our second quarter expenses. In summary, 2023 was a great year for Alchemy, a year of strong performance where we achieved a record level of new sales from both new client wins and add-on sales, added a record number of digital users to our digital banking platform, and meaningfully improved our profitability profile by exiting the year with gross margin over 60% and continuing a trend of positive adjusted EBITDA. We remain confident that we are well positioned to achieve our 2026 financial objective, a 20% adjusted EBITDA margin. Our confidence is derived from exceptional visibility and a track record of execution and scale across all areas of the business. We exit the fourth quarter with strong momentum and look forward to delivering another great year in 2024. With that, I'll hand the call to the operator for questions.
spk13: Thank you. And ladies and
spk12: gentlemen, we will now begin question session. Should you have a question, please press the star followed by the number one on your telephone keypad. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you're using a speaker phone, please keep the handset paper pressing any keys. One moment please for your first question. And your first question comes from the line of my attendance and need him. Your line is open.
spk05: Oh, thank you. Good evening, Brian and Alex. I wanted to start with a question on the bank market. As you compete for banks in the SMB space. I just want to get a sense of you know what the competitive landscape looks like. What are your win rates in that market? And who are you taking share from? Are they the legacy incumbents or some of the other companies? Are they the other digital centric players that might have secured that market some years ago, but now are maybe coming up on renewals and maybe losing market share to cloud data solution like yours?
spk09: Yeah, thanks for the question. This is Alex. The pattern match is very similar to the early days of the credit union market where these clients have a legacy digital platform that might be 10 or 15 years old. And so we are replacing those legacy platforms that are 10 or 15 years old with a more modern experience. What they're realizing is that kind of two things. One, even though they're serving businesses, those businesses are made of people. And those people have an expectation of a more modern experience in any of the technology that they're using. The second thing that they're realizing is that some of the legacy technology creates a pretty big overhead on their own internal operations. And that a more modern platform can create some efficiencies for them internally. But the short answer is we're replacing 10 to 15 year old technology just like we did in the early days of our participation in the credit union market.
spk05: That's very helpful, Alex. And then maybe just turning to the financials. And Brian, maybe you talked about this, but just trying to look at the revenue growth that you guided to. How does that break down between ARPU extension and obviously user growth being the main engine? Just want to get a sense of the balance between the two key drivers of underlying growth.
spk10: Yeah, no, that's great. My, our, our 2024 revenue guidance, it's very comparable to the longer term guide that we provided on revenue and as well as our profitability objective. And what we continue to say is we've got a company. We've developed a model. We have a market that can sustain a 25% growth rate, which is the midpoint of our guidance and how we achieve that from year to year is a combination of two things. We would expect to add between 18 to 20% from users to the platform and 5 to 7% coming from our ARPU expansion. The users that we add to the platform will first come from the new logo backlog that we have entering the year. So we have 1.3 million digital users and backlog. We have 44 financial institutions and backlog and we expect to implement approximately 40 of those this year. The balance will come from our clients growing their users. So in 2023, our clients grew their users 10% in 2022, slightly higher than 10%. So we expect that we'll continue at that 10% existing client user rate as relates to ARPU expansion. Two areas that we derive expansion in 2024 and really beyond. One is add on sales. Add on sales is now approximately 35% of the total contract value that we sell in each year. We think over time we can increase that to a level of 50%. But ARPU expansion primarily comes from add on sales into the existing base. And then finally, what we're identifying is as we have more products to sell, our sales team on the new client win side, they're selling more products on the initial order. So in 2023, on average, we had 18 products per order. We had over 14 clients that had 20 plus products. So there's a greater adoption of products on the initial order. If you went back a year, it was 17 products. A year before that it was 15 and the year before that it was 12. So we're seeing good momentum in the number of products that are being taken on the initial order, which also has the impact of expanding ARPU over time.
spk08: That's a very helpful. Thank you so much.
spk12: And your next question comes from the line of Andrew Smith from CD. Your line is open.
spk07: Hey, Alex. Hey, Brian, Steve. Good quarter here. Good, consistent results. Thanks for taking my questions. You know, the ARR, I think it was up 29% exiting the year, the live ARR. Yet the I think the revenue outlook, as you mentioned before, Brian, you had 25% at the midpoint. Maybe you can help us just reconcile that. Seems like ARR is obviously a good indicator. But any help there would be great. Thanks so much.
spk10: Yes, so when we provide guidance one quarter out, Andrew, it's a, it's a very predictable revenue model. So we generally have between 97 to 98% ARR coverage on the subscription revenue that we're going to deliver in the next quarter. And then also what we know, and we know this with a pretty high degree of certainty again, providing us the visibility and predictability of the model is the number of clients that will launch in the quarter. So the clients that will take a lot of backlog and then also what really what's been scheduled for the for the full year. So that's a very known item for us as well. And so then the final areas that can provide revenue lift over time is our ability to sell more product from an add-on sales perspective into the base and the speed at which we implement that. So that's the variables that we have that can drive the revenue growth.
spk07: All right.
spk10: Thank you, Brian.
spk07: Maybe then just a product question. I think Alex, you mentioned the commercial product, you know, big initiative this year is to sort of continue to iterate and improve that. Maybe talk a little bit about where you're at today in terms of business sizes you serve, the functionality, and then, you know, some of the things that you're going to be doing this year to continue to iterate that. Obviously, you know, big focus on deposit gathering. It seems like it could be, you know, well received in the market. But any help there would be great. Thanks a lot.
spk09: Thanks. The feedback that we've had from customers that we've signed in the bank market with respect to our commercial offering is that they're attracted to our commercial offering. But with some of their more sophisticated customers, they have, let's just call it in the payments area, they just have wire capability that they'd like to see us improve our sophistication on. So generally, as I mentioned in the call, external study, we've got really great coverage on the product. When our customers look at the product and then look at their more sophisticated customers, they're saying, boy, Alchemy, there's a couple of things you could do to help me with our more sophisticated customers. The second area is their customers that have more complex ownership interlocks, if you will, where one person might own three or four different LLCs and they might share those LLCs with different folks and they might have bookkeepers that operate against different entities. And so that's something that we built in the back half of the year, once again, from customer feedback to say, I need a better way to allow these sophisticated, I would say not sophisticated, but more complicated entities to be able to access the right businesses in the digital channel. So, in summary, their ownership structures and certain areas of payments, like wire processing.
spk08: Got it. Thank you very much, Alex.
spk09: We're at a pretty fine grain level now when you start talking about having 92% of coverage on the product, we're starting to get to a pretty fine grain level in terms of what we need to work on.
spk08: Got it. Thanks, Alex. Appreciate the comments.
spk13: And your next
spk12: question comes from the line of Jacob Stefan from Lake Street. Your line is open.
spk03: Hey guys, congrats on the results and strong finish to the year here.
spk02: I just want to touch on the non renewals that you pointed out. You know, what is this a factor of? Are these customers switching to a competitor or, you know, are these more just acquisitions in the F5 space?
spk10: Yes, so the three financial institutions that we know are not renewing and leaving us in 2024, two of those are pretty small financial institutions that are going through a core conversion. And they selected cores that are more esoteric in nature that we will never build integration to. There's not a density of financial institutions on those cores for the investment to the right return of investment for us. The third one is the result of the financial institution being acquired. Generally for Alchemy, we've been the beneficiary from merger and acquisitions of financial institutions. But in this case, we are not the financial institutions that's our client, it's not the acquirer and they're moving to the digital banking platform of the acquiring financial institution.
spk03: Okay, and then it sounds like the mix of banks and implementation
spk02: backlog is shifting kind of above the one third banks, the two thirds credit union, like it has been over the last couple quarters. But maybe, you know, you could just kind of talk about what you're seeing there. Is there any difference in implementation times for a bank versus a credit union?
spk10: Yeah, I'll jump in and take this one now if you can add as you fulfill it. The implementation time for a bank is slightly longer than a credit union today. So our credit unions are averaging, you know, depending on the number of integrations and the complexity and the size, but they average between eight and nine months. A bank, the implementation lift is, it's more hands on. There's more client specificity of the financial institution that's involved in the implementation effort, like around delegation of authority, roles and rights and wires and those types of things that have to be implemented as well. So that tends to extend the implementation out a bit longer. What's cool about 2023 is we added integration into three new cores. Two of those were in the fourth quarter. So now we have integration into eight bank core systems and there's two or three more that we feel like we need to build over time to have great coverage of the bank side of the market.
spk09: I would just add to that for, you know, for clarity when we say we added integration, that means the customer went live. So this wasn't something that we sold. This is the customer is live on a core. These two cores are critical to our long term bank strategy. And what we tend to see is that there's a bit of a logarithmic curve on effort that it takes to do an integration where after about the fifth integration, the fifth time that we do an integration, then we're at a steady state of the integration effort. So we were really pleased to get these two clients live on these two brand new bank cores for us, which opened up a pretty big chunk of the market.
spk10: And just to get more direct on the backlog, the 17 bank financial institutions in our backlog, we expect to implement 13 of those in 2024. And we had seven bank implementations in 2023. So we're starting to see more productivity and see a greater number of bank financial institutions come live on our platform.
spk08: Okay, very helpful. Thank you.
spk12: And your next question comes from the line of Pat Walrivans from CitizensJMP. Your line is open.
spk16: Oh, great. Thank you. Hey, Alex, can I ask sort of big picture? What are the biggest challenges facing your banking clients in 24? And how might that be different than 23? And then the same question on the credit union side.
spk09: Yeah, I would say for both, it's obviously continuing to attract and retain deposits in the environment, which creates a pretty heavy focus on digital account opening or call it frictionless account opening. And that could be an account opening of an existing customer or member who is buying a new product, or it could be the acquisition of a new customer. I think, Pat, the thing that folks are starting to understand, and I wouldn't necessarily say, hey, it's a big challenge in 24, but it is a challenge that they're starting to address is if you think about a regional or community financial institution, bank or credit union, there's five systems that you have to have to run that bank or that credit union. Just like if you were an airline, you'd have to have a reservation system. You have to have a core system. You have to have a digital banking system. You have to have payments capability. You have to have lending capability. You have to have fraud management. Now, if you're Bank of America, you would add to that your data platform and your data capability. You would consider that the skills that you have in your organization to to manage data, which is obviously the engine for any kind of artificial intelligence. You would consider that to be as critical as the other five systems. What we're starting to see in our customer base is a recognition that they're having to start to build the skills from a data perspective to allow them to compete with the mega bank. So kind of twofold answer. One is to continue to attract deposits and continue to be able to in a frictionless manner offer new products and on board customers. But then more strategically, they're realizing that they've got to start building some skills and capabilities that they don't have today to be able to compete with the mega banks.
spk08: That's great context. Thank you.
spk13: Your next question from the line of Alex from JP.
spk01: Hi, this is Elise. Can are on for Alexi Gogolev. So you kind of touched on this earlier talking about the ratio of net new ARR to sales and marketing spend and how you aim to get that to. I believe you said around one point six and I know you provided some color on what that entails, but could you just kind of go into more detail on how you plan to get there? Thank you.
spk09: The question was, and I'll repeat it. Maybe it was it around the target operating model in twenty twenty six.
spk01: Yes, about getting to the one point six ratio of net new ARR and sales and marketing spend. Thank you.
spk10: Yes, so when we think about twenty twenty six and sales and marketing as a percent of revenue, so ultimately driving to our twenty percent adjusted EBITDA, we believe that we'll continue to maintain a consistent level of efficiency that we have today. So in other words, to continue to generate the new new client wins and cross sell activity, our investment dollars will be comparable in sales and marketing to our to our revenue growth. And so by twenty twenty six will still be between a fourteen percent of revenue to fifteen percent of revenue contribution from that component of operating expenses in order to achieve that will maintain a one point five to twenty twenty four is a one point six of ARR creation to sales and marketing expense. Other areas of that are equally as important is we would expect to continue to leverage our RND down to twenty percent of revenue. And we're doing that from a couple of different areas. One is revenue scale. Second is continued efficiency within our engineering group and our product group, as well as some offshoring activity that we began in twenty twenty three. And then finally, GNA, we would expect to be at a ten to twelve percent of revenue by twenty twenty six. That's primarily coming from just expense management and and and scaling our GNA line as our revenue grows.
spk09: So, so Alexi, the one point six to one ARR creation to sales and marketing investment is what we're achieving today. So that's not a future target that we're that we're somehow growing into. That's what we achieved in twenty twenty three.
spk13: OK, got it. Thank you.
spk12: And your next question comes from the line of Charles, not from Stephens. Your line is open.
spk06: Hi, guys. Good evening. And thank you for taking my question. I know the new business gets a lot of air time, but I was hoping you could comment on some of the trends you're seeing in your renewal business specifically in terms of your ability to upsell upon renewal as well as any pricing trends you're seeing when when the when the contracts come up.
spk10: Yeah, the renewal class in twenty twenty three was pretty phenomenal. So we renewed thirty one clients and we were twenty of those in the fourth quarter in all of twenty twenty two. We renewed twenty clients. So we're seeing more renewals. And as as those are occurring, we're seeing a nice uplift of about six percent upon renewal that's coming from a couple of different areas. It's cross selling a new product into the client account. And then it's also the client signing up for additional minimum commitments that increase over the new renewal period. It's those two components that are driving the uplift and renewals that we're seeing. And then also in February, as Alex mentioned, is prepared comments, which was a very nice renewal for us was our largest client, which is a top ten credit union. And when you compare the contract value of this client to the original contract that they signed six years ago, the value of that contract is more than doubled.
spk06: That's great. Appreciate that color. And as a follow up, just had a financials question and apologies in advance if you touched on this already. But could you talk about the gross margin assumptions embedded in your your twenty four guide? I know historically you've talked about two to three hundred bits of margin expansion. Imagine it'll be somewhere in that range, but you also have some kind of balancing investment with efficiency. So any any comments you could make on on cadence and how we should think about that expansion on a quarterly basis would be helpful as well.
spk10: Yep, no, that's great. So in twenty, twenty four, we're going to experience seven hundred basis points of adjust the margin expansion. The way to think about that is two hundred and fifty basis points will come roughly two hundred and fifty basis points will come from gross margin and four hundred and fifty basis points will come from optics. The gross margin leverage that we're experiencing a good component of that is coming from investments that we're making in our platform that continue to drive down our costs per registered user in terms of the hosting costs that we pay to a W.S. The other areas where we're seeing nice operating leverage is in the post cell operations of our business. So implementation, reliability, engineering and our support functions. All of those functions are experiencing operational efficiency that's contributing to the year over year gross margin expansion. When we and I know you didn't ask this, but when we drop down to op X, the majority of about two thirds of the operating expense efficiency will come from .N.A. and the balance will be split evenly between .N.D. and sales and marketing.
spk08: Right. Well, thanks again and great quarter guys.
spk13: Thank you. And your next question comes from
spk12: the line of Chris Kennedy from William Blair. Your line is open.
spk17: Good afternoon and thanks for taking the question. Alex, you touched on the importance of data. Can you just talk about kind of what you're doing to leverage the data that's on your platform?
spk09: Yeah, thanks. For us from the very beginning when Alchemy was created, there was the notion that storing the transactional data could be useful for the financial institution. And then we built some technology to do that. And then we took a pretty big step forward with an acquisition. Some are before last. I'm looking at Brian. Some are before last. April 22. With an acquisition of April 22, a company with a modern data platform. And if you think about what capability we had, that company, which is now part of Alchemy, had the ability to ingest, cleanse, contextualize transactional data from lots of different legacy bank cores. And then you combine that with the information, the transactional information that's coming out of a digital banking application. So now across that surface area, we have transactional data that we can analyze from more accounts than probably anybody but Bank of America right now. And so if you think about a topic like artificial intelligence, artificial intelligence is good data plus different types of models. You could have a retrieval model. You could have a classification model. You could have a predictive model. And so what we're able to do with our customers is have this great data set that we've been able to do a lot of machine learning against that helps them classify their customers or members into demographic groups that allows them to target better. And then also has a predictive model in it so that it can say for them this demographic group you ought to make this offer for. So in summary, we think that data capability is the long term differentiator for digital banking. And we had both our own organic build from the very beginning of the company that supplemented that with a really great acquisition in April of 22 that results in a data platform that's got an immense amount of transactions that we can do machine learning against and apply both classification models and predictive models to help customers. And I'll turn to Brian because we actually saw a lot of success in cross selling that product and in selling that product with our new logos this last year.
spk10: That's right. So this was definitely a differentiator for us as related to new client wins. We had 22 of the 39 new clients that we sold in 2024 that adopted the segment marketing and analytics product that Alex was referring to.
spk08: Great. Thanks for taking the question.
spk13: And
spk12: your next question comes from the line of Adam Hotchkiss from Goldman Sachs. Your line is open.
spk04: Great. Thanks for taking my questions. It would be great to talk a little bit about the broader industry and Alex and Brian what you're hearing in your customer conversations around bank IT budgets for the year. Anything to call out there?
spk09: Yeah, like I said in some of my remarks, the priority for the customers that I talk to are around really three big things. One is reducing friction. So how can they take an end to end new customer, new member or existing customer member looking for a new product? How can they take the friction out of that experience? Number two is fraud. Fraud is huge on their minds. It was interesting. We had our customer advisory board together a few months ago and we kind of created a decision framework for them to try to understand where they were leaning. For so many years, so much of what they asked us to do was to improve their customer or member experience and do certain things that would make a really great customer member experience. Some of those things have the ability to create a threat vector. And so what we were asking them is how do you think about things today? Do you still leaning into customer member experience? Are you more leaning into fraud management? 100% of them said, boy, I'm willing to give up some of the customer or member experience to fight fraud because fraud is just really becoming a big deal for me. And then finally, modern money movement. Right? Obviously as the generations change, if you look at something like a bill pay, it looks a lot like a checkbook. And so what our customers have asked us to do that we've built for them is can I have a much more modern looking money movement place where somebody comes in and they're selecting between four or five different options of how they can move money as opposed to going to three or four different applications that are unintegrated. So any kind of friction reduction, digital account opening, any kind of ease of buying a product, a lot of investment around fraud and fraud management and the discussion of the nuances between the balancing of a good experience with fighting fraud and then providing a more modern payment experience.
spk10: And Adam, with the innovation that's occurring through the digital banking platform that Alex is describing, that's the driver in the market. That's the tailwind in the market for companies like Alchemy to pick up the number of new clients and the digital users that we're picking up. The current providers in the space are not keeping up with the mega banks and some of the super regional banks and what they're investing through their digital banking platform. And that's what requires the end market to look at more of a contemporary provider of services in the space, such as an Alchemy, which is benefiting us in the market share that we're gaining.
spk04: Got it. Thanks. That's all really useful color. And can you just remind us what the typical product roadmap looks like for a bank versus a credit union and how that landed expand motion differs between the two? Just curious if there's anything you've learned as some of your earlier bank cohorts have matured a bit.
spk10: So we're pretty early in the in the early innings of penetrating the bank market and it really depends on the bank financial institution. So if it's a bank financial institution that's heavy leaning into commercial clients and commercial deposits, then the primary difference between a credit union and a bank is the commercial banking offering. As it relates to the retail side, if it's a bank financial institution that's predominantly growing and has a strategy more focusing on retail clients, it looks very similar to a credit union. So not a lot of differences there.
spk09: Maybe you can comment, Brian, on just what we're seeing from our perspective between a new logo bank and a new logo credit union.
spk10: Sure. So in the best way to look at that is to unpack our backlog that we have going into the year. So 44 financial institutions, 1.3 million digital users and the ARPU on our backlog going into 2024 is around $26. A bank financial institution or the banks that we have in our backlog and there's 17 of them, they're averaging $31 per user compared to the credit unions, which are $23 per user. Even the $23 per user on the credit union side of our backlog, that's a significant uplift above where the company's blended averages. What's driving that is the number of products that are being adopted on the MSA and on the original sale. As I mentioned earlier, on average now our clients are adopting 18 products on the original order compared to 17 a year ago, 15 a year before that. So much different. But what's driving the increase between a bank and a credit union is predominantly the commercial banking platform and commercial banking application that they'll take.
spk04: Really great color. Thanks a lot, Brian. Thanks, Alex.
spk12: And your next question comes from the line of Zachary Callia from Barclays. Your line is open.
spk15: Okay, great. Hey guys, thanks for taking my questions here in Nice Quarter.
spk10: Hey Zach. Hey
spk15: Alex, hey Brian. Hey listen, sorry in advance if these questions have been asked, but maybe first for you, Brian, on the ARPU point, the revenue per user, that really stood out to me this quarter and you just touched on sort of the add-on sales motion really adding more product to the existing base. Can we just talk about maybe one or two of those additional products that are most substantial to sort of that ARPU lift?
spk10: Well, what we're seeing a lot of product adoption is really in four areas in 23 and those are pretty consistent with 22. So in the money movement area of our platform, we're seeing nice cross-sell activity that's happening. Also in the customer service area, which is where you'll see some machine learning type of products that come through like chat bots and those type of things. Security and fraud is an area where we're having some pretty strong cross-sell activity. A lot of that's being driven by our ACH alert acquisition from a couple years ago. And then of course segment that's contributing a lot on the marketing side of our platform and driving some adoption there. All those products that I just mentioned are those product family groups. Those are what I would refer to as more of a richer ARPU set compared to some of the other product groups that we have.
spk15: Got it. Got it. That makes sense. Alex, maybe for my follow up for you, a lot of focus, a lot of success in the bank vertical here. And I think you made some comments earlier just on the pipeline. I'm curious, how is sort of the win rate in that vertical evolved? And do you feel like you're getting the reference, enough reference customers to sort of, you know, to help that discussion, to shorten the sales cycles going forward? Anything on that win rate and sort of sales cycles, if you will?
spk09: Yeah, you know, from a market perspective, one of the things that we measure is what is the awareness of us as a provider. And that's something that we continue to try to move forward. We still have room to go there. We are consistently number one or two in the credit union market in terms of a buyer being aware that they should consider alchemy. We're currently number seven in the bank market. So we still, you know, we're building a new business in that market. And so we're still making progress in terms of in terms of general awareness. We had, I think we talked about this in the last call. Probably a year to a year and a half ago, we had a really high win rate in the bank market, but we didn't have a lot of at bats. And we said to ourselves, we, it's probably not good news. We actually need to see the win rate come down, which means we'll have more at bat. So we had more at bats this year. The win rate came down and that is a is a result of being more well known now in the bank market. So in summary, we have room to go to become known as a provider in the bank market. And we're working on that. We got more at bats this year than we had last year. And so year over year, the win rate went down as a result of the increased increased at bats.
spk10: And second, when we look at the bank market, there's a lot of factors that drive success there. It's not just at least at this stage. It's not just the number of new clients that we're adding. It's how are we moving the product? What's what's the product market fit? And as Alex mentioned earlier in the call and some prepared comments is we had a consultant come in and they evaluated our commercial offering. And we feel like we're 90 92% there in having the right product to reach a broad set of bank financial institutions. And we're going to close the remaining gap in 2024. Also, it's the core integrations that you have. We now have core integration into eight bank core systems. There's probably two to three more that we need to add to even provide greater density. But we're making a lot of progress in adding additional bank core integrations and then unaided awareness or share a voice. How do you want to describe that with Alex was just describing? If you go back two years ago, we were only in 20 bank deals in 2022. We were in about 45 or so in 2023 that moved up to over 60. So now we're being invited to more deals that results in a lower win rate. But as all three or four of these factors come together, that's ultimately how we'll forge success moving forward with the objective by 2026. When you look at our new the composition of the new clients that we sell in 2026, our view is half of those would be credit unions and half of those would be bank financial institutions.
spk09: I'll just probably summarize to say, you know, there's a management team here that has been in companies that have entered markets. And what we understand is that you can't learn from in the front yard. And so you decide to go into market and you go start attacking that market and then you understand what you need to take as a next step. And so we're we're exactly where we expect it to be at this point in time in terms of building in the bank market. We know what to do next with products, with skills, with awareness, with marketing. We're we're really pleased with the progress.
spk08: Got it. Really nicely done. Thanks, guys.
spk13: Thank you. And our Q&A
spk12: session has now ended. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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