Alkami Technology (ALKT) Q3 2023: Contract Backlog Climbs 31% as Bank Demand Accelerates
ALKT advanced its digital banking leadership in Q3, adding users at record pace and driving backlog up 31% year-over-year as banks and credit unions invest in digital transformation despite macro headwinds. Robust cross-sell, expanding product adoption, and early profitability signal sustainable operating leverage heading into 2024.
Summary
- Backlog Expansion Signals Demand Strength: Contract backlog rose sharply, reflecting robust pipeline and multi-product adoption.
- Bank Channel Momentum: Increased participation in bank RFPs and larger client wins diversify growth beyond credit unions.
- Profitability Arrives Early: Positive adjusted EBITDA achieved a quarter ahead of plan, supporting margin expansion narrative.
Business Overview
Alkami Technology provides cloud-based digital banking software to U.S. financial institutions, enabling banks and credit unions to deliver modern digital experiences to consumers and businesses. The company’s revenue model is driven by long-term SaaS (Software as a Service) contracts, with subscription fees based on the number of digital users and breadth of platform adoption. Alkami’s two primary segments are digital banking platform sales to new clients and add-on product sales to its existing base, spanning fraud protection, analytics, card services, and commercial banking capabilities.
Performance Analysis
Alkami delivered a 27% revenue increase in Q3 2023, exceeding guidance and marking sustained outperformance in a challenging macro environment for financial institutions. The company’s digital user base surged by 1 million in the quarter, the largest quarterly increase in its history, bringing the total to nearly 17 million users and driving recurring revenue expansion. Subscription revenue comprised 96% of total revenue, underscoring the resilience and predictability of the SaaS model.
Operating leverage was a standout, with non-GAAP gross margin expanding 190 basis points year-over-year to 59% and adjusted EBITDA turning positive a quarter ahead of plan. This was achieved while maintaining R&D investment at 26% of revenue, ensuring ongoing product innovation. The contract backlog reached $987 million, 31% higher than a year ago and representing 3.6 times live ARR (Annual Recurring Revenue), providing strong revenue visibility into 2024 and beyond.
- Client Win Acceleration: 11 new clients implemented in Q3, with 35 clients in the implementation backlog, spanning both banks and credit unions.
- Cross-Sell Momentum: Add-on sales represented 33% of total new sales, driven by demand for fraud, card, and analytics products.
- Churn Resilience: No digital banking platform client losses in the past 12 months, a rare feat among SaaS vendors.
Free cash flow turned positive, reflecting disciplined expense management and improving efficiency across post-sale operations. The company exited Q3 with $178 million in cash and $83 million in debt, supporting future investment flexibility.
Executive Commentary
"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."
Alex Schutman, Chief Executive Officer
"Alchemy's remaining purchase obligation or contract backlog reached $987 million, representing 3.6 times our live ARR and 31% higher than a year ago. These achievements, combined with our 2023 financial performance, evidence Alchemy's success and unique position to capitalize upon the strong secular trend of digitization in the banking industry."
Brian Hill, Chief Financial Officer
Strategic Positioning
1. Deepening Bank Penetration
Alkami’s deliberate push into the bank segment is gaining traction, with 14 of 35 new clients in the backlog now banks. Management noted increased RFP invitations and the platform’s growing referenceability, which historically lagged credit union adoption. The company’s average users per financial institution (FI) now outpaces competitors, supporting higher revenue per client and larger deal sizes.
2. Product Portfolio Breadth and Cross-Sell
Cross-sell is a major growth lever, with clients increasingly purchasing multiple add-on modules—particularly fraud management, advanced card capabilities, and analytics. New clients now implement over 50% of Alkami’s product portfolio at launch, up from 34% at IPO. This not only increases ARPU (Average Revenue Per User) but also entrenches Alkami as a strategic partner, not just a point solution vendor.
3. Scalable SaaS Operating Model
Operating leverage is materializing, as revenue growth outpaces expense growth across R&D, sales, and G&A. The company’s stated goal is to achieve 65% gross margin and 20% adjusted EBITDA margin by 2026, with management confident in 700 basis points of annual EBITDA margin expansion. Sales productivity remains high, delivering $1.60 in ARR for every dollar of sales and marketing spend, a benchmark among SaaS peers.
4. Resilient Client Retention and Implementation Execution
Zero client churn and successful large-scale implementations (including three client launches in a single day) highlight Alkami’s operational maturity. The company’s ability to convert legacy systems and deliver high satisfaction is a competitive differentiator, especially as larger banks and credit unions seek reliable partners for digital transformation.
5. R&D Investment as Competitive Moat
R&D remains a core differentiator, with over $250 million invested in the past six years. While R&D as a percent of revenue will moderate, absolute investment will continue to rise, ensuring Alkami’s platform stays ahead in fraud, onboarding, payments, and commercial banking features.
Key Considerations
Q3 marked a clear inflection in both operating leverage and strategic positioning, as Alkami’s bank channel momentum and cross-sell success set the stage for durable, high-margin growth. The following considerations frame the evolving investment thesis:
Key Considerations:
- Secular Digital Banking Tailwind: Financial institution demand for digital transformation remains robust, even as macro pressures shift product priorities toward fraud, onboarding, and deposit growth.
- Bank Channel Diversification: Increased bank wins and pipeline participation reduce reliance on credit unions and enable larger average deal sizes.
- Cross-Sell and Product Depth: Expanding attach rates and add-on sales drive ARPU growth and deepen client stickiness, supporting long-term revenue compounding.
- Margin Expansion Pathway: Early EBITDA profitability and disciplined opex scaling validate management’s 2026 margin targets and support valuation multiples.
- Implementation and Retention Strength: Zero churn and high client satisfaction reinforce Alkami’s reputation and referenceability, critical for winning larger bank deals.
Risks
Macro-driven bank consolidation, prolonged deposit outflows, or shifting regulatory requirements could slow client decision cycles or pressure digital transformation budgets. Competitive intensity from legacy core vendors or fintech disruptors remains a risk as larger banks consider alternatives. Sustaining zero churn and high attach rates as the client base scales will be challenging, and any slip in implementation execution could impact referenceability and win rates.
Forward Outlook
For Q4 2023, Alkami guided to:
- Revenue of $70.5 to $71.5 million (27% to 29% YoY growth)
- Adjusted EBITDA of $2.5 to $3.0 million
For full-year 2023, management raised guidance:
- Revenue of $264 to $265 million (29% to 30% YoY growth)
- Adjusted EBITDA loss of $2.1 to $1.6 million (improved from $17.6 million loss in 2022)
Management highlighted:
- Accelerating revenue growth into Q4, with strong pipeline and backlog visibility for 2024.
- Gross margin building toward 60% in Q4, setting the stage for further expansion next year.
Takeaways
Alkami’s Q3 results confirm its position as a leading digital banking platform, with robust user growth, expanding backlog, and improving profitability. Bank channel momentum and cross-sell execution are unlocking new growth vectors, while strong client retention and operational discipline underpin management’s ambitious margin targets.
- Backlog and Pipeline Strength: The 31% year-over-year backlog increase and 35 new clients in implementation provide high confidence in forward revenue growth.
- Margin Expansion Validation: Early adjusted EBITDA profitability and gross margin gains support Alkami’s path to 20%+ EBITDA margins by 2026.
- 2024 Watchpoint: Investors should monitor bank channel win rates, cross-sell velocity, and ability to sustain zero churn as Alkami scales into larger clients and more complex implementations.
Conclusion
Alkami exited Q3 with record digital user growth, a surging contract backlog, and early profitability—all while deepening its footprint among banks and credit unions navigating digital transformation. The company’s SaaS model, product breadth, and operational execution position it for durable, high-margin growth, but sustaining momentum as the client base scales will be key.
Industry Read-Through
Alkami’s results reinforce the secular shift toward digital-first banking across regional banks and credit unions, even amid macro volatility. The surge in cross-sell and product adoption signals that financial institutions are prioritizing digital onboarding, fraud prevention, and card innovation to compete for deposits and customer engagement. Vendors with scalable SaaS models, deep product portfolios, and proven implementation capabilities will continue to take share from legacy providers. The strong margin expansion and zero churn highlight the value of platform stickiness and operational excellence as differentiators in the broader fintech software landscape.