ALKT - Alkami Sidesteps Bank Failures But U.S. Financial System Sees Loan Drop

2023-06-30 13:00:54 ET

Summary

• Alkami Technology, Inc. provides banking software to credit unions and banks in the U.S.
• The company has guided to lower top line revenue growth and continues to produce heavy operating losses.
• While it hasn't been directly exposed to recent banking failures, its further push into banking software is a potential risk as macroeconomic conditions worsen.
• I remain Neutral [Hold] on Alkami Technology, Inc. in the near term.

A Quick Take On Alkami Technology

Alkami Technology, Inc. ( ALKT ) provides cloud-based digital banking software to financial institutions in the United States.

While it's encouraging that the company's client base is primarily made up of credit unions, ALKT's push into the banking sector brings risks as macroeconomic conditions are worsening.

With continuing heavy operating losses in a high cost-of-capital environment, I remain Neutral [Hold] on ALKT for the near term.

Alkami Technology Overview

Plano, Texas-based Alkami was founded to develop software that improves financial institution user interfaces and integrates with various banking functions and processing systems.

Management is headed by Chairman and CEO Alex Shootman, who has been with the firm since November 2021 and was previously CEO of Workfront, an enterprise application platform, and before that, was President of Apptio.

The company's primary offerings include:

• User experience.
• Payments.
• Integrations.
• Data insights.

The firm pursues client relationships with community, regional, and super-regional financial institutions via a direct sales and marketing approach.

ALKT says its typical sales cycle is from 3 - 12 months and a subsequent implementation time range of 6 - 12 months.

Alkami's Market & Competition

According to a 2020 market research report by Grand View Research, the global market for core banking software was an estimated $9.4 billion in 2019 and is expected to reach $17 billion by 2027.

This represents a forecast CAGR of 7.5% from 2020 to 2027.

The main drivers for this expected growth are the growing demand from customers for advanced banking solutions across numerous touch points and devices.

Also, the U.S. core banking software market history and projected future growth trajectory is shown in the chart below:

Major competitive or other industry participants include:

• NCR Corporation.
• nCino.
• Q2 Holdings.
• Temenos AG.
• Fiserv.
• Jack Henry and Associates.
• Fidelity National Information Services.

Also, Gartner estimates that the demand for cloud-based delivery of all types of software to financial institutions will grow at a CAGR of 17% from 2018 to 2023.

Alkami's Recent Financial Trends

• Total revenue by quarter has continued a strong growth trajectory; Operating income by quarter has remained heavily negative.

• Gross profit margin by quarter has varied within a narrow range; Selling, G&A expenses as a percentage of total revenue by quarter have dropped in recent quarters.

• Earnings per share (Diluted) have remained negative:

(All data in the above charts is GAAP.)

In the past 12 months, ALKT's stock price has risen 21.35% vs. that of the nCino, Inc. ( NCNO ) drop of 6.98%, as the chart indicates below.

For the balance sheet , the firm ended the quarter with $185.4 million in cash, equivalents and short-term investments and $84.7 million in total debt, of which $4.3 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash used was $40.1 million, during which capital expenditures were $1.0 million. The company paid a hefty $46.9 million in stock-based compensation in the last four quarters, the highest trailing twelve-month result in the past eleven quarters.

Valuation And Other Metrics For Alkami

Below is a table of relevant capitalization and valuation figures for the company.

(Source - Seeking Alpha)

As a reference, a relevant partial public comparable would be nCino; shown below is a comparison of their primary valuation metrics.

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

ALKT's most recent Rule of 40 calculation was 6.6% as of Q1 2023's results, so the firm has improved sequentially but is still sub-par, per the table below.

(Source - Seeking Alpha)

Commentary On Alkami

In its last earnings call ( Source - Seeking Alpha ), covering Q1 2023's results , management highlighted the growth of "live registered users" on the platform of 15.2% year-over-year, reaching 15.1 million at quarter end.

Notably, leadership asserted that the company's client base and target market "has not been impacted" by recent bank failures.

Furthermore, management believes that consolidation in the industry will not negatively affect the company's growth prospects since it targets the top 2,000 financial institutions in the U.S. outside of the megabanks.

However, banking clients are navigating a changing deposit environment, resulting in potentially greater profitability headwinds for banks as they compete with money market funds and ease of switching to non-bank competitors.

The company's gross retention rate was 97% "measured in terms of ARR (Annual Recurring Revenue)."

Total revenue for Q1 2023 rose by 33.9% YoY, while gross profit margin dropped 1.9%.

Selling, G&A expenses as a percentage of revenue dropped an impressive 14.9% year-over-year and operating losses were reduced by 1.8%.

Looking ahead, for full-year 2023, management guided topline revenue growth of 27% at the midpoint of the range and an adjusted EBITDA loss of $4.5 million at the midpoint.

Not that the top line revenue growth of 27%, if achieved, would represent a substantial drop in growth rate from 2022's 34% growth over 2021.

Also, adjusted EBITDA excludes stock-based compensation, which was a large $46.9 million over the trailing four quarters.

The company's financial position is moderate, with ample liquidity against low debt; however, free cash use has been high, so management will need to reduce that figure to lengthen the firm's runway.

ALKT's Rule of 40 performance has been in need of significant improvement.

From management's most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below.

I'm most interested in the frequency of potentially negative terms, so management or analyst questions cited "Uncertain" two times, "Challeng[es][ing]" two times, "Macro" three times and "Drop" three times.

The negative terms refer to the challenging economic environment and macro factors that are facing the firm's clients.

Analysts questioned company leadership about the health of their clients and management responded that 95% of their clients are credit unions who are conservative and focused on customer experience.

That being said, the company appears to be focusing more on creating products for banks, particularly business banks that are more growth-oriented and sales-driven.

Regarding valuation, the market is valuing ALKT at an EV/Sales multiple of around 6.7x.

The Meritech Capital Index of publicly held SaaS application software companies showed an average forward EV/Revenue multiple of around 7.8x on June 1, 2023, as the chart shows here:

So, by comparison, ALKT is currently valued by the market at a slight discount to the broader Meritech Capital SaaS Index, at least as of June 1, 2023.

The U.S. Commercial & Industrial loan market appears to be rolling over since the end of 2022, as the following chart shows.

Risks to the company's outlook include an economic slowdown that appears to be already underway and a reduced credit environment creating downward pressures on loan activity which may affect customer/prospect spending plans and lower its revenue growth potential in the near term.

While it's encouraging that the company's client base is primarily made up of credit unions, ALKT's push into the banking sector brings risks as macroeconomic conditions are worsening.

As such, I remain Neutral [Hold] on Alkami Technology, Inc. stock for the near term.

For further details see: