2023-04-18 21:38:44 ET
Summary
- Alkami Technology provides modernization software to legacy financial institutions.
- While the firm has grown impressively, it continues to produce large operating losses and is exposed to the turmoil from the recent U.S. banking crisis.
- I'm Neutral [Hold] on ALKT until management can make progress toward operating breakeven and we see the effects of the banking sector problems on the firm's trajectory.
A Quick Take On Alkami Technology
Alkami Technology ( ALKT ) provides cloud-based digital banking software to financial institutions in the United States.
The stock has been punished lately due to the March 2023 banking crisis.
Management hasn’t made meaningful progress toward operating breakeven and the company is exposed to smaller banks reducing their lending activity and hunkering down for a lower profit environment.
I’m Neutral [Hold] on ALKT in the near term.
Alkami 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 president 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:
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User experience
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Integrations
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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:
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NCR Corporation
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Q2 Holdings
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Temenos AG
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Fiserv
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Jack Henry and Associates
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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
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Total revenue by quarter has grown according to the following chart:
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Gross profit margin by quarter has trended lower in recent quarters, a negative trend:
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Selling, G&A expenses as a percentage of total revenue by quarter have fallen in the two most recent quarters:
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Operating losses by quarter have continued a strongly negative result:
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Earnings per share (Diluted) have remained negative, except the most recent quarter has shown improved progress toward breakeven:
(All data in the above charts is GAAP)
In the past 12 months, ALKT’s stock price has risen 5% vs. that of nCino’s ( NCNO ) drop of 37.2%, as the chart indicates below:
The company’s gross ARR retention rate was 97% ‘in terms of annual recurring revenue or ARR and digital users retained over the last 12 months.’
For the balance sheet, the firm ended the quarter with $196.4 million in cash, equivalents and short-term investments and $84.6 million in total debt, of which $3.2 million is the current portion due in less than 12 months.
Over the trailing twelve months, free cash used was $38.9 million, of which capital expenditures accounted for only $1.1 million.
The company paid a hefty $45.4 million in stock-based compensation in the last four quarters, the highest rolling twelve-month SBC as a public company, diluting equity shareholders in the process. Management expects SBC to drop in the coming quarters to around 11% of revenue at the midpoint of the range.
Valuation And Other Metrics For Alkami
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 5.3 |
Enterprise Value / EBITDA | NM |
Price / Sales | 5.7 |
Revenue Growth Rate | 34.3% |
Net Income Margin | -28.7% |
GAAP EBITDA % | -30.4% |
Market Capitalization | $1,180,000,000 |
Enterprise Value | $1,090,000,000 |
Operating Cash Flow | -$37,790,000 |
Earnings Per Share (Fully Diluted) | -$0.64 |
(Source - Seeking Alpha)
As a reference, a relevant partial public comparable would be nCino; shown below is a comparison of their primary valuation metrics:
Metric [TTM] | nCino | Alkami Technology | Variance |
Enterprise Value / Sales | 6.8 | 5.3 | -21.6% |
Enterprise Value / EBITDA | NM | NM | --% |
Revenue Growth Rate | 49.1% | 34.3% | -30.2% |
Net Income Margin | -25.2% | -28.7% | 14.0% |
Operating Cash Flow | -$15,380,000 | -$37,790,000 | 145.7% |
(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 GAAP Rule of 40 calculation was only 3.8% as of Q4 2022’s results, so the firm needs substantial improvement in this regard, per the table below:
Rule of 40 - GAAP | Calculation |
Recent Rev. Growth % | 34.3% |
GAAP EBITDA % | -30.4% |
Total | 3.8% |
(Source - Seeking Alpha)
Future Prospects For Alkami
In its last earnings call (Source - Seeking Alpha), covering Q4 2022’s results, management highlighted the growth of users on the platform representing nearly 18% year-over-year to 14.5 million.
For 2022, the firm notched strong add-on sales results, with ‘add-on sales representing 37% of total sales’ for the year, a material increase from 24% in 2021.
Notably, the firm’s deposit attraction offerings have shown strength as smaller banks have begun facing increasing difficulties in retaining deposits due to low competitive interest rates.
Looking ahead, management expects total revenue in 2023 to reach $257.5 million at the midpoint of the range and adjusted EBITDA loss of $5.5 million at the midpoint.
Adjusted EBITDA typically excludes stock-based compensation, which in Alkami’s case, has been a very large amount for the company's revenue base.
The company's financial position is relatively strong, with about five years of cash runway at its trailing twelve-month free cash burn rate.
Regarding valuation, the market is valuing ALKT at an EV/Sales multiple of around 5.3x.
The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.3x on March 30, 2023, as the chart shows here:
So, by comparison, ALKT is currently valued by the market at a discount to the broader Meritech Capital SaaS Index, at least as of March 30, 2023.
The primary risk to the company’s outlook is a likely macroeconomic slowdown or recession, especially among small and regional banks, which may accelerate new customer discounting, produce slower sales cycles and reduce its revenue growth trajectory.
Given the recent banking crisis and the likelihood of more bank failures, a continued ‘higher for longer’ interest rate environment hurting small and regional banks and the company's ongoing operating losses, my outlook for ALKT is Neutral [Hold].
For further details see:
Alkami Technology Faces Banking Industry Turmoil Ahead