Alkami Technology, Inc.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 4/5

Alkami Technology, Inc. is a cloud-based digital banking solutions provider offering a platform for financial institutions to engage with their customers, primarily through a recurring revenue model.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Alkami provides a digital banking platform to financial institutions (FIs) such as credit unions and regional banks. The company’s business model is primarily subscription-based, which means its revenues are derived from recurring contracts from its clients. This model provides some predictability and stability, making their financials look attractive, but also means revenue growth can be relatively slow in the short run. Alkami’s strategy is to provide FIs with the tools needed to compete in the digital marketplace, enabling them to offer a user-friendly and comprehensive banking experience to their end customers.

  • Revenue Distribution: Alkami’s revenue streams are primarily derived from subscription fees for its digital banking platform. This recurring revenue model provides stability and predictability. Also, professional services, which are used for implementations, customization and training form a minor part of the total revenue.
  • Industry Trends: The industry is shifting towards digital transformation, with FIs recognizing the importance of providing compelling digital experiences to their customers. This trend presents a significant growth opportunity for Alkami, as more FIs require robust digital banking platforms. Increased demand for personalized financial advice has pushed institutions to adopt more of a data-driven approach, which should also benefit the company.
  • Margins: Alkami’s margins are affected by the need to reinvest heavily in research and development to keep its technology relevant and competitive. While gross margins tend to be robust due to software nature of the product, operating margins have room to improve and scale. We can expect some improvement in the near future.
  • Competitive Landscape: Alkami operates in a competitive market with established players like FIS and Fiserv, as well as newer fintechs. This means that they have to innovate to compete and also compete on costs, making it more difficult to maintain an excellent profitability profile.
Their market consists of large regional and community banks/credit unions that use their platform. These clients are usually not as adept at new technologies and prefer to focus on their core businesses rather than implementing new technologies. Therefore, they often rely on vendors for cutting edge technologies. Because of that, clients are sticky but also have some bargaining power in pricing as other platforms with similar functionalities are available. *  **What Makes Alkami Different**: The company differentiates itself through its focus on user experience, scalability, and flexibility. They have developed proprietary software in the banking space and continue to maintain high investments in R&D.  They also claim to be the "digital banking platform provider for financial institutions" which is different from a payments or lending platform vendor. *   **Other relevant notes:** Alami has a large and growing client base. They can add more value to their customers via new features which leads to upselling and greater revenue potential.

Moat Analysis: 2/5

Alkami has a moat primarily due to switching costs and network effects, though not strong enough to warrant a higher rating.

  • Switching Costs: Once a financial institution integrates Alkami’s platform, switching to a competitor involves a significant investment of time and resources, making it somewhat sticky for customers to leave the platform.
  • Network Effects: As more FIs use Alkami’s platform, the data insights and feedback help improve the platform, creating a better value proposition. Although this benefit helps the company, the effect is not very strong yet.

However, these factors are not strong enough to give them a wide moat. This means that Alkami is vulnerable to competitors that can offer better or lower priced options. Because of their lower operating margins, large investments in development and high sales costs, the company faces challenges to compete with its competitors and generate strong profits at the same time. For these reasons, the moat rating is only 2 out of 5.

Legitimate Risks:

  • Competition: The intense competition from established players and new fintechs can pressure Alkami’s pricing and market share. If a new vendor comes up with better features, cheaper pricing or greater usability, they can impact Alkami’s profits.
  • Technological Obsolescence: Rapid technological advancements could render Alkami’s platform outdated and less competitive if they are slow in innovation. In particular, other platforms are adapting cloud technologies and newer tech stack quicker.
  • Dependence on Key Contracts: A significant portion of Alkami’s revenue is derived from a limited number of larger contracts. The loss of a major client or a slowdown of one of the largest clients can impact company’s financials.

The dependence on few large players to generate majority of their business creates high customer concentration risk. Also, the company could face losses if the customers decide to cut costs or are acquired.

Business Resilience:

The company has a recurring revenue model that allows it to withstand short-term shocks and gives its financials a predictable revenue stream. Also, the industry that they are in is not going away any time soon, making their long term viability very strong. Their main strategy focuses on adding new features that keeps clients happy and retains them longer. This all provides good business resilience. They have improved operating efficiency and have become more disciplined in their acquisitions, which should help them get better ROI on acquired businesses.

Financials:

  • Revenues: While their revenue growth is strong (14% growth in revenue from Q4 2022 to Q4 2023), it might be impacted by high costs and intense competition. Revenue for 2022 was approximately $229 million and is estimated to be around $261 million for 2023.
  • Gross Margins: Their gross margins are above average. They had a gross margin of 58.4% for the full year of 2022.
  • Profitability: The company is operating at a loss, but its financial health seems to be improving. For the 2022 fiscal year, their operating loss was $142.3 million (or -62.1% of revenues). The adjusted net loss in Q4 2023 was $24 million which is an improvement from $34.4 million in Q4 2022.
Their cash reserves are high and they are planning on increasing profitability in the next year. The business has been growing well and the management has expressed full intent in improving profitability by focusing on costs and making sure to get ROI from new acquisitions. *   **Debt**: The company has an adequate amount of cash and cash equivalents of $170 million and total assets of $483 million. This implies the debt is not a problem. They are currently not highly leveraged. *   **Cash Flow**: They are improving their cash flow. They had negative FCF in 2022 and it improved drastically in 2023 to -$7 million which is very close to break even.

Their goal for 2024 is to generate more cash from operations, so they can be less dependent on external funding in the future and improve their financial stability.

Understandability: 4/5

Alkami’s core business is straightforward: providing a software platform for digital banking. Their business operations are easy to understand but the technical aspects of the software and the industry nuances can be complex. Overall it is not too complicated for an average investor to comprehend.

Balance Sheet Health: 4/5

Alkami’s balance sheet is good, their current cash position is good, and they have low debt. However they also have large accumulated losses. The management has mentioned that they are focused on improving profitability and cash flow. Given these factors, their balance sheet strength is reasonably good.

Recent Concerns and Controversies:

  • Customer concentration: A recent concern has been that their revenue is concentrated with a smaller number of larger customers which means that if they lose one or more of their large clients it could drastically impact their performance. They have been focusing on expanding their customer base and this issue might not be a large issue in the future.
  • Intense competition: Intense competition in the market from both existing players and new entrants poses a risk to pricing and market share, impacting their profitability. Competitors are catching up with them in the features space.
  • Shaky Financials: The company has not had a history of consistent profits and it is continuing to lose money. They are making improvements but a few investors remain wary of their long term profitability.
In the recent earnings calls, management has emphasized that they have a multi-year plan to improve their financial health and to be less dependent on external funds. * **Acquisition Dilution:** Alkami acquired numerous businesses in recent years. While they have stated that these acquisitions would help them scale and add value, these acquisitions increase cost and increase the dilution of shares outstanding. While they have been performing well, they need to perform better in the future to make the acquired businesses worth it.

Conclusion:

Alkami is positioned in an important and growing market of digital banking platforms. It has the potential to be an excellent business if it can focus on lowering costs and growing ROIC. It’s switching costs and network effects are strong but need to improve to make it an excellent company.