Alkami Technology, Inc. (NASDAQ:ALKT) Q2 2024 Earnings Call July 31, 2024 5:00 PM ET

Company Participants

Steve Calk - Vice President, Investor Relations
Alex Shootman - Chief Executive Officer
Bryan Hill - Chief Financial Officer

Conference Call Participants

Chris Kennedy - William Blair
Mayank Tandon - Needham
Pat Walravens - JMP Securities
Jacob Stephan - Lake Street
Andrew Schmidt - Citi

Operator

Good afternoon, ladies and gentlemen, and welcome to the Alkami Technology’s Second Quarter 2024 Financial Results Conference Call. [Operator Instructions] I’d like to turn the conference over to Steve Calk, Vice President of Investor Relations. Steve, go ahead.

Steve Calk

Thank you, operator. And with me today on today’s call are Alex Shootman, Chief Executive Officer; and Bryan 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 a summary of risk factors associated with our forward-looking statements, please refer to today’s press release in the sections in our latest 10-K entitled risk factors and forward-looking statements.

Statements made during the call 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. Reconciliation of the comparable GAAP financial measures can be found in our earnings press release and in our filings with the SEC.

I will now turn the call over to Alex.

Alex Shootman

Thanks, Steve, and welcome, everyone. I am pleased to report another quarter of strong performance for Alkami. In the second quarter of 2024, Alkami grew revenue 25%, once again ahead of expectations. In addition, we delivered $4.6 million in adjusted EBITDA, exceeding the high end of expectations. Since our last earnings call, we celebrated a significant product achievement. Alkami is the first digital banking solution company to be certified by J.D. Power for providing clients with an outstanding mobile banking platform experience.

As the first provider in our space to earn this certification, Alkami had passed J.D. Power’s rigorous methodology for meeting high consumer expectations. Specifically, we exceeded J.D. Power’s industry benchmark across a set of 146 best practices covering all aspects of mobile application development, design and operational functionality. Additionally, we exceeded J.D. Power’s voice of the customer benchmark, which ensures our clients, customers mobile banking experience is outstanding. This is meaningful to our business as research continues to show that the number one criteria for FI selecting a new digital banking platform is the user experience for their customers and members.

Our investment in user experience continues to drive success in the marketplace. In the second quarter, we signed 8 new digital banking clients, 4 credit unions and 4 banks. One of our credit union wins [indiscernible] that will become one of our top clients in terms of ARR. One of our bank wins is a large Midwestern bank that has a commercial growth strategy. This bank is an existing ACH client will be successfully cross-sold digital banking. And as a reminder, we currently have over 500 ACH Alert clients under contract and 80% of those are banks. We now have 34 banks under contract for our digital banking platform, representing approximately 1 million digital users. Based upon our current implementation schedule, by the end of Q1 2025, we will have approximately 30 banks live on the Alkami platform.

In addition, our sales pipeline remains strong with almost half in the bank market. Our current performance and product excellence reinforced my confidence in our 2026 targets. We continue to experience tailwinds in our market, with annual digital user growth amongst U.S. financial institutions averaging 5% to 8%. On a base of more than 480 million users, that means every year more digital users are created that are live on the Alkami digital banking platform. This continues to drive our TAM and growth among our clients. An immutable factor driving tailwinds in our market is the evolution of our clients’ customer base. In May, we published a study on generational trends in digital banking being driven by the greatest intergenerational wealth transfer in history.

Some key findings include: first, 30% of millennials plan to grow the number of financial providers with whom they have a relationship over the next 12 months. This is 2.5x more than the weighted average of Gen Xers and baby boomers who have been driving existing digital banking growth. Next, millennials have 14% more products with their FIs and Gen Xers and 28% more than boomers. This will provide demand for additional products to be sold into our client base. And finally, millennials are 56% more likely than Gen Xers and boomers to grow their relationship with their primary FI. This generation views their FI as a broader solution provider, which creates an opportunity for Alkami to deliver future innovation to our clients.

Seat growth and demographic forces are driving demand in our market. And while Alkami has to capitalize on this demand, we don’t have to create the demand. And these demand tailwinds reinforce my confidence in our 2026 targets. We continue to make operational improvements that create leverage in our business. One example is the results we’re achieving from investments in our platform. At the end of Q2 almost half of our micro services have been converted to Linux and deployed to Kubernetes, which enables our platform to auto scale.

We launched our centralized certificate management store, which allows thousands of certificates to be refreshed automatically rather than the previous manual process. This quarter, we conducted a successful pilot to monitor our observability framework, which will allow detect and troubleshoot issues more efficiently, reducing cost and improved line experience. Early in the quarter, we launched our new SDK Wizard, which is a user-friendly installation tool that allows clients and partners to set up their environment in less than 30 minutes.

We also launched the Alkami developer portal tailored for developers wanting greater control and visibility into their development process on the Alkami platform. Our new Wizard and portal reduce the workload on the Alkami Engineering Organization, which allows us to work on capabilities such as our API infrastructure, which will enable us to be an API-first platform. These are some of the investments we’ve made in our platform that have reduced our cost per user; increase the availability, quality and performance of the platform; and deliver new capabilities to our clients. Our ability to continue to drive operational improvements reinforces my confidence in our 2026 targets.

Alkami continues to attract the best and brightest talent who will help us execute our vision. Over the last 2 years, we’ve added senior resources, including Deep Varma, who is Alkami’s Chief Technology Officer; and Chief Customer Officer, Wayne McCullough, both of whom are respected technology leaders. In Q2, we were excited to welcome Gagan Kanjlia as Alchemy’s Chief Product Officer. Gagan brings more than 25 years of experience developing products for some of the most prominent financial institutions and fintechs in the country, including Capital One, OnDeck and most recently, Silicon Valley Bank where for the last 5.5 years, he was Chief Product Officer.

Gagan is the right executive to help Alkami continue our momentum in the commercial banking market and refine our long-term strategic product road map, which will create an exciting future for Alkami and our clients. With the addition of Gagan, we now have in place the executive team necessary for the next phase of Alkami’s growth. Our ability to attract people like Gagan to Alkami reinforces my confidence in our 2026 targets.

I’m proud of the Alkami team, grateful for the Alkami clients that have trusted us with their digital future and appreciative of the investors who have chosen to be part of the Alkami story. In closing, our current performance, product [indiscernible] the tailwinds driving demand, our operational improvements and our ability to attract great talent, reinforce my confidence in our 2026 targets. And with that, I’ll hand the call over to Bryan.

Bryan Hill

Thanks, Alex, and good afternoon, everyone. Our second quarter was another strong quarter for Alkami, beating expectations and continuing our progress towards our long-term financial objectives. For the second quarter of 2024, we achieved total revenue of $82.2 million, which represents year-over-year growth of 25%. Subscription revenue grew 28% and represented approximately 95% of total revenue. We increased ARR by 25% and exited the quarter at $321.3 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 10 new clients in the quarter, bringing our digital platform client count to 254. We now have 39 new clients in our implementation backlog, representing 1.6 million digital users. We exited the quarter with 18.6 million registered users live on our digital banking platform, up 500,000 sequentially and up 2.7 million or 17% compared to last year. Over the last 12 months, we implemented 36 financial institutions supporting 1.3 million digital users.

In addition, our existing clients increased their digital user adoption by 1.4 million users. As a reminder, because of the long-term future of our contracts, we have 3 to 4 visibility in the upcoming client attrition. In fiscal year 2024, we expect churn of less than 1%. And over the last 12 months, we have not experienced any digital banking client churn. Over the long term, we modeled digital banking ARR churn at 2% to 3% per year.

We ended the quarter with an RPU of $17.29, up 7% compared to a year ago, driven by add-on sale success and the addition of new clients who tend to onboard with a higher average RPU. We are seeing broad-based demand across our product portfolio. Our 2024 new sales performance continues to outpace 2023. For the year, we signed 14 new digital banking clients, including 5 banks and our add-on sales effort represented over 46% of 2024 new sales.

The growth areas continue to be concentrated in data insights and marketing, fraud protection, customer service and financial wellness product family categories. In addition to add-on sales, our client sales team is responsible for client contract renewals. We expect to renew over 30 client relationships in 2024.

During the first half of 2024, we renewed 12 client relationships. Renewal terms have been consistent with historical norms in terms of pricing and add-on product adoption. And finally, our remaining purchase obligation crossed over 1.2 billion, representing just under 4x our ARR and up 26% compared to a year ago.

Now turning to gross margin. For the second quarter of 2024, we delivered non-GAAP gross margin of 63.2%, representing 450 basis points of expansion compared to the prior year quarter. We achieved gross margin expansion through continued improvement in our hosting cost per registered user as well as operating leverage across our post-sale operations. As a reminder, our [Technical Difficulty] gross margin objective is 65%. We are rapidly approaching this goal and are now beginning to look beyond 2026 as our operational and financial models continue to strengthen.

Moving to operating expenses. For the second quarter of 2024, operating expenses of $47.8 million or 58% of revenue represented operating leverage of 528 basis points. We derive operating leverage primarily in R&D and G&A, where we continue to realize operational scale. Related to R&D, we continue to invest in our platform while scaling this expense line. Investment focus areas include initiatives to drive quality and cost efficiency of the platform, expand our product offering, improve extensibility and enhance the product market fit of our commercial banking offer.

As for non-GAAP sales and marketing expenses, we continue to achieve a high level of sales team productivity and go-to-market efficiency. For the last 12 months, we increased ARR $64.5 million while investing $46.5 million in sales and marketing, representing an efficiency ratio of 1.4:1. We believe this ranks among the best in SaaS in terms of sales and marketing efficiency. Our adjusted EBITDA in the second quarter was $4.6 million, better than the high end of our expectations and represents our fourth consecutive quarter of positive adjusted EBITDA.

We are very pleased with the progression, which is in line with our path to achieve an adjusted EBITDA margin of 20% in calendar year 2026. Related to our balance sheet, we ended the quarter with approximately $87 million of cash and marketable securities. On July 1, we issued an 8-K disclosing that we amended our credit facility. The amendment expands the revolver from $60 million to $125 million modify certain covenants to be more consistent with our financial profile and extends the term by 1 year to April 29, 2027. Additional detail is provided in the 8-K. As of today, the facility is undrawn.

Now turning to guidance. For the third quarter of 2024, we are providing guidance for revenue in the range of $83.8 million to $85.3 million, which represents 24% to 26% total revenue growth. For adjusted EBITDA, we are providing guidance in the range of $5.8 million to $6.8 million. And for full year 2024, we are providing guidance for revenue in the range of $330.5 million to $333.5 million, representing total revenue growth of 25% to 26% and subscription revenue growth of 26% to 27%. We are also providing adjusted EBITDA guidance of $22 million to $24 million.

In closing, I’m excited about our financial performance this quarter. We’re continuing to deliver strong growth while achieving best-in-class go-to-market efficiency, expanding our profitability and increasing shareholder value.

With that, I’ll hand the call to the operator for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Chris Kennedy from William Blair. Your line is now open.

Chris Kennedy

Good afternoon. Thanks for taking the questions. Alex, you alluded to it, but when you talk – when you think about the next phase of growth for Alkami, can you talk about some of the key drivers that you’re focused on?

Alex Shootman

Yes. Most of – if I go back to my script, what I was reflecting on is the factors that continue to reinforce my confidence in the 2026 targets that Bryan and I sent out. So most of my commentary – I’m not trying to be argumented. It wasn’t really about a next phase of growth. What I continue to see though in the market and I talked about the demand drivers is that, we’ve got underlying seat growth in the population in general. We’ve got demographic changes that are driving the need for digitization in almost any aspect of how a consumer deals with their banks. And so Chris, I’m happy to go a little bit deeper, but we’ve got a lot of demand tailwinds that Alkami can tap into long-term.

Bryan Hill

Yes. Chris, I’ll just add a couple of more points. In the beginning of 2022, we laid out a plan to scale 2026. And in that, what we talked about was we’re pretty competitive in the credit union side of the market. And our goal is by 2026 to achieve about 50% of the new client wins from banks to complement what we’ve been doing in credit units. And in addition to that, what we also said is we would like 50% of the total contract value that we sell in 2026 to come from add-on sales, which in this what we just reported year-to-date for 2024, we’re at 46% and most likely will be in that 40% to 45% for the full year. So I think we’re making a lot of progress towards our 2026 goal, which is what we’ve outlined for the investment community back in 2022.

Chris Kennedy

Understood. Thank you. And you guys are clearly on track there. And then just a quick follow-up, you talked about better leveraging the APIs. Can you just talk about the progress on that journey? Thank you.

Alex Shootman

Yes. Thanks. The – there’s two ways that our customers and our partners access the Alkami application today. They can access it through an API where they can access it through an SDK. The feedback that we’ve gotten from our customers is that they want to be able to access more parts of the platform so that they can either get different pieces of information out of the platform or put other pieces of information back into the platform. And so that’s what we’re going through from an APR redesign standpoint is how do we allow other pieces of information to come out of the platform so that our customers can do unique things for their customers and members and then how do we allow them to put information into the platform and then ultimately turning it into an API-first platform so that they no longer have to use an SDK, if they want to integrate a third-party capability into the platform. What this will all result from is lower effort inside of Alkami to connect partner software or the third-party software into the platform. And it will enable more stickiness of the platform because there will before information in and out of the platform in service to the customer.

Chris Kennedy

Great. Thank you. Appreciate it.

Operator

Your next question comes from the line of Mayank Tandon from Needham. Your line is now open.

Mayank Tandon

Thank you. Good evening, Alex, Bryan and Steve. I wanted to start Bryan or Alex, with the comment around the add-on sales momentum, great to hear the positive momentum there. Could you maybe unpack that a little bit in terms of which areas they’re seeing the most traction, which might be lagging a little bit? Just any sort of color on where the momentum lies within the add-on products?

Bryan Hill

Yes. There’s four areas where we’re seeing some significant progress. One is what we refer to as data insights and marketing, which in large part, that’s our segment acquisition. So not just from an add-on sales perspective, but also from a new logo or new client win perspective. We’re seeing a lot of adoption within segment. In fact, today, approximately 28% to 30% of our total installed base. So the 254 live digital banking clients have adopted segment, which we think is pretty fantastic.

And then you move into fraud protection, which, again, is principally driven by another 1 of our acquisitions, which is ACH Alert. And ACH Alert has been sold on four of the five bank bills that we sold this year and ACH Alert also represents about 30% adoption in our overall live digital banking clients. And then you move into customer service and financial wellness areas and then that – and those two areas are then followed by money movement. So it’s just the fact that today, our clients average 13 products, and we offer 33. So depending on what the [Technical Difficulty] interested in from a business operation and strategy point of view, it really drives what products are adopted. But definitely within the marketing, data insights and fraud area, we’re seeing quite a bit of traction.

Alex Shootman

Maybe I’ll just take that up a level besides specific product performance. I’ll give you an anecdote of our Customer Advisory Board meeting. We had our Customer Advisory board together a couple of weeks ago that represents 10 financial institutions, both banks and credit unions, a total of a little under $50 billion in assets with close to about 1.5 million digital users across those customers. And there was – there were three topics that they wanted to talk about.

One, which was, look, we’re coming to the point where we’re going to be able to drive loan volume again and we really need to digitize the front end of our lending platform. We’ve got a lot of legacy platforms that are connected to our back office. We’ll probably leave those in place, but we really need a modern digital-first experience for attracting either a new customer or providing a new product. So they want to talk a lot about what is the digitization of the front end of the loan process look like.

Bryan already talked about it, very sophisticated thoughts around data. How do I use data for fine grain analytics to understand specific people that I could make a specific offer? How do I use it to deliver a personalized offer in channel in the channel – in the mobile channel itself? And then [Technical Difficulty] around AI. It’s just clear that there’s two big use cases for our customers for AI. One would be think about generative AI in the contact center to be able to help them respond to their customers more quickly. And then would be more predictive AI in terms of battling fraud. So you got Bryan’s perspective on the specific products and then just an overview from a section of our customer base in terms of what they’re interested in.

Mayank Tandon

That’s very helpful. Just for a quick follow-up, maybe, Bryan, on the model. Just want to get a better sense of the expectations for the back half and then what’s really sustainable for your fiscal ‘26 targets in terms of user growth and ARPU. Should we use the recent trajectories as maybe a guide to what you should expect for the next several quarters? Is that a good sort of framework to think about the model?

Bryan Hill

No, it is. I wouldn’t break away from what we’ve been saying for the last several years on how we achieved 25% revenue growth. 5% to 7% percentage points will come from ARPU expansion. ARPU expansion is driven by both the fact that new sales cohorts are coming on at a much higher RPU. Part that’s driven by more banks included in that mix, but also credit unions are coming in with more average products and a much higher RPU. So we think that’s a good driver. And we have good visibility and what that can do for us in the future.

And then secondly, ARPU expansion comes from the cross-sell that we’re seeing. And quite honestly, I’m very excited about what we’re seeing come through our client sales organization, whether it’s at the time of renewal or if it’s midstream and an MSA, we’re seeing nice adoption of our product portfolio. As I mentioned, that’s 46% total contract value for our year-to-date 2024 new sales. So 5% to 7% from ARPU expansion and the balance 18% to 20% will come from user growth. Now within any quarter, it could be a percentage point or 2 different or variability in user growth versus ARPU expansion, but we don’t see any reason to break away from the revenue calculus that we’ve been providing.

Mayank Tandon

Thank you. Well congrats on the quarter. Appreciate it.

Operator

Your next question comes from the line of Pat Walravens of Citizens JMP. Your line is now open.

Pat Walravens

Great. Thank you very much. And congratulations, you guys. So I guess I have two questions. The first is, Alex, I’m reading this press release about the millennials versus the Gen X and baby boomers. And I mean it’s super interesting. Just I’d love you to expand a little bit on why does the millennials are sell up for grabs and why they’re expanding their number of financial providers? Is it just as they get more wealth, they need more providers? Or is there something more to it? And then my second question is, I would love to hear your thoughts on how you guys feel about doing M&A and sort of what your – the parameters would be for that?

Alex Shootman

Yes. Pat, thanks for the question. First, on the first question, we set out to do that study in partnership with the Center for Generational Kinetics because of the fact that you and I both know, which is this huge wealth shift from the baby boomer generation to the millennial generation. And we set out to do this study as kind of an advisory to our customers. and many of what you – much of what you read in it is what we discovered, first of all, is half of the millennials use a very large bank. That means half of the millennials are up for grabs to change – for regional and community financial institution to be their primary institution. In that, we learned things that are very interesting, which is, for millennial, it’s not about – the most important thing for them is not that that’s where their paycheck is deposited, but that it’s a really good digital experience. And then some of the other aspects, I don’t think I can define – I’m not a millennial whisperer, so I can’t define the reason why it might be. But what it told us is there’s an opportunity for our customers to tap into that generation that’s going to inherit a lot of wealth.

And then there’s an opportunity for Alkami in terms of having more products and the ability to be more innovative. So it was – but you’ve read it, it’s pretty exciting for us and our customers have appreciated the research. In terms of M&A, our philosophy has been, we will grow through organic products, we’ll grow through M&A, and we’ll grow through relationships with third-party intellectual property that we bake in, we build into our product. From an M&A perspective, if we were to do M&A, you would expect it to have a couple of characteristics. You would expect it to make sense to our customers that they would look at whatever we would do and say that makes sense to me that Alkami brings that to the table, much like the segment acquisition makes sense to our customers.

And you would expect that it would fit into our financial profile, right? So the things that we’re trying to accomplish financially on behalf of the shareholders, you would expect us to do something that fits into that financial profile. I don’t know if you want to add anything, Bryan?

Bryan Hill

Yes. I’ll add a couple of points, Pat. And we’ve talked about this in the past. I mean, our view is M&A is an opportunity to expand our product mix. Where we are today in terms of scale, we don’t view M&A as a way to move away from digital banking. So what we’re good at is the digital experience and to the extent we can add to the digital experience, either through money movement, financial wellness, or maybe fraud and protection on the back end of that or even complementing data and marketing. I mean, those are attractive areas for us.

From – our financial model, we put a lot of hard work into our financial model. I mean this is our fourth straight quarter of positive adjusted EBITDA. We’re very proud of that. What comes with that is we are not willing to take a step back. And if we acquired something that was initially at an EBITDA loss, we’d have to bring it very quickly to EBITDA positive. We’re not looking to acquire something that would be dilutive to our growth rate. So as I kind of go through this criteria, the scope of what’s really available starts to become much smaller, but we’re looking for very high-quality assets.

And then, finally, what I’ll mention is the move on our credit facility. That was very intentional with the thought that it’s been 2 years since our last M&A transaction. The company is organizationally prepared to complete another transaction. So let’s start making room. Not that we have any acquisition target that’s imminent, but let’s start thinking ahead and make move and create the right capital alternatives and options for us as an opportunity does arise, so we can move very quickly. But generally, you know I like to buy companies. And in my past, I’ve bought many. We’re looking at IRRs north of 25% from a financial point of view, but a product that we feel will help sustain our organic growth for a very long period.

Pat Walravens

Alright. Super helpful. Thank you, both.

Operator

Your next question comes from the line of Jacob Stephan from Lake Street. Your line is now open.

Jacob Stephan

Yes. Appreciate it. Thanks for taking the questions. Congrats on the quarter. Just wanted to start off, Bryan, you talked a little bit about users added through implementation versus from existing clients, and that mix was about 50-50 over the last 12 months. Maybe could you just kind of talk about how you expect that to trend moving forward if we can see kind of a similar pattern or if you expect it to change?

Bryan Hill

Jacob, it’s a similar pattern. We’re not seeing anything that would lead us to believe that there’s going to be a significant movement one direction or the other. I mean it’s all dependent upon the timing of when we sign new clients, the mix of those clients versus credit unions and banks because as you are aware, the profile of a bank generally has fewer retail users than a credit union of a similar asset size. So there’s no reason to make a change on that. But there will be some variability from quarter-to-quarter what drives the mix in any one quarter.

Jacob Stephan

Okay. And then just on the ACH, it sounds like you guys won a nice a bank contract there. That was an ACH client. I’m just curious how common in that situation is where you’ve got an ACH client. It sounds like there’s 30% of – your total customer base is ACH clients. But how common is that situation where you essentially take somebody from ACH and onboard them to the digital banking side?

Bryan Hill

I mean, ACH is – I mean it’s a fantastic product. And the client base of ACH goes from small financial institutions to very large financial institutions, financial institutions, such as the Silicon Valley Bank or Regions Bank, Trustmark Bank, some of those type of financial institutions. So today, it’s not meant to be the tip of the spear for us to then follow and draft off of ACH success through a cross-sell of the digital banking platform. In part, that is where we are in our bank market penetration and the product market fix. But over time, it could be a very good source for additional banks to join the Alkami digital banking platform. But today, it’s just – it’s not a main strategic point for us.

Alex Shootman

Here’s why it’s important. – today, we’ve moved forward – when you think about going into a new market – any company going into new market, you look for several things in terms of entering and being successful in that market. One is our potential customers aware of you. So today, if you look at aided awareness, Alkami is either number one or number two in the credit union space. If you look at aided awareness, Alkami is number seven in the bank market.

And so the reason why ACH Alert is important to us, both as a stand-alone product and then entering the bank market, is in situations like this, the customer that we ended up selling to was not aware that Alkami was a participant in the bank market because we’re number seven in aided awareness. And through the ACH relationship, they became aware that Alkami was in the digital banking market, and then we ultimately prove to them that would could serve their needs. So that’s what’s really exciting to us is seeing that potential – and now we’ve got to go figure out if we could replicate that more times.

Bryan Hill

I mean, the general – Jacob, the general direction today is when we sell a bank, we draft ACH Alert into that transaction. And if you look at 2023 and then the five banks that we sold in 2024, there’s a very high adoption rate of ACH alert in those transactions.

Jacob Stephan

Okay, that’s really helpful. Appreciate all the color.

Operator

Your next question comes from the line of Alexei Gogolev from JPMorgan. Your line is now open.

Unidentified Analyst

Good evening. This is Smith on for Alexei Gogolev. Thank you for taking our question. So first, I know that you’re very confident about the secular tailwinds driving your business. We are wondering if there are any missing pieces that you are planning to add to your product portfolio in order to be more competitive in RFPs for banking customers? Thank you.

Alex Shootman

Yes. Thanks for the question. When we look at our bank product market fit and our ability to be increasingly competitive in that space, the bank market fit is not necessarily about there’s a large piece of capability that we don’t have that we need to add into our product line. It tends to be more around a bank’s customer might have – so let’s say, the ability to process wire transactions at the end of the day. We have the ability to process wire transactions at the end of the day, and we have the ability to serve a very large portion of the market with our capability to process more transactions at the end of the day. But there may be a bank that has an individual customer that has a very complex need around broader payments, for example. And we want to enable that bank to be able to serve that customer. So, when we think about product market fit for the commercial segment for Alkami, we already have pretty good product market fit. Our next steps are not necessarily adding some large additional piece of functionality that we don’t have. Our next step, [Technical Difficulty] bank have one or two customers that have a complex need, our ability to serve that complex need.

Unidentified Analyst

That’s very clear. Thank you so much. And for a quick follow-up, you have previously discussed how about 20 of your top 10 largest clients are accounting for 22% of your digital user base. Are you seeing continued in-market consolidation given the tougher external environment, or do you expect the concentration of your base to reduce as you add more banks rather than credit unions?

Bryan Hill

Yes. I am not clear on the stats that you just added. But just to kind of back up and just more generally, how is market consolidation impacting us, generally, we benefit from market consolidation. In fact, we had two consolidation events that occurred this quarter where we picked up some digital users, which was a positive. Also later in the year as we have been discussing for the last couple of quarters, we do have a financial institution that’s leaving us in the fall as the result of M&A activity. So, M&A activity does not – I mean it’s averaged around 3% over the last couple of decades. There has been some periods of time where it might be a little more, a little less, but the 3% is pretty consistent, and we don’t see that changing significantly in the future. Now the good news for Alkami and others that have a pricing protocol that’s driven by digital users, a consolidation doesn’t really mean now you are going to have fewer users. I mean the consolidation activity is normally about gaining market share and gaining additional accounts, and we would typically benefit from that.

Unidentified Analyst

Clear. Thank you all so much.

Operator

Alright. Your next question comes from the line of Henry Van Rhee of Craig-Hallum Capital Group. Your line is now open.

Unidentified Analyst

Thanks for taking my question. This is Daniel on for Jeff. Just on the implementation backlog, it looks like 1.6 million users. I think you said highest has been a little while, little strong, even though the client count in implementation backlog is down a bit. So, it looks like the clients coming in are getting larger. Just anything we should read there in terms of – is there a major opportunity to be moving up-market here we are beginning to see, or is this just an incremental shift?

Bryan Hill

It’s just an incremental shift based on the story of the quarter. For example, the one Tier 1 credit union that Alex mentioned we won during the quarter was almost 300,000 digital users. That’s obviously still in our backlog, given we just signed that client. So, you are going to see nuances like that from quarter-to-quarter, and it’s just driven by the mix of business that we have sold in the preceding two quarters to three quarters.

Unidentified Analyst

Okay. And then just one follow-up for me, on banks and the bank backlog there with 30 – now I think you said expected to be implemented by Q1 ‘25, really nice pace of signing expected implementations there. Just any thoughts has that just been broken open wide by getting more implementations under your belt, or is there some other factor we should be looking at for what’s driving the acceleration there?

Alex Shootman

First of all, we are pleased with the progress that we are making in the bank market. As Bryan said earlier, the ultimate scorecard of our progress in the bank market is our expectation that, over time, half of our new logos will come from banks and half will come from credit unions. What we look at internally, probably a more fulsome answer than you asked, but what we look at internally is to be successful in a market. Number one, are we driving demand. Number two, do we have product market fit. Number three, do we have the skills internally to be able to be successful. And then number four, particularly in the kind of market that we are in because there is a concentration of back-end cores in the bank market, are we being successful bringing customers on to those cores so that we have got experience bringing them on to those core, so that when a new customer looks at us and says, hey, yes, I really like your product kind of a risk to do a conversion, and we are able to walk them through where we have done it 6x or 7x, you are not going to be the first. So, on all of these areas, we are making progress. I will let Bryan give you a couple of statistics in terms of the demand side and then the number of cores.

Bryan Hill

Yes. Great. So, in terms of the demand, there is a couple of factors that we are looking at – a couple of metrics that we are looking at. One is the number of deals that we are participating in. Over the last 12 months, we participated in 90 bank processes. And we have won about 16% of the TCV that was available to be acquired during those bank processes, which is good. If you look at 2020, there was 70 that we participated in. And then the other area is, well, what’s going to happen in the future, so we are looking into our sales pipeline and that is continually moving up the bank representation and now it’s close to 50%, as we mentioned in the prepared comments of this call. So, that’s good movement. Other areas like core integrations. By the end of Q1 of 2025, we are going to have over 30 or right at 30 implementations, and that’s going to represent seven cores with multiple integrations into each of those cores. And what’s great about that is the point Alex just made where any other financial institution that happens to have one of those seven cores, it will no longer be the first implementation with that core, but those seven cores represent close to 80% of the bank market that we would view in our target market. So, lots of progress in many different areas, which were – again, we feel and we understand the ultimate scorecard is in 2026. We are achieving our 50% new client wins from the bank market.

Unidentified Analyst

I will leave it there. Congrats on the quarter.

Operator

Your next question comes from the line of Andrew Schmidt from Citi. Your line is now open.

Andrew Schmidt

Hi Alex. Hi Bryan. Good results here. Good to speak with you this evening. I wanted to maybe tab on to a previous question, just talking about the average ARR of the – apologies if I missed this, the average ARR of the clients you signed this quarter between the banks, which should maybe take more modules and then just general, more penetration. How is that just the average contract ARR trending, call it, versus a year or 2 years ago? Thanks a lot.

Bryan Hill

Yes. The average ARR regardless of a bank or credit union is coming in over the last couple of years and even this year, between $700,000 and $800,000. That is – this year, it’s trending up slightly above that. That’s slightly below our overall average for all of our live clients. But what you have to take into consideration is our top 10 to 15 clients have a significant amount of ARR, much more multiples of that in terms of average ARR because we do have some very, very large clients. But we are not seeing a dramatic change there. What we are seeing is a higher RPU. So, some of the number of users that are associated with the more recent cohorts are lower and resulting in a higher RPU with the ARR still trending upwards.

Andrew Schmidt

Got it.

Alex Shootman

The other thing – if I step away from that ARR for just a second, Andrew, one of the things we are seeing is customers being thoughtful, so the customers see the entire buffet of digital products that they would like to consume. But they are doing a conversion, and they are being very thoughtful about if it’s – if I am doing like-for-like in a conversion, what’s that portion of the buffet and then what additional capability can I bring on that my team can handle from a change perspective, knowing that there still maybe two more tranches of digital capability that I want. But I am going to push that out for a little bit after the conversion, just to be able to have my team handle the digital transformation, if you will. I just talked to a CEO the other day, and they went through a renewal cycle. They are very happy right now. She said to me, I really like – they call it home banking, which she said I really like the progress that we have made in the home banking. But in the renewal cycle, they added six projects, six discrete projects that were new digital initiatives for them that get staged out over a period of a year. So, we are seeing people be thoughtful about there is a lot that I want to consume but I need to stage it out over a period of time so that my team can handle the change.

Andrew Schmidt

Got it. That makes sense. Thank you, Alex. Thank you, Bryan. Maybe just – you may have addressed this already, but just the gross margin was nicely higher than what we forecast in our model. Is that due to mix with other – in terms of higher subscription revs and the other factors? And then what’s the right way to think gross margin for the remainder of this year? Thank you very much.

Bryan Hill

We are seeing some success in the investments that we are making in our platform, which ultimately, how that drives gross margin as a lower cost per user for our hosting costs. So, that’s one area I would expect that trend to continue through the remainder of this year. And then the other area is Wayne McCulloch is doing a great job within our clients’ experience organization, client experience group. They are responsible for our post-sale operations, so that’s everything from implementation to client success through client support in other areas. And we are seeing nice improvements in utilization on the implementation front and productivity that’s also resulting in some nice gross margin expansion. Quite honestly, 63.2% this quarter and 450 basis points of year-over-year expansion is really good. It exceeded our expectation. I think we will likely settle in that range for the remainder of the year and exit the year for the full year, just under 63% with another year to go before we achieve our goal of 65% in 2026. So, as we – as I mentioned on the call, it’s not now – if we can hit 65%, it’s when will we hit 65%, where can we take it from there, which we will have that conversation once we achieve 65%.

Alex Shootman

And we have been pretty consistent to say here is how the gross margin is going to progress. This amount per quarter, sometimes it’s a little higher, sometimes it’s a little low. So, maybe just kind of for everybody…

Bryan Hill

I mean what we have provided in our long-term outlook is right around 200 basis points, 250 basis points per year of gross margin expansion. And when we first set our – just to be clear, when we first set the objective for 2026, we were not factoring early success with our investment in our platform, which that’s what’s really driving the acceleration towards the ultimate goal in 2026 and also gives us confidence that we can achieve higher than 65% beyond 2026.

Andrew Schmidt

Got it. Yes, I know Deep is doing a lot of work there, so kudos. Good job, guys. Thanks for the time.

Alex Shootman

Sure.

Operator

And speakers, we don’t have any questions over the phone. Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.