Quick Take
Alkami Technology (NASDAQ:ALKT) has filed to raise $141 million in an IPO of its common stock, according to an S-1 registration statement.
The firm provides financial institutions with advanced user interfaces.
ALKT is growing quickly but hasn’t made meaningful progress toward operating breakeven and is producing significant operating losses, so I'll wait for the firm to produce better operating results before considering the stock.
Company and Technology
Plano, Texas-based Alkami was founded to develop a platform that improves financial institution user interfaces and integrates with various banking functions and processing systems.
Management is headed by president and CEO Michael Hansen, who has been with the firm since 2013 and was previously president and CEO of T-System, a healthcare technology firm.
Below is a brief overview video of Alkami's financial wellness solution:
Source: Alkami
The company’s primary offerings include:
User experience
Integrations
Data insights
Alkami has received at least $443 million from investors including General Atlantic, S3 Ventures, Argonaut Private Equity and D1 Capital Partners.
Customer Acquisition
The firm pursues client relationships with community, regional and super-regional financial institutions via a direct sales and marketing approach.
ALKT says that its typical sales cycle is from 3 - 12 months and a subsequent implementation time range of 6 - 12 months.
Sales and Marketing expenses as a percentage of total revenue have dropped as revenues have increased, as the figures below indicate:
Sales & Marketing | Expenses vs. Revenue |
Period | Percentage |
2020 | 15.0% |
2019 | 20.8% |
Source: Company registration statement
The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, was 2.3x in the most recent reporting period.
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 trajectory.
ALKT’s most recent Rule of 40 calculation was 21% as of December 31, 2020, so the firm needs improvement in this regard, as the table shows below:
Rule Of 40 | Calculation |
Recent Rev. Growth % | 52% |
EBITDA % | -31% |
Total | 21% |
Source: Company registration statement
The firm’s net dollar revenue retention rate rose from 114% at the end of 2019 to 117% at the end of 2020, which are moderately impressive figures.
The company calculates its rate ‘as the trailing 12-month average of current period ARR divided by prior period ARR.’
Market and 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 a 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
Q2 Holdings
Temenos AG
Fiserv
Jack Henry and Associates
Fidelity National Information Services
Financial Performance
Alkami’s recent financial results can be summarized as follows:
Strong growth in topline revenue
Very strong gross profit increase and gross margin growth
Reduced operating loss
Slight reduction in cash used in operations
Below are relevant financial results derived from the firm’s registration statement:
Total Revenue | ||
Period | Total Revenue | % Variance vs. Prior |
2020 | $ 112,142,000 | 52.5% |
2019 | $ 73,541,000 | |
Gross Profit (Loss) | ||
Period | Gross Profit (Loss) | % Variance vs. Prior |
2020 | $ 59,156,000 | 94.4% |
2019 | $ 30,435,000 | |
Gross Margin | ||
Period | Gross Margin | |
2020 | 52.75% | |
2019 | 41.39% | |
Operating Profit (Loss) | ||
Period | Operating Profit (Loss) | Operating Margin |
2020 | $ (35,103,000) | -31.3% |
2019 | $ (42,535,000) | -57.8% |
Net Income (Loss) | ||
Period | Net Income (Loss) | |
2020 | $ (51,355,000) | |
2019 | $ (41,869,000) | |
Cash Flow From Operations | ||
Period | Cash Flow From Operations | |
2020 | $ (38,145,000) | |
2019 | $ (39,085,000) | |
Source: Company registration statement
As of December 31, 2020, Alkami had $167 million in cash and $69 million in total liabilities.
Free cash flow during the twelve months ended December 31, 2020, was negative ($40.3 million).
IPO Details
Alkami intends to raise $141 million in gross proceeds from an IPO of its common stock, offering 6 million shares at a proposed midpoint price of $23.50 per share.
No existing shareholders have indicated an interest to purchase shares at the IPO price.
Assuming a successful IPO, the company’s enterprise value at IPO would approximate $2.25 billion, excluding the effects of underwriter over-allotment options.
Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 7.22%.
Management says it will use the net proceeds from the IPO as follows:
We currently expect to use the net proceeds from this offering, together with our existing cash and cash equivalents, to finance our growth, develop new or enhanced products and fund capital expenditures. In connection with the completion of this offering, we also plan to pay approximately $4.9 million of the net proceeds in accumulated dividends to holders of our Series B redeemable convertible preferred stock (the “Series B Dividend”), including an aggregate of $3.8 million to certain holders of 5% or more of our capital stock, our directors and their affiliated entities and our executive officers.
Management’s presentation of the company roadshow is available here.
Listed bookrunners of the IPO are Goldman Sachs, J.P. Morgan, Barclays, Citigroup, William Blair, JMP Securities, KeyBanc Capital Markets and Needham & Company.
Commentary
Alkami is seeking public market investment capital to fund its expansion initiatives.
The company’s financials indicate strong topline revenue and gross profit growth, but high operating and net losses as well as high operating cash burn.
Free cash flow for 2020 was a negative ($40.3 million).
Sales and Marketing expenses as a percentage of total revenue have dropped as revenues have increased; its Sales and Marketing efficiency rate was a reasonably strong 2.3x.
The market opportunity for providing improved front end consumer experience software to financial institutions appears substantial, given the legacy nature of the industry’s programming infrastructure and the need for FIs to improve their offerings to attract and retain customers from younger generation demographics.
Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 51.7% since their IPO. This is a mid-tier performance for all major underwriters during the period.
As for valuation, compared to partial competitor Q2, the IPO appears higher priced based on revenue metrics, but given the company’s faster growth, the IPO price looks comparatively justified.
ALKT is producing reasonably strong growth metrics and efficiency, with a 117% net dollar revenue retention rate indicating the firm is growing its business with a solid product-market fit.
However, the company hasn’t shown a meaningful path to operating breakeven and is still using large amounts of cash and generating significant losses.
For me to have a BUY opinion I would need to see a significant move toward operating breakeven, so for now, I'll stay on the sidelines.
Expected IPO Pricing Date: April 13, 2021
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