Alkami Technology Inc
NASDAQ:ALKT
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Alkami Technology Inc
Earnings Call Analysis
Summary
Q3-2024
In Q3 2024, Alkami Technology achieved impressive results with a 27% increase in revenue, reaching $85.9 million, and an adjusted EBITDA of over $8.3 million. Successful client acquisition continued, adding nine new digital banking clients and a total of 19.5 million registered users on its platform—a 15% year-over-year growth. The company anticipates 2024 revenue between $333.2 million and $334.2 million, with adjusted EBITDA guidance of $25.2 million to $25.7 million. Alkami targets a long-term gross margin of 65% by 2026, having improved its current margin by 400 basis points year-over-year.
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Good afternoon, ladies and gentlemen, and welcome to the Alkami Technology Third Quarter 2024 Financial Results Conference Call. [Operator Instructions]. This call is being recorded today on Wednesday, 30th of October 2024.
I'd like to turn the conference over to Steve Calk, Vice President of Investor Relations. Steve, please go ahead.
Thank you, operator. With me 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. A reconciliation of the comparable GAAP financial measures can be found in our earnings press release and in our filings with the SEC.
I would now like to turn the call over to Alex.
Thank you, Steve. I am pleased to report another quarter of outstanding performance. In the third quarter of 2024, Alkami grew revenue 27% and expanded adjusted EBITDA to over $8.3 million, both ahead of expectations. We added 9 new digital banking clients, including 3 banks and launched 12 clients on the Alkami platform, which ties a previous record number of client launches in the quarter.
In addition, during the quarter, we were recognized by several third parties as we continue to establish ourselves as the leading digital banking platform. FI Navigator listed Alkami as the top digital banking provider and credit union market share based on the number of enrolled mobile users. We were named as a 2024 fintech top solution provider by IDC and included on CNBC's 2024 world's top fintech companies list. [ Darshi ] named Alkami Best Banking App and Alkami became the first digital banking solution company to be certified by J.D. Power for providing clients with an outstanding mobile banking platform experience.
User experience extensibility, availability and broad functionality are reasons why clients have selected Alkami. More recently, our ability to create value with our data technology is being a differentiator for Alkami. With our data and marketing products included in approximately 60% of our new client wins in '23 moving to over 70% so far in 2024. These products have also generated over 20% of our add-on sales to date in 2024.
During this call, I'd like to spend a few minutes describing how our data is becoming a differentiator and a growth driver for Alkami. Digital banking has been a service platform for consumers who did not want to go into a branch to manage their money. It also served to reduce cost for a financial institution by shifting interactions from human to digital. Today, we are seeing our market accelerate the adoption of digital revenue-generating strategies in addition to using digital banking as a service channel.
As financial institutions implement digital revenue efforts, you're realizing that data is the oil that makes the revenue engine room. For example, our research shows that -- deploying modern data capabilities along with predictive AI, grow 2x faster than FIs that don't apply these technologies. Our market knows they have relevant data to drive revenue strategies, but their data is changed to access and analyze.
For instance, in our 2024 Deloitte Banking and Capital Markets survey, 92% of FI data users and leaders say that data is unavailable or takes too long to retreat. And over half responded that when the data is there, they don't have the technical capabilities to make use of it. Data declines, maintain normalized and curated. Alkami's data and marketing solutions have these full characteristics at scale. Our data platform contains 29 million deposit accounts with 20 [ billion ] historical transactions and about 20 million new transactions are added each day. FI's early in our data journey can use these data capabilities to close the gap against megabanks we are already investing in data technology and data science teams. FI is starting on a path to predictive AI can use 1 of our 12 AI models to generate revenue improve engagement or retain customers with models built for the compliance requirements of our industry. And FIs that need marketing technology in addition to data and models can use Alkami's full funnel market covers digital channels including the digital banking channel, web and e-mail and measures ROI for each campaign.
Alkami pre-plans within our data and marketing solutions, data insights, predictive AI and full funnel marketing. These plans are designed to meet the needs of the REIT community FI market and help these institutions achieve their growth strategies such as driving new deposits, loans and noninterest income.
In 2023 alone, Alkami data and marketing clients generate $4.5 billion in CDs, $525 million in money market accounts and $391 million savings accounts. In addition, our clients use disease capabilities to generate $1.8 billion in home equity loan, $1.7 billion in mortgages, $1.4 billion in consumer auto loans and $983 million in commercial loans.
It's been exciting for me personally as I've sat through executive meetings in which we show clients revenue opportunities with very large data, including for deposits, we can identify transfers where investment dollars are going, trial deposits show when new accounts are opened elsewhere or at tax refunds, so the BFI can keep those in their institution. With lending, we can identify where our account holders pay their mortgage, auto loan and credit cards. Merchant processing, commercial lending and payroll can all be identified and placed in the hands of commercial relationship managers to drive business opportunities.
Beyond our current capabilities, we see a future in which we can combine our data technology with digital banking to provide real-time revenue opportunities. For instance, if an FI customer attempted to digitally move money from the FI brokerage account, BFI could ensure a targeted offer for a high interest rate account with the pre-approval and instant account activation or if their customer tried to establish a new book payment for a recurring subscription, BFI could prompt the customer to use a rewards-based debit card instead generating new interchange revenue and transforming bill payment from a cost item through revenue source.
The mobile reduced friction and revenue generation, the more they worry about fraud. And we've also run successful experiments in which we use our data scale to provide real-time insights into proactive fraud detection. The success of our data and marketing solutions to date, combined with an increased awareness within our market and the power of data to drive revenue activity, gives me confidence that our data capabilities can be a long-term differentiator and growth driver for Alkami.
In closing, Q3 2024 was another quarter in which Alkami demonstrated continued execution towards our target operating model and the long-term goal we have to be the #1 digital banking pain.
I'll now hand the call to Bryan to take us through the numbers.
Thanks, Alex, and good afternoon, everyone. In the third quarter, we continue to outperform on the top line and profitability. We achieved total revenue of $85.9 million, representing year-over-year growth of 27%. Subscription revenue also grew 27% and represented over 95% of total revenue. We increased ARR by [ 24% ] and exit the quarter at $332 million. We currently have approximately $46 million of ARR and backlog for implementation of the majority of which will occur over the next 12 months. We implemented 12 new clients in the quarter, bringing our digital banking platform client count to 266 clients. Also, we have 36 new clients in our implementation back representing 1.3 million digital users.
We exited the quarter with 19.5 million registered users on our digital banking platform, up approximately $900,000 sequentially and up $2.6 million or 15% compared to last year. Over the last 12 months, we implemented 37 financial contributions supporting 1.2 million digital users. In addition, our existing clients see their digital user adoption by 1.4 million users. As a reminder, because of the long-term nature of our contracts, we had 3 to 4 quarters ability into upcoming client attrition. We expect churn of less than 1% for the full year 2024, all of which occurring in the fourth quarter.
Over the long term, we modeled digital banking ARR churn at 2% to 3% per year. We ended the quarter with an RPU of $17.54, up 8% compared to a year ago driven by add-on sales success and the addition of new clients who can onboard with a high average RPU. We are seeing broad-based demand across our product portfolio. Our 2024 new sales performance continues to outpace 2023. Year-to-date, we signed 23 digital banking platform clients, including 8 banks, and our add-on sales effort represented approximately 46% of 2024 new sales. In addition to add-on sale, our client sales team is responsible for client contract renewals. We expect to renew over 30 client relationships in 2024.
During the first 9 months through '24, 26 client relationships and in total, increased the ARR run rate, 16% at the time of renewal, outperforming prior year cohorts. And finally, our remaining performance obligation was just under $1.3 billion, representing 3.7x our ARR and up 27% compared to a year ago.
Now turning to gross margin. For the third quarter of 2024, we delivered non-GAAP gross margin of [ 6.8% ], representing a 400 basis points of expansion compared to the prior year. We achieved gross margin expansion through continued improvement in our hosting costs and platform investments as operating leverage across our operations. As a reminder, our 2026 gross margin objective is 65%.
Moving to operating expenses. For the third quarter operating expenses of $46 million or 53.6% revenue represented year-over-year operating leverage of 490 basis points. We drive offer leverage across each operating expense inventory, but primarily in R&D, where we continue to realize operational scale while investing in our platform. 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 offering. As for non-GAAP sales 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 $67.1 million, while investing $48.5 million in sales and marketing, representing an efficiency ratio of 1.4:1. We believe this ranks among the very best in SaaS in terms of sales and marketing efficiency.
Our adjusted EBITDA in the third quarter was $8.3 million, better than the high end of our expectations. Our adjusted EBITDA margin for the quarter was 9.7%, when combined with our revenue growth rate, results achieving a rule of 36. Our operating strategy of balancing revenue growth and profitability will continue and we expect to achieve a Rule of 40 on a run rate basis as we exit the fourth quarter of 2025.
As we are now approaching 2025, I want to provide some additional color on the path to our 2026 adjusted EBITDA margin target of 20%. As we previously mentioned, during 2023, we began to build a base of offshore talent through a third-party outsourcing model. This has been a positive experience for us, allowing us to expand engineering capacity during a period of rapid growth while focusing on profitability. We are now preparing to transition these activities to a captive offshore subsidiary model. We expect to invest in this capability starting in the fourth quarter of 2024, continuing throughout 2025, and with the goal of completing the transition during 2026. We do not anticipate any impact on our 2026 financial targets, although we do expect to see a positive impact on margins beyond 2026.
During 2025, the incremental investment to effect the transition will represent approximately a point of margin for the year. We are very excited that we are maturing as an organization and we look forward to the positive operational and financial impact this can have as we scale the business beyond 2026.
Related to our balance sheet. We ended the quarter with approximately $101 million of cash and marketable securities. Our revolving credit facility remains undrawn and provides $125 million of borrowing capacity. In the third quarter, we produced operating cash flow of $11 million and free cash flow of $8.7 million.
Now turning to guidance. For the fourth quarter of 2024, we are providing guidance for revenue in the range of $89 million to $90 million, which represents total revenue growth of 25% to 26%. For adjusted EBITDA, we are providing fourth quarter guidance in the range of $8.5 million to $9 million. For full year 2024, we are providing guidance for revenue in the range of $333.2 million to $334.2 million, representing total revenue growth of 26%. We are also providing adjusted EBITDA guidance of $25.2 million to $25.7 million.
In closing, I am very pleased with our continued progress. Our team delivered a strong quarter with profitable growth continued operating leverage and a level of go-to-market efficiency that places us among the very best performers in SaaS. And with strong industry tailwinds combined with our multiple growth drivers we have a clear path to our longer-term operating and financial targets.
With that, I'll hand the call to the operator to take your questions.
[Operator Instructions]. Your first question comes from the line of Alexei Gogolev from JPMorgan.
This is Elyse Kanner on for Alexei Gogolev. My question is about where do you currently see the AI adoption curve? And what will it take for customers to become more comfortable incorporating AI-based solutions and how dependent is this on industry regulation?
Thanks for the question. The adoption curve is -- well, first of all, AI has been used in the financial services industry for a long time. So if you thought about, you would activate your card to a voice response unit, some of those things in terms of natural language processing have been used for quite a while. But in terms of using it for predictive models around revenue generation, we're in the early stages. And what it's going to really take, as I mentioned in the prepared comments, is for the customers to be able to cleanse and normalize and manage their data. These customers -- the best data you have to run AI models as transactional data. And these customers have that information in their mobile banking application and in their core but getting all of that to a state where they can run the models against it is the first big step for them.
Got it. And then my second question would be, what do you think drove the really strong ARR uplift at renewal?
What we're seeing now is there's just a greater appetite for more innovation and technology through the platform. And so on average, if you look at our client base, they average between 13 and 14 products. And then when you analyze the new sales cohorts that are coming in, they're averaging around 19 products. So what we're renewing today or clients that typically have somewhere between 9 to 14 products. But for them to be on par with where new sales cohorts are coming in, they need more innovation. They need to be more in the 19, 20 to 22 product level. So it's really the cross-sell opportunity that's occurring at the time of renewal.
And I would like to add to that, and we've mentioned this on a couple of calls is that several years ago, we started building out a client-facing account management team. that account management team has now been in place for a couple of years. And because of that, they're able to establish relationships and execute strategic workshops with our clients where they lay out a multiyear digital transformation journey, which leads to strategic adoption of the products that Brian was just talking about.
Your next question comes from the line of Patrick Walravens from Citizens JMP.
This is Austin Cole on for Pat. Congrats on the results. So I recognize some of the kind of longer-term demand drivers don't really change day-to-day, right? But with the kind of 50 basis point rate cut and some of the long yields rising. I mean, what impact do those things have on your business? And are you feeling any change in kind of the attitude from clients?
What I would say is the demand for digital banking has remained consistent from a low interest rate environment to a high interest rate environment, to the recent interest rate changes. So this is a long-term market sector transformation in which the customers aren't making decisions to accelerate the investment 1 quarter or tolerate it another quarter.
The main difference that we see is the products that they add on based upon the interest rate environment. So are they adding on products like an instant account verification to try to be able to drive deposits or if this market changed a little bit and their balance sheets were able to change and they could make more loans. Then are they going to be buying products that help more with loan generation.
But the summary is the long-term change in investment isn't impacted by short-term interest rate changes. The mix of add-on products sometimes changes. And that's good for us because we've got products that are useful for either side of that equation.
Your next question comes from the line of Chris Kennedy from William Blair.
Brian, can you talk about the long-term savings opportunity for the offshoring and I understand that 2026 and beyond, but can you frame the opportunity there at all?
Well, we're excited about the opportunity. I mean, presently, we have maybe 110 to 120 FTEs that are coming through this third party and they're exclusively engineering. And one of the secrets to our success has always been the best platform wins. And so there's this desire to continue to innovate through the platform, create new products, provide innovation to the end market. Well, to do that profitably, we have to find areas in which we can do that at the right price point. And so engineering is definitely an area where this is going to benefit us. And also, this is going to benefit us within gross margin and cost of sales because over the longer term, there will be opportunities for some of our post-sale operations, to offshore some of those, at least the growth in those areas that then the cost curve. So we're extremely excited. The adoption within the company has been great, the results that we're seeing in productivity has been really very good as well, and we think that will only improve as we move more to a captive model versus a third-party outsourced model.
Great. And then just a follow-up on the data platform and the opportunity. Can you talk about how open banking in the U.S. will impact that opportunity?
Yes. This is Alex. I think the rate and pace of open banking is still pretty much unknown. So the customers right now -- we just see a directive that was handed out a week or so ago from the CFPB. The investments that the customers are making right now in data really have nothing to do with open banking. And so if open banking were to accept that might provide more tailwinds in terms of the data investment. The investment that the customers are making right now in data is really realizing that the advantage some of the mega banks have in terms of the investments they've made in their data platform and their models. And since that tends to be the competition is on the most, their current investment is about current capabilities with the current market conditions and really doesn't have thing to do at this point in time in open banking. Like I said, that might be an increasing tailwind for us, but the rate and pace of that, when I talk to customers is largely unknown.
Your next question comes from the line of Jeffrey Van Rhee from Craig-Hallam.
This is Daniel on for Jeff. Just in terms of -- you've discussed the mindset, obviously, with interest rates of FIs changing towards attracting deposits. Just any additional thoughts on how that's been translating into new logos and additional add-on products?
Yes. As I said earlier, the change in interest rate environment doesn't really impact the rate and pace at which we're closing new logos. If you go back a little bit to some of the comments that Brian and I have made in the past, these contracts are 5, 6, 7 years. Our customer will have to make the decision to begin a conversion process a year before their contract is up for renewal, which means they'll start the decision cycle, maybe even a year before that. And so any change in interest rate that might happen in that decision cycle doesn't really change whether or not they're going to make a decision because they're making a decision for the next 5 to 7 years.
The biggest impact that it has for us is the mix of add-on products that we sell. There's a certain set of products that are useful for a low interest rate environment and another set of products that are useful for high interest rate in products -- excuse me, high interest rate environment. And so we've seen that mix shift starting that was almost 24 months ago when the interest rates started going up and it might shift back as the interest rates start going down.
And just on the credit union ad pace, in 2024, fairly similar to 2023. Should we expect credit union adds to remain relatively flat around this level of, call it, 30 credit unions a year just based on that regular cadence of credit unions that come up for renewal and the limited number of deals that could be pursued in any given year? Or should we be thinking of any ways that, that ad count should be showing acceleration?
Yes. You should expect the credit unions that we add from year-to-year to remain pretty consistent in the 25 to, call it, low 30 range. We're working towards the same rate and pace as it relates to banks as well, and we're showing some progress there. But a lot of it is framed by the structure and cadence of the market.
As Alex just mentioned, 5 to 7-year contracts, we focus on the top 2,500 financial institutions, those top 2,500 financial institutions represent over 100 million digital users. And so there's a rate and pace in which those come market. And we continually win our fair share of credit unions, and we're starting to see more bets and more opportunities as it relates to banks, and we believe 2, 3 years out, we'll be at the same rate and pace with banks as it relates to credit units.
Next question is from the line of Adam Hotchkiss from Goldman Sachs.
I guess first to start, in your experience on some of these data-related add-on sales, how much education has to happen on your side of the equation to get FIs to understand the value and the security that you bring them here versus sort of proactively coming after the opportunity. I guess I'm just trying to understand how knowledgeable and educated some of these bank decision-makers are around the AI opportunity and the data opportunity.
Yes. It's been interesting to watch over the last 3 years. I would say 3 years ago, we would be in evangelical mode about data. And now almost every executive that I talked to knows that they have to become a data-first digital. So we're no longer in an evangelical mode in terms of, boy, you should Think about the fact that data will drive personalization in the digital banking channel. These are all smart executives, and they all get it. So that change has happened in the last 3 years.
We do have 2 different sides of the market. So we'll have a part of our market that is pretty sophisticated from a data perspective. They might have created their own data capability through something like a snowflake or something like that. They've got their own mark tech stack and what they want to do is figure out how to use Alkami's cleanse and curated data to feed into their data tech stack and then to be used into their marketing tech stack as well. And then we'll have another set of the market that it's just been hard for them to get that talent in their organization.
And so they want essentially a shrink-wrapped capability where the data platform, the models that are already built right on top of those models and then has essentially a walled garden mark tech stack that sits right on top of the data and the model.
So in summary, last 3 years has moved from an evangelical position to a position where the executives get it and they're asking us how we help. And the market is bifurcated between sophisticated customers that have built their own data, tech stack and bottles and they want our data to feed it and customers that struggle getting access to that skill set and want a prebuilt capability for data models and market.
We're seeing it in our results as well. So if you look back a couple of years ago, where we were seeing success with our data products was really when a digital banking platform sale was occurring. So we would see maybe a 50% to 55% attachment rate. But when C-level executives and financial institutions were involved in making a decision, we tended to have more success in selling our data product. Now when you look at the attachment rate in 2024, we're closer to 75%. So that's good news. But what gets me excited is a couple of years ago, it was really hard from a client sales team go-to-market motion where their penetration point in the market generally is a bit lower than the -- suite to get traction with the data sell. We'll flash forward to 2024 now our data products are one of our leading cross-sell products back into our base. So not only are we seeing strong attachment at the point of a new client win, we're also now seeing some very nice progress in our client sales team cross-selling back into our base.
Okay. Great. That's really helpful. And just a follow-up on that. In terms of bank win rates, do you think that data in AI, just more broadly, when you talk about that 70% attach. Is that helping you improve bank win rates? And I think you've given some color on where you are there in the past. Have you been making undress there generally? Just any update there would be helpful.
Just generally, our data product is a differentiator for us in the market regardless of the type financial institution. So I wouldn't attribute bank win rates movement to -- in general, that's a differentiator for us. But on the topic of banks, we're seeing some success, I mean and the point that I'd like to make is, as you're approaching into a newer market, you have to create market awareness. We're now competing, if you look at on a trailing 12-month basis, we're competing in the same number of bank deals as we are credit union deals. So that's super exciting for us. We're adding talent that's helping build out our commercial banking product. As such, one individual is our new Chief Product Officer, Doug and Kanjlia and who based commercial banking background. So a lot of positive things are occurring as it relates to banks, and we really view that as a growth driver in 2025, 2026 and beyond.
Question comes from the line of Charles Nabhan from Stephens.
Congrats on another solid quarter. My question is on the revenue growth algorithm. Clearly, it's been very strong through the year, but it looks like ARPU has accelerate -- ARPU growth has accelerated, whereas user growth has decelerated slightly, which, I guess, makes sense if you consider that you're driving more revenue from banks and cross-sell. But I guess, as we think about that going forward, could you maybe comment on how that algorithm could work over the medium term in terms of user growth versus ARPU, ARPU Growth as it pertains to overall revenue?
Well, the beauty of the Alkami revenue model is we're not really dependent on either of those factors, right? I mean we're growing -- we're taking market share by adding new logos, which adds new users and then our clients. They're very successful in the adoption of their customers and businesses that use our digital banking platform. So they're adding digital users to the platform. We're seeing new logos coming on with a much higher RPU than our blended company average unit, in fact, our implementation backlog averages around $23 compared to the $17.54. So there's a lot of levers in our revenue model, which in any 1 quarter, 1 lever may outweigh the other lever.
As it relates to user growth, that is just really tied specifically to what our backlog is coming into the year and the timing at which we implement those new clients. This year, we have seen digital user growth go from kind of high teens down to more mid-teens. But fading for that has been ARPU expansion because of the success we're having from our client sales team going back into our base. So I think what you'll continue to see is user growth in that 15 to high teens range and ARPU expansion can continue to expand beyond the 7% and 8% that we're at today.
Got it. Super helpful. And as a follow-up, I wanted to ask about the gross margin target in light of your comments around the offshoring strategy. If I understand, if I understand things correctly, you're expanding gross margin by 200 to 300 basis points a year. Those investments will be about 100 bps negative. But that still gets you to something north of 65% by '26. So I guess my question there is, are there any other puts and takes we should consider with respect to the gross margin or is that just an element of conservatism built into that target?
So we provided the 65% gross margin target a couple of years ago. And what Alex and I suggested we would achieve that target somewhat ratably from where we were at that point in time, which would indicate a couple of hundred basis points of gross margin expansion a year. We've actually outbound that, as you're pointing out, but we're still standing on our 65% gross margin in 2026.
Now the point of margin that I mentioned in my prepared comments related to establishing our offshore subsidiary, that will actually come through R&D. That's not a cost of sales or gross margin factor. But you should continue to expect that gross margin in 2026 is a target of 65%, we could get there faster. We're only a couple of hundred basis points away. So potentially, we achieved that as we exit 2025. But once we get closer and have visibility in the quarter in which we'll actually go over 65% gross margin, then we'll reestablish a longer-term gross margin target.
Next question is from the line of Mayank Tandon from Needham.
This is Sam on for Mayank. Just a couple of quick questions. One, touching on those renewals you guys mentioned. Could you talk about exactly which products you guys are seeing the strongest add-on momentum with these renewals that are coming up?
Yes. So the success that we're seeing in not just renewals but just in cross-sell more broadly within our fraud and security products. The data products, which we've spent a lot of time discussing on this call as well as our client services products, which includes things like chatting and anything that can intercept the call from going into a financial institution, contact center, so some more self-servicing type products. And then finally, financial wellness.
If you look at our client base, and with a large percentage of our clients being more retail focused, many of them have a charter of trying to build financial wellness and financial soundness within their customer community. And so our financial wellness products have been a nice uplift for us as well.
Got it. Okay. That's helpful. And then kind of in a similar vein, just wanted to switch over and get your comments on the product road map and what that looks like? Any areas that are of particular interest for you guys? Obviously, with the rise of Gen AI solutions and capabilities. And then I know you guys also brought on a Chief Product Officer earlier this year in the summer, I think. So just any comments around that would be helpful as we kind of shift focus into '25.
Maybe the best lens to look at that through would be what's the client demand. So when you sit down and talk to our clients or our prospects, they're focused on a couple of things. One, they're focused on taking a great digital experience that is a digital banking application and figuring out how they can broaden out that digital experience. So if you thought about them selling a new product to an existing customer, remember, we're bringing on a new customer or member, how can they create a great end-to-end digital experience the way that they've created a great digital banking experience.
So that's an area that customers have a lot of interest. They continue to have a lot of interest in fraud and fraud management. you have this interesting problem between -- if I reduce friction in the digital banking channel, I increased opportunities in the digital banking channel. So they'd love to see more real-time fraud capabilities that extend across the entire platform so that they can reduce friction in the way that they interact with their customers.
One of the reasons we talked about data and marketing is because it's on every single customer's plan. What am I going to do with data, a data platform? And then from a payments perspective, all of our -- the introduction of Fed now and real-time payments has been along with some of the P2P payment innovation has caused our customers to take a step back and say to themselves, how do I create a better user experience around the payments that my customers or members might want to make? And then how am I going to incorporate things that could Fed now and real-time payments into my strategies.
So for us, our opportunities are in those because those are the, obviously, where the client demand is. If I were to summarize, it's payments, it's a better digital end-to-end experience with either onboarding somebody or providing them a new loan or a new product and its fraud management with the data platform.
Your last question is from the line of Jacob Stephan from Lake Street.
Congrats on the results. Maybe just following up on a question asked about the captive offshore model, but maybe you could kind of help us understand what the weighting of the margin impact will be, will we see kind of more of an impact more expense in kind of in the first half, followed by improvement in the second half? Or maybe just help us think about that.
The 1% of investment in margin, the 1% margin investment Think about that more ratably throughout the year. So it's going to start in '20 -- the fourth quarter of 2024. Think about that more ratably throughout 2025, and then we'll start feeling more of the benefit in 2026.
Okay. Got it. And maybe just does this help kind of accelerate the implementation time line for new logos? Or is this really kind of more software internal development?
Yes. The initial focus is continuing to increase engineering capacity. This isn't a cost-cutting play. This is about absorbing growth in the organization and continuing to deliver engineering capacity and new product development capacity, while we balance that with profitability objectives that we have.
Once we establish the offshore subsidiary, which will happen throughout 2025 and early into 2026. Then we can start exploring other areas within Alkami where we can absorb continued growth. So I mean that's further into the future. And right now, the focus is primarily on engineering capacity.
This is Alex. This is the decision point. If I go back to the previous question. We have 360 degrees of product opportunities, if you look at customer demand. And what we need to do is figure out how to get more product outdoor and continue to drive balanced revenue and profit growth. If that's the real driver behind the establishment of -- at India is the opportunity that sits in front of us and our desire to add engineering capacity so that we can build those new products.
Okay. Got it. That's helpful. And maybe just one last one. Just on the kind of the loan origination product, obviously, mortgage lending has been down. Also in personal loan, there's been some softness in that vertical view. Do you feel like customers are more willing to essentially explore new solutions at this point with the industry environment where at that? Or do you find that that's not really a factor?
Well, think about loans as of house and back of house. So most of our customers have a workable back of house application for their loan origination. But what they want is they want a better end-to-end digital experience for the consumer or for the business that's coming in. So as Alkami thinks about its future, not necessarily should we replace a back-of-house mortgage application platform. In our customer, we kind of own the front-of-house experience and what could we build on to that front of house experience that would give their customers better onboarding into the entity or a better purchase of a new product.
So in summary, think about the digital experience on the front end of buying a new loan product and think about the back of house administrative activities necessary to underwrite that loan and book that loan and produce the documentation associated with that loan. Anything that Alkami does would be associated with the propose digital experience.
The last question comes from the line of Andrew Schmidt from Citi.
Sorry if I missed this. But I just want to dig into the M&A, your thoughts on M&A. Obviously, equity valuation coming up presents a nice currency to do transactions. You've been pretty successful with M&A in the past in terms of adding capabilities on. It sounds like prices out there are starting to become more reasonable. I just want to take your temperature on just the M&A environment as you see it now.
Thanks, Andrew, for asking the question. We're seeing, as you would expect, an increased number of targets that are becoming available. We have a few individuals internally at Alkami that their job is not exclusively close to exclusively focused on M&A activities. So we're seeing the multiple expectation of targets seem to be now finally coming more in line from where they were maybe 18 months ago. We're seeing the quality of assets improving.
But we're a disciplined buyer. We're not just buying revenue. We're buying functionality that can continue our growth trajectory for many years into the future. But we're also not going to take a step back on our profitability objectives. So as you put more and more requirements in the filter, it starts narrowing the field but we're pretty disciplined when it comes to those items.
And then as it relates to capital available for us, as I mentioned, we have $125 million remaining available on our credit facility because it's presently undrawn. I have ability to continue to borrow more beyond that. Equity capital is attractive as a potential source of capital. We'll always seek the lowest cost of capital possible to achieve greater returns as it relates to M&A activity. But I think the takeaway is it's been several years since we've acquired the business organizationally, we're in a position where we could absorb another business. The pipeline for M&A is becoming more attractive, and it's definitely a growth driver, a growth area for Alkami.
Yes. I agree, Brian. And maybe the summary is new organic product build and M&A are 2 parts of our growth strategy.
Got it. Makes a lot of sense. And then I believe you mentioned that the sales momentum continues. But I do want to ask about the fourth quarter, we do have an election here coming up right in the middle of the quarter and fourth quarter tends to be a big bookings quarter. Just curious how the sales cycles are shaping up. Seeing any hesitation in terms of bookings. Any thoughts there would be helpful.
Yes. Andrew, this is Alex. As I said before, to date, none of us can predict what businesses are going to be thinking about in the next couple of months. But I would say to date, we haven't seen any macroeconomic or geopolitical things occur over the last several years that have impacted the steady rate and pace of digital transformation and the regional and community financial institution market.
So I think it would be a lot of hubris on my part to predict what's going to happen 48 hours after an election. But to date, economic situations, political situations and geopolitical situations have not changed the trajectory of the digital transformation in the market that we serve.
There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.