Alkami Technology Inc

NASDAQ:ALKT

Earnings Call Transcript 2021-Q4

[Operator]

Hello and welcome to Alkami's Fourth Quarter 2021 Financial Results Conference Call. My name is Adriana and I'll be your Operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. During the question-and-answer session, if you have a question [Operator Instructions] Please note this conference call is being recorded. And I'll turn the call over to Steve Calk. Steve, you may begin.

[Steve Calk, Head of Investor Relations]

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. Where summary of risk factors associated with our forward-looking statements, please refer to today's press release and the sections in our 10-K entitled risk factors and forward-looking statements. The statements made during the call are being made as of today, and we undertake no obligation to update or revise any forward-looking 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 to the comparable GAAP financial measures can be found in our earnings press release, and in our quarterly filings with the SEC. And now I will turn the call over to Alex.

[Alex Shootman, Chief Executive Officer]

Thank you, Steve. And thank you all for joining us today for our Fourth Quarter 2021 Earnings Call. I am pleased to report that we delivered strong performance both for the fourth quarter and the full-year. Bryan will discuss the numbers in a few minutes, but let me give you some highlights. In the fourth quarter, we grew revenue by 27%, which was ahead of our expectations. We exited 2021 with nearly 12.4 million live registered users on the Alkami platform. This is up nearly 950,000 sequentially and up nearly 2.7 million users compared to the end of 2020. In terms of sales, the fourth quarter was the most successful in our 12-year history. We closed 22 new logos during the quarter and renewed five existing clients. A testament to our technology, quality, and support, and a huge shout out here to our Alkami's for a job. Very well done. I'm excited and grateful to be at Alkami. I've joined a great team with innovative technology and a vibrant culture. Since early November, I spent time with clients, prospects, investors, and employees, and conversations with these stakeholders confirm that our strategy is sound. Our product portfolio is on target and our dedication to our clients runs deep in the values of the organization. When I've asked clients why they sell it to Alkami, I've consistently heard 4 reasons. First, our market-leading user experience. Our user experience reflects the design principles and integration expertise that is embedded in our product and engineering teams. And this is validated by testimonials, independent research, and mobile app store ratings. Second is the speed at which we bring new products to market. Our platform is built on modern Cloud technology principles. It's open, extensible micro-service based and multi-tenant with rapid scalability and continuous integration delivery in deployment. With this foundation, we can deliver what our clients are asking for. The ability to compete with the most progressive megabanks, neobanks and FinTech in new markets. While in the fourth quarter alone, we developed an early release -- we delivered an early release of our all-new mobile application. We launched clients on our new crypto product, launched our integration of BioCatch, which is a new fraud mitigation platform, and launched our first client who is using Salesforce as their primary quarter. 3rd, is our proven track record of execution. Alkami is one of the leaders in new digital banking users converted over the last several years. And our client services organization continues to build a more predictable implementation experience with 28 clients going live during 2021 and 38 digital banking platform implementations underway. And we've done this despite a larger and more sophisticated product set that we offered just a few years ago. Fourth is our commitment to deliver a complete solution through building, partnering or making strategic acquisitions. Our recent acquisition of MK Decision, now, Alkami's digital account opening and loan origination solution demonstrates this commitment. In Q4, we sold this solution to 3 digital banking platform clients, already capitalizing on this great market opportunity. Our customers are increasingly depending on Alkami to be the platform on which they are delivering more of their end-to-end customer experience. And we are committed to increasing the range of our portfolio. We also continue to see tailwinds in a macro-environment and its beneficial to our clients. The financial services market has been consolidating for some time, and M&A activity in 2021 was at its highest level in more than a dozen years. The financial institutions that we serve are the acquirers in this market. And their digital user growth, which was 14% in 2021, is higher than the market average. This demonstrates the strength of their digital banking platform, often informs both the strategy and the competitive position of these FIs. Banks and credit unions in our target market view digital banking as core to their transformation. And they need a partner to advance their innovation agenda, and we at Alkami are proud to be their partner. Alkami has built a great foundation and we are well-prepared for our next phase of growth. Since there is strong demand, execution will be the key to our success. As such, Alkami will focus on five aspects of our business to drive growth over the next several years. First, we will become the digital banking provider of choice for banks while maintaining a market leadership position with credit unions. Regional and community banks want a quality alternative among digital banking providers. Over the last few years, we've made significant product investments in our commercial banking offering and are now positioned competitively in this market. Multiple new bank client signings in 2021 demonstrate that Alkami can be a force in the bank market. Our technology, user experience, product functionality, clients port and predictable deployment have made us a de facto leader in the credit union market. And these same strengths will make us the leader in the bank market. Second, we will increase our focus on growing add-on sales. Our client relationships are strong and they are asking us to provide them with more capabilities. To serve this need, our product portfolio has tripled in 5 years. We've recently built an add-on sales organization and will increase sales and marketing investment in this part of our business. I'm pleased to announce that last week we added Carl Cross to Alkami as Chief Revenue Officer. Carl is an experienced sales leader who's had a significant impact at Workfront and AppSense among other enterprise software providers. I've known Carl for some time and I'm confident that Carl will help take Alkami into our next chapter of growth. 3rd, we will allocate increased investment to make our platform the foundation of our clients’ technology portfolio. Of our common theme from clients stays SEC Alkami to be digital banking platform for their FinTech ecosystem. They understand that they are in competition. As many of the innovators in their market, given that no company can predict every winter in a FinTech industry that has raised a $132 billion in 2021 alone. Our customers want a platform that integrates with innovation regardless of origin. And we're building that platform as evidenced by the nearly 1,000 SDK submissions we received in 2021, which is almost double what we received in 2020. We envision a future in which the Alkami digital banking Cloud enables wide ranging innovation for our customers. 4. We are strengthening our focus on talent. The marketplace is competitive. And there is increasing pressure across the industry to attract and retain talent. As a young thriving company that is on the forefront of digital transformation, we believe we can compete effectively in the talent market and view success in the talent market as a necessary investment and core to achieving our near and long-term objectives. I'm happy to announce that in Q4, we added Julie Hoagland to the executive team as Chief Human Resource Officer. Julie has over 25 years of HR experience in building highly effective cultures at companies like Gavita and HBO. She is already taken our talent acquisition and culture to the next level. Yes. We will execute on our MNA strategy. We have virtually unlimited opportunities to expand our portfolio and accelerate our expertise. Although extensibility of our platform is critical to our strategy of allowing clients to connect with third-parties of their choosing. There are circumstances where it makes more sense for us to acquire companies to be able to shape the development of the underlying functionality for the benefit of our clients. As we continue to grow and improve our access to capital, M&A will be a regular feature of our growth profile. In closing, I'm excited to be here and I'm confident that Alkami is the right strategist, talent, and technology. We're in an attractive market as digital banking is a must-have component for modern FIs. And we will succeed by enhancing our business banking portfolio, investing in sales and marketing to support add-on-sales, building out our platform capabilities, developing our talent, and remaining agile on the M&A front. With that, let me turn the call over to Bryan.

[Bryan Hill, Chief Financial Officer]

Thanks, Alex. And good afternoon, everyone. Our fourth quarter financial and operational execution was strong across the board. I'll start with revenue. In the fourth quarter, we achieved revenue of $42.4 million, which outperformed our financial guidance by $1.1 million and represented growth of 27% compared to the prior year. This was driven by continued strong performance across all our primary revenue drivers. We implemented 8 new logos in the quarter, bringing our digital platform client count to 177 compared to 151 in the prior year. We exited 2021 with nearly 12.4 million registered users live on the platform at nearly 2.7 million users or 28% compared to the last year, and almost 950,000 more users in the Third Quarter of 2021. Digital user growth has been driven by two areas over the last 12 months. First, we have implemented 28 financial institutions supporting 1.3 million digital users. And second, our clients have increased their digital user adoption by 1.4 million users, or 14% For the fourth quarter, we implemented over 520,000 users and digital user adoption within our client base increased nearly 430,000 users. We continue to drive cross-sell and higher new client RPU, growing revenue per live user to $13.68 per year up 3.5% compared to the prior year quarter. This compares to our blended market opportunity of over $50 per user, inclusive of digital account openings for deposit and loan accounts. Subscription revenue grew 28% compared to the year-ago quarter, and represented 94% the total revenue. We increased annual recurring revenue, or ARR, by 32% and we exited 2021 at a $169 million. It's important to know. We also possess over $30 million ARR in backlog for implementation over the next 12 to 15 months. Our client sales team continue to build on their cross-sell success and drove 21% of new sales in the fourth quarter and 24% for the full year. This team also renewed five clients during the fourth quarter and 12 for the full year. We are very excited with the early success from our client sales team and expect this to be an area of continued investment and increased contribution. Overall, we are very pleased with our revenue performance in 2021 and with an additional $2.5 billion and addressable market related to the MK Decision acquisition. We are now serving a TAM of nearly $10 billion Turning to gross margin and profitability, our target operating model is non-GAAP gross margin of 60% to 65% as we scale our revenue. We expect to achieve this at a pace of 200 to 300 basis points of gross margin expansion on average per year. For example, some years such as 2021, gross margin expansion might exceed our average objective. Conversely, other years may possess lower expansion resulting from investment, and M&A activity. On balance, we expect to average 200 to 300 basis points of expansion, as we progress to our target operating model. For the fourth quarter of 2021, the non-GAAP gross margin was 57% compared to 58% in the year-ago quarter. Let me unpack the primary drivers for you. Our [Indiscernible] decision acquisition was 90 basis points diluted to our Q4, 2021 non-GAAP gross margin. In addition, during the fourth quarter of 2020, non-GAAP gross margin benefited from approximately $1.8 million of one-time client buyout revenue. Normalizing for both items, non-GAAP gross margin expansion would have been a 190 basis points for Q4, 2021. For the full year, non-GAAP gross margin was 57% compared to 53% in 2020. Expansion for the full year was driven primarily by revenue scale, greater utilization, and cost efficiencies in our client implementation, client support, and client success functions, somewhat offset by higher costs associated with our third-party revenue relationships. Moving to operating expense. As a reminder, our goal is to balance investment opportunities with revenue growth and to maintain a good line of sight towards adjusted EBITDA positive, which we expect to occur as we exit 2023, we have a large market opportunity to address and recognize gaining market share at the sacrifice of near-term profitability, is the correct trade-off at this point in our life cycle for creating shareholder value. For the fourth quarter of 2021, non-GAAP R&D expense was $11.8 million or 28% of revenue. A year ago, R&D represented 32% of revenue. The resulting margin expansion is primarily attributable to revenue scale. non-GAAP sales and marketing expense was $5.9 million or 14% of revenue. Sales and marketing represented 12% of revenue a year ago. The primary driver for the uptick is the return to pre -pandemic sales activities and headcount investments in strategic areas such as our client sales team. non-GAAP general administrative expense was $11.6 million or 27% of revenue. Last year, G&A was approximately 25% of revenue. The increase was primarily driven by incremental costs to support our growth, and the addition of public company costs such as higher business insurance and adding new accounting, investor relations, legal, and human resource personnel. Our adjusted EBITDA loss for the fourth quarter was $4.4 million better than the high end of our expectations. For full-year 2021, our adjusted EBITDA loss was $22 million compared to $23.4 million in 2020. Moving on to the balance sheet, we ended the quarter with just over $308 million of cash on balance sheet, representing a $6 million net use of cash during the quarter. We continue to see opportunities to use our balance sheet to accelerate technology growth and expand our addressable market through M&A. We approach M&A with conservative guidelines around return on investment, deal size, and portfolio integration. And we expect to continue this approach going forward. Our most recent acquisition MK Decision performed in line with our Q4 expectations. We continue to see strong growth in digital applications for both deposit and loan accounts. MK Decision supports both on a single cloud-based decisioning platform and gives financial institutions the ability to offer additional products and enhance the on-boarding experience. As I discussed last quarter, you should view the MK Decision as a purchase of technology requiring future investment during 2022 as we address the market opportunity, MK Decision added approximately $1 million to our adjusted EBITDA loss in the fourth quarter of 2021. And we expect will contribute approximately $5 million to our adjusted EBITDA loss in 2022. Now, turning to guidance, For the first 1uarter of 2022, we are providing guidance for revenue in the range of $43 million to $44 million and adjusted EBITDA loss of $5.5 million to $4.5 million. For full-year 2022, we are providing guidance for revenue in the range of $188 million to $192 million and an adjusted EBITDA loss of $21 million to $18 million. The full-year adjusted EBITDA guidance includes the impact from MK Decision previously discussed, and moderate pressure on wages resulting from an increasingly competitive environment for recruiting and retaining talent. An area of focus key to our success in 2022 and beyond. It's important to note that since our revenue is primarily subscription based and there is a 9 to 12-month implementation cycle between new logo signing and revenue recognition. Nearly 95% of expected 2022 revenue is already under contract. Revenue variability results from implementation timing and the velocity of in-year add-on sales, which possesses a much shorter implementation cycle. To summarize, our fourth-quarter was the most successful in our 12-year history. We closed 22 new logos during the quarter. We made significant strides in sales, implementations, technology, infrastructure, and human capital, all while expanding our TAM and accelerating our competitive position in the market place. With that, I'll hand the call to the operator for questions.

[Operator]

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] And our first question comes from Andrew Smith from Citi. Your line is open.

[Andrew Smith, Citi]

Hey, everyone. Thanks for taking my question and welcome again, Alex and Steve. Good to have you. First question on the -- just -- this is for Alex. If I can ask about the -- just if you think about the platform coming on board. And I know you mentioned a little bit of this in your prepared remarks, but are there areas you think that you could double down on new areas that you think can get into from a product perspective? Just curious, as you approach the business from fresh eyes, how you think about the product portfolio today and going forward. Thanks.

[Alex Shootman, Chief Executive Officer]

Thank you very much. This is Alex. An answer to your question, what thing is exciting to me, as I mentioned in my prepared remarks, is that the product portfolio itself has tripled just over the last couple of years. And so an area that we will increase investment is in our sales and marketing effort to bring those products to the existing customer base. So that's, for me, an area of clear investment.

[Andrew Smith, Citi]

Got it. Thank you for that. And then maybe one for Bryan. Could you help us out? Sorry if I missed this. The user backlog at the end of the quarter. And then when we should expect those to come into the base from a timing perspective? Thanks.

[Bryan Hill, Chief Financial Officer]

That's great. And thanks Andrew, for the question. As Alex mentioned in his prepared comments. I mean, we have 38 new logos and fly. And the 38 new logos represent 1.3 -- little more than 1.3 million users. During 2022, we expect 33 of those will implement, but you have to think of the sales rhythm throughout the year, and given the majority of the new logo sales that took place, we're in the back half year with a very high concentration in Q4. Given we had a very successful Q4, you will see a similar type trend in implementations with more of a back half of the FY '22 year ahead of the implementation cycle. So each quarter of 2022, there'll be more implementations in terms of users than the previous sequential quarter.

[Andrew Smith, Citi]

All right, I'll jump back with you. Good quarter, guys. Thank you very much.

[Operator]

Your next question comes from Bob Napoli from William Blair. Your line is open.

[Bob Napoli, William Blair]

Thank you and good afternoon. Good to talk to you again, Alex, Steve, Bryan. Nice to see the user additions. The mix -- I know Alex, you've talked about banks being one of your 5 key themes, if you would, or areas of focus. What really was the mix of the new logos added? What's the mix in the backlog? If you just give some color around that. Then I think on the last call you had discussed that the revenue per user for the bank users was much higher than for credit unions. If you could give some color around that as well, it would be helpful.

[Alex Shootman, Chief Executive Officer]

This is Alex. I'm going to let Bryan ask -- answer a little bit of the specifics. What's pretty neat to me about the business banking market, we're making investments in the product to continue to build out the competitive nature of our product offering. And what's great is we've got the bank market we can go into, but what we're also increasingly seeing is that credit unions are trying to attract business banking customers as well. So the product investment for us helps both in terms of our historic strong position in credit unions and then it also helps us in the competitiveness in the bank market. And then Bryan, I'll let you answer some of the specifics in the question.

[Bryan Hill, Chief Financial Officer]

Yeah. Bob good talking to you again, appreciate the question. So presently we have 13 banks under contract. And of those 13 banks, nine of those are live. So we have four in our implementation backlog. But more importantly, when you look at our sales pipeline, we now have close to 35 to 36% of our sales pipeline that is supported by new bank -- new logo opportunities. So we're very encouraged by that. Also what's key with the banks that we have that are in the implementation cycle or in--implementation motion. Several of those are on new core integrations. And as you know, Bob, once you integrate to a new core that opens up a full new market for you -- so again, we're very excited about the progress we're making in banks in that -- in terms of the core integrations that are underway.

[Bob Napoli, William Blair]

Thank you. And then just -- you went through the business model, Bryan just -- and the stock on the growth of revenue per user over the next few years, the growth of users and revenue per user, the model that you're focused on for long-term growth.

[Bryan Hill, Chief Financial Officer]

So our long-term growth objective is staying above 25% organic growth on a long-term basis. We expect 20% of that to come from user growth, whether it's new logo or whether it's from our clients growing their users and then about 5% coming from RPU expansion. Keep in mind, when our existing clients grew their users, they are adding users at a much lower RPU than our overall average. And so that results in a bit of a headwind and RPU expansion. ARPU expansion comes from a couple of different areas, one of which is cross-sell activity, which we're seeing an increasing amount of our total contract value that we've originated coming from cross-sell activity. So that's encouraging for us. Then secondly, we're also seeing each year for the last three years as an individual cohort more products and higher ARPU associated with that new sales cohort. For example, in 2021, our clients average -- our new clients averaged around 16 products and $20 of ARPU.

[Bob Napoli, William Blair]

Great. Thank you.

[Operator]

Our next question comes from Sterling Auty from JP Morgan.

[Sterling Auty, JP Morgan]

Yes. Thanks. Hi, guys. So wondering in -- from a very high level, when you look at the strength in demand in the quarter, what's the key pain points that you are seeing customers looking to solve and how durable do you see that demand be as you look out over the course of 2022, especially in the face of rising interest rates?

[Alex Shootman, Chief Executive Officer]

Yes. Thanks. This is Alex D. When we sit down and speak with brand new customers who are making a decision, the thing that they're trying to accomplish is to have a more digitally friendly platform for their end customers to use. And so their end customers are increasingly getting younger. Their end-user -- their end customers are used to having much more of a B2C type experience in the rest of their digital lives. And they want their bank to give the that same type of experience. And so one of the reasons why we feel like we continue to be successful is that we reliably have one of the best, if not the best user experiences from a product perspective. If you look at app ratings, if you look at testimonials. And so from our perspective, the market really starts to come our way as financial institutions have to deliver a more modern, more user-friendly banking experience, they're going to pick a company like Alkami to be their partner.

[Sterling Auty, JP Morgan]

Got you. And then Bryan, you talked about the add-on sales that renewal time skewed towards the end of the year. Any additional color as to what you experienced and particularly which modules had the most traction in terms of that add-on sale.

[Bryan Hill, Chief Financial Officer]

Sterling, there isn't a common theme on one particular add-on sale being pushed over another I mean, generally what happens and what we experienced is there is a core group of eight to nine products that are typically on every new low go account. And then depending on the bank strategy and with the bank or credit union is presently obtaining from their existing digital banking platform, there will be additional products that are added just to match the capability. Those are always different. And so the add-on sale motion is driven by what the individual needs are of each financial institution, so it's hard to pull out a single thing. But having said that, when we do see traction, it's typically when we roll out a new product. For example, we're seeing a lot of demand generation around our crypto product where we partnered with NYDIG. We've seen some demand generation being built around BioCatch, which is a new security product that we've offered. And so there's typically some buzz that we'll see whenever rolling out something new because we're putting marketing plans and things of that nature behind it and pushing those products. But outside of that, it just depends on the strategy and the goals of the financial institution. Outside of our top six highly-adopted to seven highly-adopted products, the adoption rate drops quite a bit, creating a very large white space for us to go after as we're trying to expand ARPU and increase the continued success of our client sales team.

[Alex Shootman, Chief Executive Officer]

Maybe one -- just a little color commentary on top of that. This is not a 10,000 company dataset. We've got a customer advisory board and we will ask them, what are the things that are most interesting to them in their business right now. And three things come up across that customer advisory board. One is what alternatives can they have to BNPL, or buy now pay later. The second is what new innovations are coming from a fraud perspective. And then third is what investments can we continue to make to create a more extensible platform that they can plug and play different innovations that are -- that are coming into market. So three things that we hear from that advisory board or BNPL, is an area of interest for them, fraud is an area of interest for them. And our continued investment in our platform.

[Sterling Auty, JP Morgan]

Great. Thank you.

[Operator]

And our next question comes from Mayank Tandon from Needham. Your line is open.

[Mayank Tandon, Needham]

Thank you. Good evening. Alex and Bryan, I was just curious, as you mentioned the 22 new logo wins, which is very impressive this quarter. Could you talk about competition in that context in terms of are you seeing better win rates? Is it just the market that dynamic where that's really boosted the fourth-quarter sales? Maybe something sort of underlying trends around competition would be helpful.

[Bryan Hill, Chief Financial Officer]

Yeah. I mean, before we answer the competition part of this question, let me just provide a little bit of color for the new sales and how they came in during the year. What we had mentioned in our Q2 call and our Q3 call is the earlier months of the pandemic resulted in lower new opportunity creations, which then as they work their way through the sales cycle that resulted in softer new sales. And what we were wanting in the first half and even in some respects in the third quarter of 2021. But we also mentioned was that recovered. The new opportunities recovered in the first half of 2021, we felt good demand build as we were approaching the third quarter and we were expecting a strong Q4 as as a result of what we were seeing in the marketplace. And as you mentioned, 22 new logos that's very impressive. It's the largest in company history. Our fourth quarter new sales were up about 60%, a little bit more than 60% over the prior year. So a lot of success in the fourth-quarter. Now as we row into 2022, as you would expect, your sales pipeline, you have to rebuild from the success that you had in the fourth quarter. But what we're seeing and feeling is there shouldn't be the same level of drop-off in Q1 that we've experienced in other years, albeit Q4 was a very, very high quarter for us in terms of new sales. So with that, as we proceed through 2022, we're expecting similar type of demand. And I'm not suggesting we're putting up 22 new logos each quarter, what I'm suggesting is year-over-year, we should experience still strong growth as we're tracking through the year in terms of new sales.

[Alex Shootman, Chief Executive Officer]

And maybe what I would add to it, it was our best competitive win rate in almost a couple of years. I got an opportunity -- the great part of airplanes flying again is many of these clients came to our Plano headquarters and we got to spend one and two days together. And so I was fortunate to be able to spend a lot of time with prospects that became clients in the quarter. And every single one of these situations, it's competitive. There is not a situation we get into that's not competitive. And the win themes for Alkami are pretty consistent. First the best product wins. And so the investment that we make in the product -- the investment that we make to create a great customer experience is one of the main reasons why customers buy Alkami. The second is this is a very dynamic market where there's a lot changing, and customers are looking for a company that can get technology out the door quickly, that can build and release software on a continuous basis. And so the second reason that I heard from customers that they wanted to do business with Alkami is they had confidence that we had the ability to allow them to stay competitive with the larger banks in the industry or brand new FinTechs in the industry. And then finally, we've got a significant investment in our client success organization. And the customers experience the entire client success organization, and the culture of that organization, and the desire that their organization has to help them be successful. They realize that they're not just buying a product, they're also buying a company. And so for me, the customers that I got to visit with, that were all competitive, the reason why they chose Alkami is, we have the best product. We have the ability to get product to market faster than anybody else. And we have a really good support service organization. that helps them get live on the product.

[Mayank Tandon, Needham]

That's a very helpful perspective. Thank you so much.

[Operator]

And our next question comes from Pat Walravens Willis from JMP Securities. I'm sorry.

[Unidentified Analyst]

This is an intern filling in for Pat. How did you guys think about the trade-off between groth and profitability in 2022 in particular, can you talk more about the wage pressure you mentioned and if you started to see any signs of easing?

[Bryan Hill, Chief Financial Officer]

Hey, Han. Appreciate the question in Pat's absence. Our thoughts today, as we mentioned on the call, is the market opportunity is significant. We are one of the more successful companies in growing our user base, which directly contributes to our revenue model. And we believe that we can create more significant shareholder value by gaining market share and growing top-line revenue. But with that, we also believe that a balanced approach over time makes the most sense. And therefore, we have our target operating model that suggests that we'll be at a 60% to 65% gross margin over the next two to three years, with an eye on 25% plus adjusted EBITDA margin, a bit longer than that. So we're balancing current investment and future investment with an eye towards continuing to grow the top-line north of 25%. And then with a view of becoming adjusted EBITDA positive as we exit 2023 and reaching a 25% plus gross or adjusted EBITDA margin rather, at some point in the future.

[Unidentified Analyst]

Got it. Thank you very much. And then Alex, now that you're three months into your time as CEO, can you help us understand your top two personal strategic priorities for the remainder of 2022.

[Alex Shootman, Chief Executive Officer]

Yeah, as I stated we're pretty clear on our investment areas. We're going to focus on having the best business banking product out there. We're going to invest in sales and marketing to help us grow our add-on sales. We're going to continue to build out our platform capability because our customers are basically telling us that they want their digital banking application to be a broader platform upon which they're running more and more of their business. We're going to have the most talented software company. And so we're going to invest in the talent in the organization, and there are a lot of pretty amazing M&A opportunity that we have to build out the reach and range of our company. So those are the focus areas for us.

[Unidentified Analyst]

Got it. Thank you.

[Operator]

And the next question comes from Josh Beck from KeyBanc.

[Josh Beck, KeyBanc]

Thank you for taking the question. I had a little bit more of a financial question maybe for you, Bryan. But just remind us on really what's driving the Delta between revenue growth and AR growth and maybe how we should think about some of those trends as we model out 2022.

[Bryan Hill, Chief Financial Officer]

It's the timing of implementation. And if we have one-time revenue items such as what we had in Q4 of 2020, ARR growth is really our primary focus. If you look at 2022 the low end of our guidance through the high end of our guidance, that would suggest ARR growth for the year will be in the 25% to 27% range, which is a bit ahead of the revenue growth. That's being driven in large part by the back half concentration of new logo implementation. And what can influence that during the year is the motion and timing of add-on sales because an add-on sale implements much quicker than a new logo. Typically, it's a 90 to 120-day implementation cycle for an add-on sale.

[Josh Beck, KeyBanc]

Very helpful. Thank you for the color there. And you talked about the win rate there, Alex, and best if I believe you said in in a couple of years, you obviously went through some of the finer points around the product and some of your differentiation. The other thing I'm curious about, do you feel like just being public, obviously, you're dealing with banks they have very high bar for the vendors they work with. They want great transparency. Has that process of just being public and just maybe a little bit of a brand boost you get from that, has that helpful in any way?

[Alex Shootman, Chief Executive Officer]

Having been in several software companies, look, it doesn't hurt, right? It doesn't hurt to be a public software company. And so I certainly think that that gives you a gives you some ample amount of credibility, but the end of the day, customers are making a decision based upon their brand, how they want to represent themselves to their customers, what's going to make them more competitive. And they pick the best product and the best company. And so we've got to win that battle, more than anything else. So it may give us a little bit more credibility, but we still have to have the best product and the best service and the best culture to win

[Bryan Hill, Chief Financial Officer]

Yeah. And I'd add a couple of comments to Alex's response. We're dealing with financial institutions. I mean, our end-market, financial institutions. And what's important to them outside of what Alex has spoken to about the best product and the best product wins, the financial profile. The conversations I had with CFO s pre -IPO versus the conversations with CFO s of prospects and clients post-IPO, it's very different because now we have greater access to capital, we have more capital on balance sheet, we have sufficient capital on balance sheet that's necessary to reach free cash flow positive, which is about $40 million to $50 million of our $309million or $308 million of cash on balance sheet. So those conversations are very different. And I believe that the CFOs of prospects of -- or even clients, they like the aspect of us having greater reach into the capital markets to fund our business.

[Josh Beck, KeyBanc]

Great. Thank you, team.

[Operator]

And our last question comes from Bob Napoli from William Blair. Your line is open.

[Bob Napoli, William Blair]

Thank you for the follow-up. You had mentioned, I think, a couple of times, Alex, that your customers are asking for buy-now-pay-later products and third products. Are you planning on -- are you building those products organically or are you partnering with other firms that provide those products?

[Alex Shootman, Chief Executive Officer]

The answer is both. And just the other day, I got to see an early version of some technology there we've created around the MK Decision product that one of our customers intends to use as their BNPL offering.

[Bob Napoli, William Blair]

Okay. So organically on that product, in the fraud product [Indiscernible]

[Alex Shootman, Chief Executive Officer]

We will partner with people as well. But as I was saying, I got to see the other day and early versions. So this is not something that we take in the market, but an early version where we've taken our MK Decision Technology and it's serving as the foundation for a BNPL offering for one of our customers.

[Bryan Hill, Chief Financial Officer]

And Bob, that's really one of our core strategies. We want to build out our platform either through partnering or through acquisition, and then also obviously organic development. We don't necessarily want to always pick the winner for each of our clients, even though we think when we organically build a product, it is a best in class product in the market. But we want to have a platform that is flexible and extensible that allows our clients to choose the solution that they desire to use. And then we want to be able to bring that to market very quickly, which is a huge competitive differentiator for us.

[Bob Napoli, William Blair]

Thank you. And then on the M&A front, it sounds like you're very active. What products and what -- I'd would've guess you are looking forward technology primarily. But is that correct you're looking primarily for technology add - ons? And what areas do you see the most interest in? And I guess should we expect the size of M&A transactions to be similar to MK Decision, or could they -- could it be much larger?

[Bryan Hill, Chief Financial Officer]

Yes. So Illuminade just fits into our product strategy and how we're going to deliver products to the market. Again, we can either partner, buy, or organically develop. So we don't look to Illuminade for any specific area of focus. It's more driven by our product road map. In terms of size, MK Decision was, again, more of a technology purchase without a large install base of clients. I wouldn't point to MK Decision and say that's the typical acquisition because if we can buy a best-in-breed point solution, say it fits into either security or marketing automation or one of those types of areas of interest for us. Then if they come with an installed base, that's great. But it needs to meet our financial profile, meaning in terms of long-term contracts, accretive to our growth rate, accretive to our gross margin fits in within all the financial objectives that we have. But a great solution that we can bring to market very quickly. And one that's desirable by the end market.

[Bob Napoli, William Blair]

Thank you. Appreciate it.

[Alex Shootman, Chief Executive Officer]

Okay, well, this is Alex. Thank you all for joining us and look forward to updating you next quarter.

[Operator]

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.