nCino, Inc. (NCNO) Earnings Call Transcript & Summary

Okay. Hey, good morning, everyone, and welcome to day 2 of the Barclays TMT conference. My name is Saket Kalia. I cover software here at Barclays. Very honored to have the team from nCino. We've got Pierre Naude, Chief Executive Officer; and we've got David Rudow, Chief Financial Officer. We've got about 25 minutes together. Let's take maybe the first 15 or 20 minutes to do some fireside chat with the team. But I'd love to make this interactive. So for you folks on the webcast, any questions, just feel free to e-mail me at [email protected], and I'd be happy to weave your questions in towards the end. So with that, first and foremost, Pierre, David, thanks so much for taking the time for being with us today.

Thank you. Thank you for having us. We appreciate this.

Absolutely, absolutely. So first of all, Pierre, David, I think this is your first conference with us here at Barclays, albeit virtual. Look forward to doing it in person at some point, hopefully the first of many. You just completed your IPO this past July very successfully. And so maybe the question here is, first, for Pierre, maybe for some of those on the webcast today who might be a little less familiar with the nCino story. Can you just spend a couple of minutes giving us a little bit of an introduction to the business? And maybe as part of that, David, maybe you could just fill in some of the financial highlights that you were particularly proud of. Coming off the quarter, you folks just reported last night actually.

Yes. Thank you. So we started the company in 2012 with a big vision to transform financial services through innovation, reputation and speed. And if you look at what happens in a bank, there's what I call the underlying infrastructure, which is your back-end core, all your transaction pipes, debits, credits, ATM driving, ACH, wires, et cetera. And there's a lot of people that invested lots of money in good companies in the transaction processing business as well as online banking, et cetera. But we looked at that and said, in the banking landscape, there's an area nobody really is addressing to make it customer-centric and really make the customer journey of onboarding, originating a loan of any type or opening an account end-to-end from the middle, back office all the way to the front to the consumer in a modern way. So can you truly go into these banks and clean the kitchen, so to speak, and really give them a modern, flexible platform where they can change their credit policies, they can change their processes on the fly without writing code and actually drive that efficiency? Because you know what, just like manufacturing, to do these processes, you need continuous improvement and continuous innovation. And so when the cloud came about, many people said banks will never go to the cloud. It's a security risk and et cetera. Well, we had a big treatment. In 2012, we started the company, focusing first on commercial loan origination as an easy thing because that's where the banks make money, and we saw the mess there, okay? And as we continued to build out the platform, we built out eventually small business lending, consumer lending. We built account opening out. We built the onboarding. We then built the regulations in. We collect all the documentation, all in a single platform that's customer-centric. Because I'll remind all of you, when you go to a bank today, you interact with them in these silos. And if you go do a deposit account, it's typically the branch, you're an individual. Tomorrow, when you want a loan, you're in a totally new department, and they ask you for the same documentation over again. Because the software solutions in the market today are all point solutions, and they are business line-centric, not customer-centric. And because we are both on the Salesforce.com platform, we took this customer-centric, CRM view and we build on that platform to give this highly flexible solution to the banks. And we've now built it out as the only single platform in the market where you literally can go from the most complex commercial loan, all the way down to the most simplistic unsecured individual loan. You can onboard any customer, and we can open any account. And we do that today across the globe because on that platform, we get more than 120 currencies out of the box at more than 120 languages out of the box. So that enabled nCino not only to scale globally, but actually to also scale across the platform with all these multitude of solutions.

Now going the financial side, on the financial side, our second quarter of being public. We reported $54.2 million of revenues and operating -- non-GAAP operating loss of $2.7 million. I'm very pleased with the performance of the teams through COVID, the lockdowns, additional lockdowns in Europe. So very pleased with the activity. International revenues, it's a big area of focus for us for investment. That was 12% of revenues. It grew 98% year-over-year. We're now moving on to the continent in Europe, hiring salespeople. And we're very excited about what we're seeing in the activity. The IPO actually was a great marketing event for customers. They see who we are. They have more confidence in our ability, and it's much easier, I think, to get in the door there. PPP has benefited us in the second and third quarters and a little bit in the first quarter. Pleased with that. Good activity, though, outside of PPP in the third quarter, and our pipeline looks really strong in the fourth quarter. And we assume no additional PPP revenues, and those seats activate immediately. We don't expect to see any of that activity in the fourth quarter as well. And the pipeline just looks strong. It's all about execution. The deals are there. People are in the field. We would love to travel and see customers, but we feel pretty good with where we're at right now.

Absolutely. We'd love to travel as well. And David, maybe just some really impressive stats there in international. Maybe just zooming out a little bit, I think that $54.2 million was a little bit over 40% revenue growth, if I'm not mistaken, largely organic? Got it. Got it.

Yes. If you take out PPP total revenue, which -- total was 43% without PPP, which was $5 million in the quarter. It was 30% revenue growth in total.

Got it. Got it. Here, maybe just to go back and build off some of the intro comments that you made earlier. There was a lot to unpack there, right? But what I'd love to maybe start with is what leads a bank to adopt nCino? Typically, when a big bank or even a small credit union adopts nCino, what were they typically using beforehand? And how do they think about ROI on an nCino-like tool?

Yes. It's interesting. These different market segments, whether it's geographical or small bank versus big bank or credit union versus bank, they all have their own issues and their own motivations for doing this. But in the end, what we boil this down to 4 different areas: If you're a smaller community bank or a midsized bank, you're all about growth. And you need growth against the big boys with the technology budgets, et cetera, okay? So it's revenue. Then the second thing we typically see is cost savings. Can I be more efficient, okay? The third thing is, well, cost savings and inefficiency. And then the fourth one is compliance. So this is literally -- you have to think almost like a UPS truck. How can I be fast and efficient while staying compliant? And that's why UPS trucks never turn left to cross traffic, okay? Their whole route is considered like that. And so what we do for bank is we actually provide them ways to make that process a lot faster. And you don't do that on day 1. You implement the software, and then you realize I've got steps in here I don't need. Now an old software, you have to call a vendor or you have to write code, okay? In this software, you can literally go in there and just treat the process. And slowly, over time, you compress those processes, okay? Well, sometimes you automate them totally, take the step out. But the magic is those four elements. Some want revenue in the lower-end markets. If you go to your very large banks, it typically is more compliant and efficiency-driven in the cost savings. If you go to your small and mid bank markets -- and that brings me to this point, Saket, nCino the only company ever -- normally, you would have companies specifically focused on the community bank market and then other companies focused on the enterprise market. On this cloud-based platform, [ force.com ], we actually can address the smallest credit union. And we can go all the way up to Bank of America or Barclays, so to speak. And the solution was both to address both of those market segments.

Got it. Got it. David, maybe, again, sort of building on some of the intro comments here. Obviously, a SaaS company here, but a little bit of a different rev rec model than some other SaaS companies out there. So can you just remind us how that rev rec model works? And sort of what metrics investors should look at to gauge the health of the business?

Yes, that's great. Yes, we are different, our revenue model. So unlike Workday where you buy 1,000 seats and you start recognizing revenue upon contract signature, we have a delayed seat activation schedule that really helps our customers as they're deploying to maximize their value and helps us really to maintain pricing and maximize our TCV over time. So for a community regional or smaller transaction, it's 6 to 9 months up to 12 months, you'll see those seat activations ramp. And then for enterprise, it's up to 24 months where you see those seat activations. So contract signing, within a month or 2, you might see 10%, and then it goes to 20% and so on and so forth. So that ramps over time. The other thing about us, we're different in the fact that we charge support, too. So we charge support as a percent of subscription revenues, and that's 15% to 20%, just depending on the transaction and the customer that we're speaking to. And that really -- we add value with our support team. Our support team interacts with our customers, they build reports for them. They help introduce new product. So they are a key element to us in terms of upselling and cross-selling into the bank. And then in terms of metrics, it's revenue growth, obviously. That's one of the big things. And then remember, these activation schedules are key to building out the financial models. And I think you've modeled -- you've done a great job in modeling out our activations and assumptions of bookings and everything else. So I think everybody should look at your model as kind of the key marquee model on the Street for that. And then at the end of the year, we'll give customer accounts for not only the Bank Operating System, but also for the nIQ products. Those are a much higher customer base. Visible Equity and FinSuite, that's -- we're well over 900 customers now versus the 300, from around 300 customers on the Bank Operating System. And then net revenue retention, we're going to give on an annual basis. And as a reminder, that was 147 at the end of fiscal '20. It probably likely increases because PPP was mainly from the installed base. And so that probably drips up. But that -- we expect that will moderate over time.

Absolutely, absolutely. Pierre, I'd love to maybe talk about what nCino sort of went through during COVID this year. Obviously, a very different year than most, right? I mean I think we've heard lots of companies have been accelerating their digital transformations this year, moving to the cloud and adopting SaaS faster. I guess the question is, how has the core business performed through COVID in your view? And I know you spend a lot of time with customers. How are customer conversations changing as a result? Does it make sense?

Yes, 100%. So in the beginning, we all have to admit that when this was announced in March, there was a tremendous amount of uncertainty. And everybody was somewhat in shock. What is this going to mean working from home, consumer behavior, customer expectations? How do you keep the economy going? But fortunately, very early on, we realized that the government is going to provide stimulus, especially to smaller businesses, okay? And the moment that became clear and that it would be based on the normal SBA lending facilities, our team jumped into action and said, wait a minute, we do SBA loans every day. We can prepackage a stand-alone loan that's going to look like an SBA loan, which, in the end, became the PPP loan package, and be 100% ready when these banks can start to distribute money. And so the moment the final rules was announced, within a couple of weeks, we got some major banks up and running and in production. And that allowed them to distribute more than $50 billion in that PPP period. So that became a revenue opportunity, which obviously accelerated because that solution was deployed so fast and all the seats were activated. That really was an upside to nCino. I would say if I look back, there was about a 4-month pause or distraction, where all of us went through this PPP world, we deployed, we make sure customers could serve their small business customers. And the good news is the whole pipe that we had in place was pushed out for about 4 months, but nothing went away. And then after that, activity started slowing down and people flipped from loan origination to more the Forgiveness. We saw some more upside in the PPP activity on the Forgiveness side. And then banks started coming back. And they realized, based on their experience, many of them for years, we've put this off. Our peer will get to the digital origination of loans, for the account opening. We know we have to do it, but is it really urgent? This was a wake up call. We won some new logos that we've been talking to for years about their digital transformation. That this made them jump into action as the first place for nCino to land. So I'm very proud of that. On top of that, as we talk to customers, I would say your community bank segment was a bit more occupied and overwhelmed by the PPP activity because they have lower staff levels. And we're slowly coming out of that. But the big banks could absorb this level of change in volume a lot easier and turned away from that and really become more focused on digital transformation overall. So what does that mean? It actually is all about customer journeys because only about 53%, 54% of loans that they start processing ever gets completed and underwritten. That's a massive amount of waste. Can you get quicker to a yes or a no, okay? The account opening. I mean you're talking about 30% success rates of people who start to try and open an account. We've got examples of banks that would have a previous account opening process in place online then move to the nCino one. And in 2 months, we will exceed their previous 18 months of volume of successful account openings. These things matters, okay, because it all cost money. And as the evidence grows, people realize when we come out of COVID, the expectation of the consumer is going to be different, number one. But number two, their habits have been broken. They will change what they do. They're aren't going to go to the branch anymore. They expect everything on their phone, et cetera. Then you have to look at the opportunity. You go to your online banking account. Every day, you move some money around, check your balances, et cetera. That's all transactional. How many times do you decide to open an account or apply for a loan? You do that once 18 months, once every 24 months. So to miss that opportunity by the bank is massive, it's impactful. So the moment they touch that, you have to make that experience low touch, high tech. And we are seeing that strategic initiative of the banks really coming to the forefront now.

Got it. Got it. David, maybe that's a good segue into the financial part of the PPP and Forgiveness program. If I connect back to sort of the prior question on rev rec, talk to us a little bit about how the rev rec on those PPP seats work. And of course, as PPP winds down, I guess, how do you think about those seats in the future?

Yes. So PPP was a big source of the upside in the second and the third quarter. When you sign a deal, that activated immediately because we were able to get our customers up and running and sometimes days for a week, 10 days. So those seats activated pretty much immediately upon sale, unlike our standard that are kind of phased in over a multi-month or multiyear period. So that really was a big cut. So you got a booking and 100% comes in today. And so then as these contracts start winding down, most of them were co-termed with the original. There was a couple that were a 1-year -- we assume some level of churn next year. But really -- and what we're trying to do is help our customers say, I need those seats somewhere else. Maybe it's in the treasury group, maybe it's more on the commercial loan side. That's the key to us. And we have a couple of customers that already moved some of their PPP seats into production somewhere else. So that's good, but it was just a handful of customers. But I think the sales team is tasked with that. We have very close relationships with our customers, and they're confident they can help redeploy those seats. In the fourth quarter, we don't see any PPP in the pipeline. This big source of upside on PPP will not happen, we don't think, just because there's not just more -- there's not much activity on PPP anymore. Even if there is additional stimulus, we don't know how that impacts our customers. And it could end up being at the end of the quarter, right? So if that happens at the end of January, we don't get any benefit from that anyways. But the guidance assumes no PPP immediate seat activations.

Got it. Got it. I think a prudent move. I'd love to shift a little bit to -- actually, one of the -- I feel like the strong points that we were talking about last night, I mean, we're talking about pipeline. But in particular, the pipeline feels strong internationally. And so I just want to double-click on the international opportunity a little bit with you here first, Pierre. Because you've also started to see some big logos outside of the U.S., not unlike the one that's right behind me as well. I guess maybe the question is, what markets do you think are ripe for an nCino solution like the Bank Operating System? And the competitive environment here, I think, is an important part of the story here in the U.S. What does that competitive environment look like internationally?

Yes. So early on, we realized with the platform, we could go international so we dipped our toe into Canada just to see what the reception was. You learn lessons. It's French and English and the multilingual, et cetera. But then in 2017, we opened our office in London, so the European market, first focused on the U.K. and Ireland. And we won a bank in Ireland. And then we started getting inquiries out of Australia. We got Macquarie, which is a very innovative bank down in Australia. And then last year, October, we opened an office in Japan in a joint venture because we saw the potential. And subsequently, we started winning deals. And now we're deploying people in country in Germany, Spain, Italy, et cetera, to cover your major markets there. And it's very interesting. The initial motivation may be slightly different because it's different regulations and it's heavier regulations than the U.S. But in the end, it comes down to the same thing. They have to drive efficiency, save some cost. They've got an elderly population. If you look at Japan, they've got a shrinking population, so they have to do the same work with less people. And so digital transformation there is a massive story when we opened there and I talked to the press and to our partners. If you look at the U.K. and Europe, compliance and regulation is a massive issue with them. But as you can see in Australia, there was this commission, went through all the banks and it's testing how quickly they understand their risk as the economy changes, okay. So all the same tailwinds in digital transformation that we've seen in the U.S. is happening in these overseas markets. And then you step back from that and you look at what your options are. The old way is, you build it yourself. And there's so many failures and carcasses on that path that people are trying to veer away from it. We've convinced them about the security of the cloud and the evidence we've got in the U.S. and the sizes of banks. You know banks like Barclays, embracing it in the U.K., okay? Well, we have a fantastic story, not only in the main commercial bank, but also on the [ CBOS ] program, which is the equivalent of PPP in the U.K. So Barclays became the biggest funder of those loan types. All of that momentum, and you know how bankers work. In the end, they find the safe place with a safe solutions that's proven can help them and work them with their ROI requested -- required and they move forward. If you would have told me before COVID that we could sign an enterprise bank on the European continent without any physical presence there -- because we have no people working there. We couldn't travel, okay? We sold over Zoom or Webex a bank on the continent, which we announced after our second quarter earnings call. So this whole mindset is kicking in. It's a massive SAM. We've got a $10 billion serviceable addressable market. EMEA makes up $4.6 billion of that; north America, $4.4 billion. And again, we scale from credit unions, building societies all the way up to the largest enterprise banks. So I'm very hopeful, and that's why international growth. So I could -- just to comment on this. We've got 3 pillars of growth we look at. International expansion is number one. Cross sell from commercial to retail, small business and account opening is number two. And number three is the whole nIQ, which is bringing intelligence to the whole enterprise and plug it in underneath and serve that intelligence up at every point of production. And we just see all 3 of those are firing on all cylinders.

Absolutely, absolutely. And I would say I think we could spend another half hour on each one of those individually. Maybe in the last couple of minutes that we have there -- I'm not showing any questions here in the queue. But maybe in the last couple of minutes that we have here, Pierre, I think one important takeaway for me last night was this nIQ Automated Spreading product that you've got. Can you just give us a broad brush on kind of what that is and why that can be a revenue opportunity here for nCino?

Yes. So for the audience, imagine this, you do a commercial loan with a bank. And then every quarter or every 6 months, there's a review of that loan. And so what do you now need to provide? You provide financial statements. You could be a corporation. You could be a small business, et cetera. And then somebody at the bank, like I mentioned an example bank here, will have 3,000 people sitting offshore reentering that financial statements into what's called a spreading tool. And the spreading tool is there for the bank to make a financial analysis of the viability of your business and your creditworthiness, okay? And then there's somebody called an underwriter who goes through that and compare that set of financials against their credit policy and their book of business. And they may have to make a projection, can you repay the loan. It's as simple as that. We have now built technology where literally, you take stock financial statements. You scan it in, we will interpret that, digitize all the data and pre-populate all the spreading solution -- into this spreading software that's also nCino. And now so instead of shipping this overnight, coming back, literally by scanning it into product, these are -- we analyze that thing and serve up insights compared to your credit policies and your current book. So now the analyst comes in. They may have to correct a few inaccuracies because of the technology, learn over time, and we're now over 90% accurate. And once you've got that ready, so it cuts that time back by over 60% it takes to do this kind of job. And that's repetitive over and over for these businesses. So we see a massive, attractive business there to drive that intelligence. And we launched this in October and already signed 2 enterprise bank overseas using the solution and seeing fantastic results. So I think that will provide an upside into all of our accounts, not only to expand our presence, but to drive optimization.

Got it. Got it. Well, again, folks, unfortunately, that's all the time that we have here. Again, a lot more that we would have loved to dig into. But hopefully, that gives folks on the webcast a little bit of color on kind of how the quarter went yesterday and a little bit, more importantly, just a little bit more education on the business. Guys, thank you so much for the time, Pierre, David. I look forward to being able to do this in person next year.

Great.

Thanks, Saket. Talk to you soon.

Thanks, Saket. Appreciate it.

Excellent. Thanks, guys. Have a good one. Bye now.