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

All right. Good morning, good afternoon, depending on where you are. Delighted to welcome nCino to the conference. We're very lucky to have CEO, Pierre Naude; CFO, David Rudow from nCino. Welcome, guys. Great to have you here.

Thank you very much.

Thanks. Good to be here.

Yes. And -- yes. The format of the session, as you all know, is I'll start out with some Q&A. And if you have any questions in the audience, you have your -- the chat tool up. You can send those to me. I'll see if I can get to some of those. We'll leave some time at the end for any questions that come in from the audience. And with that, we'll just get started. So Pierre, David, thanks again for joining us. Delighted to have you all here -- have you both here. Why don't we just start high level? I know most folks on the call here and webcast are familiar with nCino. But I thought maybe just a little bit of background on the company and the opportunity you're addressing would just be helpful to kind of level set.

Yes. Thank you, Brad. When we started the company in late December of 2011, we realized that there was a massive opportunity to apply the cloud to banking processes. What we saw was that the middle back offices have archaic software, very cumbersome, struggle with compliance, et cetera. And we started tackling the problem first in commercial origination. What we realized, in the end, we'll actually want to build the platforms. We architect it from day 1. This start from a place where the client is centric, whether it's a business entity or an individual. And actually, we do 3 main things, if you think about it. We onboard a customer in a compliant way, we can due process any loan from the most complex commercial syndicated loan all the way down to an unsecured personal loan; and then we can open any account, what is deposit, the checking account, CD, et cetera. And that -- in other words, we are here to help banks to capture opportunities. And that's the business we're in. It's a market of about $12 billion as a SAM as we estimate that. The company is going to market in the U.S., Canada, Western Europe, which is U.K., Ireland, Italy, France, Spain, Germany, the Nordics, Australia, and we've got a joint venture in Japan. We're about 1,150 people. And we're headquartered in Wilmington, North Carolina.

That's great. And maybe just to remind us the heritage from Wilmington. I know that there's some interesting history there.

Yes. So look, the software was bought first for a community bank here called Live Oak Bank, it's the largest SBA lender in the country. They wanted to automate their processes being a single branch here and lending nationwide. They stumbled across the force.com platform, started building out on it and realize that this could be a solution that could to expand other banks. I was asked to come here to start the company up. And as you look back, what we did is we looked at that and said, let's just take this concept and actually build this consumer or customer-centric platform out. And the thing I'm the most proud of is that today, we have banks as small as 500 million assets and banks as big as Bank of America as clients, and it's all on a single-code base and a single platform, which is actually unheard of. If you look at the software market, typically, you've got enterprise software companies for big banks, and then more of a commodity bank-in-a-box platform for smaller banks. And so for the first time, I feel that smaller banks can get the same level of sophistication than big banks and to compete effectively. And this is going to help banks transform themselves from the old model to actually more of a fintech-like modern banking platform that can compete effectively, especially if you have nonbanking entrants coming into compete in banking.

You mentioned the concept of user-centric. I think that's kind of a novel concept for back-end systems. Typically, they're built for back-end personnel, but I know you all have taken a different approach there, and -- where the front-end application that a customer would be using and accessing is very similar to the loan officer. Maybe if you want to describe a little bit about that, since you touched on that earlier, I think that's kind of a key differentiator for you all? And what does that mean for your competitive advantage?

Yes. Brad, what it is to me is, if you go to a bank typically and you get a loan. And then tomorrow, you go to do a deposit account or you open a checking account or something else, it almost feels like you're a new customer of the bank because these systems were bought and deployed more from a business functionality and a silo perspective as opposed from a client-centric perspective. And we wanted to break that down. So what we did is built this platform, it's customer-centric, and we share the clients data throughout all our different workflows aspects. And so what it does is it gives you a much more streamlined customer experience, a streamlined back office and middle office. And we have this belief that you first clean out the kitchen or that middle back office, streamline the processes, make them compliant through analytics and reporting and actually, get that experience down from a few days to a few minutes. And then you roll it out to the front end where you allow clients to use apps as well as websites and cellphones or mobile phones to actually interact with you. And if you can look now after COVID, all of us know that's where banking has to go because we learned we can actually rebalance our expense from brick-and-mortar over to more digital interaction with our customers, especially at the consumer side, which is in our view, no-touch to low-touch to high-tech. You go to small business, that's going to be a low-touch, high-tech business. And then commercial will be a high-touch, high-tech business. And we are well positioned for that. We are clearly the market leader in commercial small business loan origination, and we are expanding continuously into consumer lending and account opening, and those products are maturing fast.

That's great. That's great. And since you reported Q1 results last week, David, are there any key highlights you want to point out here from that? Anything worth that you'd like to just highlight from the earnings call and the results.

Yes, continued leadership on commercial. We announced a large bank deal we closed in Canada. And then our first German deal on the international side, in country. I think international growth was 113% for the quarter, which is great. And then just continued maturing of our retail product and nIQ Auto Spreading, which is a new nIQ product, went -- became generally available in May. And we're seeing nice traction there after we released it. We had a handful of customers on it. And we're seeing more interest there. And then we also announced our early release, early adopter release at commercial pricing, too. And some of that product, we're getting a couple of customers and deploy it and then further mature the product and open it up to bigger customers looking out towards the balance of this year and next year.

That's great. That's excellent. And while we're on those topics, why don't we dive into those a little bit. International, I know you've all have said that, that could be a market opportunity at least the same size as the U.S. in your core market, and you've been investing to go after international geographies. If you could just maybe illustrate for us where you're at on that effort and where you've seen traction so far? And what should we expect in terms of incremental growth coming out of Europe and Asia?

I think the first thing I'm very proud of is the growth rate of international. Last quarter, year-over-year, was over 100%. So obviously, it's outpacing the U.S. from a growth rate perspective. Secondly, we've made investments in a team in Toronto, Canada. We've got a nice team of over 100 people in London that serves our Western European market. We've got 2 teams in Australia, one in Melbourne, one in Sydney, and we've got some nice banks there, including Macquarie. And then we've done a joint venture in Japan with a small team there. That's a conservative banking market, but Salesforce has got a nice platform there and a nice customer base. So we believe we've got good promise. If you look at the impact of COVID on us, I would say the biggest thing was hiring in Western Europe. You want local teams with local dialects and languages in each of these countries. We have decided to work in a small number of very focused countries, like Germany, France, Italy, Spain. We have a few people in Nordics to sell there for us. And that was slowed down because we didn't get in country, in travel and in hiring people and get the excitement to them. But we're getting through that now. And as we establish people in these countries, we can clearly see the difference in the pipelines and the market receptivity because it's local people selling to local banks, and we like that. David, anything from your side on the Europe?

Yes. We are investing -- we've added a good amount of salespeople onto the continent. It's slower than we would have liked to have seen. But I think the IPO was great from a talent acquisition standpoint. Once we -- once the IPO was done, we kind of -- here's this company. We're a real company. We're not some little software company on the beach. And so the talent level we're attracting now on the sales side is much better than what we saw a year ago. So I think the IPO was great. And we've got a good amount of people in Germany now. We're making bets in all those countries, Spain, France, Italy, Germany and the Nordics. And we continue to look to add people responsibly. We're going to land a couple of customers and then continue to backfill more resources into those countries as we see opportunity. We're not just going to go dump a bunch of people in each of those countries and let them go crazy and just waste a lot of money. The idea is let's smartly and responsibly invest and start landing deals and then start filling in with more people to build out the base.

That's great. That's great. And as I understand it, the product is already localized well since you're sitting on top of force.com and you have multilingual capabilities and currency functionality in there, but the name of the game is just having the right feet on The Street to be able to sell into those different countries. What does that mean in a geography? How specialized does the salesperson have to be? Are there different requirements country-by-country from a compliance standpoint? Or is it just simply relationship-based? I mean where are you finding the talent? What are you looking for in talent as you go international?

So the first thing is from a product perspective. As you look at commercial, it's a lot less regulated and a lot less local requirements, okay? So there's more integrations to different entities, et cetera. So then you go to the people aspect. And it's typically somebody with an experience in banking processes and with a good Rolodex and a bank -- and a good reputation in the banking industry. That's what we like. So we actually don't mind hiring people that's from banking and to actually train them how to sell software because we are convincing you we can do a better job at making a loan than you can today. So that takes somebody with a good knowledge of the processes. When you come across to retail, it becomes a different game, okay? There -- your product needs to be a lot more localized, a lot more local regulations, et cetera. That's why we're very careful and strategic in where we invest and what we build for what market on the retail side, small business being fine too. Unsecured lending is fine too, it can go across geographies. From a people perspective, as I mentioned, that banking background and the local language, local reputation and local knowledge matters.

Okay. Great. And then -- that's great. Why don't we shift a little bit to just the cloud refresh cycle? The banking industry, we all know is a lagger to the cloud. In some ways, cloud-shy, you might say. Why is that? What's changing there? What inning are we in, in terms of the cloud refresh cycle? Are CIOs of these mid and large banks warming up to the cloud? And I guess as part of that question, what does the Salesforce partnership do for you in terms of your ability to kind of get these CIOs over the cloud hurdle in terms of whatever barriers that might be there?

Yes. In the early days, we used to chuckle because you either see something as opportunity or an obstacle, okay? And when we started the company, people said, Pierre, they will never come to the cloud. Banks are scared for security reasons, et cetera. And we did an in-depth study of how much Salesforce is spending on security and data security and data integrity and so on. And I would hold up to the bank. I said, look, I mean, you're a mid-sized bank or even a large bank. They spend more in security than your whole bank's budget for the whole bank. Forget security and IT, okay? So we got them over the hump for that. What I'm seeing now is the first 5 years was we had to convince the market it's the right thing to do, the cloud and what the benefits are. Now when you go into the competitive processes, you struggle to win the deal if you're not in the cloud because people are there. In Europe, we're in that first adoption phase. I would say they were a bit slower to get to the cloud. And there's also people who's pretending. They've got an ASP solution, and they call it a cloud solution, all of a sudden. But cloud nativity matters. As far as Salesforce, I call it the blue halo. We literally sell around this fact that we're on Salesforce.com. It's a remarkable brand. It's well known, and they are global. So it gives us lots of credibility out of the box. We are now the largest company building on that platform, okay, apart from Veeva in life sciences. And that bodes well for us. So it gives us tremendous pull on that. We've got a deep, long-standing strategic relationship with Salesforce. And as you know, with the IPO, we signed a new 7-year contract. So we are well positioned, and we feel good about that relationship.

That's great. And while we're on the topic of sales force, obviously, there's a lot of strategic reasons for your being on the platform, which you just got into, and thank you for that. But from a go-to-market standpoint or even just a marketing standpoint, how closely aligned are the companies? I mean when we talk to some of your customers, we heard things to the effect of you acquire the customer and Salesforce and then you passed it up to nCino for specialized portal functionality and then -- so a loan officer, in some ways, needs both. It's kind of a one-to-one relationship.

Yes.

How do you guys capitalize on that, the fact that Salesforce is the standard in banks for CRM? And how do you guys piggyback on that and go-to-market together?

Yes. So number one, from a product perspective, we are truly 100% aligned. We talk to their product people all the time, what are they building. We don't want to overlap with them, we've never built a CRM product, okay? We understand where they play, they know where we play. We are the highly specialized banking company that actually goes deep into middle back office compliance processes. So it literally is -- we use the same databases. We interlock -- these processes are very complementary. However, the other funny side is, about half our customers don't use Salesforce at all. They just buy nCino stand-alone, okay? In that division where we play, all right? So you can have nCino without Salesforce because we're just on the platform. Or if you already have these obviously benefits having their CRM connecting into us, we'd like to say that we're the company wherein the customer says, yes. You look at the CRM record, you understand their needs, you identify a loan product or a deposit account they want to open, and you literally press a button and all that data goes into nCino and we process that requirement.

That's great. That's great. Excellent. And then why don't we shift back to nIQ -- or nIQ, you called that out, David, one of the areas of strength this quarter. And maybe it would be helpful to illustrate what's in there today. You introduced Auto Spreading a few quarters ago and now you've got commercial pricing. What does that footprint look like? What's in there? And how do the 2 complement each other? Why don't we start there and then we can talk about just the road map for nIQ and where it's going?

So on the nIQ side [indiscernible] unions and it's more a retail focus. We've replatformed that onto AWS and now we're selling that platform into some -- we've made some sales into our nCino installed base. And we are working currently on our commercial analytics product as well that we'll sell into our base also at some point. And that's further out right now because we're building data lakes, and we're gathering all the data that we need to do the analysis. On the Auto Spreading side, that was early adopter last quarter. And what that tool is, it leverages our spreading tool and about 1/3 of our customers have spreads. And it automates the process. So you can scan financial statements into the system that auto-populates into the spreading tool. And I think out of the box, about 60% accurate. And then the machine actually learns, you can help map it. The machine actually learns where to place it. So we're looking at accuracy rates of about 80%, 90%. So the credit analysts can spend more time analyzing rather than putting data in, and this is a big cost savings for our customers. We have 1 customer who is at 3,000 people in India doing these calculations overnight. It's a higher-end person, too. It's a college grad normally because you have to understand how to read financial statements, and they're all different and where to place the data. With the spring release, we also have included tax returns in there as well. So that's another level of efficiency customers can gain. And so the great thing about Auto Spreading is it's a couple of weeks to maybe a month of deployment. We had our early adopter customers. We had a handful of them. They were -- and sizable customers. They were up and live and running within a couple of weeks and pushing volume through. AWS platform is great for transactions. This is heavy compute that we have on there, so that's why we want AWS. And so now we are selling that into the base. So 1/3 of our customers have spreads. We can walk in and say, "Hey, use our spreading -- our Auto Spreading tool." And then for the 2/3 that don't, it's an opportunity for us to say, we have something new, you can get efficiencies and cost savings and increase your accuracy and do deeper analysis, why don't you let us deploy our spreads and then layer auto spreading on top of that. And then Commercial Pricing is an early adopter. That's a new product as well that we've built from the ground up. That gives you the ability to look at, on the fly in front of a customer, reprice loans, whether it's time, rates, principal amount, anything that you want and you can do different scenarios and it's right within the nCino Bank Operating System. And then you can also look at the profitability of our customers. So you can kind of maximize your relationship with the customer rates or maybe raise more deposits to get them to a level -- so they can bring more business into the bank because of this tool. And so that is early adopter now, and we have a couple of customers that are deploying it. That is the longer term. It will mature over time because it's a very complex product. But I think that's got great opportunity. And all these products, you think about nIQ, the whole idea is, yes, it's on average, a 20% lift to an existing sale. But I think it makes win rates go up, it locks the customers in even more. And within the platform, you can do deeper analysis. You can get creative on how you work with customers and really have a different experience as a customer and as a relationship manager on the front end as you're working with customers on their loans and/or deposits.

That's great. That's great. I mean you can think of just so many different -- right there, you just listed a number of use cases that are unique. And I don't -- I can't think of another vendor that has those capabilities. When you think about the road map for nIQ, where is this going? Obviously, you built out a lot within commercial, even just with moving commercial, are there other opportunities to further embed nIQ? And then the other question I was going to ask you is just around that prescriptive capability that you just described where you're leveraging your data set and you process billions of loans and so you have -- there's intelligence. There's a data set there that enables you guys to provide that feedback loop on things like Auto Spreading. How does that kind of flywheel effect kind of take hold in your business around data and AI? And how can you apply that in other areas?

So the first concept from a high-level strategy is that we would like to see that if you look at banking and, let's say, a commercial loan has got 11 stages, okay? It's no different than a manufacturing process. And once you equate banking to manufacturing, you start saying, wait a minute, how much can I automate and how much insights can I provide at every step of production? And then you squeeze each of those steps down to be more accurate. Because if you look at manufacturing, you always look at velocity and quality. And I would, if I can squeeze it down and get my quality up, then it's a win-win, okay? And so that is the whole concept behind this, is to get this thing as much automated as possible. It will actually help you with compliance, and it removes the human bias. That's the biggest thing we find is that people have long memories about making a loan in a certain industry so they're scared to make one there. However, the bank as a whole has made many loans in that history, and they've got great credit, okay? So we are looking to drive automation and deep insights into these processes. And on the consumer side, it's going to drive full automation. On the small business, it can drive a 90% automation. And then when you get to commercial, it will drive a much higher-level quality decision as well as insights. Pricing and profitability. Not a single bank today do business with consumers with a profitability mindset for the full relationship. So we want to price -- if you promise your full book of business, because of transaction monitoring, we can tell you, this customer actually has an American Express card and you may say, wait a minute, I thought you're giving me everything with my card with all your spend, okay? So you can start pricing according -- and dynamically price according to the wallet share you get from a customer, which is a much better competitive model what we have today, which is pricing by product. So pricing by relationship, I believe, is the future. And these are all just simple examples. On the other side, when it comes to transactions, I don't want to be the transaction processing business, but man, there's such a wealth of information, analyzing transactions and understanding next best product, what people's habits are, where they buy next. So you can start driving lifestyle banking, which is we can see patterns of behavior that maybe there's a child on its way or a kid is going to college or certain age groups, and you can start doing your marketing towards a much more intelligent subset of your customers.

Interesting. No, that's great. David, why don't we shift to the model a little bit here. You guys have a fairly unique model in the rev rec and the revenue ramp schedule, if you will, from when you book a customer on ACV. If you could maybe just walk us through quickly that model, what is driving that kind of -- that schedule for revenue ramp once you book the customer? And what are the key metrics that you think we should be focusing on to understand the underlying growth of the business?

Yes. That's correct. Yes. We're a little different than other companies. You think about Workday where I buy 100 seats, on day 1, I start paying for those 100 seats. What we've done is we have an activation schedule for customers. We go in and we negotiate the contract. And the whole idea is keeping the customer happy, helping them get value and all the while maximizing our TCV. So we go to a customer and say, for its community regional, it's 6 to 9 months ramp; for enterprise, it's up to 2 years. But the idea is to align interest, right? So while you're deploying, why should you pay for 100 seats upfront, right? So maybe on -- after the second month, you turn on 10% of the seats because you need those seats while you're working and deploying the software. And that's by contract date where additional seats activate over time. So what you'll see from us is this constant seat activation schedule, which creates lumpiness from quarter-to-quarter as we saw in the last couple of quarters. But then over time, you'll grow into that ACV of a customer. On top of that, we also charge support, unlike other SaaS companies, we actually can get support from companies, from our banking customers. And that's in 18% to 20%. We've been increasing that over time. And that support function, but we do -- it's headcount-driven, so the margins are lower, but our support team works with our customers as much as possible, they help, they show reports. They try to help them use new functionality as it's released. And they're kind of the front line to keeping customers happy and helping us to upsell to the base. And we've had great upsell traction over the last couple of [ weeks ]. And then we have a services organization, too. That's just great. And then nIQ products are priced as a percent of assets or transaction volume for the Auto Spreading tool.

Okay, great. And then when you think about the disclosures that are available to us, as public investors, what are the key metrics to focus on when gauging growth?

Yes. Well, it's -- the activation schedule, so I think everybody does the calculated billings, right, it's deferred plus revenues. Our RPO, it's 6 time periods now that we have disclosed. And so we're learning that. I think it's an important metric because it just shows all of our future revenues that we will recognize. And so that, again, will be lumpy because you have renewals flowing in. If we have a very active quarter like we did in Q4, we signed multiyear deals, I think our average within the RPO base, the average contract length is still 3.8 years. So you'll see kind of lumpiness in RPO as well. So the last 2 quarters, we finally had year-over-year comparisons and those grew. But still, the sequentials are still trying to figure out. It was -- last quarter was down sequentially, this quarter was down sequentially, but not as extreme as last quarter. We had a really -- we had a good bookings quarter in Q1. And then also, I think a lot of investors do channel checks with customers. In my mind, that is the true -- that's how you really get a feel for how we're doing, right? If we're keeping customers happy, they see the new products, they understand what the new products are, will they buy the new products. And I think from my standpoint, customer checks are the most important thing to do with nCino and then backing up with the results that we're guiding to.

That's great. And while we're on that topic, your net ACV expansion, I think, is a good gauge for customer expansion. 118 is what you reported last quarter. Where has that trended historically? With that ramp schedule that you described, what does that do to customers' ability to expand as the -- as they're going through these implementation cycles? Do you see cases where customers come and add more seats before they're 100% live? And then just at a high level, what does a typical customer journey look like? What do they start with? And then what are some of the things that they add on from -- is it departmental expansion, nIQ is coming in more? So just any color on that as well, please.

Yes. So we will land with anything. I think the products are good enough, you can land with retail, you can land with the bank, the commercial side. So there is land anywhere where we can show that or a pain point has -- where a customer has a pain point. In one case, you might land a collateral system, which is a smaller deployment. The idea is to deploy that as efficiently as possible, get customer happy live and up and running. And then while you're in deployment, if it's going well, then Salesforce says, hey, maybe you look at small business, maybe look at commercial. And so the idea is just anywhere you can land, land it and then sell into it and then bring nIQ and surround it with nIQ as well. I think that is kind of the normal way. In the past, it's been commercial, but we've landed retail deals as well.

But, Brad, if you look overall, the customer base of the nCino Bank Operating System customer base is about just over [ 300 ]. We only penetrate each of those customers between 11% and 15% of the potential seats. So there's tremendous upsell and cross-sell opportunity there. Sometimes the bank take a small piece of commercial banking, and then we go expand from there. Sometimes they do a full commercial business transformation. But then we've got small business and retail to go to a deposit account opening and nIQ to add. So we feel the potential with our customer base is large.

Great. Great. Okay. Excellent. And we only have a couple of minutes here. Maybe we'll just end with one for you, David, again. You've got the long-term margin target of roughly 30%. In your mind, what are the key sources of leverage here? And how do you gauge it? How do you gauge sales productivity today? What are some of the things that you look at? What should we be looking at? And just how you get to that 30% over time?

Yes. I think the idea is to continue to invest for growth. That is the goal. We're a growth company. We see opportunity. I believe in responsibly investing, it's -- we're not just going to spend without having proof points of -- or data to support, okay, we made these investments here, here's what our expected return is. And so really, it's we're going to get some leverage in gross margins, a little bit of leverage. We do pay Salesforce a royalty out of that. It's a fixed percentage. But we're seeing an improvement on the subscription gross margin, because of product mix, we're selling less to the smaller banks where we can resell Salesforce, and that's a lower margin. And so more enterprise and more international, their product mix gives you a lift. We'll see some leverage on that side as well. We're still expanding internationally. It's a people cost, but that will improve over time as we continue to grow services, our services, right? We're carrying a lower margin on services. As you mature products, I think you have to be flexible with your customers and your rate at times just to make sure their deployment goes well and customers are happy. And then on the OpEx side, we'll see leverage in all -- in sales, marketing, R&D and G&A. And G&A has been rougher because of public company costs. I'm sure everybody knows with their other investments on D&O, it's very, very expensive. And so we're growing into that. Yes, sorry, by [indiscernible] cost. But once we get through probably in the next -- this year and maybe part of next year, we should be able to normalize that G&A, and we'll see leverage next year in G&A. And then on sales and marketing, we are continuing to expand internationally. Our salespeople are more efficient than others in SaaS because they carry a higher quota, bigger deals, more deals on the fee side. And then R&D, we see the opportunity on the product side. And again, it's all about, okay, if I give you a dollar, what am I getting back in return? So we measure the investments we're making to ensure that we're investing everywhere we can to advance the product, mature the product and get them in the Salesforce hands to sell them into the market. So it's a balance. And I think our goal, of course, is to be -- hit cash flow -- operating cash flow breakeven. And it's in line with what we originally talked about during the IPO. And so we do expect to see leverage in all operating functional areas next year in fiscal '23.

That's great. Excellent. Well, guys, that's -- we're out of time here. Pierre, David, thank you so much, both of you for joining us. I learned a lot, very informative. And a pleasure to have you at the conference.

Great. Thank you so much. Thanks for having us.

Hopefully, next year, we can do this in person.

We're looking forward to it.

Please.

Yes. Same here. All right, guys. Thanks again.

Okay. Thanks again. Bye.

Thank you. Have a good one.