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

Great. Hi, everyone. I think we can get started. I'm Joe Vruwink from the vertical software team here at Baird. Our next presentation comes from nCino. nCino is the leader in the cloud-based digital lending. The company serves, at this point, over 1,200 financial institutions around the world. Very pleased to have with us today, Pierre Naude. He is President and CEO; and David Rudow, CFO. This is going to be a fireside chat. If anyone in the audience has questions, you can use the prompt in the webcast. Those will be e-mailed to me, and I'll filter those in.

I wanted to start, vertical software is unique given its proximity to a given industry. But nCino has, I think, one of the more unique origin stories of anything I follow. Maybe we can just start there in terms of background on the company and why that gave you kind of a unique view on what you set out to do. Pierre, you're, I think, on mute. We can hear you now.

All right. Yes. Thanks for having us, Joe. Yes, we like to say that our product is built by bankers for bankers. A few things you realized from day 1. Firstly, Live Oak Bank is a unique institution that is the largest SBA lender of the country. They go to market in verticals. And they have 1 branch, which is locally and Chip Mahan loves to fly around with the planes and get to see land borrowers before he lends money to them. But the actual outflow of that is more the concept that when you look back in 2009, '10, '11 as they were looking for a system, that they figured out to be customer-centric, number one. And number two, that they will do it digitally and electronically. In other words, they are going to build out more branches, okay? And that -- but they hired people all across the country. That would be in Colorado or in California. And so they needed a system where they can truly collaborate the lending processes. And they found Salesforce on the force.com platform. And so the 2 things that I think differentiate us from day 1 was we understood that actually we're a business process reengineering company. We're here to help you make your processes more efficient, et cetera. We understand the nature of collaboration in making these loans, and we picked the right platform on force.com. It will actually put the customer at the center. And then we try and get it as soon as we can through that. Like what the bank has always told me is, "Pierre, the customer doesn't really care if we have to be compliant. They just want to know, am I approved and when can I get the money?" And so that is still very much in our DNA from day 1.

Maybe -- so Live Oak has grown into the largest SBA 7(a) loan program provider in the country. Can you just crystallize why that is a complex undertaking? If I'm going to submit for a 7(a) loan, I think there's 150 documents that need to be filled out and submitted. So how is the nCino product built around the idea of just doing that better?

Yes. By the way, first, bless your heart for doing that. But maybe it is truly 150 documents, and that loan process is akin to herding cats. People think it's complex processes, but it's more about there's an appraiser involved. There's a banker involved. There's an underwriter involved. There's the government involved, which is called [ eTrans ] in connection to the government, okay? Because in the SBA lending process, you sell that just like private credit to the government. In the end, there will be guarantee. And then, by the way, they sell most of their loans. So the book of loans is sold to other banks. And that's how they make the gain on sale of profit. So as you look at all those aspects, what it gives us exposure to is not only the value of focusing on specific verticals, which we've done successfully in our business by focusing on commercial lending in the beginning, but also the value of being very customer-centric and be able to do it in a remote fashion, okay? So when you think of that business model ramped off from us and also how to automate complex processes and how to do that collaboration, just like an SBA loan, we're trying to tell a bank we have a better way of doing a very complex commercial loan. And we've learned that by our association with that. And then, of course, we became a software company, and Live Oak Bank is a bank. So we drifted apart with very different strategies, et cetera. But it truly was instrumental in the early days to understand the fundamentals of the business being associated with Live Oak.

And then maybe you mentioned the company arrived at Salesforce as a partner and kind of a foundational technology very early on. I was hoping we could speak to, number one, the advantages that commands. And then maybe you can contrast starting cloud from the very beginning, partnered with Salesforce, contrast that with what you typically see happening in the loan origination space, where there's a lot of different vendors that are also trying to be cloud products at this point, but it's not quite cloud from the very beginning ultimately.

Yes. Firstly, the whole Salesforce ecosystem is actually very well thought out. It's an open ecosystem. And then Salesforce will build, of course, CRM, which is their main component. But many other functionalities around it, which is very customer-centric, was what I would call slight verticalization, okay? So just take CRM, make it more akin to banking and so on. But once you -- we like to say we're the company when the customer says yes. So you use CRM to have the conversation. And then when Joe says, "Yes, I would like that loan. You've identified the right need for me." Well, what do you do then, okay? Without reentering data, you press a button and nCino takes over. I call that ecosystem the blue halo. It's a massive company with a tremendous track record of trust and security around their data centers, their data. They provide you out-of-the-box, over 120 languages and currencies. And they try to be complementary to us, okay? So we coordinate what they build and we build. And so you get that pull-through from a big marketing machine because Salesforce tells a big story. And the big story is actually their ecosystem, not only their own products, and we are part of that ecosystem, okay? So some companies just integrate likely to their CRM, and others like us built on their platform actually part of the ecosystem. As I contrast that with what I see traditional loan origination systems that maybe was built on Microsoft or Google Cloud or any other technology, I would say the biggest difference is the agility. This platform allows us to make changes to the bank operations through configurations as opposed to writing code. So we literally can install the software. And the bank cannot move from where they are today to the endpoint in this 1-project time frame. It's just too much change for people to absorb, okay? So we can go what we call to nearvana as opposed to nirvana, where we can get into a certain point where their risk-averse culture and their credit culture will get to this point in that time frame, and then we teach them how to make changes and tweak on an ongoing basis, just like manufacturing. [ Tata ] became perfect by continuously improve little things. And in banking, we believe we should do the same. So our platform allows us to do that where the digital software was never designed to do that, and actually companies are coming in the write code to help you change your processes. So these systems became stale. And I think that's why we're the market leader because we understand our customers. We're focused on their success. We picked the right platform. We built the right culture in the company.

Before going into how the platform appeals to the different opportunities across commercial retail, small business, I did want to touch more about the commercial model, the financial model. So this is a seat-based subscription model, but there's some unique aspects that provide you with really incredible visibility. Maybe you can just talk about things like the activation schedule and then how customers tend to grow. So you've disclosed some ACV-based net retention, more typical subscription-based net retention. Just once a customer does engage with nCino, how that engagement tends to grow over time.

And David, do you want to take that?

Yes, I got it. Yes, so it's a seat-based model. We also -- unlike other SaaS companies, we also charge support on top of that, so it's about 15% to 20% of the subscription the customer pays. And every single customer has an activation schedule on their contract. It's all contracted by date. And for purely regional, it's 6 to 9 months to achieve full ACV value, and enterprise is up to 24 months until they see the full value. So when we sign a contract on day 1, unlike Workday, you sign 100 seats, you start paying on day 1, the customer, they might be 2, 3 months and they pay 10% or turn up. And then another 3 months and then another 10% until it ramps up at the ACV. So at those dates, we turn on seats, and we bill the customer for those seats. And it's similar activation schedules for international as well as the U.S., too. On the net revenue retention side, 155%, it ended last year. It was 143% without PPP. Our model is great because we get into a customer, we find their pain points, sell them the software that they can use. And then as we're deploying it, we'll still talk to them about other things they can use from nCino. And so we've had a very high success rate of upselling customers in the other areas of the bank. The other thing we see too are add-on sales. A bank usually underestimates their seats. And then so while they're deploying or plan deployment, they realize, "Oh, I need to deploy to another 10, 20, 30 or maybe 100 more employees." And so then we'll get an add-on sale for that as well.

And then just on how this works, when you talk about 143% net revenue retention, you land within, let's say, a line of business, but you're landing adds 10% of what you ultimately could address. And so the goal is to spread out. And then why would -- I guess the question I get a lot is why is there a spreading? So maybe you can talk about your landing with an individual doing something specific for the bank, but then what's the broader scope of the platform? What can you ultimately allow that institution to do?

So the typical figure -- so number one, let's just use commercial because that's a much mature product or solution set of the company. But even if a bank chooses to do a full commercial transformation, which is all lines of business within commercial lending, to install and get everybody up and running will take 24 months. The bank is not enough to understand that I'm going to activate my seats maybe 10% on day 1. I use that to configure and start testing and do things. But then in very specific time period over 24 months, more batches of seats will be activated. That is typically by contract, and that happens very preferably for us over that 24 months period when they get to full scale, okay? So that's just the practicality of how the project goes and how they can expand. And that is reflected, by the way, in the net retention rate because of that continuous increase in revenue coming from that same customer, which you signed once, okay? Then typically, as David said, on top of that, you get the group going. They're fully installed and they work and they go, "Oh, we didn't realize we're going to include those 10 people." And then you get actually expansions on top of that. And those 2 factors, like maybe C&I lending or it's commercial real estate or unsecured lending or you go down to the small business group, all of those lines of business may see what's happening to their brethren and then decide, we want to be on this bandwagon as well, okay? And we see that a lot, especially between the lines of context. The other thing you have to realize is we replace between 15 and 20 systems. And upfront in the sales prices, you get some resistance. Somebody says, "Well, I do like my collateral system. Well, I do like my current manual underwriting systems that is spreadsheet based." And what we do is we tend to shrug and say, "Fine, we'll get there later." We start the project and we can see the benefits of the integrated product. And then they'll bring around their underwriting people and actually replace what they have today with nCino as well. So many of those expansions happen through project or the moment we're live. So it's no different than you used to have a flip phone, probably loved it -- or a Blackberry. And then 1 day, you just realized that the iPhone is better, and then you make the switch. And then people just resist change.

You mentioned the different time lines with activation, and sometimes that's dependent on the caliber of customer between small community up to some of the biggest banks in the country. Is the product scalable across those? Or are there different things that typically need to be done if you're addressing an institution of a given size?

One of the things I'm probably proudest of the company is the fact that we started with the community banks, first 3 years focused on banks up to about 10 billion assets. And then we won SunTrust. And we actually made the products scale all the way up to the enterprise. So today, where we are, and I always call it, it's like a box, okay? What's in the box is our Software-as-a-Service code. And nobody can touch that. That's what we upgrade twice a year. And we've fought banks as large as Bank of America all the way down to the smallest community bank, running exactly that same product. Now look, it's configured and set up for different use cases because Bank of America obviously do much more compact work than a small community bank. But yes, it's 1 product, 1 code base that scales up and down the market as well as internationally.

And let's talk about international because this has been a big part of the recent growth. I thought it was interesting, you spoke a bit on the call because there's been efforts to establish in-region offices. There's leadership that's championing some of these international growth plans. And yet there's some things, you shared an anecdote about how there's characteristics about the German market that actually are kind of similar to what nCino is used to dealing with from kind of a U.S. community standpoint. Maybe you can talk about kind of the international opportunity, the challenges that you're going to face that are maybe different than what you faced so far and how you're investing to support the growth plan.

Yes. So we, from day 1, believed in a very disciplined strategic go-to-market plan. And as opposed to build wide and thin, we decided to go narrow and deep with commercial lending on day 1. And after 3 years, got into bigger banks, as I mentioned. And then in 2017, realized because we get 120 currencies in 120 languages out the box on the force.com platform, we can go international. So -- and there's also a pull because people look at the Salesforce ecosystem, they go, "Oh, there's nCino. Why can't I do that for loans in London?" So we got pulled internationally like that. So we went from the U.S. to Canada. That was a much easier transformation. By the way, commercially, it's not heavily regulated. So the product actually do apply on the global marketplace. Then we went to the London, established an office there, a footprint. Today, there's over 100 people there. And we won Allied Irish Banks, we won Barclays and a number of budding societies and smaller banks as well like new banks like OakNorth. And then lo and behold, we got fully into Australia. And so today, we've got offices in Sydney and Melbourne as well as some development centers. But that product doesn't need a lot of customization, okay? And that's the great thing. And that gave us the ability with the platform to go Australia and Japan as well. So those use cases are fairly similar. In Germany, it's more a matter of the sales effort, that you need the local dialect and local people. It's just how people trust companies. "Are you here to stay? Are you here to sell me something and leave, okay?" So we're going to have this big London office to support Continental Europe. But then in country, we will have dedicated sales teams that's locals selling to locals. And we're going to do that in Germany, Spain, Italy, France. We've got people in the Nordics as well. We've got Australia going and Japan, like that. And that's the current footprint. We have such a massive opportunity of over $12 billion. So now what we're going to do is stay within our geographic footprint and actually mature those markets and win as much as we can. Market leadership brings business. And we've seen that in the U.S., and we're going to repeat that in Canada. We're going to do the same in Europe.

A question came in. You kind of addressed it a bit in your recent answer. It's just on how you think about investment in talent. And I think some markets require a slightly different SKU. As you were saying, some markets, it's more about getting the right product in place. Other times, you need the sales and marketing support behind it. But specifically on your engineer -- your product work, how do you think about investment there? And then the question came in, can you kind of compare your R&D team relative to the Salesforce R&D team? Is there kind of an alignment where you both are working harmoniously to ultimately tackle kind of 100% kind of pie, you're going after the same vision?

Yes. So look, firstly, you have to realize Salesforce is a wonderful platform. It's a great company. We have fantastic relationships all the way up the food chain from David Schmaier, [ Gujar ], all the people involved in engineering it from there. And we are aligning our road map, so to speak, to make sure it's a complementary ecosystem. But I always remind people, it's like being in the life boat with an elephant. We have strategically the same mindset. But when they move, I have to just be a bit more agile and move along with them, okay, because they are the big companies. But so far, after 9.5 years, we've just had a fantastic experience. And being in that what I call the blue halo, you do get a drop-off effect of the Salesforce presence and you're on the platform, okay? So I see the alignment. It's important to us. Before we went public, we've got the 7-year contract with them. So we feel very confident that this is a long-standing relationship. There's good examples from an investment perspective. Veeva is a great example in the life sciences, being on that platform, what a fantastic company Veeva has now. So I feel good about that. When it comes to local investments in country, we will do that depending on the need, and we analyze it. That's why we like the commercial platform because we don't need that much customization locally, okay? So let's talk about talent a little bit. We started this company in Wilmington, North Carolina. Put recruitment in marketing because we sell the whole caboodle. You sell the beach, you sell the town, the short commute, the fun environment, the company culture, the opportunity of a fast-growing company. And that's worked very well for us. So we're now, I believe, around 800 people in Wilmington, okay? But we won't shy away from other places. For instance, we bought a company in Salt Lake City that's heavily invested in analytics, AI and machine learning. Because I realize if it's a homegrown, that will be tough, okay? And then further underneath, we bought a company in Melbourne, Australia for order spreading, replatform that. So we are very willing to go look at these pockets of people and do acquiring or buy companies with good technologies. But in the end, the mothership is Wilmington. We have specific hiring strategies. To give you an idea about the attractive and the appeal of this, last year, we hired 250 people out of 12,000 applications. So that's our focus. We focus on our people, and we want to maintain our growth rates and just be a big company.

You brought up some of the recent investments that have helped you build out your nIQ offering. I was hoping we could talk about that in a bit more detail and beyond. Maybe just an introduction for those that don't know of the capability we're talking about, is this something that can be a stand-alone product? Or is it something that ultimately is really an ROI enhancer for existing bank operating system customers?

Yes. So my first view of nIQ, let me explain nIQ a little bit, nIQ stands for nCino IQ. In other words, intelligence, okay? And we believe that to put nIQ under an umbrella, which is our AI machine learning and analytics platform and all the derivative applications coming out of it, is that data alone is not enough, okay? Data is very important and powerful. But it's actually what you do with the data. So we are building products that bankers can understand will have unique value in how they go to market and what they do in their businesses through automation as well as helping the customer be more intelligent in their choices. So right now, we've got 3 products we've launched. And the first 1 is Portfolio Analytics, very important. What's going on with your balance sheet, quality of credit? How is customer repayment? Are you compliant to red lining, et cetera, okay? And that works in the retail bank. We took it from the trade leaders, brought over to banking, and I see very good receptivity in the community regional space. We will enhance that to appeal to big banks as well. On top of that, we are building commercial portfolio analytics, okay? Then second to that, we launched Automated Spreading, which is a product that will digest financial statements and tax forms, pre-populate spreading, do analytics on it and serve it up to the underwriter. Tremendous enhancer of productivity and quality of work by the underwriters. And then finally, commercial pricing and profitability, which is deeply integrated. So look, all of our products is by the seat. So you can deploy the module of underwriting by nCino and its -- and nIQ will come along with it, okay? So you can do it somewhat stand-alone, portfolio analytics specific can't be standalone. But you get the best value if you look at the integrated value chain or the supply chain of the whole thing, because we replace between 15 and 20 systems when we deploy. And so we see banks embracing the platform vision.

Maybe then the last area is just on retail, and you touched on it earlier, a very -- it seems like a very deliberate strategy where you've originally initially set out to grow in retail because retail comes with a whole host of other considerations. Maybe just talk about the initial strategy there. And when you think about the go-forward, I'll call it, incremental growth at nCino, is there any way to characterize retail share of that growth? Should investors be mindful of retail kind of capturing an ever-growing share of company revenue?

Yes. So realize the commercial SAM in the countries we're playing is about $3.3 billion, and retail is about $6.8 billion, okay? So it's a massive marketplace. Your community regional space loves the platform play because it's simple as IT with the customer at the front is going to allow them to compete in a global market space that we believe will be influenced by external players like an Amazon or a Google as they dabble around financial services, okay? And if you're a smaller institution, nCino will, for the first time with an API-first strategy, actually help you enhance your ability to participate with that ancillary players, okay? So as I look at the retail, firstly, what we have to realize, it's a lot more localized and a lot more compliant-driven, compliance-driven. So we take a deliberate approach. We have launched onboarding and deposit account opening. We're very pleased with those. But every team in retail knows that they have to have a best-of-breed product. It cannot be a B- product because commercial is the king of the hill, okay? So we are driving towards a true touchless low-touch customer experience for unsecured and secured lending, okay, which is a lot of fun to build because it's complex and a lot of integrations, but I see us getting there. It will take longer to mature because of the detailed nature, and it will only apply to certain geographies. For instance, we're going to focus on the U.S. for consumer lending and deposit account opening and onboarding. But then when you look at mortgage, we will not focus on the U.S. because [indiscernible] is so entrenched and it's a very complex marketplace. However, if you look at Canada and the U.K. and Australia, mortgage is a great product for that, and we see a nice market because we don't see dominant players, okay? So we're building that, we've launched it, and I see that retail over time will increase as a percentage of the revenue of the company.

Okay. Maybe we can just close on the financial model going forward. It was a really strong start to the year. The year began with better-than-expected guidance with maybe the potential for subscriptions to grow 30%. It seems like now we're going to be north of that. Can we just talk about kind of the growth profile you think about when you think about and nCino over the next few years?

Yes. So I think Pierre talks about an aspirational goal that we strive to and invest for internally, and that's 30%. So as we look out to the future, as we invest in products and look to expand our sales force, that's the number that we target and talk about internally. And I think it's important that you have to have a goal for the team to shoot for.

And then how about just scaling the business? nCino hasn't shied away from this being an important investment year. Is this kind of the peak investment year, and so we should expect kind of scaling margins, maybe positive cash flow on the horizon?

Yes. I think our goal is to reach cash -- operating cash flow profitability breakeven in fiscal '23. We said that at the IPO, and it -- we did have a good year last year on free cash flow. We generated free cash flow. We have benefits from travel and PPP billings and collections. This year, we're investing more in sales, international and R&D around retail and nIQ. But as we look towards fiscal '23, we do expect to see leverage in all functional areas. And we have the ability to increase gross margins as well. We have flattish gross margins for subscription this year on some investments we support internationally. And so that, we think, can walk up from here. But yes, fiscal '23, we believe that we will see leverage on the cost side.

And then maybe one last question. Are there certain areas of the business where if they contribute growth, you would expect margin improvement to come along faster? So does pricing differ anywhere? Or if you're growing faster internationally, does that require an elevated investment to support? Just are there mix considerations at play?

Yes. I think if you look at mix, it's higher margins for international and enterprise, lower margins on the community. At $5 billion and below, we can bundle Salesforce FSC in as well, but then it's a higher royalty payment. So the increase in margins that you've seen over the last couple of years is just product mix changes. Our margin, though, internationally on a seat for nCino is flat. Whether it's in Germany, Spain, France, U.S., it's the same gross margin regardless. Now on the nIQ side, if we do see acceleration in nIQ, that's on AWS and that comes at a much higher gross margin. So as nIQ accelerates, you'll see that we'll be able to lift gross margins. On the investments that we're making internationally on the sales side, we're placing people. We're making a bet in Germany, but we're not opening offices there. There's an upfront cost to creating an entity, creating payroll in those countries. So we're absorbing those costs now. But then as we place people and close deals and start deploying and generating revenues, those revenues will come in. And then as we see success, we'll then put more people in country. So I would view this responsibly investing for growth. The growth is there, but we don't need to pile a bunch of money in all these countries and be inefficient with our dollars. We're always thinking how we put money in and what do we get dollar in -- what does that get me out from that dollar in terms of bookings. So -- and then on R&D, we will continue to invest in R&D. We're adding heads in London as well for integrations on our international platform. And then on G&A, there's a lot of company costs that we have, obviously, being a public company. So those, in the coming years, we'll see additional leverage on that side as well.

Great. Well, unfortunately, we're out of time. nCino is going to be hosting a breakout after the session. So I hope everyone can join us for that. But thank you, Pierre. Thank you, David. Hope everyone has a great rest of your conference.

Great. Thank you.

Thank you, Joe.