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

Good morning, everyone. We really appreciate everyone's time today. My name is Josh Beck. I cover the software and the fintech vertical here at KeyBanc. And we're incredibly thrilled to have Pierre Naude, CEO; and David Rudow, CFO, from nCino join us for a fireside chat. I do apologize for the late start. Something about the connection between Portland, Oregon and Wilmington and the Zoom circuit was not well-liked, but we were able to patch a connection there. So if anyone has questions throughout the session, there's a Q&A box, so please go ahead and ask your question that way. Or if you'd like to e-mail me, my e-mail is [email protected]. If you would like it to remain more anonymous, please do that.

So with that, we'll just -- we'll go ahead and jump in. We'll run this for about 30 minutes. And we're -- like I said, we're really happy to have Pierre and David speak to this cloud and open banking idea. Pierre was a visionary in this market. I think he maybe had a few employees and a very small banner for his company and said, yes, we're going to be a global operating system for banks. And that was some time ago, and it's starting to really become a reality. And so it's really exciting to have them join. So yes, this, I think, I'd like to make it more of a strategic industry-level discussion. I think, really, what's happened in the last year, in particular, I think it's probably accelerating the embrace of modern architectures of cloud-based software, of digitization by banks. And I think it's maybe getting a little bit lost with all the other side effects, if you will, and trends that maybe make it a little difficult to discern what's happening with this broader arc in digital banking. So that's really where I want to start. It's just, Pierre, when you look back into last year, and you look at maybe how the conversation has changed with some of your banking clients and really how they're thinking about transforming their business, just would really be curious to hear maybe what is happening to this arc as banks really consider a greater level of digitization within their businesses?

Josh, good morning, and thank you, everyone, for joining us. So as we look at before the pandemic, we were going to banks and sell them on why this was important and what we believe the future is going to look like for bank infrastructure, for how bank's going to interact with their clients, et cetera. And many people bought into it. I would say no, normally, your early adopters are more aggressive forward thinkers. But many people like the status quo. And what we've seen through the pandemic is, with the amounts of money distributed through PPP, in the U.K. through CBILS and BBLS, is that banks, all of a sudden, I would say, came to the full realization and actually moved this from more of a tactical investment to strategic, which is your customers actually will work with you electronically, and they are demanding at that. And they're demanding that you have the services and the interfaces for them to be effective and efficient. And they will meet with you, but they will meet when you add value, not just about the relationship, but that's an interesting shift that people are undergoing, okay? I don't mind a banker, but I want to see when I actually need you for advice, counsel and help me how to drive my business forward and secure financing for us. So what we've seen is, literally, this shift away from why would I do this to how would I do this. We have many banks calling us now. And you see it in our results, fourth quarter as well as first quarter results. We commented on this fact that we haven't shown our best selves for business to the company, and the pipeline is still growing. So I would now say confidently that it's a trend in the industry that people are going to digitally transform their back end and middle-office services and infrastructure to be a lot more efficient to drive customer acceptance on the front end.

Okay. That's a great starting point. And maybe just to piggyback off your last comment there, I don't really feel like the banking tech stack is probably as well-known as a -- the traditional enterprise tech sector. There's really fewer companies that are really specialized in banking tech. So maybe just help us understand a little bit about maybe the core providers, where that line ends and where you start to fit into the equation? And then also, you mentioned it a little bit about where the mid-office and the back-office, kind of where you fit within that nomenclature as well?

Yes. So the first thing I want you to understand is that in a bank, there needs to be a general ledger as well as a system that maintains all the accounts, and that should balance every night. But that's what we formally call the core system, okay? The core system keeps the list of accounts. It gives you a balance, it calculates the interests, send out statements and some other compliance functions around the money. Attached to that core then is a number of pipes. I call it the plumbing of the bank, okay? So you've got this core engine and the plumbing in systems like wires, payment systems, point of sale, ATM drive-in, in online banking, et cetera. But everything, if you look at that, has to do with payments or balancing at the end of the day. On top of that, there's a number of layers. And all of this infrastructure was put in place over the years. As you wait to serve customers at a branch, you have to really think about that, the old infrastructure all designed around the branch. And so then you say, well, we have a certain client account, we have to do 3 other things: onboard a customer over that account or process alone. It was designed for in-branch. And then in the middle of these, online banking came about. And we said, well, we'll just plug that into the core and provide a way for you to transact. But again, what do you do on online banking? You transfer money, lowered your balances and pay a bill, okay? These are your major functionalities. Or even a small business, you can sell ACH and rights. But again, the point is it's moving dollars and moving money. If you then look beyond that, these big, what we call, core companies, actually become payment processors. If I ask Jack Henry and Fiserv today, and you look at their acquisitions, are mostly focused on processing monetary value, okay? They'll drive massive networks, driving ATMs, et cetera. Where we saw the opportunity was, there's this massive layer right on top of all those pipelines, all that infrastructure I just talked about, which actually has to do with onboarding a customer, opening an account and processing a loan that was archaic, they were not integrated, and they actually connected to the core. And these companies build those capabilities by acquiring other companies and then attaching it to their core. We saw the opportunity to step away from that, and we're going to talk customer-centric perspective. I said, "Wait a minute, if I'm the client coming in, don't they already know who I am? Maybe I have a checking account with them, but I want a loan. They should know who I am." Well, in those older systems, it's point solutions, okay? So the one system they have may not be the best. So the opportunity we saw was this next layer, which is followed by that onboarding the customer and making it customer-centric, whether you're a big corporation, a small business or an individual, okay? Because before -- and the mid- and back-office is robust so you have to make sure all that is compliant with the regulations. And then there's a key thing. Owning an account will now become a big thing or want a loan application. But people used to make a nice [ entry ] web from there. You can enter on there, finish in 5 minutes. You hit enter, and just like with Amazon, you would expect an answer back. In 3 days, either you get a call and it says, "Come to the branch and bring me your driver's license." And you go, what kind of a buying experience is this, okay? So you move to the new bank. That's what's happening. And so what we said is, one, reaching the kitchen first, which means that mid- and back-office processes should be modernized, streamlined and [ child based ]. Once you've done that, and only then do you exit from your storefront on the web and in an app to the front end so customers have the same fast and nimble experience. And that's the layer where we're focusing on. It's all about customer acquisition and efficiency and actually a modern fintech experience for banks.

Very helpful. And I'm curious, when you look at banks, they generally are segmented, obviously, a number of different ways. But generically, you have a retail-oriented business. You have a commercial-oriented business. Certainly, the retail business may have seen some of this earlier on because you mentioned the bar is just quite high because of other apps, Amazon and others. So I'm just curious, when you speak to maybe business leaders within each of these units, do you feel like the pace of change or the willingness to modernize is notably different across commercial or retail? Maybe it's a higher-level decision? Just curious how you'd parse that out.

Yes. Firstly, what we've seen is the commercial side of the bank, commercial lending is where the banks mostly make their money. That's the profit center. And so to make the ROI work there and drive efficiency was much easier business case. So we saw the movement actually starts on the commercial front as first. And those industry make the investments. They see the value, and they drive a slow business. Some banks put it in retail. Some banks put it in commercial. Small business was the next step. Where do they want to go? And then finally, it's very interesting. On the retail side, banks who love retail deposits, but they like commercial loans. They're just kind of a generic statement around banking industries. What I'm seeing now is that, and the stats will prove this out, that the banking leadership is figuring out, "Well, wait a minute. If I don't fix my holistic 360 customer experience on the retail side, which includes many, then I'm not going to get the deposits because most deposit flow goes to the top 4 banks." And so beyond the top 4 banks, what I'm seeing now is, I mean, [ to be realistic ], I have to get my retail bank to be efficient, to get to the process, number one. But also if you look at my branch infrastructure, I'm not going to spend as much as we can offer. That's going to come by way of technology.

Very helpful. And maybe just taking the Amazon example a little bit further. So certainly, the last couple of years, a notable trend that has breaking out has been really neobanks and tech-focused companies that are really offering a lot of the banking suite in some form or fashion, mostly on the consumer side. But I'm just curious, what are the implications for this when you think about the traditional banking sector? Maybe how are some of your customers viewing this trend in terms of implications to their business and the traditional banking sector?

What I'm seeing is it is like a canary in the coal mine. It is pointing out to us as an industry, the shortcomings of the current business model and the infrastructures we built that is aging, okay? And so these new banks have the lux -- they're standing up from scratch and -- to build the modern infrastructure, very client-focused. The counter to that is it's a very simplistic banking model. And yes, I know students love SoFi and now bank -- and the younger people like these very simplistic systems. The problem is the moment you start making money, you need a more realistic banking experience because it attach the investment [ health ] with the mortgage, et cetera. And those more complex products, typically, they can drive that customer towards, what I would say, to reformat. So what I'm thinking is just like after 2012, from '08, '09, '10, '11, lending job and nonbank lenders became very cool, and people love that marketplace until the banks kind of go back on their feet after their financial crisis. And here's the reason why. The cost of goods, which, in our case, is deposits in banking, is about 1/10 that of if you're a nonbank lender. And I will tell you also that these new banks, to come back to that, their physical infrastructures and their IT infrastructures is really cheap and simplistic. But to move from that, to be doing what a bank is doing is just a massive leap. So I believe that nCino is focused on that, in helping banks to actually reform themselves and come around and act like different there, can be nimble and fast and convenient to the customer. And I think banks can do it because of their knowledge, their people and their breadth of services versus these new banks.

Excellent. And just to round out our industry discussion, want to get your view on open banking. I think, certainly, that has a lot of different meanings when you think about the traditional enterprise stack and the importance of APIs and micro services. That's been really quite a 10-year discussion at this point. I think in banking, it's a lot earlier. I think you've made some pretty interesting comments about it. So I'm just curious about how important of a trend you see this and maybe where you see it headed in the next few years?

Yes. I mean it's interesting. So the open banking concept obviously came from Europe. I see it in Australia, it's got some traction, et cetera, also in New Zealand. But it's this conflict that the bank is like a utility, and they should open up their services, by the way, also problem-solving, pricing and et cetera. And then other players are going to look into that and provide those services to the public. I think it depends on your viewpoint of where banking fits into the full economic picture. I moved to America because I love the American capitalist itself, which is now, if I am the best company, I'm going to win the most market share, okay? So personally, I'm somewhat averse to, "Why would I open up my secret sauces if I can provide a better service to my customer?" I also think, from a compliance and regulatory perspective, in the U.S., it'll be slower to be adopted as a full utility, okay? However, let me go from there, which is different. Open banking is a concept that's government-driven, okay? There's a second concept, which is market-driven, which is what we call embedded banking. In other words, I do think the future is going to be about open APIs, which is the technology and me exposing my services to ancillary players around my industry. For instance, we already do it. If I talk to bankers, I say, it's almost like when I go to the auto dealer and I can buy a car and get financing. That's software interface with a number of banks who decide that they want their business, okay? And as you know industrial business is always the best example, but you've got mortgage brokers. And the question is, can we actually change our infrastructures to have open APIs and interact with these industries around us? I think that's a very good thing for banks. And look, forward-thinking banks will start embedding services and loan types in -- at Home Depot for construction projects. And you can come up with a thousand examples like that, okay? So I do think that style is going to take off in the U.S. versus in Europe, where it's more of a centralized government-driven open banking concept relating banks' utilities.

Yes, I agree. That will be a fun one to watch in the coming years. Maybe shifting gears a little bit more towards the nCino story and strategy. So you obviously started out in commercial. And you've really expanded the portfolio quite meaningfully since then: treasury, small business, account opening, retail lending, mortgage, et cetera. So maybe just help us walk through what's the rationale behind having the much broader portfolio? Help us understand maybe what are the synergies between offering these different products? What type of differentiation does it offer? That would be really helpful.

Yes. Josh, when I was asked to come and do this, my first response was, "This is for kids, okay? I'm way too old for this." And they said, "No, [indiscernible]. And we came in and looked at what literally was there at the time, which was a small business lending framework from rival bank. And the contract with Salesforce said, we can sell this to community banks under $10 billion. So there's a community bank commercial loan origination platform that we have to take to market and build enterprise trust off of. We sat back and said, number one, product companies get acquired. And I believe, when we truly want to change the world, we should be called a platform. That's number one. Number two, we wanted to stay independent because we truly believe we could change the -- something like Wilmington with [ 220,000 ] people, all right? So we had these much higher levels. And then the third thing is, with my background, I said, "Guys, wait a minute." This platform we selected gives us over [ 120 ] languages out of the box and over 120 currencies out of the box and an entitlement system check into that. So why would we stop in being a commercial [ origin ] system for community banks? Let's just make a big statement of what we're going to be one day, but narrow your focus, really laser-focused, on building the best products for one marketplace, and then we'll expand from there. So that's the approach we took. We had 7 people when I put up the sign nCino Worldwide [ has bought us ] inside the building. We had lots of fun with it. But for 3 years, we showed only commercial loans as community banks. And then December 24, we've got 2 big banks that have helped us to expand the platform, but also -- always architected as a platform that's going to have multiple products in multiple countries under multiple jurisdictions, okay? And so you could grow this thing. And then by 2017, we went overseas or international with commercial and origination. At the same time, in 2015, we started building out to do treasury management, sales and onboarding, to do account opening and [ establish ] consumer base. And so we went across with our flagship product, and we come out. And we always found the products mainly in the community bank space [ where Fed can permanently take them off of ]. And that gives us multiple levers of growth as we expanded. And I think it's proving out that the value prop of a platform that is client-centric for banks to actually remain this efficient and effective is proving its own health.

Excellent. And how should we think about where the platform heads in the next 5 years? You've obviously had some very nice expansion and really changing of the narrative from a point to a platform story. But do you feel like you've covered a lot of the meaningful parts of the value chain where you want to be, and it's much more about getting adoption in one of these areas and then maybe cross-selling something else? Or do you feel like, when you sit back and you talk to your customers and you look at your platform, there's some other maybe major or meaningful adjacencies where you could see the platform expanding into over time?

Yes. And you know the interesting part of our business, because we are innovation-minded at nCino, is that we call our platform the agile enterprise, which it allows people to make changes to processes without writing code. And they can change approval processes, credit policies, et cetera, as they get comfortable with automation, okay? But that was the first 5 years, and those products were mature, anything from retail, et cetera. And we get questions about why would I worry about when my retail customer to be on the same platform in commercial, et cetera? And yes, the real reason is all going to be the next 5 years. It's going to be about the intelligence you can inject in these systems. But if you run these point solutions, you never gather enough data, okay? You have to do it manually and somebody [ like tests on these ] data, or you cannot drive your high-level policies and procedures with intelligence into every step of production. What I mean by that is, for the platform, we are now adding very specific products coming out of analytics: AI and machine learning that will affect everything out of the bank, that's going to run from underwriting decisions through automation of the data entry; to pre-filled application forms; to next phase offering; to automated underwriting, which we already do our base scanning in tax forms and financial statements for small business as well as corporations. So as you look at the next 5 years, we call it, it's all going to be about intelligent enterprise. And we actually are going to provide those services through the app -- through the platform, okay? And so for instance, if I'm a consumer coming to your bank and I applied to something, I will get a pricing and profitability model ascribed to me that will determine how many fees I'm going to pay, how much -- what my rate is going to be, et cetera. And it's going to drive me to bring all my business as opposed to being a one account with you, all right? And so I think as the industry look at that, most of these banks are full-service banks, and they can't get away from it, okay? So that I'm going to embrace their customer holistically and try to capture as much business as they can, or they will lose out to the big banks. We've got to perceive the advantage of [ portfolio of ] tech and more than $10 billion in IT expense. And so I believe that this approach will give banks a great opportunity to compete from.

Excellent. And maybe we could just talk a little bit about the competitive environment. My sense in talking to a number of these banks is there's lots of homegrown, lots of custom systems out here running these processes. So maybe just help us understand what -- what's the most prevalent when you are getting into a -- some type of new customer or RFP situation? And what's the catalyst? If a customer has been at this for years on some systems they've built, lots of resources, lots of subcosts, I mean, what's the catalyst to get them to modernize to a system like yours?

Yes. Your typical obstacle is they spend so much on that custom system or an old system they install that exists on the balance sheet, and then who's going to take the fall for writing that off, okay? That is one major obstacle because we capitalize off that. The second obstacle is people just don't like change. I mean putting nCino, we need a place between trusting and friendly systems, okay? Now your catalyst normally is a management team that look at them more strategically and say, "Is there a return on investment looking at systems like nCino's?" And normally, what they find is the ROI is overwhelming. It's much more about change management and cultural change and how they're going to drive the institution and actually look at the long-term future. And that's why there's a conference by Bank Director called Acquire or Be Acquired. I think it's just the awesome title because bankers everyday make this conscious decision. Do I want to be an acquirer or be acquired? And if you want to be an acquirer and look at the future long term, and then you look at these investments and change management, you have to go through in a positive way. And you actually acquire banks, and if you put platforms in place, it's a lot easier to absorb that bank because you know exactly how you could do things, it's good you [ just had ] that in place, okay? So typically, it's financial. There's 4 value drivers we're seeing a lot. The first one was revenue. But entering a bank, community banks that matters or the very big banks, they more look at efficiency and cost savings as your other field, and then finally, compliance. With platforms like nCino, you literally push the button. You fully understand your compliance. You ask it for all the products we handle, okay? Whereas your traditional stuff, which was all manual work, the annual exam is a nightmare. Nobody wants to deal with it, and it's weekends and long nights, okay? So those are the 4 value drivers: revenue, efficiency, cost savings and compliance.

Great. Shifting gears a bit to the demand environment, which you commented on earlier, certainly, you commented on during the earnings call as well. It sounds like net new business was greater than upsell. This is really the first time since the pandemic had onset. So I'm just curious, when you look at your book of business and you think about the rest of the year, do you think this is a sustainable trend? Do you think it could revert back the other way? How are you thinking about this in the future?

What I think is because of the massive opportunity. It's a 12 billion of SAM, okay, in terms of the addressable market, number one. Number two, it's a global phenomena, okay? Number three, people told me at the beginning of retail, we'll be able do this. We've got great examples of retail coming our way. So I think, actually, it's a momentum in banking, just like when I was a kid, [ I haven't heard of ] ATMs. Automated teller machines came. Online banking started in '95 as [ dad ] came into [ bunker ]. Can you imagine being a vet without ringing any of those things today? And I believe that this momentum is now here to stay. Cloud-based banking, modernized systems is a fact. And if you don't get attacked by the new banks and the nonbank lenders, your neighbor bank, right next to you, is the first mover, will actually beat you out on every next deal. Because always remember, the customer only have 2 questions: Am I approved? And when do I get the money? And if you're just [ slow there ], you're always second. So I feel pretty good about the momentum and the conversations we have for the banks.

Excellent. And maybe shifting gears to the financial framework a little bit. Yes. I don't think you have to get too quantitative, but just when we think about the long run for this business, what should we think about in terms of the growth algorithm, what are the key drivers, what are you most focused on? Just would be curious to you speak to that.

I'll give you a quick high level and let David jump in here, okay? The first thing is, hopefully, you're seeing what the platform approach to international expansion we've gone through. But this management team is focused to be a large independent software company, changing banking for the future on a global scale. . I've challenged my management team, and I'm going to emphasize this is full of guidance, but we made this public to the Street. And I have to challenge the management team to think 30%-plus growth on an ongoing basis. We want to get to $1 billion of revenue as soon as we can. So I'm going to leave it to David to tell you a bit more of what's behind that.

Yes. So if you look at our -- we have 4 growth pillars. The first one is maintaining our commercial leadership. That's our flagship product. We're dominant in commercial, community and regional and on the enterprise side. The second is international, so taking commercial and retail mortgage or the mortgage side internationally. We have offices in Australia, in London, Toronto and Germany and France now. And that's a big focus of ours. We're adding heads onto the Continental Europe. It's great because commercial product can move offshore. There's not as much regulations you see on the retail side. The next one is retail, and that is a U.S. retail lending, international markets and digital account opening. And so we're investing on the retail side as well. It's maturing. There's a lot of interest from our customers. And then finally, they're plugging in analytics at every level of the enterprise as they're expanding our relationship within the commercial enterprise. And I think those are the 4 that we're focusing on, a lot of investment there. And if you look out over the coming years, we'll see leverage. We're still committed to being operating cash flow breakeven in fiscal '23. And so we are investing. I view it as responsibly investing for growth.

Excellent. And just to close out, many software companies have some type of forward-looking metric, could be RPO, billings growth, et cetera. I think with your contractual schedules, the phased activations, the minimums, it's less relevant to look at every quarter. So what would you point investors towards? Should we just be very keen on the new logo commentary? How should we be monitoring, really, the forward progress against having something like that 30%-plus type of growth over a longer period?

Yes. So I look at it as, I mean, all those metrics are important, right? RPO is just -- I view it as the signal of what our future revenues will be. There are all sorts of renewals that will flow in there. The other thing is calculated billings. People are calculating billings as well. But I think the most important thing for us is talk to our customers, right? Talk to them, figure out how they're using us, what the interest is to grow the products and add-on products and just their relationship with us. I think we -- our key main reason why we win and we continue to grow is because our relationship with customers. And it's the way they deploy the products, use the products, see the value from customers, I think that will give you a clear indication of where we're going to grow in the future.

I agree. And we've done some of those public calls with investors, and I think that's probably the best way to understand how you're viewed, really, from the bankers' seat. So gentlemen, I really appreciate you all carving out some time today. It was a really fun discussion. And audience, thank you for joining, and I hope everyone has a great rest of your day.

Thanks, Josh.

Thanks, Josh.

Okay. Thanks, gentlemen. Cheers.