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

Good morning, everyone. Welcome to day 2 of the Barclays TMT Conference. My name is Saket Kalia. I cover software here at Barclays. Very happy to have with us the team from nCino. We've got Pierre Naude, Chief Executive Officer, also have David Rudow, Chief Financial Officer. Just to frame out the session here a little bit. We've got about 25 or 30 minutes together. Maybe what we could do is I could take the first 15 or 20 minutes with just some fireside chat here with the team. But I'd love to make this interactive. And any questions from the audience just feel free to e-mail me at [email protected]. We'll do our best to get through as many of the questions as we can. So, with that, Pierre, Dave, thank you so much for being with us here today.

Saket, always great to be with you.

Right back at you, man. So maybe just to sort of start us off here. Pierre, you completed a very successful IPO in July of last year. You've had several public company quarters now. Maybe for those of us that are a little less familiar with the business, Pierre, maybe you can just recap some of the biggest drivers of the business today. And Dave, maybe to complement that a bit, maybe you could just fill us in on some of the key financial highlights from the most recently reported quarter that you were particularly proud of.

Yes. Thanks. Saket, as you know, we specialize in automating processes in banks to make them more efficient, more customer-friendly and or like a fintech, okay? And in that vein, what we do is we process the most complex commercial loans down -- all the way down to a simplistic, personal -- individual loan. We onboard customers and we open any account. And these are complex processes highly regulated. We're a global company. We operate in seven countries, and we've got customers on many more. Our main growth drivers now is to expand and accelerate our global lead in commercial loan origination and small business. On top of that, our international expansion is a significant growth lever for us, and we've seen great success outside the U.S. in places like Canada and U.K., Ireland, Western Europe, Australia, New Zealand and Japan, and we're still expanding. On top of that, we've got this thing called nIQ, which is in nCino IQ, where we actually bundled together all our AI machine learning and analytics. And we've got some fantastic products coming out of there. That's like a layer cake on top of our current licensing models. So that's an incremental revenue stream as well as a differentiator in the 1% and on rates we get. And then finally, we're expanding into the consumer lending and deposit account opening area, which is all new greenfield for us, and we're seeing great success there. That is a highly regulated environment. What happens to you there as you go in, you run a number of accounts, and then you have to make sure those projects are successful. And then you fine tune your software to actually be more compliant in out the box and literally a plug-and-play model. But those are the priorities, levels and growth levels for us as we go forward. David?

Yes, we had a very good Q3, very strong Q3. Very happy with hitting the $70 million mark in total revenues. RPO grew as well, and that shows the strength of the sales that we had in the quarter as well. I would say Q3 was better than a normal Q3 was because Q3 is our second seasonally lightest quarter from a bookings perspective. So we have good activity in the second quarter. Community regional actually came back in the quarter. It was slower in the beginning part of the year. COVID, I think, impacted that market, but it was very good to see that come back. We still -- about half of bookings in the quarter were new versus existing. So that tells you that the market is, in fact, investing in digital transformation. And then the international deals as well. It's great to see the win in Japan, our first win in Japan. We had a deal in New Zealand. Just overall pleased with the performance that we had in the third quarter.

Got it. Got it. A lot of great tidbits across both of those that I'm sure we're going to dig into. But Dave, again, just for kind of foundational purposes, maybe just one for you here. You talked about RPO and some of the other metrics that we should be looking at. The rev rec here, as some of us know, is going to be a little different than a -- what I'll call a traditional SaaS company. just to make sure we're all on the same page. Can you just recap for us kind of how the mechanics of a contract waterfall into revenue sort of works here? And about how long it takes before a deal that nCino signs could become a more material part of revenue? Does that make sense?

Absolutely. We have a unique model. We sell a contract and then we have contracted dates where the seats are activated during that deployment. So unlike Workday where you get 100 seats and you pay for how seats on day one, we have an activation schedule. So for community to reach a deal, a smaller deal, that seat activation schedule is 6 to 9 to 12 months. And then for an enterprise deal, it's 12 months and for like a mega enterprise deal that will be on the 2-year period of activations. And so that gives us great visibility into the model. It's better for a customer during deployment because they've not paying for 100% of those seats upfront. And it really maximizes the total contract value of those contracts over -- with each and every customer. So great visibility that we have with this model.

Got it. Got it. Pierre, maybe that's a good segue for you just in to. Again, certainly, we are the new business versus existing business mix certainly shows that we've come a long way since the pandemic. But I was wondering if you could just talk a little bit about how COVID sort of impacted the business? I mean nCino quickly rolled out a tool for banks to process PPP loans when those launched early on, which maybe encourage customers to adopt the platform a little bit earlier. What have you seen from those customers in terms of buying habits sort of since then?

Yes. So it's very interesting. In 2020, March, when this happened, you literally have the shocker factor what's going to happen in the market. And what we saw is there was about a 6-month freeze in big software buying decisions at the enterprise level and the community bank region, that, I would say, freeze lasted more like 12 to 15 months, okay? And so what that did is we replaced all of that with PPP, which was the government loan process to help small businesses and actually generate debt, that was a great inflection of content. And so what that did is we replaced all of that with PPP, which was the government loan processes to help small businesses and actually generate debt. That was a great inflection of contracts, but also a rev rec anomaly to our normal processes. So what you have is you know your normal steady growth rate the veritable and signal as you could see everything in the model. And then boom, all of a sudden, you have this accelerated growth because we signed the contract and we turn on the seats immediately. By the way, we also had a similar effect in the U.K. receivables and [ bill books ], okay? So all of that carried us for that 6 months until the business starts getting back to more of a normal cadence. So you had an accelerated growth rate then because of it. And at some point now, those seats either get redeployed, and we've been very successful to date in doing that. And the final pieces of that will probably come over the next 12 to 15 months here, okay? But yes, the effect. If you're running at $100, and you add $10 on top of PPP, and then you even redeploy the $10. Your growth rate is still 0. So you have to understand there's a mathematical effect that PPP and accelerated growth rate they actually have a negative push down on that. But I will tell you, we're proud of how we helped the banks. We explained this to the Street. We're very transparent on the PPP effect, and we also look at the underlying health of the business. And we've said many times before, our management team wants to honor the 30% growth rate for the foreseeable future. We believe that's what the growth company should do. So yes, you have this anomaly of the PPP seen for the past 18 months.

Yes, absolutely, absolutely. David, maybe just to put a bow on PPP. I mean we talked about sort of the lagging effect, right, putting aside sort of the upfront rev rec that Pierre was talking about, we talked about how sort of the lagging effect of bookings into revenue is unique here. I'd imagine that some banks were really penciled down during COVID, focusing on PPP and the rest of their book. I guess the question is, how have those periods of COVID-impacted bookings affected your revenue model in the most recent quarters? And how should we think about that impact kind of going forward? Like when do we see the lagging impact of COVID-impacted quarters actually start to dwindle a little bit, if that makes sense from a revenue perspective?

Yes, yes. So we had 3 quarters where it was -- bookings were mainly PPP. So you get those onetime activations. It's in the model. But what we were missing though is no bookings that have an activation schedule. So we kind of have a hole in the model for 3 quarters, right? And if you roll it out, assume a 12- to 24-month average period, that will tell you how long that will impact us, right? So it's impacting us now and probably in the first part of next year. But then it should improve after that. So I mean, if you understand your model is great on nCino with the activation model, everybody should look at your model and understand that how these activations impact revenue recognition looking out in the future. I think it's important to just plug it in and see how it works.

Yes, yes. No, absolutely, because you definitely do start to see some of the impact of those quarters starting to dwindle as you said in the first half. But then really the strength that we've seen in the last few quarters starting to pick up a little bit as well. So interesting time potentially next year. Pierre, I'd be [indiscernible] if we didn't talk about international because over the last couple of quarters, it's just been one logo after the other. I mean, we talked about the first customer in Japan through your joint venture. I believe you signed your first customer in Germany or a quarter or two before that. How important is it that for those banks to sort of be reference customers as you sort of land and expand, hopefully, in those countries even more?

Saket, it's extremely important because, as you know, banks are a conservative buying group, and they prefer vendors with trusted and tried solutions. And so the big difference, although Europe is a -- or international is a bigger SAM or serviceable addressable market than the U.S., so it's an exciting market, the wherewithal you need to actually go and compete there and the patience of the investment is different because, quite frankly, you want to bank in Germany and then the German banks will wait for that success to actually percolate you right before the next one will buy. We're beginning to see that effect now, okay? Depending on the time frame when last year sold the first one. We go back to U.K. and Ireland, we saw the same phenomenon and then the rest will come. Yes, great news. Once you've got that first two, three going and their references, then the dominoes fall because you become that true and trusted software vendor who's actually standing by their product. So what I'm seeing is, it is critically important that we are successful by country. We've announced that deal in France. We've got Germany going. We've got a nice customer in the Netherlands. We've got U.K., Ireland going. We've got Australia, New Zealand going, we now got Japan going. And all of these little green shoots as they come up and I get the next ones, this thing will accelerate. So we are very excited about the international expansion and also the fact that how the brand is actually becoming household name there. So it's going well for us, yes.

Yes, absolutely. That's a much broader international footprint than I sort of mentioned in my question. That's really interesting. Dave, maybe just to sort of focus in a little bit more on the quarter, I think you just reported a couple of weeks ago. A question I've gotten sort of was, coming into the quarter, I think -- or maybe earlier this year, I think that we maybe thought that this most recent quarter, Q3, would be maybe what we call sort of the trough in subscription growth. Again, right? Just kind of talking about the mechanics of bookings to revenue that we were talking about earlier. I think some of us kind of thought about Q3 maybe being that trough in subscription revenue. And certainly, the theme of acceleration is something that's already come out here in this presentation, right? So maybe we would have thought that there would have been some acceleration in subscription revenue starting in Q4. But based on the Q4 guide, it seems like maybe -- maybe it's a little bit slightly different. The question for you is, what's changed in the past few months? Or would you say that there is some conservatism, right? But hallmark, I think, of the strategy so far. But would you say that there is some conservatism that's also part of that?

Yes, I think we had some deals that closed earlier than expected. And so those seed activations do throw off the over quarters. And I think that's really what's happened. We had a very strong Q2 as some of those deals closed earlier than we anticipated, had some great performance. I think that's the reason why it shifted kind of the growth rate this year to where Q4 now, which seasonally we're experiencing just a lower level of seat activations, we think that's the way Q4s will be. If you go back to time, you have annual budget cycles for our customers, you have the holidays. And what we're finding is there's less number of seats being activated in the quarter, and that's the reason for the up a little bit sequential increase in our revenues for the fourth quarter on our guidance.

Got it. Got it. But presumably not a bad thing to be closing some of those deals earlier than you expected. It may throw up the year-over-year growth rates, but a timing issue, right? If anything. You want to get those customers signed as quickly as possible. So definitely a timing point, I think, is the sense that I'm getting here.

Yes. And I think it's important to note, Q2 was dominated by enterprise, and it's abnormal to close those big deals midyear. Sales force did a great job. The health of the market is great, but we did execute quite well. And I think it shows you the level of commitment our customers have to digitally transforming their business and really closing those large deals and committing to us at that time of the year. I think it shows the strength of the business.

Yes. Yes. Absolutely. Dave, maybe I'll just stay with you just for another financial question that we've gotten. Just -- I mean, listen, RPO is a really important metric. Subscription is a really important metric. Historically, I haven't gotten many questions about billings in the past, but maybe got some questions on billings this quarter, right? Like which there are -- could be tons of drivers around billings, but can you just comment on billings a little bit? How it performed? How do you think about that metric going forward?

Yes, that's great. Yes, you had a number of questions on calculated billings as well post call. For us, it's just -- it's not a meaningful metric. We don't use that to run the business internally. I think to note, our contracts are not 100% annual for all of our customers, right? During their deployment cycle, there are seat activations that happen that don't repeat on a year-over-year basis. So the seats activate, we build the pro rata between that period and the billing cycle and then you move on to an annual billing period for that customer. Also, there's add-on sales that happen that then coincide with an annual billing period in future periods. And then, of course, like any software company back end, bookings would result in delayed bookings. But specific to our Q3, we had PPP billings through add-on sales to existing customers that happen. We had a 2-year contract that was billed in October of last year. And then we also had a customer that was acquired that moved from their normal billing cycle at Q3 to the acquirer's billing cycle, which was different than Q3. So those are the reasons why the numbers were -- the compare was tough. Now you have these nuances every single quarter out there, but these are some of the outsized ones, especially in a seasonally lighter period, which is Q3 as our lowest seasonal period, that throw that number off from a comparisons perspective. So Q3 last year was quite strong because of these. And I would say Q3 this year is just a normal billing cycle that we've seen with no real kind of onetime items in there. On the RPO comparison, right? Billings is you have seat activations that change things. You have add-on sales, you have any billing cycles. RPO is truly that measure of all of our contracted revenues in that number. So you really can't compare the two. It's a less than 24-month number, billings is an annual and then you have more than 24-month on the RPO side as well. So that's the reason why there is a bit of a difference this quarter in the calculated billings number.

Got it. Got it. That's really helpful to understand some of those moving parts in billings as well. And I think, if anything, maybe just reinforces the importance of that RPO metric to gauge the health of the business. Got it. So maybe we'll shift on from Q3, and, Pierre, I'd love to sort of switch gears and you brought up nIQ and the retail solution a little bit earlier. I guess the question for you is, how has the early reception been to customers that are fully online, I guess, with the retail solution? And how big of an opportunity do you think that can be, again, to sort of complement what is a leading commercial lending business, if you will?

Yes. So as I always explained, Saket, retail consists of three components, okay? There's your deposit account opening and onboarding solution, there is your consumer lending solution in the U.S. and then there's international mortgage, okay? The markets are strong for that. The demand is big, and we clinged out of the blocks and sold quite a large number of those and went into project mode. What we've found is in project mode is that it's such a highly regulated environment. And then you find nooks and crannies or use cases by zip code, by county, et cetera, and then sometimes just have to rework that. So we slowed down the sales force to say let's get these projects in place because we play the long game here. I want to keep that reputation of the best software in the market going. And so we held back so that we can catch up with our project teams and our product to mature to that point. And now we've narrowed the go-to-market strategy with that retail lending solution to really hit the nail every time we do it. We can plug and play and go in there and automate it. So there was a slowdown on the sales of that, specifically ordered by the management team. to catch up with the project. We're through that trough now. We've refined our go-to-market strategy, and we're picking up sales again. The customers whose live on the product loves it. They understand the value of the flexibility. The modern software is a lot more agile, and they can do things a lot faster, and we see it in the volumes they generate, et cetera. So the excitement is there. The mode of this thing that excites me is the investment and the effort to get here. So not many other people are going to try this. So I feel uniquely positioned with this company and that solution as we fine-tune it that there's going to be an exciting opportunity in market. International mortgage is a different one. That's an enterprise market, okay? We see great interest and reception as we're building up. There's some very interesting discussions going on. But enterprise is lumpy. You could sign one massive deal one quarter, then 3 quarters, nothing happened just later of any enterprise business. But all of those initiatives, the market is telling us we're doing the right stuff. So I'm excited about it.

Yes, yes. Absolutely, Pierre. Dave, maybe just to add a little bit of color to retail. I mean, can you talk a little bit about the pricing in retail, sort of compare it to commercial? That's different, I mean, there are other retail solutions out there that maybe are -- have a little bit more of a volume-based component. I don't think that's the case here. Can you just remind us how the pricing here for retail works?

Yes, it's all seat-based -- our selling model is seat based. I think what we saw kind of -- as with any product, you have -- you discount a little more initially to get the deal and to deploy it. I think what we're seeing is, as we're selling more product, it does come at a slight discount to commercial, but there's a lot more seats. There's twice as many seats that are available in a retail deal than commercial. So a little bit of discounting to account for that. But as we roll out the product, get the customer reference, I think the product and the platform is what really sells retail.

Got it. That's an interesting tidbit. I never realized that retail opportunities have -- certainly understand sort of the lower pricing, just different P&Ls for a bank, right? But the higher seat count for retail opportunity is interesting. Pierre, maybe just in the time that we've got left, I'd love to shift over to the SimpleNexus deal that you announced a few weeks ago, understanding that it hasn't been closed yet. How do you describe the strategy behind that deal? And I think some of us that may be covered Ellie Mae and the Mortgage LOS guys in the past sort of thought, "Oh, boy, this is going to compete with Ellie Mae." I'm pretty sure that's not the case. But maybe as part of that, maybe you can touch a little bit on just who the main competitors are here in this mortgage point of sale space?

Yes. Yes. So let me explain, because it's an interesting the use cases of what I believe is a tremendous asset with a lot of strategic value. SimpleNexus is focused on automating the home buyer experience. So firstly, it goes much broader than "I need a mortgage application", okay? And that's what intrigued us, #1. #2 what intrigued us was the fact that SimpleNexus has a seat-based model and on a transaction-based model. So today, in the market of the well-known companies, the best in competitor is probably Blend. Blend Labs is exactly that same compatible product. But what I would say is more focused on mortgage application, where SimpleNexus is truly have a browser experience, it's got an Apple iPhone app and it's got an Android app. And in these apps, the loan officer, literally, ask the real estate agent as well as the borrower to all download the same app and they create this ecosystem where they actually work together on completing the mortgage, the home buying experience, get your insurance, you get a security system, do the e-closing, et cetera. So it makes it very sticky because it distributes and goes vial amongst all these people. And what intrigued us was, the point-of-sale solution, if you look at [indiscernible] divisionally from the commercial side, middle back office expertise second to none, okay? And now we have a world-class point-of-sale solution at the front end, which could be extended to other solutions like retail lending, cloud opening, et cetera, down the line if we want to, okay? So that's a very important thing. As you look at Ellie Mae, we made 100% there. We have no plan to go compete with Ellie Mae. Ellie Mae is a mortgage LOS for conforming mortgages for Fannie and Freddie, okay? I don't want to go into that business and drip and replace it. However, SimpleNexus will be the point of sale or funded for the nCino retail suite, including our portfolio mortgage, which is when you, Saket, by that $15 million home in new mortgage is $10 million, that typically stays on the bank's balance sheet. And that loan may be processed by nCino and stay in the balance sheet.

Got it. Got it. Very helpful. Dave, just maybe to complement that a little bit. And again, I know we're holding off financial commentary on the deal until it closes. But can you just remind us what you've said around timing of the close? And any financial impact that you've talked about as well, just to make sure we're on the same page?

Yes. We expect the deal to close by the end of our fourth quarter, which is January 31. We talked about a trailing 12-month revenue of $41 million and an annualized revenue based on our September numbers of $54 million, right? We also talked about the majority of SimpleNexus' customers are on monthly billings as well. And then we will update after the deal closes.

Got it. Got it. And employee headcount, just to -- I know we're talking about -- now we're talking about sort of expense contribution, but just for context, anything you can say about employee headcount?

Yes, we think it's around 300 people.

Yes.

Got it. Got it. Very helpful. Pierre, maybe one last high-level question for you. let's take away rev rec, let's take away all sort of the financial stuff. You spent a lot of time with customers. How do you feel about the health of your end market now? I think what we all see that's affecting banks, right? Is rising rates. You've seen a lot of cycles. I mean, how do your customers sort of behave in this type of backdrop? How do you feel about the end market going into 2022 open ended?

Saket, I honestly believe that this market is as good as ever. And nCino has promoted the cloud and the flexibility it provides since 2012. And I'm seeing that message resonating more than ever the digital transformation aspect of this. Because the next initiative coming after this of this transformation are things like embedded finance. How do I participate with the Amazons and the Googles of the world, okay? How am I going to answer ESG and portfolio management, okay? If you look at all those big strategic shifts in the market, nCino was available and actually ready to execute in all of those places. When I go to Europe, the people talk for the first time about the cloud with ease and was a trouble before. ESG is top of mind. Portfolio analytics from nCino was 100% in the market. They understand the efficiency issues they've got there, but they have to do the visibility into their pipeline, how their workforce, execute, et cetera. So on a global basis, I see a momentum that I've never seen. I think people are ready to come out of this pandemic and focus on strategic elements and actually maintain banks to be relevant for the future because that's what we're fighting here. Because our bank is going to be relevant in the future or become a back-end utility for fulfillment engines like Amazon. And nCino's role is to keep those banks relevant, operating like fintechs, be nimble and fast and that's our mission, and I think the market knows that.

Got it. Got it. Very interesting. Dave, maybe just last question here on the couple of minutes that we've got left. I'm going to ask you to put your IPO hat back on -- can you remind us what you've said about the long-term operating model here? I mean, obviously, the focus here is very much on market share, land grab and growth. But can you remind us what you said on sort of longer-term goals in terms of profitability, anything on timing or scale open-ended?

Yes. That sounds great. So we expect in the long run to have a 75% subscription gross margin and a 70% total gross margin. From an operating -- non-GAAP operating income basis, we expect 30%. We don't put a time on that. We are a growth company. The priority is to invest for growth. We -- I would like to say we're responsibly investing for growth. We look at every strategic investment measure whether it's going to cost and what growth contributes to the company. We do think that it is important to reach cash flow breakeven next year as a stand-alone nCino. And that's the goal. I mean we are a growth company. We'll continue to invest for growth with an eye on profitability as we get scale.

Got it. Got it. Well, I can't think of a better way to end there. Of course, we've always got more questions, but I also want to be respectful of your time. Pierre, David, Thank you so much for your time. Wouldn't be a conference without nCino. Thanks a lot for making the time for us here.

Thanks, Saket.

Thanks, Saket. You have a great day.

Appreciate it.

Excellent. You too folks, bye now.

Okay.