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

Great. Well, we'll go ahead and do the second part of this automation spotlight series here today. We have the CEO and CFO of nCino. Pierre, David, thank you so much for coming to Nashville.

Thank you.

Thanks for having us. It's great.

This reminds me of Vail.

It's kind of a Vail 1.0. There's a pattern-matching that David remembers here over the years. Obviously, we're here talking about automation 2.0. It's one of the big thesis that we have, this idea that this maturing [ CDL ] stack coupled with labor, it's kind of an interesting catalyst for companies that are truly driving value in automating a business process. I think of nCino as a vertical software company, but having a really unique automation angle. It's not new. Actually, it's part of the DNA of nCino from day 1. But maybe, Pierre, talk a little bit about the role that automation has, the value that automation brings to a bank when you go in and pitch them your [ bankless pipeline ].

Yes. So the first thing is, in banking, it's brand new, okay? I tell bankers all the time, they should go and have industrial engineers and start acting like manufacturers. Because the only thing they really do is to take something, from a raw material, in this case a loan, which is an applicant, and they have to finish the process until they close the loan or say no, okay? And what is the difference to a manufacturing process? Would they ever lend money to a manufacturer who has no metrics, no understanding of the bottlenecks and no understanding of the capital outlay by machine and throughput, et cetera. And I would say we'd never do that. I said so why would I do business with you if you don't send your own processes, okay? And it really is that simple. And so when we started the company, we got a lot of feedback, people will never do this. The fact is, that there are competitive mechanisms that they have to adhere to. There's client demand. And if you can get a few to keep on going, so when we expanded the company, we really started doing it in places like Nashville. When you find one bank, you do it right. That will outperform the others, and then the others come, okay? And yes, the factors that play into it. The first challenge was to actually get your software on every desktop as people go through the process, that everyone works in the same system. Once you got that, you can fine-tune the process and you get the credit policy because all of a sudden, they found out that a lot of the information they're asking for, they either waive every time or they ignore in the decision process. So why are you asking the customer to go through all this motion to do it, you're never going to use the data, okay? And then once you've got what we call nirvana, the automated process is highly efficient, et cetera, by product type, next to risk, the next frontier, probably the next 5 to 8 years, is going to be driving integrations and intelligence, which is AI, machine learning, analytics, into the platform at every point of decisioning. In other words, every time that there's either a stage gate or a person making a decision, what value can we add by assisting with insights into data, external data, internal data, analytics and guide them to remove biases. Because in lending, I'll give you a good example, and this literally happened, to give you an example, an underwriting -- underwriter, 15 years ago, had a limousine company loan go bad. That same person has exactly the same role today, had never approved a loan from a limousine company ever again because that's bad business, isn't it? That same bank has thousands of limousine companies borrowing from them. And so what you can do is with insights, you could pop that up and say, look, yes, your average book, you have to run performance by that industry type or that business type, and actually automate that and remove human biases, which is quite important.

You digitize the process. Now you create this digital workflow, end-to-end connection. As you think about what's capable in the cloud today versus, let's say, when you started the company, is it easier? Is it easier to build these add-ons? Obviously, you're having success with nIQ right now. Is it mature enough, where that's a catalyst? That's one of our thesis. Or not? It wasn't -- it didn't exist 5 years ago, and it exists today. It's just the digitization of workflow is what you had to have...

No. What we are seeing now is there's an expectation that we're not only going to automate the workflow, we're actually going to automate the insights, intelligence, machine learning, et cetera. And we're doing it, all of it. So demand is coming. Finally, the marketplace shifted, where they said, the thing is real, we see a return on investment and how can you go quicker. So now, you're dealing with a demand curve that's accelerating.

One of the double-edged swords of automation, David, is fewer bankers are required. That's a benefit, but not when you price your product on a per-seat basis. So think about offsets. Are you able to raise price per seat as you think about adding more value? How often did you do that? Are you introducing more usage-, transactional-based products into the system to offset some of the automation-based benefits? Walk me through that -- the double-edged sword of the business model side, bringing automation to a banker.

Yes, at the end of the day, if we do our job right, there will be less bankers. There will be less seats available. And we have added products that price on a firm's assets, right, and also transactional. So auto spreading is based on a minimum transaction. And we always look to minimums, right? SimpleNexus is a mortgage company we bought. They had minimum seats that they sell into. And I think that's the key. I think, over time, the pricing model will evolve to where you have a foundational pricing model, a foundation fee, engine fee, and then you'll price based on whether it seats at a lower rate and/or a transaction for something else that drives value for the bank. It truly comes down to partnering with them so they understand like that we're adding value, we're paying for this value, but ensuring that us, as a company, that we have a foundational understanding of what we're going to make so we can make proper investments for the future.

Makes sense.

I can assure you, if we are instrumental in helping a bank to become more profitable, we're going to show you.

One way or another. On that point, as you think about the value you're adding here, where are we at? Like how much runway is left for you? Top 50 banks in the world. What's your share, top 100 banks? What -- how many of those banks have automated maybe the commercial side of the workflows? And then how many of those banks do you think are automated on the retail side? Just level-set where we're at today.

Yes, we're at less than 5% market share. I mean this whole game is just starting. You have to realize, in Europe, they're still talking with the cloud idea, okay? Canada, we've got 5 of the top 7, but it's commercial. Overall, we've got about a 10% penetration rate, if you do a seat count. But remember, that's purely seats. If you look at nIQ, which is our AI, machine learning, analytics platform, we believe there's a 20% uplift in your current contract value, and that's not even including retail yet. So there's a massive market. Every time I hear people say, well, will they ever come to small business, will they ever come to retail? We build it and they come. So I think it's our objective to take the customer base, talk to them and build more product that they need and want as they open their eyes to the potential and possibility for automation. And that's happening as we demonstrated with nIQ.

Obviously, Rabobank, largest nIQ customer on the automated spreading side. There's, what, 3 nIQ products now, I think, or 2?

Yes, for -- in nIQ, auto spreading and then commercial pricing profitability.

How would you -- a large bank, what would the large bank spend on 1 of these 3 products? Could they spend $0.5 million a year? Do they spend north of $1 million a year on this product? Just trying to gauge how big could each of these 3 products become...

No, they could spend more than $1 million on a product very easily. Yes. But you have to look at the value you provide and the ROI models. We have both to prove out what the uplift is.

And when we talk about nIQ, we say it's a 20% uplift to the current relationship with the customer. And we're seeing that as coming through, right? Commercial pricing profitability probably has the higher potential in terms of ACV contribution because that's a lot of value you're bringing to customers. But yes, normally 20% is our assumption, a conservative assumption on the SAM that we've added with nIQ.

Obviously, you're selling to very large banks. Macro headwinds, obviously, are intensifying here. What are you seeing relative to the headwinds for the business? Large deal delays, we're starting to hear. How is that impacting kind of your business, both parts of the business, credit unions and then some of the larger enterprise banks?

No. What we see today, mostly that is in Europe. I went to the lunchtime precursor for the session. So I'm a little bit more careful after lunch than I was before lunch, okay? But the fact is, so far, digital transformation is such a global shift for banking and how they work. And there's other factors purely than affordability, it's actually how could you not do it? You run into things like compliance, whether you have to do it because they can't comply anymore. In Europe, we see a whole ESG initiative. So we're building a product for that. We're actually going to help European banks to understand their portfolio, subsegment it by ESG components, price according to ESG rule cases, et cetera. But they're leading on that front. In the U.S., I would say we're leading more on a customer-focused efficiency, throughput, model, shareholder value, et cetera. It's just how the value systems, even banking systems are. So I'm optimistic that we are at the right place, right time. You get other external factors, like in Japan, aging population. When you go there, it's palatable how scared they are of lesser people to do more work for the long term. I'm seeing that same phenomenon in Australia. So that mix of factors, I think, bodes well for us, but we are not cavalier about it and fairly careful.

U.S., any sort of additional layers of scrutiny you're seeing? And you had large U.S. deals, or that's not in your environment? You've always had multiple layers of scrutiny, I don't know.

I think it's more a cultural -- maybe you're 62, you've got 3 years left with the bank and are you going to be the guy who's going to change the bank. And so we have to [ outweigh ] you, okay? And then we get the next person who's ready to go and change the bank up. That is a much bigger factor than any of these external factors. It's a cultural inertia in the bank.

The change catalyst...

100%.

They have to have a change catalyst...

If they had their way, we would probably be back in 1970 or something...

If you think out the business here, we're $400 million revenue run rate, 25% organic growth rate. Obviously, the second half outlook suggests you're going to moderate a little bit, but maybe walk us through visibility you have in the business. It is a slightly different model than most traditional SaaS models. So walk us through how much visibility you have and kind of how the product is priced and recognized.

Yes. So on the organic side, we guided to 28% organic growth for the year and 27% for Q3. There is a stub period for SimpleNexus in Q4. So we noticed investors are coming up with the 25% number, but it has to be in 28% for Q4. So just to make that clear. On the pricing side, we price by seats. When we sell a product -- when we sell a deal, you would ramp those deals into revenue. So it's activated by contracted date into revenues. We have phenomenal visibility entering into a year. We have about at least 90% visibility on the subscription side, and then that improves throughout the year. So you think about the impact on bookings closing in the third and fourth quarter, majority of those bookings end up landing in next year for revenues. And so we're already working on next year. You have some that will flow, right, because you -- when you sell something, you might activate in month 3 just to get the project up and going. Large deals will activate over a longer time period. But what we're working on now is a little bit of contribution to revenues for this year, but then it will all flow into next year so seats activate. And so we're mindful of that. I think it gives us great visibility in terms of investments that we can make. And we like to guide to a realistic model when we guide to The Street, an achievable model when we guide to The Street on our earnings call.

Accelerating path to profitability, focus for the company right now, how do you get there without like hurting the growth opportunity? You have less than 5% penetration there. So how do you just balance that, Pierre, as you think about like we're going to be focused on profitability, but at the same time, there's a big opportunity like that?

If capital was easy to come by for so long, there literally is an element in the company's culture. Can we do something? Yes, give me 10 people. It was just such an easy answer, okay? What we've realized is to client would add over 700 people. And it is just time to pause, bring them back into the office, kind of read out the inefficiencies and get this thing under control. But before we do any of that, we always make sure we cover the SAM. Number two, we serve our customers in support. Number three, we have the PSO resources because that does revenue and your implementation. Once you've covered the 3, we look at the global infrastructure we put in place for [ GA ]. And that's in place, and so we will get leverage from that. And then finally, you look at product development. We've fully staffed all the different elements that we want to do. And we feel that there's a lot of slack in that chain because we hired so many people, they were busy onboarding, training, getting people ready to go. And we have a fairly low turnover rate. So I think if we can just stabilize that, we're going to see a tremendous productivity uplift, and it should not impact growth at all.

And I would note, too, that we had originally, on the IPO road show, we wanted to be profitable in the core business in fiscal '23. So if you take out the SimpleNexus acquisition, we are profitable this year. We will be profitable in the core business this year.

Okay. Interesting. I have 2 last questions for you. The first one you might not love, but I'm going to ask it anyway because I have pushback from investors all the time. The pushback is you're the best house in a bad neighborhood. If I look at software, finance, selling into banks, a lot of those companies haven't done very well in the last year, 1.5 years. But you're doing very well in that market. You have a very proven sticky product. How would you reframe the debate with investors that you're just in a bad neighborhood. Good house, but just in a bad neighborhood.

No, I think you have to look at banking software in different segments. Transaction processing or in the money movement business is a commodity. And you have to recognize that. If you look at online banking today, there's a dime a dozen, there's companies who can do it, they can replace you, unplug you, et cetera. If you look at the nCino product suite and the problem we're solving, you literally cannot unplug us. We replace between 15 and 20 systems at every implementation, okay? There is nobody else who has built a comprehensive suite that will do the collateral, the particular systems, the workflow, the underwriting, the intelligence, et cetera. So once you're in there, these systems will stay in place 15 to 20 years. So that stickiness, the lack of churn, that matters. I think the growth rate in banking, reputation matters, so the whole nature of what our customers say and what they're going to use. They use us as a platform for acquisition. So I think there's a bolt-in growth rate there. So I do think you have to segment that out and see what we're doing and actually understand that we live in a pretty good neighborhood, which is the business transformation of selling systems.

Last question, we've obviously spent a lot of time talking about risks, talking about what could go wrong. Maybe I'll start with you, David. What could go right for nCino in 2023 that maybe could offset some of these clear macro risk factors that are out there? I'll start with you, just given that Pierre was in the lunch session, so maybe he'll have a little more time to think about that. Go ahead, David.

No, I would argue like there's a lot of good going on now, right? We've got -- the commercial product can sell anywhere in the world, that's world-class, right? Nobody can beat us on commercial. We've got a retail product that we're rolling out, U.S. retail lending and digital account opening. We had some stumbles last year. We've come back. The product is showing extremely well. We went live with a couple of large customers this year, extremely well-received, and then in turn, have added additional products to the relationship. The nIQ product, auto spreading, is wildly popular with our customer base. We think every customer can use auto spreading. It is -- it can save you money. Like the value is there, right? Scanning financial statements, scanning tax returns, you become more accurate, do more deeper analysis with it. And then finally, on the commercial pricing side, it is, I think, a newer product, we've had a handful of deployments there, but we're seeing interest from bigger banks, too. And then finally, SimpleNexus, we got them into the mortgage market this year. I would say we're somewhat pleased with the performance. We were able to forecast properly in Q1 and Q2 and maintain the guidance for the year. But that's turning out to be the best product in the space. It shows well. Customers like it. Consumers that use it love it. It is a complete homeownership system that customers can use to actually buy a home. And there's collaboration all around it, and we're seeing competitive wins there as well. And we're pleased with what we're seeing there, and the feedback from our sales teams, too, has actually been very strong in the potential for cross-sell. And I'll hand it over to Pierre.

Anything else you'd add?

No, I'll just say that why do we sell to banks? Because that's where the money is. I mean I'm not kidding you. The deficit of bank automation is so massive that the business will continue to go after those markets. And I think it's a great marketplace.

Well, we're out of time here. Thank you so much for joining us in Nashville here. It's great seeing you again.

You bet.

Thank you very much.

Thank you so much.

Thank you.