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

All right. Good afternoon. My name is Alex Sklar. I am one of the software analysts here at Raymond James. Very pleased to have nCino with us this year. We have David Rudow, Chief Financial Officer. We're going to do a fireside chat. I'm going to open it up to Q&A in the audience about halfway through. If you have any questions, just raise your hand in the back.

So David, just kind of as an overview on the company. There's some conflicting trends kind of impacting your target financial institutions right now. But thematically, nCino is benefiting from kind of the digital transformation at financial institutions. So just kind of as an overview, can you talk about how nCino's -- your key value propositions and how those have evolved in the current macro?

Yes. Nice to meet everybody. Good to see you this afternoon. Yes. So nCino, when we go out and sell to a customer, we have a value team that goes and actually works with the customers' data. So they digged out the data, they do the analysis, they help present it to the Board. We sell on a couple of different items. First one is revenue. You can get time to revenue much quicker with an nCino platform. The next one is efficiency. So you can gain efficiencies with your team within your bank or financial institution. There is also the item of compliance. So if there's a regulatory burden, we also help with the regulatory side. It depends on the market. If the governments are pro-regulation like in Europe, a lot of the sales just go directly to the regulatory side. And then also, it's about revenue generation, too.

Got it. So on the demand environment, it's pretty topical right now, obviously, with the -- globally with the macro, you do have some international exposure. What have you seen kind of in your own markets in terms of driving your greater focus on profitable growth?

Yes. So this year has been interesting. We entered into the year we acquired SimpleNexus. It's a mortgage company. The mortgage market has been challenging, to say the least, this year. Europe has also been more challenging than we had anticipated. And so we've been building a pipeline there. There's a lot of nice activity. We closed a big deal in Q1, but it's been very quiet throughout the quarter -- throughout the year, really. We've seen nice trends internationally. We closed our -- one of our biggest international deals in New Zealand last quarter. That was a great win for the team. And then even in Japan, it's a small country for us. We've been there 3 years now. We're seeing nice traction with the banks. And the great thing about Japan is it's a wonderful market for us because it's very similar to the enterprise and the regional space in the U.S. The trends are there. There's an aging population, aging infrastructure. We've worked with nice SIs there as well, and the SIs actually help run the bank. So I think we're very well positioned looking into the Japan market. Canada last year was a phenomenal market for us. We closed 3 of the top 5 banks in Canada. If you look at kind of how we roll out product around the world, that's a great test case. You get there, plant people in-country, get a bank up live and running and then we can sell behind that. And then in the U.S., the trends have been good so far. Community regionals had a good year this year after kind of bouncing around after COVID. We did see some signals of caution during the quarter. It didn't inhibit our ability to close the deals that we anticipated. And it was -- it ends up being the U.S. remains strong. Enterprise was good last year. As I said, community regional is coming back. SimpleNexus is what it is. I think we're well positioned on SimpleNexus though. And then the nIQ products, too. I think nIQ is a great proof point, and it ties in -- it makes the product a lot stickier, too. And so we've had auto spreading and commercial pricing and profitability that we're selling this year.

Got it. I definitely want to hit on those nIQ products a little bit. So just on the serviceable addressable market, $16 billion, obviously, a lot of runway, greenfield opportunity, particularly internationally. In a more normal operating environment, like what's the -- how do you think about the optimal growth and profitability profile?

Yes. We came out with a framework on our earnings call last week, given what we're seeing in the market of a 20% growth rate and a 10% margin. We talk about Rule of 30. We think it's a good starting point for us. The mortgage market, we talked about it earlier, has been challenged this year, which is leading to kind of the deceleration of growth. EMEA is another -- a portion of that too. We're seeing the slow bookings. As we activate seats, it usually is delayed from the time we close the initial deal. And then we have a 2% to 3% headwind on FX for next year, too. I think it puts us in a good position given our strategic positioning with companies. Even if there is a slowdown, I think we're still very well positioned. The trends of digital transformation do not change. I think it's a question of not if but when. And we have the leading commercial product around the world. Our U.S. retail lending product. It has a lot more functionality. We have the -- real estate portion coming in the April time frame. And if you look at the mortgage side, too, exiting out, I think we're just very well positioned to benefit from that as well.

Got it. So the -- you just talked about that 20-10 framework. The magnitude of the profitability ramp next year, I think caught some folks by surprise. Just factoring where you're kind of been this year, what are the biggest opportunities to go from that kind of breakeven-ish to that 10-point op margin expansion that gave you -- kind of what was the line of sight that led you to be comfortable with that target?

Yes, we started this year, we guided to about a $30 million to $35 million loss for the year. We're going to end up at about $7 million to $8 million. And what we did midyear was we halted hiring. We evaluated the headcount adds that we needed. We canceled some backfills. And then we executed, right? The teams are optimizing all of their team members. And looking out to next year, I think there's still more efficiencies to gain out of the company. We're going to look at headcount costs and non-headcount costs and go line by line and really kind of drill down and figure out how we can save even more money for the company. The focus, though, for us is growth at the end of the day. We are a growth company. We just -- we want to be the world-class profitable growth company. And I think -- we've heard good feedback on the 20-10, the 10% margin that's aggressive. But I think you have to draw a line in the sand and really make a stand and show and execute on that number. I think Rule of 30 is a good starting point. I think we'll look to improve those numbers as we look forward to the future.

Got it. So when we think about kind of long-term growth runway. I think one of the biggest opportunities is internationally. You've got 50% of your pipeline. I think last you disclosed was international. I know there's some unique aspects in Europe right now, but 15% of revenue today. So how do you think about closing that gap? Obviously, the macro and FX are two of the big things. But what are the other gating factors that would prevent you from kind of closing that gap from the 15% of revenue today, getting it up to where the makeup of the pipeline is?

Yes. International is much different than selling in the U.S. I can't use a bank I sold in Florida to sell something in Texas, right? U.S., you can do that. Internationally, you can't do that, right? If I close a deal in Germany and get them live and up and running, somebody in Italy doesn't really care at the end of the day. So the key is getting in the market, building that brand, getting the sales force in, selling that first deal, getting them live and up and running and then being able to reference that account, which takes time. If you look at what we did in Canada, and we've been there now 5 or 6 years, it started slow. We put people in-country, show that you're committed to the country. But then as we started closing deals and getting customers up live and running, then we started closing the bigger deals. Last year, we closed 3 of the top 5, which is -- I think it was a phenomenal year. And that's kind of the blueprint of how we view rolling into all the other markets. Australia and New Zealand, we had a couple of customers in Australia, smaller banks. We have -- Macquarie Bank is I think the biggest one we have in Australia. A couple of years ago, during COVID, we closed another big bank in New Zealand. And then this year in Q3, we closed Bank of New Zealand, which was one of our top international deals that we closed ever historically. And so the key is getting into a country like Germany, we've closed in Hamburg Commercial Bank. We're live and up and running on that, building pipeline around that. And then as we can use that as a reference, other banks look and say, "Yes, it does work" and then we'll start -- then we can start closing more deals. And it really is country by country. COVID did slow us down in some of these countries, too, over the last couple of years. That seems to be coming out of it, but now we get hit with kind of the economy and everything else. But the good news is we're able to get meetings with the customers doing proof of concepts, like the pipeline is rich with opportunity. And it's just a matter of closing those deals in this tough economic environment in Europe and on the continent.

Got it. In addition to kind of the -- what drove that success in Canada. I'm curious, is there any aspect aside from kind of go lives where you're seeing your competition book with nCino and there's any sort of fear of being left behind? Is that at all driving the decision making or is it really...

Yes. Yes, that's some of it, too. I think if you look down the street and your competitors are doing it, they're going to have a leg up because of the technology. So I think it helps drive sales if you can get your competitors -- if you're a bank, get your competitors and keep pace with them or try to jump ahead of them in terms of new technologies.

So I kind of want to continue on the pipeline conversation that we just laid out. But you talked -- last quarter, you talked about the elongated sales cycles, obviously not unique to nCino right now. Sounds like deal sizes though and pipeline is still growing nicely. So can you just help parse out like when we think about the 20% like baseline early growth expectation for next year versus what you're seeing in terms of pipeline growth, are you seeing the pipeline grow faster that you could see growth kind of reaccelerate from the 20% level in the future once the sales cycles normalize? I'm just kind of curious what you're seeing between pipeline growth versus expected revenue growth?

Yes. And that 20% -- 20%, 10%, that's a framework that we're using for building a plan. It's not guidance, of course. The pipelines continue to grow as these deals slip. In Europe, it continues to increase. We keep a clean pipe. We always review it. Is there an opportunity to accelerate things as things improve? I guess there probably could be. These are long sales cycles to begin with. It's a generational purchase that these companies make when they buy our software. So we would hope so. So if you compare it to what we saw during COVID, COVID impacted -- it was very quick and abrupt. There was PPP revenues that flowed in, so they were very busy with that. And then as we exited COVID, enterprise came back first because they had more people. They could reallocate some of their people away from the COVID craziness. And then community regional, they were very busy with all the PPP loans and everything else. Enterprise came back first, and then community regional was kind of spotty, but we've been seeing nicer sized deals in the community regional space, even with a more cautious market.

Got it. So I think most investors are kind of comfortable with your leadership position in the commercial loan origination side. It's -- I wanted to kind of dig in a little bit on some of the consumer products between SimpleNexus and then also just the retail lending in general. So on SimpleNexus, mortgage is under pressure, you have a lot of -- you've talked about some kind of independent mortgage broker downsell activity. But you have a lot of opportunity to cross-sell into your existing base. There's a lot more growth within SimpleNexus outside of just seats. You've got the eClose, you've got notary. Can you just talk about like what the path for SimpleNexus looks like the next few years in terms of the growth opportunity there?

Yes. Yes. SimpleNexus, it's actually coming out. I think the product is going to be the leading mortgage front-end product out there. We have a great starting point. We have a seat-based model. We have eClose. We have a compensation management system to LBA Ware that we can cross-sell into the base. And our brand is -- it will end up being the #1 vendor. So our key right now is to continue selling into the IMB space as we can, understanding we have churn issues and there are some bankruptcies and other things. But then more importantly, cross-selling into our base. It's a more stable group of companies that are interested in looking at it, right? Because they know us, they know nCino. They know our reputation, and we've seen nice traction there. I think the other area where I think we'll end up picking up shares on the competitive win side, too. We had -- I think it was 6 competitive wins in the quarter. And I think we'll continue to see that given that we're not pulling back in spending. We've done some cost optimization within SimpleNexus. But still, we have the right amount of salespeople on the field. We've got the right developers developing the product. And I just think overall, we're going to look back and say coming out of this because we're going to grab logos all through this downturn. And when it comes back, I think it could be pretty powerful. I think just the wild card is how long does the mortgage slowdown continue on for?

So on retail lending outside of mortgage, you showcased kind of an impressive go live with Hancock Whitney. You talked in the quarter about 30% logo growth. So a lot of momentum there. It's still obviously early days. But like when you look at the kind of path that commercial took, like how do you replicate that success on the retail side? And with that, how -- can you just talk about how strategic it is for your customers to have kind of that end-to-end commercial and retail loan system?

Yes. I think that the -- nCino was created to be a platform company. The beauty of the technology is I can use the database model is a 360-degree view of the customer, whether they land into commercial, treasury, small business, retail. And what we've seen on the retail side, really that platform strategy does play. So we've sold commercial retail, small business, all-in-one deal. There's nice traction there. It starts in the low end of the market and continues on from there. But we've seen some very nice deals and feedback from customers on that. When you think about it, you've got nIQ, too, within there. Then you can sell nIQ into the base. It makes a stickier product, you can service your customers better. And then at the front end of retail and all the other products at nCino, we will have the SimpleNexus technology as the front end. So you're going to get that world-class customer experience at the front end with the deep functionality of the nCino LOS or account opening product, too. So that's kind of come over the next couple of years. But the whole plan is kind of the -- when we bought SimpleNexus, we knew they had great technology, but after digging in and putting Matt Hansen as the CPO of the product line -- of the entire development team, like we can put the front end there, the technology is there, the APIs are there. And so we'll have that great experience at the front end. And then that awesome experience for the middle and back office to actually get those loans to the system quickly and efficiently.

Yes. I know we talked in the past about when you go through the mortgage product, just being able to open up a deposit account at the exact same time, a lot of mortgage banks incentivizing it, but then they make it as hard as possible to kind of open an account. And I think, like, SimpleNexus is kind of -- what you're doing there is kind of help solving that.

Yes, and we're going to embed some of that functionality too. We'll have account opening, unsecured loan, right? So when you're done with your mortgage, you can then go ahead and buy a furniture to furnish your new big house that you like.

Okay. So on nIQ, the 3 core solutions today, they have slightly different maturity. How should investors think about nIQ longer term in terms of kind of the opportunity? So you've got the three products today. There's probably more you can be doing on the analytics side. But is there an opportunity to sell some of those solutions outside of your operating system base? Could those be lead kind of tip of spear type products? How should we think about that strategically?

Yes. So there's three products to nIQ. Portfolio analytics, which was the visible equity acquisition we did 3.5 years ago. That's a CECL solution for credit unions. And that's a stand-alone product sale. You don't have to use the bank operating system to use the CECL product. That's the majority of revenues. It's a big base. It's over 1,000 customers. Auto spreading and commercial pricing and profitability. So auto spreading is where you can take and scan unstructured financial statements and they'll populate your spreading tools. You just think about doing the underwriting. And we also have tax returns too, so structured data. That is a great product because it saves -- you get a lot of efficiencies. You think about how they did it in the past. It was actually somebody looking at financial statements and keying in data into the spreading tool. So it gives them -- you get high accuracy out of the box, it's probably 85%. But as the system learns, it gets to be like 95% accuracy. So you can spend more time analyzing those loans versus just keying in the data. And then commercial pricing is a product that we created that we sell. Originally, it was the low end, but we've seen moving up into the higher end. And that's a product we can sit with your customer, walk through the loans. So you can walk through the terms of loans, you can change the rate -- you can look at the price, the profitability of that loan relative to the bank's averages. And then from there, you can look at the customer as a whole and say, how -- what's our relationship with you as a customer? Can we -- if you bring in $1 million of deposits, I can give you a 50 bp break on your note. I think that creates a much stickier product. You're actually adding value and you're being strategic with customers and maximizing profitability of the bank in the long run. So I get that. And I think there's a lot more we can do with AI machine learning. And so we're not talking M&A, right? But on the M&A side, we would look at all the nIQ products as a potential because it just deepens your relationship with the bank. It makes you even more sticky. You talk about auto decision. I mean, there's a lot of things you can do with the nIQ product line. And we have a great base of customers to sell into.

Got it. I'm going to open it up to the audience, if there's any questions. Brent?

So there has been this narrative I think in the investor community on interest rates and how that can kind of influence spending to your customers? I can kind of see both sides of that. I want to get your thoughts on what you're seeing so far this year. How does that kind of influence pipeline decision making [indiscernible]?

The question is on the impact of interest rates effectively and overall demand from your end customer?

Yes, higher rates are good for banks, right? However, now deposits are starting to come down. So the idea, I think banks are going to have to start competing for deposits and increasing rates, so that spread will change. It's favorable right now. But if you look, Europe, there's extenuating circumstances in Europe, right? You have the war, you have energy crisis, you have inflation raging. The banks, if you take Europe out, banks are quite healthy right now. Loan loss reserves aren't up, defaults aren't up. And they're healthy and they're -- it appears like they're going to spend their budgets this year. Even with kind of this cautious tone, we saw a couple maybe signature needed or maybe a different layer of review, but it doesn't seem to be really hampering deal closings yet.

Okay. So shifting gears. The partner channels, it was new-ish kind of at the time of the IPO two years ago, but it seems like it's really taken off. I think last you talked about 3,000 kind of certified reps. Can you just kind of talk about, as you're focusing more on profitable growth, is there any opportunity to leverage the partners more on the go-to-market side? What's kind of an optimal partner kind of target as you think about trained consultants based on the demand you're seeing?

Yes. I think that's an asset that nCino has. We have almost, as you said, almost 3,000 SI partners, and that helps us deploy product around the world. We could not deploy to big banks that we sold without the partners, right? Because it's a -- these are multiyear deals. We wouldn't be able to hire enough people to do that. So you have to have the partner channel to do that. They help us internationally too, right? Some of the initial deals we work closer with them. They've done a great job of learning the product by country and then deploying those products outside of our countries that we focus on. So anything out -- so it would be Latin America, Middle East, Southeast Asia. Our partners then go to market and sell nCino. We don't have exposure there yet. It's been fairly slow. COVID was -- kind of slowed things down there, but they target the top 400 banks in the world. So the idea is they can walk in, do a transformation deal and pull nCino in with alongside of them. So that's an opportunity for future growth, too.

So I wanted to ask about kind of the upsell opportunities. So you have -- you have, I think, is it 15 of the top 30 kind of global banks roughly?

How many? 13.

13. So -- but within that, you only have about kind of -- it's a small piece of -- even within the commercial offering alone. So can you just -- and sometimes it's geographic, they buy it in one country, they don't buy everywhere else. Can you just talk about that product? The process to kind of upsell those customers even on a like-for-like product, just go global with those existing base?

Yes. I think we have a number of examples. So take an international deal. During COVID, in the Netherlands, we sold a deal to a bank around collateral management. The regulators came in, you have to do this. Never went there, never saw them in person, sold the deal. Got that live and up and running. In six months we added commercial to it. We have many examples of that. U.S. Bank is another one. We went in, they had an aggressive plan to roll out a single segment. They did that quicker than anybody had expected, an awesome job for rolling it out. And then we followed up with some additional segments as well. So it's really going in and finding the pain points of the customer, solving that issue and showing the value and then selling on top of that, too. Historically, we've led with commercial. There are some cases where we actually leave with retail now too. And auto spreading is a driver, too. They look at auto spreading and say, we can get a lot of efficiencies from this, but then they would have to deploy a spreading tool. So you get the combination of spreads in auto spreading. And then that gives you opportunity to sell all the rest of the commercial product, too.

Any other questions from the audience?

In terms of when you're [indiscernible] so many different systems, the scope of work you're replacing, is that changing? [indiscernible] taking a bigger bite of the apple or a smaller bite of the apple? [indiscernible]

The question is, as you're selling upmarket, are you -- is the scope of what customers are buying changing? Are you effectively able to consolidate more systems or is that changing?

Yes. It just depends on what the customer wants. We'll deprecate 20 to 30 systems, checklist, spreadsheets, ticklers, like it just depends on how big of a commit the bank will want. I don't know if there's an average. It just depends. Like if a big bank does it, you're probably going to see a lot more deprecation of systems, 10, 20, 30 systems. Those are long-term deployments too. But it just -- it really depends on how complex their system is and what they're doing. You take an example like the Bank of New Zealand is doing a refresh of their entire stack. So we'll see how many systems that touch. It just depends on how much a customer wants to commit upfront.

Can you -- so I'm curious on the retail product. Can you talk about kind of the level of integrations needed to enable some of your solutions there in terms of whether it's mortgage on the SimpleNexus side or on the lending side and kind of what you've kind of prebuilt in place in terms of APIs for customers to kind of adopt those solutions.

Yes. So we are -- we're building APIs so customers can use call it headless. So you can use the product headless, right, to where they could build their front end, whatever logos they need, whatever functionality they need and then plug us into the back end. So we're doing that. I think the SimpleNexus front-end API strategy, they have, I think, plug-and-play, not that these developers will disagree with that. But like there's a lot of functionality prebuilt into it.

Maybe just as a wrap-up question here. So when we're sitting here a year from now, I'm curious what do you think maybe one to two underappreciated aspects of the nCino story or that people will have a greater appreciation for next year?

Yes. I think mortgage has been -- I don't know how many letters that word is, but that's a bad word nowadays. I think given the strength of the product, the strength of the team that we bought, the technology, our ability to grab logos even in a really tough market, I think, positions us extremely well at the exit here to benefit massively with that product and the team. I think it's underappreciated now. Rightfully so because the mortgage market is tough. I think also that acquisition when we put that at the front end, I think that is an underappreciated item as well because it will make that experience, whether you're on retail, doing a secured loan, unsecured loan and auto loan and U.K. -- and international mortgage, that will make that experience so much better. I think that's it. I can't think about anything else.

All right. Well, thanks for the time today, David. I think that's all the time we have. Thanks, everyone, for coming.

Great. Thank you, everybody.