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

Good? Excellent. Okay, we are live. Well, good morning, everyone. Welcome to the Barclays TMT Conference Day 1. My name is Saket Kalia. I cover SMID Cap Software here. Very happy to have with us the team from nCino. We've got David Rudow, Chief Financial Officer. In the audience, we've got Greg Orenstein, Chief Strategy Officer. Also, we have JoAnn Horne in Investor Relations. So we've got about 30 minutes together. Let's take maybe the first 20 or 25 minutes and go through some fireside chat here with David. And then I'd love to make this interactive. So if you have a question, just pop up your hand. I think we're webcasting. Anyone on the webcast, just shoot me an e-mail. I'll try to get to as many questions as I can. So maybe with all that as a framework, David, thanks so much for being with us here today.

Thank you very much. Early in California. This is wonderful.

Yes. Compared to Wilmington, absolutely.

Although the weather is not so good here today.

David, it's great to have you here in person. I think maybe for the folks in the room that are newer to nCino, could you maybe just level set us here and give us a little bit of a quick overview on the business, and maybe recap some of the things from last quarter that you were most proud of as a CFO?

Sure. Yes, that sounds great. Yes. So nCino, we -- you think about nCino as we do the workflows for the middle and back office of banks. If you think about the process of actually creating a loan, applying for that loan, on the commercial side, we start it. It's that start to end from over the time a customer comes and says, I need a loan and then they go through financial statements, they do the analysis as a collateral review. There's the underwriting piece, and then finally, the approval, and then it's booked to the core. So we're kind of this middle and back office piece. We also touched the front end, too. So relationship managers that deal directly with customers too. We started in commercial. We moved to small business, which it's kind of a small business, which is kind of commercial light. Moved into treasury. We now do U.S. retail lending, digital account opening, and we also have 2 products -- 3 products of our nIQ portfolio, and that is -- we have portfolio analytics and the CECL product that we saw in the credit unions. We have Auto Spreading that does the automation of financial statement ingestion into the underwriting tool. And then we have a commercial pricing and profitability product, which is new to nCino. We created it 2 years ago that we've seen nice traction on. And then we also have -- we purchased SimpleNexus, which is our home buyers journey that we acquired almost a year ago now. And that's been a tough market, but a great product with a great team. And in our mind, sets the stage for some exciting things to come as we integrate it into nCino. On the quarter, I think the first thing is we're profitable on a non-GAAP basis for the first time as a public company. We had originally targeted profitability on the core business in fiscal '23, we're doing our IPO. With the acquisition of SimpleNexus, we are not profitable. At the core business this year, we'll be profitable, so right in line with what we expected. During the quarter, it's been -- Europe has been weaker for us, but we closed one of our largest deals in New Zealand -- one of our largest international deals in New Zealand. They have a very aggressive digital transformation, we're part of that. That was great. We signed a commercial pricing and profitability deal, a competitive deal with a larger bank in APAC. We closed in that quarter. That was very positive. And the SimpleNexus too, we're seeing cross-sells and competitive wins which we're very happy with, given the tough market there.

Yes, absolutely. A lot of fun stuff to talk about in there. SimpleNexus, the core business, I'm going to start with the core business first. I'd love to talk a little bit about the TAM. Just going back to the IPO, can you remind us how you sort of talked about the sizing of the TAM? Maybe segment that between international and domestic. I'm sure SimpleNexus kind of adds to that, but maybe help us kind of think about what the TAM is in the core business?

Sure. On the core business, we look at commercial, it's about $3 billion TAM globally. It's split about 50-50, probably a little bit heavier to international -- between the U.S. and international. Retail is $7 billion. It's split pretty equally between international and the U.S. And we look at international retail -- or global retail as U.S. retail lending, U.S. digital account opening. We do some digital account opening international, but then we also do U.S. -- I'm sorry, international mortgage too in Canada, U.K., Ireland and Australia. And then the nIQ products are about $2 billion. We think it's about a 20% uplift from what we've seen on the base. And then SimpleNexus, we talked about like a $4 billion TAM that we added with the acquisition.

Got it. So I mean, well in excess of $15 billion in total there?

Yes, like $15-ish billion in that range, yes.

Yes, yes, that's great. That's helpful. So I mean, international, clearly a very exciting part of the story, and I want to dig into that. But I actually want to start with domestic here for a second because nCino signed a lot of big banks here over the last couple of years. Some you've called out before, right. some of the Wells Fargo, some of the big Canadian banks as well. Maybe the question for you, David, is where are we on the adoption curve in your core commercial lending market domestically?

Domestically. Yes, we've seen nice traction. If you look at the numbers, we're in 12 of the top 25 banks. And within those banks, you don't always go in and tap 100% of your seed potential. We have -- like Wells Fargo, we signed commercial. That was a wall-to-wall commercial deal. We followed up with small business. So we've got great exposure at Wells. But there are some other banks that we sold into bigger banks where you're maybe just doing collateral, and you have the opportunity to add underwriting or the entire workflow that we offer the bank. So even though we've got half of the 25 -- Top 25 Banks, there's still opportunities to go in and dig and get more revenues on the core product. And then of course, you wrap around nIQ with that as well, the auto spreading product and the commercial pricing and profitability product which both sell into that commercial base, that just adds the ability to sell more into that base and it also creates a much stickier product once you have all those products in there, because I would view that commercial pricing and profitability as very strategic to a bank as they're working with their customers.

Sure, sure. You called out earlier, just like so many of your peers, Europe is obviously a tough place from a macro perspective. I'm curious what you think about just the U.S., whatever metrics you look at, I mean, pipeline or performance, how would you sort of characterize the macro backdrop in the U.S. right now?

Yes. The pipeline has been growing nicely, right? We've seen very good traction, and the retail side, that's building as well. The U.S. all year has been quite healthy. We did see some element of caution emerging into some of the deal cycles that didn't inhibit our ability to close deals in the quarter. But get another signature, maybe it needs to go to another desk for review. Those are things that we're starting to see now. Pipeline looks very strong, though, for the balance of the year. What we saw on Community Regional, COVID really impacted Community Regional pretty dramatically during that time frame, and it kind of came back a little bit in '21. We're actually starting to see Community Regional deals now closing, and they're getting bigger than what we saw in the past. So despite kind of the macro environment, that Community Regional space seems to be coming back. And if you look at on the bank side as a whole, interest rates throughout that's beneficial to them, loan loss reserves are -- like you look at all the metrics that would impact the banks, and the banks are doing well this year. So in our mind, what it sounds like is they're going to spend their budgets this year. I think the question will be what happens next year if the economy does turn and it impacts their consumer customers.

Right, right. That's helpful. So international has been, I think, a really exciting part of the story, right, just with all the -- some of the new logo wins that you put out there. Again, you mentioned New Zealand, I think we had a really big win in Japan as well in the prior quarter. Can you just remind us which countries nCino has had the most progress in? And are you finding the competitive backdrop internationally more challenging, less challenging than the U.S.? Any commentary there on international?

Yes. So we started in the U.K. and Ireland, and so we've built a good brand there. We have a great customer base. And you think about international, it's more enterprise-like here, so it's very lumpy in closing those deals. But the Europe -- U.K. and Ireland are a great launching point for us to get on to the continent. I think where you look in Canada, we entered there 5 years ago. We initially covered it out of the U.S., didn't see much traction. We hired people in country, Canadians that know the business, that know the banks. Then we started closing little deals, but then it accelerated, right? And last year, we closed 3 of the top 5. We have 5 of the top 7 in Canada. So if you look at the blueprint of how it works, what we target when we move internationally into new countries, it does take time, right, a lot longer than you would anticipate. But if you think about you need to go to the country, you need to build the brand, you have competition, right, locally that you don't hear the names from the U.S. standpoint, they have to sell that first customer, evangelize, right, here's -- in this new country, and then you got to get them live. And then from there, you can use them as a reference point. So if you take Canada -- I'm sorry, Germany, for instance, we closed Hamburg Commercial Bank Q1 of last year. That went live in Q3. They've done a great job of turning that bank around. They're listed as one of the top-performing banks in Germany now. But the pipeline is that we just haven't closed any more deals, so it does take time, right? We can't use our customers in the U.K. and Ireland to say, oh, Germany.

It's very regional.

It's very -- SAP is used everywhere in Germany. So you have -- you're competing against SAP everywhere. And then you look at France, Spain, Italy, the Nordics, the key is to get that one customer and then work with them, get that reference support and then the flyway will start. And we always go back to Canada and say, okay, this is -- it takes 5 to 6 years to get that acceleration. I think if you look at New Zealand -- APAC, New Zealand, Australia, with a handful of companies in Australia that we signed. Macquarie is one of them, but we couldn't get the big ones. And so we had the opportunity to sell some in New Zealand which are owned by the Australian banks. Going there, sell, we closed one during the COVID time period, got them, went up live and running. Then comes New Zealand, Bank of New Zealand. And then from there, we should be able to go back into the Australian market and sell into the bigger banks there. And if you look at Japan, Japan is just a much different country. It's really -- SIs are very much part of the deal process, they actually help run the banks. A new company in Japan, we partnered with Japan Cloud, which is a phenomenal partner of ours, and then you just start selling. And they buy in smaller increments, right? So something that might have been $600,000 might be $120,000. But they'll buy in smaller increments, get it live and running and comfortable, then you can sell on top of that. And so we've done 4 of those deals. I think all 3 -- at least 3 are live now, and so we have great proof points. And now we're starting to see the pipeline build with bigger deals. And the Japanese market is a very good market because it is the -- it's like the regional and enterprise market here. I think there's about 1,000 banks. And so I think we're very well positioned there to be successful too, especially with our partners that we've developed in Japan.

Yes. I think Pierre has a saying that it's the first customer that's always the toughest to get in the country, right? But then from there, the flywheel really starts to get going?

Yes. And it's tough because even though these countries bought each other, you can't use a reference from France to sell in Spain, right? So that's what makes it a little more difficult and different than the U.S.

Got it. Got it. I want to shift gears to SimpleNexus, which you brought up earlier, an acquisition that we -- I think we closed almost a year to date, January, right? We're getting awfully close, right? So I think with the challenging mortgage market, that business has probably been a little bit more in line versus ahead of expectations like the core business. But I was wondering, David, if you could just talk a little bit about the organic growth profile there? And I think the team has had some interesting anecdotes about Simple Nexus competitively. I was wondering if you -- love to share some of those, if you have them?

Yes. We bought SimpleNexus in January of this year. It is -- what gets us excited about SimpleNexus is that front end. It's -- they've simplified a very, very complex process of doing a conforming mortgage loan, right? You think about all the documents you need to sign and all the regulations you have to sign, they do it from a mobile device. So Apple or Android, they can do it on the web, too. But it is -- you go on your phone, it interacts with the loan officer and a real estate agent too. And then from there, you can apply for the loan, upload all your documents, you can follow that, you can track where am I at in the process. You can order an appraisal, order insurance through there, all the way through to the close. Then at the close, you can also eClose. So instead of having to go into an office or find a notary to help sign off on this stuff, you can do it remotely, too. And so that product has been -- we think it's market-leading in this market. 38% growth in Q3 organic. We had mid-teens, logo adds. I think the important thing now is to add logos. So Q1 and Q2 is like mid-20s. Q3, because of churn, it came down to the mid-teens. And what we were excited about is we saw competitive wins picked up and cross-selling into our base. So they have -- about 70% of their business is on the independent mortgage bank side. And so you think about -- that's the more volatile side of the business, they -- we bill monthly there. That's where all the cost cutting and the bankruptcies and the M&A is happening now. It's quite -- there's a lot going on there right now. And the more we can sell into our banking base, they do annual contracts, longer sales cycles, of course, a much more stable customer to have because they do loans and it doesn't change that much. They don't go on these big hiring binges and firing binges, and so we're excited about that, right. The more we can diversify -- IMB space is just extremely important to us. We're going to remain in that space. It's a priority for us. But we do need to move into the banking side because that's the product that they can use. And we have the brand, we have the relationships with all of our customers to go ahead and offer something new to them that they need at the end of the day.

Sure. It's interesting just on the shift to more banking because -- remind me, the pricing model there for SimpleNexus is a little different than some of your peers. Remind us how that SimpleNexus price...

Yes. So we charge on a seat basis. Customers sign up for a minimum amount of seats, and then we also have expansion too. So if you're a customer, you say I need 10 -- I've 10 [indiscernible], right? I go add 5, I can have 5 additional seats that are not contracted, right? So that doesn't go into RPO. Upon renewal, depending on their business, I could say, I'll roll those into my minimum contracts, [indiscernible] 15. Or if things are a little tougher, they get rid of heads, they'll say maybe he only need 7 heads, right? And so we're seeing -- like during the crazy times, we saw expansion continue to build. And over the last number of months now, we've seen expansion flatten out. Now there are customers -- there's some customers that are actually adding seats to their relationship with us. But we are seeing an increased churn, we saw some bankruptcies, we look at collections every other week to make sure that we're on top of that. We had some bad debt write-downs in the third quarter around SimpleNexus. I mean, we're on top and we just have to have a really good understanding of the health of the customers.

Sure, sure. I'd love to shift gears into, I think, a very useful topic from last quarter, which was a very helpful framework, which is the kind of preliminary framework right, of 20% revenue growth next year and 10% operating margins or a rule of 30. I guess before we talk about margins because I think that was probably the most surprising thing that we saw. I'd love to just maybe start with the revenue part of that equation. I think organically, nCino is going to grow, I don't know, subscription 28% -- 20% exiting this year. The 20% growth for next year feels like a good starting point. But I maybe just wanted to get any other thoughts that you had on how to think about that sort of glide path and growth?

Yes. Yes. So it's -- as you said, it's a framework. The 20-10 is what we're using to build out our plan for next year. You have to start somewhere, and given what we're seeing in the business as a whole, I think that's a good starting point for us. We have headwinds on SimpleNexus. We expect churn will elevate into next year as customers renew or you start -- or you continue to see kind of pressure on the IMP side. EMEA as well, it's been very slow in EMEA this year. We closed a big deal in Q1 but it's been very slow, which impacts -- directly impacts revenues into next year. And then we have about a 2% to 3% headwind from FX. So we look at that and say -- and then also, we talked about caution emerging in the U.S., so that's part of the factor as well. I think it's a good starting point for us. Obviously, as we close Q4 because it's the biggest quarter for us for the year, those revenues -- we're probably going to talk about it, but like, our activation schedule and revenue recognition, these deals in Q4 will start impacting us positively next year, too. So this is a very important quarter for us.

Absolutely. And so I think a great segue. Just to make sure we're all on the same page around the revenue model. I mean, obviously, a lot of visibility as a SaaS company. But even more visibility, I would argue that some of the other SaaS companies I cover, just given that activation-based seat model, walk us through the mechanic there from a high level?

Yes, yes. So when we close the deal, and it depends on Community & Regional or Enterprise, we have an activation schedule that's contracted. It's not reliant on anything that's going on with the deployment or any stage of the deployment in terms of where the app is at. It's contracted by date. Usually at month 3, you start turning on seats, and for Community Regional seats activate within a 12-month period. Upon that renewal period, then you will renew for the full year. And for enterprise, normal enterprise deals is probably 2 years. But then for the whale deals like we closed last year, it's 4, maybe 5 years even, too, just because the deals are so big. SimpleNexus is more immediate within -- you sign a deal, it's 3 months. You start recognizing revenues. And then nIQ products, which are different, those are usually within a 3-month period to where you're activating those seats and recognizing revenues.

Got it, got it. Maybe last question, just on the top line metrics here. Given that great visibility that nCino has on revenue, I think some investors have looked at the RPO metric as may be an indicator, right, of forward-looking or certainly of bookings activity but of forward-looking revenue. Now to be clear, you've said in the past that nCino doesn't manage the RPO, and I think there are a lot of good reasons for why that is. But maybe you can just talk us through some of the puts and takes in an RPO metric? And anything we should consider directionally as we think about that?

Yes, yes. I think RPO is -- it's a good indication of the activity that you closed in the quarter because it represents total contract value of all contracts you signed in the quarter. If you've signed a big deal with Wells Fargo or TD Bank or whoever, it's that 6-year, 5-year, 4-year contracts, all those revenues, all those future revenues go into the bucket. I think what throws off the number, if you look at 38% growth rate, there are renewals in there as well, so the renewals are actually already in the rev run, right? Now we do upside renewals. We try to go in there and sell additional products, we do a price increase with customers too. And so renewals throw that number off, which is why there's a difference between what we report in terms of RPO growth and what we report on revenue growth. I think if you look at the RPO from this year, our long-term RPO is now at single-digit growth. I think part of that is a difficult compare we have from all the deals we closed last year. Last year, we closed Wells Fargo. It was an enterprise-heavy quarter in the second quarter of last year. Goes [indiscernible] last year too in Q2, so it creates a tougher comp. But the reality is, this year, we had one big deal in Q1 and we had the big deal in Q3 internationally. And it's been fairly quiet on the big deal front because those deals kind of migrate to the second half of the year. Last year was just so different and odd the way those deals close.

Yes, sure. I mean, even from a seasonality perspective, the bookings last year were a lot more evenly spread through the year. This feels like a little bit more like a normal enterprise cycle?

Yes. Usually, we say it like in a normal time, pre-COVID, it was like 60% in the second half of the year. Last year, it was like 60% in the first half of the year which is much different. And Q2 was the biggest quarter of the year with Q4 being the second biggest, which is abnormal as well.

Got it. I want to shift to a really fun topic, which is the margin framework of 10% for next year. I think, David, in the calls prior to that, we were talking about breakeven in fiscal '24 to 10%. Clearly, a lot better than that. For what it's worth, I think the focus on profitability was palpable, right, from the team just for the first few quarters of this year, so kudos. But I guess the question is, what gives you confidence in that number, right? I guess as you look at the different -- however you look at it, right, the different expense line items or different parts of the organization, because that's a nice ramp, right, in profitability from year to year. How do you get there?

Yes, I think if we're going to do it, do it right, right? I mean, you know Pierre, he's an aggressive kind of guy. I think if you look at what we did this year, we took $30 million out of the business from what we had planned, right? We had $33 million to $35 million in losses this year. We're guiding to like $7 million to $8 million this year, so we've taken a lot. And that was from let's pause hiring in the spring, let's review all the headcount adds that we had and backfills and really start optimizing the teams, right, understanding that the world is changing. I think if you look how we get there next year, there's more optimization that we'll have to do, right? But it's not only on the headcount side, we're also going through on the non-headcount side too, and stripping through every single line item. Do we need to do this? How does it generate revenues? How does it improve profitability? We buy a lot of software, right? And so we're going to be aggressive on that side, too. I mean, the team can do it. We have -- I think during COVID, initially, productivity was strong. I think now we're bringing everybody back to the office in Wilmington in January. I think it's time. I think we can further improve productivity and efficiencies and really have the teams look and say, okay, do I have the right people in these roles for the future? I think -- I mean, we're very confident we would not set it if we didn't have a plan in place to do it.

Yes, yes, absolutely. So just to the audience, we've got about 7 or 8 minutes left. So maybe before I keep on going on margin front, any questions here from the audience? David, maybe then to think about margins on a little bit of a longer-term basis. And I don't want to put the cart before the horse, because 10% for next year is, again, something that's going to be great to see. But you and Pierre have talked about being a best-in-class SaaS company with a balance of growth and margins. I guess, can you just remind us of anything that you said on what best-in-class margins look like for nCino?

Yes. I think rule of 30 to start is -- it's a good starting point, right? I think you put yourself on the map that we're going to do this. But I think longer term, you got to look at like the rule of 40 as kind of where we need to move to. The timing of that, right? But I think that would be -- that would allow you to flex for growth where needed and then account for margins as you can, but really keeping within that band of the rule of 40. That's over time, we're not going to give a time frame on that. But I think that rule of 30 that we're moving to next year, I think it's just a great starting point.

Yes. Yes, I agree. Maybe one thing more tactically, I feel like nCino has done a great job of optimizing services, let's say, right? Like the parts of the service engagements that need to go to partners have gone there and the parts that have been done in-house are, I think, have been done with reasonable economics. But maybe talk to us a little bit about how you think about that services mix, right? Because of course, that has an impact on gross margin. Does that make sense?

Yes, yes. So we -- I think in the long run, we think professional services margin should be in that 20% range. I think as we leverage our partner channel, which is almost 3,000 certified people now, that allows us to have a strategic team with the SIs that work with them, and we get full bill rate for that. Now, the Community Regional space is very important to us. We have teams that deploy on the community side, too, the smaller customers, so we will continue to do that. But we're looking at other things, too. We rolled out a managed services offering last year, so we're working on it this year where we have like a named person that will help customers and be their [indiscernible]. So it's a new -- it's small, right? But it's higher margins than core professional services, and it's something that customers -- there's decent demand for it, too. And so we rolled that out this year, small starting point. But I think it helps customers ensure that they're rolling out the updates through, gives us a chance to sell additional product to them and really help them. Because nCino talent is very limited out there right now. So we won't get like -- I don't have an nCino person. I can't hire an admin. And I think it's important to help customers where you can, and so we're doing that now. So we've seen nice demand from that side, too. And then as we roll on the subscription side, support is going to get more efficient too. We have a sports team around the world. And so that is lower margins than our core subscription, but we'll see margin enhancement from that as well as we get more efficient, too.

Yes, that's great. It's interesting that managed services offering. Is that -- will that entire thing go into services or is that entire thing considered a subscription?

We put it in services because we have some that sign up for a 1 year. We have some 2-year contracts. But we place it in services because I think that's where it should be for the timing.

Yes. Got it. But it's not a time and materials type of engagement, like a typical services engagement, I'm guessing, right?

Well, you have a head, right, the same headcount as you would see because they actually have -- [indiscernible] will be my person for 20 hours a week. Yes. So it is headcount driven, and so that's why it really listens.

Okay, that makes sense. Okay. Now I understand. Got it, got it. Last couple of questions here because we've just got a few minutes left. And again, anyone in the audience, please do pop up your hand if you've got a question. But maybe shifting beyond profitability. I was wondering if you could just talk about any nuances with free cash flow? Now I know we don't guide to operating or free cash flow, but conceptually, how different should operate -- maybe operating cash flow margin is the best metric to look at, be versus EBIT or EBITDA margin?

They should approximate each other. I mean, if you think about how do we sell product, on the core side, we sell an annual contract upfront that our seats are activated, right? And then SimpleNexus, I think, throws that up because we still have a lot of monthly billings. But overall, it should approximate each other as you look out towards the future.

Got it. Got it.

Accounting for kind of the quarterly collections, right? If you bill out a big customer and collections are a little late, you never know when they land. I mean, that's what causes kind of the movement from quarter-to-quarter and make -- that's what really makes cash flow forecasting difficult if you have big customers that you're billing. Like, even if it's 5 days later, it lands in the next quarter.

Sure, sure. Got it. That's nice to see that over time, they really should approximate each other.

That's right.

Yes. Got it. Interesting. Maybe just -- we've just got a couple of minutes left here in the session. One common question we're trying to ask all of our coverage companies here at the conference is, how much of your revenue or revenue growth, whatever metric you look at, I think you know where I'm going with this question, but how much of nCino's revenue comes from new logo business? And I mean, nCino is still a relatively young company, but how do you think that new business fares in a recession?

Yes. We've not -- I mean, I would say, the vast majority of our revenues entering into a year is known, right? You make assumption on what roles from current customers, and then we have an assumption on renewals as well and price increases on those renewals. And then what fills the hole is new bookings. Now with SimpleNexus, a lot of those revenues come in quicker, so we add some volatility to that number with SimpleNexus. But the core business, even like nIQ, they'll roll into that number, too. Just lost my train of thought.

The -- just the percentage of the business coming from...

Yes. So then if you look at -- going back to the COVID days, when COVID hit, everything stopped. Now we had PPP, so that kicked in. But like in terms of new bookings that we closed from new customers, that didn't turn on until Q4, right? And so there was a time period where we did have a lack of new bookings, which you would expect, right?

Of course, yes. Of course.

We actually had -- starting Q3 and Q4 of that year, we saw some nice sales for the installed base. But I would say, if things do get tough, installed base will drive performance, I think. And the new -- like, if you look at the pipeline and how it builds, the need for this type of product, digital transformation does not go away. If somebody says -- little uncomfortable, maybe it delays a quarter or 2. But like even with budget pressure, you look and banks will still spend money, digital transformation remains one of the top priority list for banks. And so I think deals will still get done. The question is timing of them and size where they come and say, hey, I don't need to do it this quarter or maybe we'll cut aside the initial launch of that, which is fine with us, right? It's not [indiscernible] to get in there and approve ourselves. But yes, I think the installed base will be helpful in the slowdown.

Well, right on the dot. I think that's about all the time that we have left. David, Greg, JoAnn, thank you so much for the time here.

Thank you very much.