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

My name is Bob Napoli. I'm the analyst at William Blair that covers nCino. nCino is a provider of cloud-based software for financial institutions and powering banks and credit unions, clear leader in commercial loan underwriting software, also a leader in mortgage origination, it also uniquely have a vibrant and rapidly growing international business. Excited to have with us today, CFO, Greg Orenstein, Greg has been at nCino for 8 years, about 20 years in fintech and banktech. And so he says through the great financial crisis with another banktech company. We're doing a fireside chat format today. So Greg, if you could give an overview for those who don't know nCino well, give an overview of the business, so it would be helpful.

Sure. Thanks, Bob, and thanks, everyone, for being here. nCino was formed about 12 years ago, originally focused on commercial lending for community banks in the United States. There have been a lot of investments in payments and in Internet banking, but we saw an opportunity really in the middle and back office for a lot of the interferences the financial institutions are to help streamline and make those more efficient. So we did start with community banks in the U.S. for commercial lending. In the summer of 2017, we actually planned our first international flag in London. We subsequently expanded to Sydney, Australia. We expanded to Toronto, Canada. We expanded to Tokyo, Japan. And while we're spending geographically, we also expanded from a product set standpoint. And so again, starting in commercial, we then built out our small business offering, our consumer offering. Through an acquisition that we closed early last year, we added mortgage and about 4 years ago, we launched what we call nIQ, which is nCino IQ. And that really is our analytics data, AI initiative where we leverage really the data that we have to help our customers make more informed decisions at the point of decision-making. And ultimately, we've got 3 products under that banner, portfolio analytics. We've got an auto spreading product, we got commercial pricing and profitability. And that's something I think that we're pretty excited about as we've talked about on our earnings call and at our investor conference in May, the amount of data that we're -- we've access to through our customers. And just to give you guys some perspective, we have about 50% of the C&I assets running through our portfolio through our product set in the U.S. We've got over 1,000 credit unions consumer data from over a decade, Our SimpleNexus product touched about 25% of the mortgages originated in the U.S. last year. We've got 5 of the top 7 banks in Canada, 5 of the top 9 in UKI and 3 of the top 5 in New Zealand. And so it's a pretty robust product set that I think is going to allow us to leverage data even more productively and efficiently as we go forward.

Thank you, Greg. So I mean, last quarter, nCino had 21% revenue growth, 10% EBITDA margin. Margins were up substantially year-over-year. I think a year ago, Probably flat at the EBITDA margin line or even slightly negative. How have you been able to continue to grow while dramatically improving profitability?

Yes. So we started really focusing in Q2 last year as the market changed and evolved focusing on our bottom line. And we grew very quickly through COVID, and we had PPP initiative that we serviced our banks with. And ultimately, I think it was a healthy time for us as an organization to catch our breath, assess where our investments were, assess where we had our people and where they were focusing their time and energy. We did go through a 7% headcount reduction in January as part of that effort to I think, set us on this path, but ultimately, I think making sure that we've got the right people doing the right thing. I think we feel like we've got the right infrastructure, the right size now. And I think I feel like we're going to be able to incrementally grow our bottom line accordingly. We've been very focused going back to November of last year, talking about being a Rule of 30 company this year. And then building on that next year and beyond as we get to a Rule of 40 and beyond and obviously being profitable as part of that equation.

How much visibility do you have? I mean, I think -- you've talked about 95% visibility. I think you had a slight reduction in your guidance, like 1% reduction in your guidance. And so what caused the -- I mean, the slight reduction? How much visibility do you have? How confident are you in that Rule of 30, I guess, for this year? Obviously, longer term?

Rule of 30, again is just a starting point for us. But we do have great visibility. When we entered the year, we had 95% visibility to the top end of our guidance. And so we really needed to contract and get revenue from that 5% -- that 5% delta. In Q1, we saw some expected churn that is part of the forecast. We forecasted some higher churn this year based on some independent mortgage banks that are really closing down shop or downsizing in light of the rise in mortgage rates. And so we had some churn that we expected. From a timing standpoint, it was a little bit accelerated. So that really was a driver for, as you noted, the minor decrease in our guidance, which now we actually have greater visibility, we're now about 96% towards the top end of our guidance for this year.

Great. Can you give a little color on your customer base? I'm sure it's a question you get frequently on the mix, especially with the Silicon Valley banks and the other issues around there. Just some color on the mix of the customer base and the revenue mix.

Yes. Well, particularly here in the U.S., as you talk about Silicon Valley, our revenue, as you look at our bank operating system customer base, which is 450-some-odd customers is really spread evenly between enterprise, regional and community banks. And we define community as being up to $10 billion in assets, regional between [ $10 billion ] and [ $100 billion ] and then enterprise being north of [ $100 billion ]. And so that's really a nice spread of our customer base here. And then again, I noted earlier, where we are internationally. And so we have diversification there. And then we also have about 1,000 credit unions that we serve through our portfolio analytics business as well here in the U.S.

Thank you. If you have questions, please feel free to raise your hand, and we've got plenty of questions to keep rolling here. I just -- and maybe jumping ahead a little bit, but international, I think, has been unique for a company like nCino to have had the kind of success that you've had internationally. I believe it's 17% your revenue now, growing at a very high rate. And what is -- first of all, why is nCino -- how have you been able to be successful internationally. There so much larger banktech players that have very little international presence. And can -- that 17%, can it be 50% 7, 8, 10 years from now?

Yes. So to answer the second question, we do believe that the opportunity outside of the U.S. is equal to or greater than in the U.S. And so we've -- for a couple of years, getting back to our IPO, talked about the fact that, that could be a greater than 50% contributor to our overall business. I think from a success standpoint we really are unique in that with 1 product, 1 true multi-tenant SaaS product, we span community banks up to the largest banks in the world, including the BofAs and the Wells Fargos as well as internationally, folks like Barclays. And I think we've had success because I think we've been fortunate to have built a great product. I think we've really focused on taking care of our customers, making sure every implementation we're successful at. And I think ultimately, that's helped reputation travel. And when you can go somewhere and show them the successes that you've had, particularly at some of the largest banks in the world, I think it allows you to get an opportunity to get up at that. And I think once folks look at our product, look at the amount of innovation that we've had, even as we focus on profitability, still invest over $100 million in R&D this year, I think that they know that when they buy nCino, which because these products are going to stay in for 10, 15, 20 years, we call them generational buying decisions, they know that we're going to be there continuously innovating and investing and therefore, I think they feel comfortable placing a bet on us.

Great. Thank you. So nIQ, n-I-Q, can you maybe give a little more color on nIQ. I believe it's about 5% of your business it is today. But maybe give some color on what nIQ is and what you think the kind of the potential is for niQ?

Yes. nIQ, again, it's our data analytics AI initiative that we started 4 years ago. I know AI is a big buzzword now. But it's something that we really started 4 years ago, really working with our customers. Because we have the platform, because our software is on the screens of our customers' employees every day, we realize the importance of being able to give them information, data analytics, more efficiencies on those screens at the point that they're making their decisions. And you can contrast that with other systems, which we call the swivel chair, where you've got one system and then in order to get data, you got to turn to another system and then you turn back and input into this system. And for us, it's important that you have it all in the workflow. And so we have, again, 3 products, as I noted earlier, commercial pricing and profitability being our most recent product. We've had really good success there, including with a $100 billion bank here in the U.S. as well as overseas. And what we expect to do with the data that I referenced earlier is continue to come up with new use cases for our customers, whether it's early warning, whether it's predicting default, whether it's predicting early payment, so that they can leverage this data and make more informed, we can say intelligent decisions with the data that we've got.

Great. What's the potential for niQ, I guess?

Currently, with just the 3 products we have, we have about a 20% uplift on our base sell and so we think as we continue to add products, that will just continue to increase.

Great. Thank you. So SimpleNexus kind in the mortgage business through an acquisition. Was that a good acquisition? I mean I guess it was done when your stock was a higher price with all stock and -- but why SimpleNexus? Maybe give some color on what SimpleNexus is because it's an important part of the story, I think.

Yes. We remain incredibly excited about the SimpleNexus acquisition, particularly in light of the challenges in the mortgage market to see them grow. We said on our call that they grew at a similar rate as nCino in Q1. And so when you're talking 20% north growth, while working through churn with some of these smaller independent mortgage banks that have either downsized or closed up shop. I think that shows the power of the product, shows the phenomenal people supporting that product and just the business model that they have. And so when we were looking, we always focus on acquiring for architecture, right? As we build out the pieces to the puzzle and we build out our platform story around being able to use nCino as a platform to operate your bank. We did have a hole in mortgage. We always go through the build partner by scenario. And as part of our analysis, we looked around the marketplace and came across SimpleNexus, incredibly impressed with the people, incredibly impressed with the raving customer fans that they had. Culturally, we felt like we were aligned. And then from a technology standpoint, we're incredibly impressed not only to bring a mortgage point-of-sale offering to nCino, but we are now using their technology to build out the front end across of our consumer touching applications. And so they have a mobile-first technology that we think is unique in terms of what they've been able to build and we think that's going to further accelerate the adoption of our retail solutions because that end user, that customer experience is going to be that much better from a competitive standpoint.

Can you give some color on your retail strategy? I mean retail today is a very small part. I guess, if you include SimpleNexus is retail. I mean...

So as we think about retail, again, we started at commercial. I think that's where most people got to know is that. But we really have expanded beyond that to small business to retail lending. We have now more than 80 retail lending customers, which we started that about 4 years ago, and certainly, that growth is much greater than we had 4 years after starting nCino on the commercial side. We talked about nIQ and then we talked about SimpleNexus and also outside of the U.S., we talk about property lending, one of the bullet points we had in our press release for our Q1 call was we signed a large property lender in the U.K. And when you think about mortgage in the U.S., obviously, you've got the whole government involvement and it's unique. For the most part, outside of the U.S., mortgage is just another loan with a piece of collateral and a great piece of collateral. And so that really helps drive us into the retail side of the bank outside of the U.S. And so when you add all of that up, I think that our retail business is larger than what people think, and we think that's an important part of our platform story, leveraging the success we've had with commercial and then being able to repeat that on the retail/consumer side.

Great. Your commercial LOS, if there are any questions, please -- yes.

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You can repeat the question.

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So the question was how do we view alternative lending as impacting our business. Look, we have historically supported banks and credit unions. We've dealt with some alternative lenders over the years, that'd be a very, very, very small part of our base. But ultimately, we look for opportunities to help facilitate customers making loans to people. And as we see market dynamics, it's something we'll continue to look at. It's historically not been a priority as we look at the bank and credit union space here in the States and globally is a massive SAM. And so I think we've got plenty of stuff to focus on. But we do keep our eyes and ears and make sure from a trend standpoint, particularly as there certain thesis around alternative lending coming maybe being more of a factor going forward, it's something we pay attention to.

Your commercial -- I mean your core product, I guess, or like what you're really known for is the commercial product. And as a relatively young company, I mean, how have you been able to -- why have you been as successful as you have there? And do you view that as -- I mean, what do you view as your moat? I mean, the competitive environment around that product?

Yes. We think we have an incredible competitive moat. First and foremost, just with the customer base. And I'd say a very satisfied customer base. I think one of the things we take a lot of pride in is our customer references. And so I think that's a big part of it. I think our focus on making sure every customer is successful as we get back to -- we started the company with really 3 things: innovation, reputation and speed. And that reputation has always been at the forefront as we think about things because it very much is a land and expand strategy. And if the land isn't successful, obviously, you're going to be challenged to be able to expand. And so I think we built great product. We really drove cloud banking when we started the company. We were told that banks would not put their data in the cloud. And so we had to get over that hurdle. Just like as we talk about AI and usage of data, we have a similar thing, and we'll navigate that in partnership with our customers as well. But I think it's just we've built great product, we've got great people, and we've taken care of our customers. And our goal is to replicate that with each one of the products that we come out with that success.

Who do you view as your competitors for that product? Maybe just a broad on how you view the competitive environment for nCino as a whole?

Yes. And so I think we're uniquely positioned competitively because I don't think we have an apples-to-apples competitor. And what I mean by that is I think we're the only -- as I said earlier, the only platform play where you can go from commercial to small business to consumer, to account opening, to onboarding and then leverage all of this intelligence and data on one platform. Again, from community banks up to the largest banks in the world as well as domestically as well as internationally. And so I don't think we have a pure-play competitor. I think in the States, depending on which point, vertical you're talking about, commercial, small business or consumer, you'll have some competitors mainly down in the community bank space. And then when you go internationally, it really differs by geography. And your competitor in Germany is going to be different than your competitor in France and in the U.K. And so we attack each one of those opportunities in light of the competitive landscape that we see.

Other questions? Your gross margin I think -- I'm sorry.

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I think the question is, is when community banks are modernizing, they will sometimes pair us with other modern technologies and is that what they like to do. And I think if you're going to go down the modernization path, you do want to look to make that investment in modern technology and not only modern technology, but with a company that's going to continue to innovate, right? And just not someone who will take you part of the way, but help you continue on the journey. I think all financial institutions and it's probably not limited to just FIs, but would like to have as few vendors as possible. And so to the extent that a company like us can bring them multiple solutions and they can consolidate on that, if you think about it from a training standpoint, it helps them because they can move for different parts of the bank. As an example, obviously, dealing with 1 vendor, 1 code base relationships there. I think that's what they would look to do.

What do you see as the biggest challenges to nCino in achieving its growth targets and profitability targets?

Yes. I think -- from an internal execution perspective, I think it's something we've always taken pride in our ability to execute. I think right now, obviously, we're dealing with macro issues. We saw them start in Europe in Q2 with macro, with the energy concerns and obviously with the war. And we saw a shift, Q2 and Q3 were slower in Europe but we saw a nice bounce back, both in Q4 and Q1. And we'd expect to see a similar thing here as that kind of traveled in Q4 and Q1 here and obviously kind of culminated with the liquidity crisis in the March and April time frame. From -- what we hear from our customers, and we were fortunate enough to have 1,700 customers with us in Charlotte North Carolina, a couple of weeks ago for our annual user conference. And so speaking with them in real time and hearing them talk with each other, I think overall, they actually feel fairly positive. I think that things have settled down for the most part, there may be an individual bank here or there that may be dealing with some unique issues. But really, it's just working through the macro. Our pipelines remain healthy. And again, we commented we expect Q2 to be better than Q1. In the second half of the year to be better than the first half, and that's because of the activity we see and the discussions that we're having. We're not hearing anyone say I don't need to modernize, right? I don't need to digitize and I don't need to provide a better user experience for my customers. It's just, hey, I'm dealing with a liquidity issue right now. Can you bear with me and we're in this for the long game. And so from our perspective, again, within making generational buying decisions, that's not a big issue if they need a couple of months to catch the [ trend ].

Liquidity issue, is that offered the opportunity to provide different products or new products?

Interestingly, it has. I think, and it's also reinforced really the importance of nCino and so a treasury product that we have, deposit account opening product that we have, I think, heightened demand. But really, it comes back to us and our platform. And again, our unique ability to provide the financial institution with a complete view of their customer, right? And their customers' needs and how that customer interacts with the bank. Again, think about it historically, you really interacted with your financial institution based on the silo that you were working with, which was highly organized. And so if you had a small business, you may work with their small business team but if you wanted to go get in -- go in and get a car loan, that's a different part of the bank on a different system. And they really had no idea, the relationship that you had. With nCino, they do know and I think more than anything through this liquidity crisis, the importance of being able to support each and every one of your customers has been reinforced, and I think that bodes well for what we offer them.

One of the questions I get a lot is just the visibility into like next year, you have this liquidity crisis and projects aren't going away, but maybe they're onboarding slower. Is there a risk that we could have significant -- like an air pocket in growth before it reaccelerates like as we get into next year?

Yes. Well, I think we're really working through an air pocket right now, right, which we highlighted in preview in Q1, knowing that a, Q1 is historically a low bookings quarter for us; and b, that we saw with what happened in March and April, we pretty much lost a solid month plus of sales, right, as folks were focused elsewhere. So I think we're really working through that now. Again, as we look at the opportunities in the pipeline and some of the exciting things going on, we just need to focus on bringing those over the goal line, right? But as we sit here today, we're not obviously -- too soon to talk about '25, we've still work to do in '24, but nothing going on right now. We see, I think, negatively impacting '25 as we sit here today.

I mean you've had pretty dramatic gross margin expansion over the last several years. And I mean, what is driving the gross margin expansion? And is there still a lot of room to go on that?

Yes. I think we -- the team has done a great job there. I think we can continue to incrementally drive higher gross margin. It really comes down to mix. And so subscription now is up to 86% of our overall revenues. And so that certainly helps because we also have our professional services in there. That helps. And as we think about the different products that we're selling, some of them have a little higher gross margins. So something we continue to focus on, but we would expect, again, continued incremental improvement.

What's the difference in gross margin between international and nIQ and the core business?

Yes. So when you think about the U.S. community space, we actually have the ability to resale based on our long-standing partnership with Salesforce, their CRM solution in the community space. And so when we do that, that impacts our gross margin. And that's really what we're coming from because that's where the business started. When we go upmarket to regional and enterprise and we go international, we don't have that. And so that's a part of the improvement. And then we also have our nIQ products as well as our SimpleNexus products, are on AWS, and that drives a nice gross margin for us as well.

How important is that Salesforce relationship?

Salesforce has been a phenomenal partner. We've been partnered with them since we started the company. Most recent news would have been leading up to IPO. They worked with us to put in a 7-year agreement, knowing that there'll be questions around the relationship that we had and so they were great working with us in doing that. And we see a very solid partnership. We interact with them quite a bit. We're the largest or second largest ISV partner. And so we use their platform pretty extensively in terms of challenging it, and I think we have a great cadence in terms of feedback loop. And also in the field from time to time, we'll -- there's opportunities to help each other. We've brought them into quite a few banks, particularly in the community space where we've resold their product. And there's large banks that have made decisions to standardize on Salesforce, and it's really easy for us to go in right after that and hopefully accelerate the sales process.

Other questions? When you ask on Salesforce, I think your -- the Salesforce expense as a percentage of revenue has come down significantly. Is that because of international? Or is that -- I mean, is that...

No, I think it really hasn't in terms of what we're paying them. We used to because they were a related party based on their ownership in the company. We used to have a different disclosure. I think that made its way into our public filings. But as it relates to what we're paying them, that should be fairly consistent over time.

What's most misunderstood about nCino?

That's a good question. Most misunderstood. I think one that we're a commercial lending company and that people don't appreciate how we've diversified even though, again, that's a fantastic product line for us, and we'll continue to innovate and drive that. That's one part. I think the second thing is the -- again, the uniqueness of the platform and what we've been able to do with a single code base up and down the size of financial institutions as well as our international presence. And then finally, I'd come back to -- as we think about nCino over the coming quarters and years, the data. And the amount of data we have and what we're doing with our customers to help leverage that data. I think that's pretty unique and we look forward to talking more and more about that in the coming quarters and years.

Does that show up through nIQ that the...

It'll ultimately show up to nIQ. nIQ as well as, I think, ultimately driving additional sales when people appreciate that by picking nCino. I get not only this incredible optimization workflow automation software, but I get this intelligence along with it. And again, I think that positions us quite uniquely in the marketplace.

Great. I think we have time for one last question. No. Should we expect to see nCino make additional acquisitions? And if so, where is the product gap or where is the opportunity? And what do you -- how do you think about that?

Yes. We've made 3 acquisitions in the company's history. The first 2 were in 2019, and that was really to launch our nIQ offering and then we did SimpleNexus in January. And so I think we've been able to demonstrate success buying and integrating businesses. And so I think we have the ability to do it. I don't feel like there's a need in terms of missing gaps, but an area that we said we're going to continue to focus on is nIQ. And as we think about companies out there that really more products versus businesses, are things ultimately from an analytics or an AI perspective or added it to nIQ and our customers, that will be an area of interest as we continue to grow that part of the business.

Great. Well, thank you. We have a break out at upstairs. So thank you very much, Greg.

Thanks. Appreciate it.