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

I'm Adam Bergere, a member of the software equity research team here at BofA. And I'm happy to welcome Greg Orenstein from nCino. Greg, how are you?

I'm doing great. Very happy to be here.

Yes. Great. So let's just start with a quick background. You stepped into the CFO role in January but you've been at nCino for much longer than just this past January. So yes, [indiscernible] yourself.

Yes, I joined nCino almost 8 years ago, been fortunate to have a few different roles there prior to taking on the CFO role in January. I was focused on corporate development and strategy. And really just over the last few years in that role, we did 3 acquisitions. We went public. We had a secondary offering and then was fortunate to get the opportunity to step into this position in the middle of January.

Yes. Congrats.

Thank you.

And so yes, just for people who are new to the story, let's just start out with like a high-level overview of what nCino does and the solutions it provides.

Absolutely. So we are a multi-tenant SaaS provider of financial services software to banks. We focused originally on commercial lending to community banks in the United States. In late 2014, 2015, we took that solution up to enterprise banks here in the States. In the summer of 2017, we planted our first flag outside of the U.S. in London and we subsequently expanded geographically into Australia, both in Sydney and Melbourne through an acquisition that we did, as well as Toronto and Tokyo, France, Spain. And while we were expanding geographically, we also expanded our product set. We started, as I said, with commercial lending, expanded to small business, consumer lending, which includes our mortgage solution that we acquired last year. We also do account opening and onboarding for customers. And then about 4 years ago, we started what we call nCino IQ or nIQ, which is really our data analytics AI initiative. I know AI is the buzzword and hype today but it's something we really started 4 years ago. And under that, we've got 3 products and it's an initiative that we have in terms of leveraging a lot of the data that we have with all of the customers that we have. And that's something I think you'll continue to hear more about. But I think what's unique to us is, again, 1 single code base, spans community banks, the largest banks in the world and it's just all in a single platform. So we really give the bank the ability to run their financial institution with nCino.

Great. Thank you. And just as a follow-on to that, like, how do you think about the addressable market of the core business? And how has that continued to grow over time?

Yes. From a SAM perspective, our SAM, as we talk about commercial, we're, again, we started and a lot of people think that we really are a commercial lending business, which we've evolved quite a bit from as we can elaborate as our discussion goes on, that's a little bit over a $3 billion SAM. When you look at the retail side, which includes mortgage, it's almost a $7 billion SAM. And then on the nIQ side, with just the 3 products that we have, it's about a $2 billion SAM. And as we come out with new nIQ products that SAM will continue to increase. The other interesting thing, I think about our SAM is that more than half of it is outside of the U.S. And so we see a great opportunity outside of the U.S., which is still pretty early days, notwithstanding some of the success that we've had, including, we've got 5 of the top 9 banks in [ UKI ], 5 of the top 7 banks in Canada. 3 of the top 5 banks in New Zealand.

Great. I guess a bit of a harder question. So apologies here. So we're now more than a year into like the Fed tightening cycle and the beginnings of some recessionary fears. Can you provide a quick synopsis of how the operating environment has evolved over the last 12 months?

Yes. It has evolved and been interesting. I think when we take a step back, if you follow the company, you would have heard us on our second quarter call last year, talk about slowness and some delays in Europe, not surprising given macro, given the concerns about energy and obviously, the war. And that continued in the third quarter. And we kind of saw travel over to the U.S., if you will, in the second half of the fourth quarter and into the first quarter. I'd say kind of culminating with the liquidity crisis or concerns that we saw in March and in April. But I think what's interesting and what we've seen through that is from a deal standpoint, deals not falling out of the pipeline -- a healthy pipeline. It's just there was a little bit of an air pocket in Europe and we talked about that being in Q2 and Q3. We saw in Q4 and Q1, really strong sales in Europe. And I think that's what our expectation would be here in the States, is kind of, again, we get on the other side of the liquidity concerns in March and April and financial institutions were able to kind of focus back on their need to modernize and digitize and provide their consumers with the experiences from a technology standpoint that they're used to. The demand remains, the pipe remains and again, from a timing standpoint, a little bit of an air pocket that we previewed on our last call, was going to happen in Q1 and we're seeing that play through.

Got it. And yes, you kind of alluded to it that you reported results last week. So just let's quick recap, maybe some key highlights that you wanted to point out. And then maybe some common discussion points you're having with investors.

Yes. I think key highlights I'd point to are our record cash flow and the non-GAAP operating income that we were able to generate. I think those were financial highlights. I think from a customer perspective, we announced a deal for property lending in the U.K. with a large institution there. And if you think about property lending, it's really property lending over there versus mortgage. The U.S. is really unique in terms of the government involvement in mortgages. Primarily outside of the U.S., a mortgage is just another loan and a desirable loan we see a really large opportunity for property lending outside of the U.S. And I think that, that sale was a good evidence of that opportunity. So we're excited about that. From a commentary standpoint, not surprisingly, a lot of questions about macro. And what we're seeing -- and so certainly expected in this market but trying to provide as much transparency to focus as we can, let them know and hear what we're seeing.

Got it. And there's a counterintuitive element of, I guess, your reported earnings last quarter, where you kind of saw a bit more resilience in small banks, smaller financial institutions. So just curious if you could elaborate on that.

Yes. I think a lot of people believe that's counterintuitive because I think people would have expected more impact on the community banks. But I think we saw -- we had a lot of conversations with our customers during March and April as the liquidity concerns were top of mind. And really what you saw -- I think on the news it was characterized as regional banks. The way we look at our market is, community banks are up to $10 billion, regional banks are between $10 billion and $100 billion and then enterprise are north of $100 billion. But the banks really in question were large banks. I mean, Silicon Valley Bank was a $200 billion bank. That's a nice sized bank. And that's what you saw on the screen every day on CNBC, the stock implications in terms of their stock prices, et cetera. And that's where, again, we saw folks saying, "Hey, we need to go focus internally. Bear with us for a few weeks." The community banks in our discussions and experience did not experience that for a couple of reasons. One is, I think just the nature of community banks, I think it really reinforces the place that they play in the United States. They truly are part of the community. And as the concerns rose, I think it was very easy for them to call their customers, many of which they know well. They've got long-standing relationships with, address any concerns that they may have and have those discussions because they may run into each other on the soccer field on Saturday, right, with the kids. I think that's part of it. I think the second part is those 3 banks in question really did have unique business models tailored to certain customers and high net worth customers. I think the average deposit in a community bank is about $1,300. And so in terms of deposit outflows, really, there's really no incentive for you to open up a new account and move money somewhere, particularly if you have a relationship with the bank, you trust the bank and moving $1,300 balance to another bank for an extra 0.5 point of interest isn't really going to change anything in your financial profile.

Got it. Thank you. And stepping back a bit, thinking about the build versus buy thought process of a lot of these banks, you sell to institutions of all sizes, small and large. Just how is the discussion around build versus buy -- buying software evolved over time?

Yes. It's -- again, I've been in the financial services software business for 20 years now and it really becomes less and less of a discussion point. Starting here in the U.S., I think you see fewer and fewer financial institutions doing it. I'd say, Europe, a little behind on that on the path but going down the same path. And ultimately, I think the cloud has been a difference maker with respect to whether you would build internally or ultimately leverage a vendor. And ultimately, with the speed with which vendors like nCino can build, the expertise we have, I mean, we have on our bank operating system platform, we've got over 450 or so customers, the lessons learned, it's really from an ROI perspective and from a risk perspective and from an allocation of capital perspective, it really becomes less and less of an incentive for a financial institution to do it themselves. There's still 1 or 2 out there, there's still a handful, that is just their mindset but we'll continue to try to convince them to come our way over time.

Yes. And kind of what leads most customers to choose nCino over competitors, whether it's replacing an older system, an alternative or replacing that something they had built themselves and then maybe it just gets a little unruly?

Yes. I think a few things. One is, I think our people, first and foremost, I think we've always focused on our reputation. We do have a land and expand strategy and you've got to make sure that land is successful in order for you to be able to expand. Second is our -- is the software that we've built, again, with our great folks. I think we've built some really good software. I think we've been innovative. When we started the business, there really was no cloud banking. People told us banks would never put their data in the cloud. And so we really have pushed the market. And so I think our customers look to us to continue to innovate and help drive them to where they need to be as they need to transform from a technology standpoint. And then the other thing, I think, is just our single platform story. If you think about how software was historically purchased by financial institutions, it was very much siloed. So the commercial lending department would have their own offering, small business, consumer, et cetera. And you may be a great small business customer to a financial institution and go in for a car loan for you personally and the bank would have no idea who you were. And so with our single platform, with everything focused around the customer, that end user and the ability to understand the full scope of their relationship, I think, sets us apart and again allows a bank to standardize on 1 nCino and get the efficiency gains from doing that as well as the enhanced customer relationships from that technology.

Perfect. And then thinking about the different lines of businesses you serve commercial banking, retail banking, small business banking, treasury, asset finance and leasing use cases. And you talked about the single platform. So just when you kind of build a relationship with the customer, are they landing on a single use case or several? Or are they kind of because there's that platform effect, are they kind of buying the whole thing outright?

Yes, it's been interesting. So obviously, we did start with commercial lending as noted. And so for many years, that was the product. As we've built out our focus has always been making sure that each one of our products could stand alone from a competitive standpoint. And so we have seen a couple of trends, I think, over the last year or 2. One is landing with retail or landing with small business and then maybe commercial comes after. So I think we can land with any product. The second thing is having customers buy everything at once, the full platform. In Q4, we announced Johnson Financial, is a really nice sized institution. They bought everything. And so that land ends up being significantly larger. But I think that's a testament to how our other newer products have matured and how, again, they are also being viewed as best of class. And that allows us the opportunity, whatever the pain point may be for a customer for us to land their and then again, work with them over time so they get the full benefits of having a single platform.

Got it. And then are there any areas of the portfolio use cases that you've kind of seen, come a little stronger just despite the tougher macro?

Yes. Retail lending, which is something we've been working on for a while. I think we've been pretty open. It took a little longer than we expected or wanted. But I think that product has come a long way and we now have over 80 retail lending customers. We launched that about 4 years ago. And so if you kind of match that up to when we launched the company in commercial, I think we're way ahead of that. And so seeing that momentum, I think, is exciting. I think also with our SimpleNexus acquisition, the ability to bring them into our bank and credit union customer base. We've really seen a lot of excitement around that, again, leveraging some of those relationships. And I think that there's a great opportunity for us there. If you look back at last year, obviously, turmoil in the mortgage market. We were integrating that business with nCino. And in parallel with that, we had 16 cross-sales and 19 competitive takeaways. And I think that bodes well for where we are going forward with that product. So those are the 2 things that I would highlight. Well, actually, I'd say one more is international. Again, with the diversification we have outside of the U.S. and some of the investments that we've made, I think we're starting to see pretty more consistent returns on those investments, particularly as the macro, as that subsides over time.

Perfect. And then on SimpleNexus, you kind of touched on it already. How should we think about the [ TAM ] and opportunity? Who's the target customer? And also in just the last quarter earnings, you called out in the market, the housing market is slowing but SimpleNexus is taking share. So clearly, you guys are doing something right. So I wanted to get your thoughts on what that might be.

Yes. We remain to be extremely excited about that business and opportunity. Again, it starts with great people and great product and then taking care of the customers. And so we had, as we looked at our product portfolio, we saw a need for a mortgage offering. And the other thing we saw a need for is, with their mobile-first technology, you would have heard us talk about how we are bringing that and expanding the use cases. So that ends up being the consumer front end for all of nCino's products. And that's something that we showcased at our nSight event in May, our user conference and something that you'll see as the year progresses, us rolling that out more aggressively. One of the things that we saw with SimpleNexus, was again this great technology but we also saw a great business model. And unlike the other players that we looked at or are familiar within the space that are very much transaction based. We tried to highlight from day 1 that SimpleNexus had a seat-based transaction model. And while they didn't see the high highs of the mortgage boom, we also didn't think that they would be as impacted in a rising interest rate environment and that has played out. And so we've been very transparent about some of the churn that they've had in their market, specifically on the independent mortgage banks. But notwithstanding that churn, again, consistent growth with the rest of nCino this last quarter, again, we had 2 more competitive takeaways. And as that market settles down, I think we expect continued good things from that business.

Awesome. And yes, you're -- just got to ask about M&A here. So I guess just how hands on has nCino been with some of the acquisitions? For example, SimpleNexus is pretty full fledged but in terms of go to market, how much of a joint effort is there in terms of product road map? How much more are you mixing the 2 offerings?

Yes. So those businesses, we did fully integrate them last year within the year of acquiring them. And from a product perspective, actually, the Co-Founder of SimpleNexus [indiscernible] Matt Hansen became the Chief Product Officer of all of nCino. And so we've seen that as an accelerator for bringing the -- certainly the product organizations together but ultimately, the companies together. And Matt's done a great job of coming in and really pushing our development organization to release quicker. SimpleNexus has multiple releases of code a day. Historically, we were on a 2x a year cadence for releasing a new product. That's now shifted to a monthly cadence, which I think from that, we've seen a lot more efficiency gains and just shorter product builds, which allows us to get product out to the market quicker. And so we've worked really closely with SimpleNexus as well as with the other 2 acquisitions, the teams that we've done. And I think we feel really proud of the work. And I think we've demonstrated an ability to acquire and successfully integrate companies, which, I would say, even the easiest acquisitions are really, really hard. But with great folks working together with a common objective it increases your chances of success quite a bit.

Great. And then on the hot topic, AI. You kind of mentioned nIQ already but what are some other AI enabled offerings? How big of a revenue driver are these solutions today? And where could that opportunity be over the next few years?

Yes. So we started nCino IQ or nIQ about 4 years ago and it really was working with our customers. Again, as we have this platform, as we -- our software kind of owns the screen of the bank employee, [ weighs ] for us to inject intelligence into their daily decision making versus what we always call as the swivel chair where you've got different systems and you swivel from one system to another, which really makes inefficient use of data. And also, you'll see quite a bit, you'll have information but maybe it's only shared at more senior levels, it doesn't get out into the field for people who are actually making decisions on a daily basis. And so we launched nIQ, 2 of our acquisitions were the catalysts for that back in the summer and fall of 2019. It currently is about 5% of our revenue. We see about a 20% uplift with the 3 products that we have, which is portfolio analytics, auto spreading and commercial pricing and profitability. With just those 3 products, we see about a 20% uplift. And that really is just primarily in our commercial lending base, which specifically auto spreading and commercial pricing and profitability are really targeted to. What we've been working on over the last period of time is taking all of the data that we have access to and just to expand upon that. We talk about having assets from 15% of the C&I business in the U.S. running through nCino. We talk about 5 of the top 7 banks in Canada, again 5 of the top 9 in [ UKI ], 3 of the top 5 in New Zealand. SimpleNexus last year, touching about 25% of mortgage originations in the U.S. And then our portfolio analytics business having over 1,000 credit union customers where we have tremendous data from a consumer perspective, bringing that all together so that we can continue to expand on our nIQ offering and come with additional products like early warning, like propensity to default, propensity to pay early, different underwriting analysis that we can do in credit analysis. And so we see the nIQ product set growing over time, leveraging that data. And ultimately, we would expect that 20% to increase along with, in terms of upsell opportunity with our customer base.

Yes. And just a quick clarification. You mentioned it contributes roughly 5% of revenue. But in terms of like percentage of customers who are using it, would it be fair to characterize it as also 5%? Or how should we think about that mix?

Yes. About 30% of our customers have at least 1 nIQ product of our BOS customers or Bank Operating System platform customers on about 1 nIQ product.

Got it. And then the go-to-market for nIQ, how do you guys structure that?

Yes. It's just another offering that the sales force has. We bring in experts, solution experts to help support the sales initiatives. But again, as you talk about, for example, auto spreading and commercial pricing and profitability, I mean, that's something that we would expect every one of our commercial lending customers to want and need. And it's just a question of lining it up from a timing perspective and budgetary perspective. But those are front and center. And again, I think we're excited about the infrastructure that we've invested in over the last couple of years to set us up to really leverage the data that we've got access to.

Yes. And then stepping back from that, thinking about the whole company go to market, it's a combination of SI partners as well as direct. So just where incremental investment dollar is going in terms of investments being made in the sales and marketing organization?

Yes. We do have a direct sales force. We work with our SIs in specific accounts, for example, as we think about areas of the world that we don't have a flag planted, working with SIs, leveraging their relationships to bring us into countries. And so we'll continue to do that. But when we looked at this year, we looked at our plan, it was important for us to make sure in light of the demand that we see out there notwithstanding kind of near-term headwinds that we have the same covered. And so if you look year-over-year for us from a sales and marketing standpoint, you'll see R&D is down some, you'll see G&A is down quite a bit but you'll see sales and marketing is actually a little bit up. And that is because of the opportunity we believe exists. We actually have more sales folks in the field today than we did this time last year. And I think that bodes well. One of the things that I've certainly seen in my career during difficult times is, people quickly cut back on sales and marketing. It's kind of easy dollars to save in the short term. And then as you kind of ride through the storm and you get on the other side, your sales are down and you don't know what happened. And it somewhat becomes a self-fulfilling prophecy. And in light of the demand that we see, we wanted to make sure that, that wasn't the case for us.

Great. It's a good segue. So on capital allocation, you guys made great progress on profitability these past few quarters, managing the business to the Rule of 30 for this year. Just how should investors think about capital allocation and the trade-off between growth and profitability? Just how much of that profitability would we have seen had there not been that slow down? Like, was this already kind of part of the plan?

Yes. Again, going back to, I think, what we saw taking place in Europe in Q2 of last year, I think really set us up down this path. I think, frankly, just in terms of the maturity of the company, it was time to pivoting any way, particularly in light of the growth that we had during COVID. And so as a company, we view ourselves as a growth company. We err on the side of growth. And as we see opportunities to grow, we want to make sure we invest in them because we still think we're in the early innings of a massive opportunity. That said, I think it's important to put a stake in the ground and Rule of 30 this year was that. Again, just as a starting point, you should expect that we'll improve upon that next year and beyond as we look to Rule 40 and then beyond Rule 40. But again, ultimately, erring on the side of investing in growth is the mindset that we have. And you would expect also to continue to see incremental improvement on our OpEx throughout the year as we leverage some of the investments that we've made previously.

Got it. Is it fair to say that hiring plans are slowing a bit for the year? Or what's the cadence there?

Yes. I think we feel good about the headcount that we have. We did have a headcount reduction in the middle of January, at the end of last fiscal year that I think set us up on a good path. We also have been one of those companies that has mandated everyone to come back to the office and we did that in January as well. And interestingly, I think the reaction to that was better than we feared. A lot more folks receptive. I think the feedback has been very strong. And I think the output from an efficiency standpoint has been very noticeable. And so as we think about our current level of head count, I think we feel like we're in good shape. And I still think that we've got efficiencies we can gain, again, as more time passes, with people working more closely together.

Got it. And lastly, on international, just how should investors be thinking about the international opportunity? Is it, a lot of companies obviously say like, in the end state, it will be like a 50-50 mix between U.S. and international. Where do you guys see that going? And where is that today?

Yes. So last quarter, international, which is just outside of the U.S. for us, was about 17% of our revenues. We are also one of those companies that think it can be 50-50, if not greater. If you go back to my earlier comments about the SAM, it's a larger SAM outside of the U.S. I mentioned we had our user conference a couple of weeks ago, it was fortunate for us, we had 1,700 attendees, which we didn't know in this market as people are focused on expenses, whether we would have that strong of attendance. And we did, it was sold out but it was of note to your point, was that we had people from 15 different countries come. And I think that bodes well because again, I think the international opportunity is still early for us notwithstanding some of the success that we've had. And as I said, it can be 50% plus of our business over time.

Got it. Good to hear. And just how much incremental effort is it? I feel like for financial services customers, I would expect it to be the regulatory hurdle, localizing the products. Is it a lot more incremental effort to kind of do that? And is the sales motion different for international?

The sales motion, we really look at it on a country-by-country basis. Again, we talk about international but every country is certainly unique. They are at different stages, whether it's regulatory issues or mandates on cloud adoption. But ultimately, the need to modernize and digitize and provide that consumer -- that excellent consumer experience is the same, I think, on a global basis. And so I think that does bode well again as we continue to expand. Specifically on the retail side, you're going to deal with more nuanced regulatory things on a country-by-country basis. But with the platform, with all the investments that we've made, that becomes much less of an effort, I think, with us and our product and our platform than maybe others.

Got it. Thank you. Yes, that puts us at time. So yes, thank you very much for joining us.

Appreciate it. Thanks for your time.

Yes. Thank you.