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

Awesome. Well, good afternoon, everyone. Welcome to Day 1 of the Barclays Tech Conference. My name is Saket Kalia. I cover software here at Barclays. Very happy to have with us the team here from nCino. We've got Greg Orenstein, Chief Financial Officer. I also have Harrison Masters, Head of Investor Relations there in the back as well. So we've got about 30 minutes together. Let's maybe take the first 20 or 25 minutes to do some fireside chat with Greg, which I know is going to be really fun and educational. And then we'd love to make this interactive, anyone that's got a question, just pop up your hand, we've got a mic runner in the back. So love to make it interactive. So with maybe all of that, Greg, thanks so much for being with us here today. .

Thanks for having us.

Wouldn't be a conference without nCino or commercial lending business. Well, first off, Greg, it's funny. I think this is the first time we've hosted you since you became CFO earlier this year, so welcome back in the new capacity.

Thank you. Good to be here.

Maybe for the folks in the room that are newer to the name, can you just give us a quick overview of the business. And since we just reported recently, maybe recap some of the things from the results that you reported last week that you were just most proud of.

So for those who don't know, nCino, we're about a 12-year-old company. We're basically in Wilmington, North Carolina, and we provide financial services software to banks and credit unions around the globe. We do three main things: we facilitate lending, whether it's commercial, small business or consumer, including mortgage, we open accountants and we onboard customers. And we do it all across a single platform. which enables our customers to get a complete 360-degree view of their customers. So that's what the business does from an overall perspective. As it relates to Q3, we announced our results, it was just last week. And I think the things that we were most proud of in addition to the financial performance, including the strong overperformance on the bottom line, were a few data points. One was our consumer lending product, which is one of our newer products. We announced our first enterprise deal for consumer lending in the United States, a $200 billion financial institution. And so that's a product that we've been working on. We've been maturing it. When we went public in 2020, we had about 40 customers using our consumer lending product. We've more than doubled that now. And consistent with how we bring products to market, we very much initially focused on community banks and work through building that up and having our products mature. And so from our perspective, a great validation for our single platform strategy and for that product specifically. So that's something we're really pleased with. I will note that's our first sale to that bank. It was -- that entry point was on the consumer side. So excited about that. A couple of other data points was we had a cross sale to a $35 billion regional bank in the U.S. with our mortgage solutions that customer has historically used us for both commercial and consumer, and now they've added mortgage. We also signed a bank in Japan, Yamaguchi, which is an over $150 billion U.S. asset bank. The first use case there is for mortgage. And they've already communicated, as they talked to press about their excitement to expand us across the commercial side of the bank as well as more on the consumer side. And so those are three great data points. And I think from a strategic standpoint, it was a very strong quarter. I think all those things very much are supportive of our overall long-term strategy.

Yes. Yes, absolutely. It's funny. I mean a lot of those wins are in areas outside of kind of the historical commercial lending kind of strong franchise that we've got. So it's really good to hear about the diversification of the business, right? And maybe just to frame that a little bit, just from a high level, how big do you sort of think about the serviceable, addressable market or the SAM for kind of nCino's current products? And you've got a few that you touched on, right, whether it's commercial lending, there's mortgage, there's consumer. How do you sort of think about that broad brush in terms of the opportunity?

Yes. So at our Investor Day a few weeks ago, we updated our SAM , which was around I think $14 billion, when we went public with some of our nIQ offerings that grew to 16%, and this was now about $18.7 billion sale. This year, towards the top end of our guidance for 78.5% or so of revenue. So we have a lot of runway ahead of a second. From a TAM or a SAM perspective, only about $4 billion of that is on the commercial side. And so most of our SAM or more of our SAM, I should say, is on the consumer lending side. And when you think about the U.S. versus non-U.S. business, more than half of the SAM is outside of the U.S. This past quarter, we had outside of the U.S. was about 19% of our overall revenues, and that grew about 48% year-over-year. So from a growth lever perspective, we see international as a great growth driver for us. over the coming years as well as in our products outside of commercial, as you noted. Some of them are newer and you can see seeing the traction that we're getting is really excited as we think about driving that long-term growth and value.

Absolutely, absolutely. Maybe just to double click, though, on the U.S. commercial lending part of the business since it is still the -- I think the largest portion -- and nCino's got some regional banks and credit unions, but they've got all the way up to the mega banks as well really kind of runs the gamut in terms of logos. Maybe the question for you, Greg, is how far along the adoption curve are we at this point for commercial LOS? Does that make sense?

Yes. So we're real fortunate and we started with commercial. It's been our flagship product. I think the clear undisputed market leader there. And we've been able to accumulate some great logos as you noted. We've got about half of the top 25 and half of the top 50 banks. But from our perspective, that's an asset. I think we sometimes get questions around market penetration and saturation concerns. But we view that very much as an asset for the company. First off, I think we have great customer relationships with those clients. Secondly, as you look at the breadth of our product offering outside of commercial, again, using consumers an example at an enterprise bank. We can go back to those very happy customers and sell them more products across the platform. And then above and beyond that, nIQ is another one of our product offerings, our AI, data and analytics business. And we've been adding nIQ products specifically to go back into that commercial base, whether it's auto spreading, whether it's commercial pricing and profitability. We announced our banking adviser offering at our Investor Day. And so those allow us to go back and continue to provide more and more value for those commercial customers while we're trying to sell them again more products across the platform. So we can go broad with them and we can go deep with them.

Right, right. seems like a good landing point, right, with commercial [ LOL ].

Commercial has been a great landing point for us. But again, I think what's exciting to your earlier comment is us being able to land with consumer...

Consumer lending through...

Mortgage with our account opening offering, and so I think one of the things we've been focused on is making sure each one of our products across the single platform is best of breed, and we can land anywhere and ultimately expand working with the bank to do that over time.

I want to touch on the macro a little bit since there are just a few moving parts for a lot of my companies, too, by the way. But I think in the last call, we talked about how enterprise banks are maybe taking a little bit longer to get over the finish line. The question is, how do you sort of get customers that are working with tighter budgets, more comfortable with the ROI that they got from nCino. And that's across different products, whether that's commercial or consumer. How do you get them compare? I mean, is that -- are you going into replacing multiple systems? Are the productivity gains here just so black and white that that's the ROI? How do you operate in that sort of tighter budget environment?

Yes. I think efficiency is a huge value driver for what we do. And it's a combination of productivity gains, where they can do more with the same or more with less or ultimately the same with less, depending on what's driving the bank. And then ultimately, from an efficiency perspective, in addition to productivity, we do eliminate numerous systems when we implement our software. At an enterprise bank, we've had upwards of 15-plus systems that get ripped out, older software, hard to maintain, costly to maintain. And so as net interest margins have been squeezed I think one of the takeaways from this year and the macro is, again, it's really reinforcing the need for two things, I think. One is to get more efficient. And we've got, again, over 450 platform customers that we have where we've got tremendous data to show them how we do that and commitment -- tremendous validation from our customers in terms of the efficiency gains that they've seen. So that's exciting. And I think ultimately, that's what's driving the decision like the consumer lending deal at a $200 billion bank. When the liquidity crisis hit, I think it's been car intuitive to a lot of folks, but it really -- we saw an impact to larger banks more than the community banks. And I think you've heard probably other commentary from companies out there with a similar experience. And ultimately, we see those banks needing even more the software that we provide. And again, I think one of the takeaways is that they're going to have to invest in technology. And they're also going to have to invest more on the consumer side, right? Because again, from a deposit gathering standpoint, I think the liquidity crisis has demonstrated the need that you have to proactively go out and get deposits, right? Money is not free, and it's just not flowing around anymore. And again, our software facilitates that and enables that, and that's something we're really excited about. As we shift to kind of the post interest rate height environment to whatever the go-forward environment is going to be.

Yes. Yes, absolutely. I want to come back to that idea of consumer deposits and that great win that we talked about. But maybe while we're talking about macro, I think mortgage has become a bigger focal point for folks. I mean, when nCino got into this market in a bigger way when we acquired SimpleNexus. I think it was last year, right, early last year. And of course, rates have been impacting mortgage volumes. But maybe you could just remind us, how much of the nCino's business currently comes from mortgage roughly, right, if you can disclose? And why -- I mean, it's been growing despite sort of what mortgage volumes have been doing. So maybe talk about that dynamic a little bit.

So we've owned SimpleNexus about 2 years now.

Okay, there we go.

Yes. And when we acquired the business, we knew that rates were going to go up. We didnt knew that they were going to go straight up overnight necessarily. But as you look at what we do in terms of lending, we had a hole in mortgage as a product offering and our customers were asking us to solve that for them. And so we looked around the market, we actually started talking with him about a partnership. It evolved into an acquisition opportunity. And to your point, despite the headwinds, including churn, which I can touch upon in a second, that business right now is about 15% of our total revenues, and it grew double digits year-over-year in the third quarter. So despite the macro, despite the headwinds and some churn, it's been able to grow, which, again, I think, positions us very well. Again, as the rate environment settles down, and we look beyond that. From a churn perspective, that has been a challenge. Again, some of these smaller mainly IMBs, these independent mortgage banks have closed up shop because it's just been difficult to make money in this rate environment. And so I think the fact they've been able to grow despite that, again, shows the strength of the business, the strength of the technology, which is one of the things that really attracted us to that business, the strength of the customer relationships and support they provide. And as we think about the technology, as you know Saket, because we've talked about it, we're leveraging that mortgage technology to be the front end facing technology for all of nCino's consumer-facing applications. We have our first big release in the spring, which is consumer and mortgage with the same front end. And we do think that will help drive both consumer sales and mortgage sales. If you're a mortgage customer, why would you not buy consumer from us, right, if you're a consumer customer, why would you not buy mortgage from us. It's going to be that same user experience for our -- for your customers, talk about that.

Yes. Talk about that.

I mean maybe just to put a bow on this topic, I mean, 15% of the business is growing double digits. Despite mortgage volumes being down, I mean, a pretty healthy amount really speaks to the share gain there, right? I think is the bridge, which is great to see. Great people, great model. And again, it comes with great software.

Yes, for sure, for sure. I want to move to consumer as well, which -- I mean, just the announcement last week with an enterprise bank adding your consumer LOS solution. And hopefully, that's the first of many, right, such types of deals. Can you just remind us how big consumer lending is for nCino's business today? And what's driving some of the share gain there? Like why -- I think you said we've gone from 40 to we've doubled the number of customers in the IPO. What's driving that traction right now?

Yes. So we've been able to double that over the last few years. And again, I think a lot of it is just the evolution of software, right? Software and building software is all about iteration. And we've been very transparent that building out consumer was more difficult than we had hoped. And so it's taken us a little bit longer to get to where we are, but we've been highlighting over the last several quarters, the progress that we've made, and I think kind of this validates that progress. And I think what's driving it is, again, there really hasn't been a tremendous amount of investment, I think, on the consumer side. Folks have been leveraging what they've had. A lot of it's been slapping on a pretty front end, but internally, once you push submit on a nice application, it's still the old processes that need to be addressed. And so I think banks appreciate that the experiences that consumers are expecting, right? Old technology is not going to be able to provide. And so I think we're excited about that win. We're excited about the validation of our single platform strategy. it provides. We're excited that that's an entry point, a new entry point into an enterprise bank. But ultimately, again, I think in terms of lessons learned this year, I think it is more and more focused on the consumer side. And so I think we've got the right product at the right time to help you another growth lever. I mentioned international earlier, but another growth lever for the business for years to come.

Yes, for sure. Great segue actually into international I mean I think if I go back to your answer on TAM, I think international is the bigger part of the TAM, right, or maybe -- right, it's just as big as North America, let's put it that way, right? Maybe the question is, what are some of the biggest countries that nCino has kind of landed reference customers? And what's the competitive landscape like there? I mean, when it comes to some parts in the U.S. with commercial LOS, I mean, it's a very favorable competitive backdrop. Is it the same internationally? Talk to us a little bit about that.

Yes. So we've had great success internationally. I mentioned 19% of revenues last quarter and 48% year-over-year growth. We first went outside of the U.S. in the summer of 2017, and we planted flags in UKI. We now have five of the top 9 banks, a flag in Canada when we're up to five of the top 7. Australia and New Zealand, New Zealand, we have three of the top 5. And then in Japan, we had a great Japan win this quarter at Yamaguchi, which I think I touched upon earlier. We're actually replacing paper at Yamaguchi Bank on the mortgage side. And so those are the countries that we've been focused on. We've also have announced customers in South Africa, in France and Germany as well. And so we see international as a great opportunity for us, a little behind the U.S. in terms of cloud adoption overall.

That's interesting.

Particularly, I'd say, in Europe. And you see a lot of older legacy software solutions that have been somewhat stitched together. Some older in-house built software. And so we are excited about that. And again, we want to make sure we're focused on growth. And what we've seen as we go from country to country, the first customer is always the hardest. That's right, right? People get excited. They want to be early, but no one wants to be first. You sign that first deal and then everyone kind of sits around and see how it goes. And then once they see that you're making progress because it's a big industry, but it's actually a really small one in terms of people know each other. You see the others come along. That's how we've been able to add those logos and you'll see a lot of opportunity there.

It's been a great reference account strategy over the years.

And a lot of those are larger banks, so larger deals. Maybe take a little longer from a sales cycle standpoint. But again, great opportunities -- and again, we see both with commercial as well as mortgage, those are the two driving products that we see right now Internationally.

Let's talk a little bit about nIQ as well since I think that's really come a long way since the IPO. Can you just remind us how big -- how you think about sort of sizing that business today? And what are -- nIQ, it sort of encompasses a few different products, what are some of the key nIQ products that are getting cross-sold into deals today most successfully, let's say?

Yes. So NIC, I think we touched upon it on our call. 34% of our customers have at least one nIQ product of our bank operating system platform customers have at least one nIQ product, and that's up 25% year-over-year. And so we're excited about that. We've had three main nIQ products, historically portfolio analytics. In fact, this past quarter, we signed our -- which they've historically focused on credit unions. They've been expanding the banks, signed the largest banking customer deal in Q3. We've had auto spreading. We've had commercial pricing and profitability. The auto spreading and commercial pricing profitability are mainly focused on our commercial lending customers versus portfolio analytics, which is a little bit more on the consumer side. We have spent a lot of time and focus over the last several years because we launched nIQ back in 2019. And so we saw the opportunity for data analytics insights being pushed out to the users of our software for several years. And so we've really embraced this AI hype that's been going on because I think it's helped elevate some of the discussions that we've had with our customers. Which, as you can appreciate as banks are not necessarily at the forefront of technology adoption. But we've been building out our data assets. We've got the largest commercial lending book of data anywhere in the world. From a consumer lending standpoint, we've got data from over 1,000 credit unions from a mortgage standpoint. We've got a tremendous amount of data in light of the SimpleNexus acquisition. And so we've been focusing on building out the infrastructure to leverage that. And that ultimately is going to allow us to come out with more and more insights over the coming quarters and years that we can bring to our customers, charge them more different SKUs or ultimately included as part of a base package in terms of the value that we're adding and we think that will further differentiate us from the competition.

Yes. Yes, for sure. I want to come back to pricing in a second, but let's maybe shift gears to some financial questions here. Just on the back of last week. Maybe starting with bookings, right? Like I think you, like many of your competitors had a bit of a pause in kind of customer activity earlier this year, just given some of the liquidity issues, right? That banks are going through. How have you sort of seen customer buying appetite come back since then, right? And remind us what you said about booking growth as we sort of progress through this year?

Yes. So the liquidity crisis definitely impacted our Q1 sales. We saw -- we had a strong Q2. Some of that could have been because of the Q1 impact, but ultimately, we had a strong Q2. I think Q3 was playing a little nicely, I think when rates spiked in October right? The 10-year goes at about [ 5 ]. I noticed this morning, it's down back to like [ 416 ]and mortgage rate spike, which --It's back to some of the churn that we saw on the mortgage side of the business. I think that caused some folks to pause. So Q3, I'd say we're okay. It wasn't as good as we had hoped, but it wasn't like Q1, right? And so as we look at the second half of the year, and the deals that we had hoped to come in, that did. And I think we still feel good about the second half of the year. Q4 has historically been our strongest sales quarter. On the call, we talked about having ample pipeline coverage -- and again, the pipelines have looked good throughout the year. Getting back to earlier comments, it's really around just getting things over the goal line, and that's what the team is focused on doing. It's really just about execution right now. And again, just getting these opportunities that we see signed and ultimately behind us.

Yes, absolutely. We're pulling for you here. Maybe just on that point, just around some of the churn in the mortgage business, right? You touched on this a little bit last week and what we saw in Q3, particularly with the independent mortgage banks, right? The IMBs and I think with one of your bank customers, right, that maybe related to the liquidity issues, right, that was part of that churn. Can you just remind us sort of how much impact that churn is having and whether we should foresee additional churn like this going forward?

Yes, churn is a little new for us because we have a sticky customer base on the depository side. Historically, our turn has been about 2% to 3% of revenues. When the year began in light of what we were seeing in the mortgage market and the final wind down of PPP. And then a couple of customers we knew were going away because of M&A. M&A is generally a positive for us or has been, but we had a couple that didn't go our way. We announced that churn was going to be about 6%, which was about $21 million. As we got through the third quarter, and again, October, I think specifically, I think two things happened. One is we saw the IMB churn exceed our expectations. The team has done a really good job throughout the last six quarters, tracking churn, forecasting churn. But really, I think it was that event in terms of the interest rate spike that ultimately caused some IMBs to say, we were going to try to wait it out until the spring buying season, but we're done. And so we experienced that. And then as you noted, the three liquidity banks that kind of acquired. Two of them are staying with us. One we've actually expanded up into, but one we expect it to lose in May of next year, but ultimately got accelerated. And so that left us at about 9% churn. So it's about $30 million for the year. $20 million of that came through to one -- quarters one through three, so we're up to [indiscernible] in the fourth quarter. And then as we get on the other side of this, again, interest rate and macro environment, from our perspective, I think we would expect to trend back down to more towards historic norms and really view this, particularly on the IMB side, as somewhat of a onetime anomaly what we're seeing is that as the capacity gets taken out of the system on the mortgage side, you end up being left with a smaller number of larger, better capitalized IMBs. And we've been very focused on aligning with them, right? And so as they grow, we're going to be able to grow with them, right, view that as a growth driver. And in parallel with that, we've been cross-selling more into our banking credit union base which are going to be more sticky customers. And we're also seeing larger deal sizes as we talked about with that side of the business.

I want to talk about that point you mentioned just around being able to grow with the customer. And I think it speaks to one of the things we talked about at Investor Day back in September was sort of the idea of an evolution of the pricing model, right, over time. to maybe what I'll call more of a platform plus kind of volume-based fees, right? And you sort of correct me there if I'm mischaracterizing it. But maybe you could just help us, Greg, understand how that's going to sort of impact your model today. And maybe how much of -- as you think about your just book of business, how much of your book of business is already on this kind of pricing model versus will transition over time?

Yes. It's a small piece still. We've historically been a seat-based model. I think one of the things that we've seen as we've created more value and more efficiency at the bank is that ultimately, we're going to enable our customers to meet fewer people, right? And we don't want to be penalized for that for creating those efficiencies. The other thing, particularly as you focus on consumer, for example, is our technology is helping drive more activity to the digital channel, but you don't need people at all. And so as we look out and what we're trying to do and what we're doing with our technology over the next coming years, unless the bank wants to for their own internal reasons, you should not need human intervention in a consumer loan, right, up to whatever you want to do. It should be automatic, and it should be able to be done in minutes, not in days and certainly weeks. And so again, you won't need human intervention. So we see this. And so really for two parts of our business right now, we started to transition pricing. One is consumer, the enterprise deal that we announced was done on a platform pricing basis. And those are generally aligned to asset sizes, which our banks are very comfortable purchasing and they're very used to that. Projecting based on their asset sizes. I think the other thing that we've seen is that it allows us from a sales cycle standpoint to avoid the discussion around how many seats do you need, right? Trying to forecast that. It just takes that all the way and it really allows you to focus on the value that you're bringing to the customer.

Right.

On the mortgage side of the business, which also historically was seat based, again, in light of what's been going on in the market and trying to work with our customers through a more difficult time. We've also evolved the platform pricing, where, again, they pay a committed fee to us. And then ultimately, if they exceed a certain amount of volume, really one or two things happens, either we get paid a higher fee on a per loan basis afterwards, which, by the way, any excess or overage is not counted in our RPO. As you know that's a metric. Or it pushes you into the next tier of commitment, right, which then would go into RPO. But as those volumes increase, we're going to expect the revenue to increase as well, and we'll be able to benefit that. And so those are the two places that we're focused. And over time, we'll -- our plan is that we'll have that throughout the company from a pricing standpoint. And again, as customers get efficiencies. Like I said, we're helping them do that. We want to be able to benefit from that.

Absolutely, yes, absolutely. That will be a great model once rates start to normalize and we get to more normalized volumes, if you will, that's right -- you get to participate a little bit in that upside.

That's exactly right. And we're helping them now, and I think it's a good partnership as we think about the long term for the mortgage industry.

That's a good approach. I want to touch on a couple of more financial points. And one of them is just margins, right? I mean I think the 17% operating margin last quarter was just a huge stand out for me. Maybe you could just talk about any sort of onetime or seasonal items that we should be thinking about within that number, but then also more broadly how we should sort of think about that balance between growth and margins over the next few years, something that you spent a lot of time on at the Investor Day in September.

Yes. The company, the team has done a great job embracing profitable growth. So we are very proud of that. We did highlight that, that 17% included about $2.8 million of onetime benefit. If you look at some seasonality in Q2 from a sales and marketing standpoint is our user conference. And so we were able to get the benefit of not having to incur some of those costs. But to your point, we have been consistent talking about the balance between growth and profitability is that we're always going to aim on the side of growth. We believe we're in the early innings of a massive market opportunity and have a great market leadership position. And we want to be disciplined, and we want to be responsible. But again, we aren't going to try to meet some arbitrary margin target at the expense of long-term growth. And so again, it's a balance, particularly in a more difficult macro. You want to make sure you're maximizing opportunities, but not putting investments where you're not going to see a reasonable return, right? But ultimately, like I said, the team has done a good job, and we expect to get continued leverage as we look in the out years, getting back to the longer-term model that we talked about at Investor Day.

Sure. That's a great way to wrap up here. Maybe last question. I think the Investor Day, just ready when the audience that hasn't looked at it. Super helpful slide deck, super helpful, just content set up some really helpful targets when thinking about the model on sort of a multiyear basis. Maybe the question is, can you just remind us what those are. Some of the ones that you want to make sure we take away? And are there any puts and takes that you want us to think about with respect to that model as we start to start thinking about planning for next year or modeling next year?

Yes. So thank you for your comments. It was a great day for us. It was our first Investor Day that we've had since we've been public. So we're excited to do that. It was just a great time to give an update, particularly with the macro. But we announced over a 4- to 6-year period, we expect to go from a rule of 30 this year to a rule of 50, and that includes approximately 35% operating margins and free cash flow margins. And speaking of free cash flow, we do also expect to be free cash flow positive in the fourth quarter, which is something that I don't think we noted on our call. And so that implies about 15% growth. And again, I think with the investments that we've made in products, the depth and breadth that we have with the investments that we've made in our geographic footprint, I feel like we've gotten a lot of kind of the infrastructure spend behind us. And again, I think we're well poised with products, with geographic reach to attain those goals. And I think as I said earlier, I think one of the big takeaways from Q3 as some of those strategic wins, I think is given folks more confidence right, that they see a path to how we're going to get there, and we're really excited about doing that. I will go back and say, again, we're going air on the side of growth, right? So we had 15% was the implied top line, happy to have that be higher, and we'll focus on doing that. But yes, that rule of 50 something that we're targeting and we're going to go execute in order to achieve that.

Super helpful. I think that's about all the time that we have left. Greg, thanks so much for the time. Really helpful discussion here.

Always a pleasure. Thank you.

Thank you.