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

Everyone, my name is Mayank Tandon. I'm the fintech analyst at Needham. I'd like to welcome Greg Orenstein, the CFO of nCino. Thank you, Greg, for joining us.

Pleasure to be here.

We're going to do a fireside chat. I'll ask a few questions, and then maybe we'll get the floor to ask questions as well. So first question is, I think just some people might be new to the story, it might be helpful to give people a sense of where you are positioned within the digital banking space, how do you compete with the likes of, say, Q2, Alkami, others? Where do you play in that market segment?

Sure. Again, nice to see everyone, and thanks for joining us today. Ultimately, we do three main things at nCino: we facilitate lending, and that's anywhere from commercial to small business to consumer, including mortgage; we open accounts; and we onboard customers. We do this all in a single platform. That same platform spans from community banks here in the United States to the likes of Wells Fargo and Bank of America that are our customers as well as travels overseas. About 19% of our revenues this last quarter were international, which was actually up 58% year-over-year -- I'm sorry, 48% year-over-year. And ultimately, as you talk about a Q2 or an Alkami, they're in the Internet banking space. And so they really do check your balance, bill pay, money transfer. We really -- we're not in that business. And so a bank would use them for that, but ultimately, in terms of fulfilling their lending, their account opening or their onboarding needs, they look to nCino.

Great. So just to piggyback off that, what is the value proposition that nCino provides its banking clients? Like what are the pain points that banks face that you're hoping to solve?

So in terms of value drivers, I mean, ultimately, we help banks become more efficient, which allows them to reduce expenses. We can help banks grow their revenues and ultimately comply with regulatory requirements. If you think about the way that banks have operated historically, it's been very much in silos. So you'd have different point solutions solving different points of the bank or different problems for the bank within a silo. The bank would buy a commercial lending stack, and then they'd have a separate consumer lending stack and then a separate mortgage stack. Those didn't really interact with each other. And in terms of providing the consumer a great experience, very difficult, because if you went on to get a mortgage, they wouldn't know you on the commercial side of the bank and vice versa. And so we took an approach that really focuses on the end user, the consumer, right, and allows the bank to have a 360-degree view of that consumer across one platform. So wherever that consumer interacts with the bank, you'll be able to see that through nCino and ultimately be able to serve that customer in an incredibly efficient and very positive user experience perspective.

Is there a way to measure that? Like any ROI metrics that you can share with us, provide some sense of what the impact is on the banking client?

Yes. Ultimately, we've got tremendous statistics. And again, it's all over our website and our marketing materials about reducing close times on loans, for example, so ultimately getting money quicker, right? Because you, if you're getting a loan, what you want to know, am I approved? When am I going to get the money, right? So we can do that quicker, which allows our customers, for example, to be able to get money quicker, right? Because ultimately, you're going to start earning interest quicker the money that goes out. Same with an account opening standpoint. We're able to facilitate and open accounts very quickly, right, versus it taking weeks historically. You're able to do it in a very efficient and online manner. And so ultimately we're helping banks to provide their customers a better user experience, which ultimately is going to help drive efficiency at the bank and a better overall relationship, right? Because if they don't have a good user experience, they're going to go somewhere that provides it to them.

Right. Then what is nCino's go-to-market strategy when you're going after these big opportunities in the market? How do you attack the market?

So we have a direct sales force. Again, from our perspective, our sale is very domain heavy, right? And so we have a lot of ex-bankers that work for us, people who've lived in the banks and have dealt with the problems that were there to solve. So they can really go and talk to folks on the other side of the table around their experiences and how our technology can improve their life. So we have a direct sales force. We'll work with partners, system integrator partners. We've got a great system integrator ecosystem. We've got a couple of thousand nCino-certified consultants out there, working with the likes of Accenture, Deloitte, PwC as an example, that we also will go to market with, although, again, they'll go direct, and we'll go direct.

So I want to jump on that point about the SI partnerships. I think you touched on this also at the Analyst Day. Is that a function of just now playing in the bigger leagues with bigger banks, both domestically and internationally, where you now have to work with the SIs versus doing the services on your own side?

Strategically for us, particularly as we look at scaling on a global basis, partnering with the SIs was something that we made the decision to do early on in the company's history. And it's been a great relationship for us. We very much are a product company. We do services for community banks internally ourselves. Some of that is driven by price pressure down market. A lot of it really is driven by making sure that our folks are trained and very knowledgeable in our solutions. But as you go upmarket, instead of having that whole bench sitting there, right, dealing with ebbs and flows, particularly of lumpy enterprise deals, as well as having the expertise of these consultants, many of which live inside these banks on a day-to-day basis, right, they understand the banks. They understand the infrastructure of the banks. They understand the technology stacks. They have relationships there. For us to be able to scale as quickly as we have on a global basis, that was something that we strategically pursued, and it's been a great thing for us.

Right. I think it's been seen in those big deals that you won recently. We've seen that in the recent quarter as well. Maybe that's a good starting point on some of the recent trends. I think last quarter you had some nice big wins, expansions, but you also called out higher churn. Could you maybe remind us of some of the puts and takes coming out of the last quarter in terms of trends that you're seeing in the market?

In Q3 we had several strategic milestones, I'll say. The first one and I think the one that's gotten the most attention was we signed the first enterprise bank, a $200 billion bank here in the U.S. signed for our consumer lending offering. And that was the first enterprise bank to sign on for that offering, which is still a newer offering for us even though it's been in the market for a little bit, but in terms of newer in terms of [ adds ] it's continued to mature. When we went public, we had a little over 40 consumer lending customers. We're now over 80. And so that was a huge milestone for us. Another milestone was we cross-sold to a $30 billion regional bank that uses us for commercial and consumer. We cross-sold our mortgage solution, which is a product that we acquired about 2 years ago. So it was great to see that. And then finally, in Japan, we signed a $150 billion bank, Yamaguchi, to a mortgage offering. And so that was exciting, because from a size perspective, that really took us up to that next tier of bank in terms of size in Japan. So that's exciting to see. We're excited about the Japanese market. And then the other highlight I'd say is just continue to improve operating margin that we were able to demonstrate last quarter. You mentioned churn. Yes, so churn, historically we've had about 2% to 3% churn, and I say 2% to 3%, that's based on prior year subscription revenues. This year, we've had heightened churn. It's going to be about 9% of prior year's revenues, and it's really driven by three things, I'd say the main factor being churn in the mortgage space, more specifically independent mortgage banks. Obviously, the volatility in the mortgage market, unprecedented rise in interest rates has created turmoil, and so we've had to navigate through that. I think we've seen a lot. We can argue maybe all, most, but a lot of the excess capacity that was built up in the mortgage industry during '20 and '21, I think we've seen that wrung out over the last year plus. And so I think we're looking forward to kind of a more normalized churn rate from there going forward. And then we also had the final piece of PPP revenue. If you go back to COVID, we were involved in the PPP initiative. And we had some seats that ultimately come up for termination this year as well. And so we've talked about churn trending down over time back to our historic norms. But we do have to deal with kind of that anomaly this year and as we go into next year and look at comps year-over-year.

I was going to dive into numbers a little bit later. But since we're on this, as we think about headwinds and tailwinds going into the next fiscal year, I know you haven't given formal guidance yet, but how should one think about that, like net-net, from all these different factors that you mentioned? You've got these expansions and new deal wins plus you mentioned PPP and also the churn rate leveling off eventually, but it will take some time.

So I think what we've been very focused on are the things that we can control over the last couple of years, very focused on continuing to invest in R&D and make sure we take care of our customers. And so from a strategic perspective, I think we'll enter -- our fiscal year starts Feb 1 -- I think we'll enter the fiscal year feeling very good about how we're strategically positioned, particularly against competitors, many of which have visibly had to cut back on investment in R&D, cut back on investment in customer support. And so I think we feel good about that. I think we feel good about the investments that we've made on a global basis and the footprint that we have as well. And so from that perspective, I think we're optimistic. I think the other thing that we've seen over the last month or 3 is really hopefully a stabilization from an interest rate standpoint. I think what we've been looking for, I think what our customers have been looking for, is stabilization, right? Just rates going down will be one thing, but just knowing or believing that they're not going to continue to increase, I think that allows them to take a step back and be a little bit more strategic versus kind of chasing where the rates are going to go, which is a little bit more difficult to make long-term strategic business decisions while you're kind of focusing on very tactical day-to-day things.

Got it. Let me back up a little bit. I think you've been talking about elongated sales cycles for some time. That's a function of the higher rates, tougher macro conditions. Then you also had the regional banking crisis going back to last spring. How has that all sort of played out, and where do you stand today versus the headwinds you saw back then? Just to get a framework for how we should think about the forward outlook.

Interestingly, from the liquidity crisis, I think a lot of folks believe that that would impact the community banks mainly. Really where we saw the impact was in the enterprise banks. And we saw a lot of them become very internally focused, assessing their balance sheets, assessing their P&Ls, looking for opportunities to become more efficient. I think the further we've gotten away from the events of last spring in Silicon Valley, I think the more banks and credit unions really have been able to kind of lift their heads up and, again, think about where to go from here. Not all of them. There are some still that are internally focused. But again, I think we've seen more and more be able to pick their heads up as we've gotten some distance. And frankly, a lot of them spent the last year really looking internally at what they need to do to be more efficient and ultimately to grow their financial institution again. And again, I think that's where nCino comes into play to help them do that.

Would you say there's a noticeable difference between international, because that's a pretty sizable chunk of your revenue today at 20%, versus domestic? Or is it pretty similar across the board?

Well, I think that's a nice thing about our business model. We do have coverage community banks, regional banks, enterprise banks here in the U.S. as well as internationally. We've planted flags on a global basis from UKI to Canada, New Zealand, Australia, I mentioned Japan earlier. And so you see different pockets where things are maybe a little bit more active or less active. But again, I think from a global perspective, outside of the U.S., again, we've seen good traction. And ultimately I think some of the headwinds that we've experienced here [ are ] passed over there. For example in Europe, last year was a little bit more challenged because of the Ukraine war, right? I think ultimately we've seen folks deal with that on a day-to-day basis but focus on again moving forward. And I think hopefully getting over this interest rate cycle will allow banks here to do the same thing.

Got it. Let's focus on the overall market. I think at the Analyst Day recently, you and your team talked about the SAM or the TAM basically doubling from when you first went public. Could you maybe walk us through some of the underpinnings of that model? Like why is it 2x what you thought it was when you went public? What has changed in the market?

So we've expanded our product portfolio. We've added our nIQ product lines and expanded those. And so that was part of the increase in SAM. The other thing we did was we purchased SimpleNexus about 2 years ago. So kind of a nice -- a really nice footprint in the U.S. mortgage space. So those were two big elements to it. And the other thing that we did is we evolved our pricing model. When we did our first SAM, it was very much driven on a seat basis. But as we evolve more to a platform fee, recognizing that our technology is allowing banks to become more efficient, which means that they're going to require less and less people, looking at it from an asset perspective, ACV to assets versus ACV to seats, has also helped drive that over $18 billion SAM that we have.

And then if we break this SAM up into different components, let's say, commercial, consumer, mortgage and other areas within banks, how does that sort of break down?

Our commercial SAM is a little over $5 billion. Our consumer is over 10 and then our nIQ's about 3.5. Those are the breakdown. And so we started the company focused on commercial. I think we still have a lot of runway and a great opportunity there. We've been investing on the consumer side. And I think we feel extremely good about where our consumer products are, and that's almost double SAM. And then again, from a nIQ standpoint, which is our AI data and analytics offering that we started back in 2019, that's about $3.5 billion. And again, I think we see the opportunity to continue to expand that as we leverage all of the data assets that we have in the company to provide more and more use cases for our customers.

I thought maybe we could go down the list of each of these big segments and talk about the opportunity. So within commercial, obviously, as you said, that's where you started. You have very strong penetration in the market already. What do you see as the runway going forward? Like how do you keep winning in that market? And then who are the other players that you potentially could displace or replace in their clients?

I think we're really proud that that is where we started, and I think we're viewed as the clear market leader in the commercial lending space on a global basis. And we want to continue to not only keep that lead, but expand it. And so I think we have a lot of runway in that. I think some people get caught up in the number of logos that we have. In the U.S., for example, we have got a half of the top 25 and half of the top 50 logos that use us. But we really view that as an asset because in a lot of those logos, we're not even penetrated throughout the commercial side of the bank. But ultimately, our job is to make sure those customers are very happy with us, which is going to allow us to go back and sell them consumer or sell them small business or sell them mortgage or account opening. And so we see plenty of runway still in commercial on a global basis, including here in the U.S. as well. From a competitive perspective, again, we'll compete with point solutions, mainly down market in that community space, as I noted. And you've got some good competitors down there, but it's really a different value proposition, right? That's a very, very specific point solution, maybe solve a very singular problem. And what we really focus on is, again, making sure each of our products are best of breed, so we can go compete with them down there while selling a single platform vision. On the consumer side...

Can I just stop you there, Greg, for a split second? So on commercial, are you replacing like the cores in certain cases? It could be a homegrown system in a larger bank that you might be displacing that is moving to a SaaS platform. Is that the way we should think about the replacement opportunity?

We really see cores as more as integration partners versus competitors. There will be some homegrown systems, some financial institutions still have no systems, and then some will be replacing maybe some legacy point solutions. And that's the competitive landscape.

This is international as well. Do you see the same type of dynamics internationally?

A little bit different. So I'd say that's community. If you go upmarket, again, you've got older legacy solutions and maybe some older homegrown stuff. But in terms of kind of a competitor upmarket, our biggest competitor upmarket is do nothing, right, versus another vendor. Internationally, again, no single competitor is doing what we're doing on a global basis. So in each particular geography, you may see some -- a local vendor. You see a little bit more build-your-own outside of the U.S., but again, I think that continues to be less and less on a global basis because banking is hard enough, why do you want to also be a software vendor, which is also pretty hard. So you see less of that, but still a little bit more outside of the U.S. than here.

That's very helpful. And then you were saying, yes, on the consumer side.

On the consumer side, down market, again, you'll see older solutions, some nice customer bases that some other companies have amassed. But as far as I know, in terms of building a net new consumer LOS, I'm the only one aware that we built it and built it to scale from community banks up market. And so we're really excited about the consumer space and the consumer opportunity for us. And you do see some, again, older legacy systems, some stuff that's been cobbled together. And I think that from an investment cycle standpoint, I think one of the outputs of the liquidity crisis was you really do need to invest in technology to support your consumer, because if you don't, your end user -- because if you don't, you could wake up tomorrow and they no longer be a customer.