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

Good morning, everyone. My name is Alex Sklar. I'm one of the application software analyst here at Raymond James. Very pleased to have nCino with us this year. We have Chief Financial Officer, Greg Orenstein. We also have Harrison Masters, Director of Strategic Finance and Investor Relations in the audience as well. Greg is going to start with a brief presentation on nCino. We're going to open it up to kind of a fireside chat. And if there's time left, I'll open up the audience for questions. But Greg, thanks for coming. Let you take it away.

Thanks, Alex. Thanks, everyone, for being here today. Appreciate it. Mandatory cautionary statement, I will note that we will actually report our financial results for the fourth quarter and the fiscal year ended [ June 31 ], 2024, after the market closed on March 26. So this presentation should not be construed as commentary on such quarter or fiscal year or on our guidance for next year. So now that the lawyers are happy. When you look at the technology landscape across financial institutions on a global basis, you'll see that financial institutions remain encumbered by legacy IT investments, and infrastructure. They historically purchased numerous disparate point solutions by business lines that did not interact well with each other, which has driven unsatisfactory and frustrating customer experiences. This legacy software has also made it very difficult for financial institutions to leverage data effectively, right, which is particularly an issue in the age of AI, as well as it's been difficult for them to hire the best talent out there who only want to work with modern software. nCino addresses all of these pain points with our SaaS solutions that are offered on a single platform, along with us providing deep domain expertise, to enable banks, credit unions and mortgage lenders to operate more like fintechs. nCino has a strong history of delivering results for our customers across four value buckets. One is increasing revenues; two is reducing costs; third is managing risk and compliance; and the fourth, which is I think very top of mind for our customers and prospects these days [indiscernible] by providing a single cloud platform across the financial institutions business lines that focuses on a 360-degree view of the customer. It does not focus on how the bank or the credit union or the financial institution is organized, which again is how they historically purchased the software. The depth and breadth of nCino's products truly separates us from the competition. On the nCino cloud banking platform, we facilitate three main things. One is lending, two is account opening, and the third is onboarding customers. And we do this across commercial, small business and consumer, including on the consumer side mortgage, enhancing the workflow that we provide for an FI. We also offered nIQ, which stands for nCino IQ, which is the family of AI, data and analytics products that we offer. We actually launched this back in 2019. And what that does is it provides intelligence and actionable insights at the point of production. As an example, we're launching in the near future, we've talked about it before starting on our Investor Day back in September, banking adviser. So that's the newest nIQ offering, which leverages generative AI to accelerate various employee tasks. So for example, if you're a commercial lender and you have to put a credit memo together to support your decision for making a commercial loan, leveraging banking advisory, you'll be able to do that much more quickly and much more efficiently going forward. nCino has a massive SAM of close to $19 billion. And we're the only company that I'm aware of that with one platform spans community banks and credit unions in the U.S. all the way up to Bank of America and Wells Fargo as customers. And with that same platform is global. Of note, 19% of nCino's revenues in the third quarter of this past year are from outside of the United States, which is an increase of 48% year-over-year. nCino SAM is actually larger outside of the United States than in the U.S. And our noncommercial offerings, the SAM for that is actually larger than our commercial lending, which is where we started the business. Expanding on our global footprint, you can see the success we've had around the world. Our solutions are now deployed in approximately 1,850 customers in 16 different countries. And we've already made significant investments in our global infrastructure to support our global presence. To wrap up kind of the more formal part of the presentation before Alex and I sit down and chat. Just a quick look back on our Q3 financial results. Of note, you'll see that nCino, we had strong top line subscription growth in a difficult market, and we continue to execute on our strategy of profitable growth with a 1,400 bps year-over-year increase in our operating margin percentage. And with that, I'll turn the session back over to Alex.

Thanks, Greg. Grab some seats here. So great overview of the kind of platform, the global diversification. You've been with the company now for a good number of years, founded 10-plus years ago. I'd love to just kind of hear more about the evolution because originally starting with the kind of commercial loan origination system side of it, but it's a much broader platform now. So can you just kind of talk about what nCino looks like today even versus the last 3 to 4 years from kind of a diversification and solutions standpoint?

Yes, absolutely. So when we started, we always had the strategy or vision of being a single platform that a financial institution could operate its bank from. The initial focus was on commercial lending in the United States, more specifically on community banks. And once we built out the product and our success there, we were able to take that same platform and take it upmarket to enterprise space. and then ultimately, starting in 2017, we went global with [ planting ] our first flag outside of the U.S. and the U.K. While we expanded globally, we spent quite a bit of time and investment on expanding that single platform vision. So we move from commercial lending to small business to consumer that includes mortgage, which we facilitated through the acquisition of SimpleNexus about 2 years ago as well as account opening and onboarding. So we've really built out the breadth and depth of our products in parallel, expanding globally to have the footprint that we have and the product portfolio we have today. And then the last point in terms of the product build-out goes back to nIQ, which I mentioned in my presentation, we had this vision back starting in 2019, leveraging the data that we have access to with our customers. I think we have the world's leading commercial lending business from a mortgage perspective, we have a tremendous amount of data as well as from a consumer lending perspective, and we spent the last couple of years building out infrastructure to be able to leverage that which I think from a timing standpoint, it works incredibly well with this past year, as we saw kind of the year of AI, which for us wasn't necessarily a new thing as we've been investing in it. But I think from a customer perspective and a prospect perspective, I think really opened the eyes in terms of some of the messaging that we had and the power of that data to provide to help them do their jobs better.

I think I was going to hit on the data side later, but just given kind of how you -- what you've alluded to here, you've got access to a lot of anonymized data. You showed the highlights of some of the customers that you have in the U.S. and globally. Banking adviser coming out, the product road map around banking adviser was really impressive that you laid out. Can you just kind of give a little bit more color on like how big is this nIQ and banking adviser opportunity that you see it over the long run for nCino?

Yes. So the SAM -- the updated SAM that we provided at our Investor Day a few months back showed a little under $4 billion SAM for it. That was just with the products that we currently have. And so banking adviser as an example, would be on top of that. And again, I think we're in the early stages of being able to leverage the data that we have working with our customers, making sure they're comfortable with the security and privacy standpoint, which, of course, is top of mind with financial institutions. But I think they appreciate that because of the platform that we have, right, they're going to be able to leverage data across their bank, right? It's not siloed. It's not limited to certain specific use cases. They're going to be able to leverage it across the bank and you need a platform to [indiscernible] around the customer. And so what you should expect to see from us over the coming years is new product releases like banking adviser and little subcategories underneath that, which are ultimately different use cases that we can bring to our customers, for most part charge them for. Then there will be some things that we ultimately incorporate into our product is more standard. But when you bring to them a use case and says, if you work with us and allow us to use your data on an anonymized and secure basis, these are the insights, these are the intelligence. This is the information we can provide you. We've seen our bank customer base be very receptive to that.

And just kind of for the audience, you gave the TAM (sic) [ SAM ] number $4 billion of kind of the $18 billion, $19 billion number. But for your average customer today, which isn't taking everything, right, they're not wall-to-wall with every solution, the ACV uplift for taking nIQ and some of these banking adviser solutions that were not quite in market yet, but that was pretty large. So any way to frame kind of what you're seeing from an uplift of an average customer who's taking some of these nIQ data solutions?

Yes. Our legacy nIQ solutions, which we've had three commercial pricing and profitability, auto spreading and portfolio analytics. We set up in about a 20% or so uplift particularly some of those products mature and ultimately grow in terms of functionality, there's opportunities to increase that. But we've had a slide on our Investor Day where -- a white space slide, where we said, just going back to our current customer base, we can more than double our revenue with the products we have and the white space we have within our customer base.

Yes, it's an exciting long-term opportunity. So you alluded to some of the demand drivers broadly about kind of revenue growth, efficiencies, there's compliance in terms of value propositions of [ vibe ]. What are kind of some of the catalysts that you see actually that are driving new business adoption? So what gets the financial institution to kind of actually stop what they're doing and say, hey, this is now the priority, we need to bring in nCino?

I think there's different things. You saw those 4 bucket drivers. But ultimately, I'd add on top of that. One is, and probably the biggest one right now is efficiency, right? In this market as net interest margins have been squeezed, efficiency is the word that we consistently hear as we speak to customers and prospects in terms of what they're looking for. And if you're leveraging old software, if you're leveraging software that doesn't effectively speak to other software, if you're leveraging software that can't truly leverage AI and leverage data and analytics, you're really going to struggle to be efficient and be competitive. And so I think the competitive environment has been driving a lot of customer adoption. I think vendor consolidation, as you think about us as a single platform also in this type of a macro is something that is top of mind. And I think we also see customers who see opportunities out there from an M&A standpoint. I think we're, again, the only platform out there that I'm aware of that has been able to successfully scale from small banks all the way up to the largest banks in the world. And so if you're thinking about growing your bank through M&A, we're really here to help facilitate that and a track record of being able to do that very successfully.

Got it. So I wanted to kind of take the addressable market commentary that you laid out and kind of see if there's a way to frame kind of how that compares to what your pipeline next to the third quarter look like? Is it pretty ratable within kind of the broader addressable market, where do you see the biggest opportunities here as part of that. You laid out a multiyear targets as part of the Investor Day. Kind of curious where you're seeing kind of the biggest opportunities for nCino over the next few years?

So clearly, still commercial, which has been our flagship product. But I think it's important that people appreciate beyond being just a commercial lending company and to truly being a platform where, again, we can lend with any solution that we have. A perfect example of that in the third quarter, we announced signing a consumer lending opportunity with a $200 billion bank in the U.S. It was actually our first lend at that particular customer. So we see opportunities in commercial, but as we think about pipe, over the last 2 quarters, we've talked about noncommercial products or solutions being half to a little bit more than half of our total pipe. And then outside of the U.S., we continue to see about that 50-50 split from a pipeline standpoint. But again, as I noted earlier, the pipe that correlates to, over the long term, what we see from a SAM standpoint where again, it's bigger outside of the U.S. as well as products outside of commercial being bigger than commercial.

Got it. So just sticking on international. And given it is now, it's been 50% of the pipe, maybe it's a little bit over for a little while now, fastly approaching 20% of revenue. You just had a win you announced last week the Japanese bank that's taking mortgage first. It's actually -- you had a win last quarter, a Japanese bank taking mortgage first. I'd love to kind of hear more about kind of what's driving the international opportunity?

So I think they need to invest in technology in some countries more than others. You mentioned Japan. We launched a joint venture in late 2019 in Japan. We see that as a great market for us, not only the number of financial institutions in the size, but ultimately, you need to invest in technology as well as Salesforce, which has been a long-standing partner of ours, has a very nice presence there. And so in terms of drivers, we do see commercial lending being a driver and then also mortgage. . And if you think about mortgage outside of the United States, it's much more of just another loan that's -- the collateral is the house, right? They don't have the government involvement that we do here. It's just a great asset that frequently, if not almost always stays on a bank's books. And so we see both of those as drivers right now as well as, again, just the need to digitize. The bank that we announced in the third quarter is a $150 billion bank. They're moving from paper. So they've been doing all of their mortgages on paper. And again, we're going to bring them onto nCino. And they've already talked about publicly their plans to move us across the rest of the consumer bank as well as across commercial.

Yes, it's pretty amazing when you hear banks still moving off of paper. But having gone at the user conference, it's not that uncommon, especially talking to some of the international customers that are on board. Can you just help frame the go-to-market and how you feel about overall coverage internationally? I know that's been a big source of investment the last several years. You've got a lot of SI partners. You have the Salesforce relationship, which obviously helps. How do you think about kind of overall coverage on go-to-market internationally?

And so being in a vertical market, you know your customers, and you make sure you have the right cadence to stay in touch with your customers on a very consistent and regular basis, and make sure you appreciate what needs they may have and where there's opportunities for them to leverage nCino and invest. And so we always make sure, first and foremost, that our SAMs double. And again, as we think about the business and the business model, we continue to believe this is very early in the stages of helping to transform the financial services industry on a global basis. And we always want to err on the side of growth. And so we have made significant investments on a global basis in specific locations or specific countries where we have a physical presence. And the other thing that we've done, and you mentioned that we announced a really nice deal in the second quarter in partnership with Accenture in the UAE where we don't have a physical presence, but we've got great SI relationships with the Accentures, the Deloittes, the PwCs of the world, where, again, leveraging their relationships we're able to focus not so much on a specific geography, but on a top 400 or top 500 account basis on a global scale. And so that's also how we're attacking that SAM.

Got it. So maybe just switching gears, you had some long-term targets that you laid out at the Investor Day last -- late last year. We've got a target for kind of Rule of 30 in the current calendar '23, fiscal '24 year that you're about to report next week on the path to kind of that Rule of 50 outlook. Can you just talk about some of the puts and takes, remind the investors in the room kind of that path from Rule of 30 to Rule of 50, what that looks like? Any linearity comments, anything like that, that you've talked about?

And we've talked about it, you should not assume it's a straight line, maybe more of a stair step. Because ultimately, I think it's important that you make certain investments. You see the return that you're getting, and if you're not getting the return you expect why and make sure you make the changes along the way to get the return that caused you to make the investment in the first place. And so again, as we think about that, I think we feel very comfortable with our operating expenses with the investments that we've made so that we were able to stand up and chart out that path to 50. But you should not expect it to be a straight line. In terms of the puts and takes, again, I think we have been very focused notwithstanding the last 2 years of unprecedented rise in interest rates, and some challenges to our end market really almost going back a year ago with the Silicon Valley Bank impact, staying focused on executing on our strategy because, again, we believe the market opportunity is so large, and we believe it's still very early. And so we've continued to invest. Our products have continued to mature during this time period. Our consumer product again -- consumer lending product being a perfect example of us being able to continue to invest and grow to be able to lend a $200 billion bank in the U.S. And I think from a breadth and depth of product perspective, we think that gives us the confidence to be able to look towards continued growth. Again, going back to that model on Investor Day as well as again being comfortable from an operating expense standpoint, how we're able to do that efficiently.

Got it. And I think one of the great things of the model has always been kind of this visibility. You've got kind of great visibility at the start of the year. But some of the newer products now that you're putting out there, especially with the platform pricing, which we'll kind of hit on maybe in a minute, there's an ability to kind of turn some bookings to revenue faster. So can you just talk about that kind of dynamic, some of the newer products that are out there, the platform pricing and how that kind of impacts that 4- or 5-year kind of growth algorithm?

Sure. So when we started the company, we really leveraged building off the relationship with Salesforce, a seat-based model, which worked incredibly well for us as we grew. And particularly as we engage with larger and larger accounts, what was important for us as a younger company was to make sure we had the commitment from them over a multiyear time period. And so we evolved to a pricing model that was seat-based, but unlike most other seat-based models, again, we would focus on getting the commitment upfront on a -- maybe on the full rollout and work with them on activation dates in terms of when those seats would actually turn on and turn into revenue. And again, I think as a younger company when you're looking to invest and build out a business on a global scale, that commitment and visibility very helpful for us. And frankly, I think from a customer perspective, very well received because they knew they were going -- we were going to be around and ultimately, we were going to partner with them for the long term. Really, as -- our products are mature, starting with consumer, we believe that we're going to be able to automate and can today, but we'll continue to be able to automate consumer loans up to whatever the dollar amount in a particular financial institution is comfortable with without human intervention. And so that seat-based model that we built the company on really leveraging the commercial side of the house, from a long-term standpoint, we don't think makes sense for consumers. So we've evolved that, starting with consumer as well as on mortgage, which I can touch upon as well, to have a platform fee. And ultimately, that platform fee grows along with the financial institutions assets. From a financial institution standpoint, I think it's been very well received because that's how, frankly, they're used to buying their software from their vendors. And from our sales team also very well received because it really took out a whole bunch of back and forth in terms of debating number of seats that they were going to buy, what that activation schedule was, what visibility they had down the road into the seats that they would need and truly allows us to turn the discussion much more to driving home and discussing the value that we're bringing to the financial institution. And so from that perspective, again, starting with commercial -- I mean, starting with consumer, and then also on mortgage is obviously the mortgage market has been impacted with rising interest rates. Customers have started coming to us saying, "Hey, can you work with us, to help us through this time period." And ultimately, we said that we would. It doesn't help either one of us if you don't make it through, but also moving to a platform fee because we said, as the market comes back, which we know it will, just a question of timing, we want to participate in that upside. And so we really evolve or have been evolving from a seat-based license model for mortgage to a flat platform fee that gives mortgage lenders a number of loans and once you exceed that loan number, either you're paying [indiscernible] on additional loans above and beyond that? Or ultimately, it will push you into a higher tier of committed revenue for us. And I think that's worked well. And again, I think, positions us to participate in the rebound of mortgages that comes along more than we would have -- just sticking with the historic seat-based model.

And mortgage, I think it's -- we gave a stat on the third quarter call that it's actually been growing for you all. So despite all the pressures we've talked about. So maybe just talk about, since you bought SimpleNexus that cross-sell growth that you've seen in the market. What's been the key driver of how you've been able to grow that business despite all the headwinds?

Again, very proud of our nCino Mortgage, formerly SimpleNexus team despite the kind of turmoil in the mortgage market, continue to focus and execute. As you noted, still double-digit subscription growth last quarter in the third quarter year-over-year. And really what's been driving and I think it's the technology, first and foremost. I think it's fantastic technology, number one. Two is the people, really focused and continue to focus notwithstanding the turmoil and taking care of our customers. Third thing is I think our customers and prospects have seen that we have continued to invest believing in the long-term vision of the single platform and nCino Mortgage being part of that. And I think they've contrasted that with other competitors out there who have not been able to manage through the cycle, where ultimately were acquired or had to pull back significantly on R&D and customer support. And so I think that's positioned us very well. We were comfortable with the strategic positioning of SimpleNexus when we did that transaction a little over 2 years ago. But I think notwithstanding the turmoil and the churn that we've experienced, particularly in the IMB space, as things have shaken out with rising interest rates, I think we're even better positioned strategically now. And I think that goes really well because we're leveraging the nCino Mortgage former SimpleNexus technology to build out what we're calling omnichannel, which is the front end for all of our consumer-facing applications. And so that product is being formally launched over the next several weeks leading up to our inside event in May, where, again, from your phone, from your browser, being able to do consumer loans as well as mortgage from your phone. And again, that's one of the many benefits we got from that acquisition.

This is something you just alluded to on the mortgage side. But you'd be able to participate in some of the upside. Can you just -- so you've got the new customers coming on with kind of the new pricing model and mortgage. Any way to kind of frame like how exposed you are to now being able to participate in the upside? Is that more of a -- when customers roll off contract and renew, the pricing changes? Any way to frame kind of how much of the base is now on the new pricing structure?

So I think we've evolved probably 25%, 30% of the nCino Mortgage base, I think, was the last statistic I saw, again, I look to update that with Q4, but it has really been around net new sales as well as customers have come up for renewal. Some customers have been very happy with their former seat-based pricing. So it's not something that we're pushing or insisting. But ultimately, it's been, I think, a good discussion, again, to allow us to kind of get to a nice risk reward, particularly through the last 12 to 18 months. And so we'll continue to have that discussion. But ultimately, we're going to do what's right for the customer and then as long as it works for us as well.

Exciting opportunity, obviously, just given the expectations around rates for the next 12-plus months. But well, we talked in a lot. I guess just to kind of wrap up, you've talked to a lot of investors since you reported last quarter. And I'm curious kind of if there's any commonality in terms of what you think is probably the most underappreciated aspects of nCino, the story, from your seat?

The most unappreciated? I think it's probably the uniqueness of our product portfolio and global presence. The fact, as I touched upon, we're not a commercial lending company. We do that, and that's certainly where we got our start and have had tremendous success. But we really have built out a unique platform that I think truly differentiates us from others and positions us on a global scale to help grow the business over the long term. And so I think that's underappreciated. And again, hopefully, as we continue to be able to announce wins outside of commercial and more international wins, people will gain a better appreciation of that. I think the other thing is the unique positioning we have around the data assets that we own. Our own work with our banks that allow us to leverage in terms of their data. I think that is unique as well. And again, I think that for a financial institution to truly leverage AI and data and analytics, you first need to have the ability to have a platform to bring it all together versus it sitting in disparate parts across your organization. And I don't see anyone else out there that has the platform, first and foremost, the ability to scale up and down in terms of any size bank and then ultimately be able to leverage those data assets. So I think those are 2 things that I would highlight.

Great. Great points of differentiation there for sure. So Greg, thanks for joining us today. Thanks, everyone, in the audience.

Thank you all. It's a pleasure. Appreciate everyone's time.