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

So I guess, we'll just start with a quick intro, Greg Orenstein, CFO at nCino.

And yes, like maybe let's just start with -- for those who are new to the story or picking back up on nCino, what's maybe a few things you would highlight that's changed over the past couple of years? Or like just general trends within the software banking market?

So thanks for having us here. When nCino started, we were very much focused on solving commercial lending problems in the U.S. We started in the community banking space, ultimately went up to the enterprise space, and then went global. But we always had a vision from day one of being a single platform that will enable a financial institution to do all of their lending, whether it's commercial, small business, consumer, including mortgage, deposit account opening and onboarding on a single platform. And over the last couple of years, we've been very focused on making sure that each one of those products is best in market and that we're able to land within a financial institution with any of them. And underpinning all of that, we have what we call nIQ, which is nCino IQ, which we've made a lot of progress on since we started that initiative in 2019. nIQ is our data analytics and AI initiative. We spent a lot of time investing over the last year or 2 in building out the infrastructure to be able to leverage the data of our customers, working with them to provide them insights and intelligence. And so we've really gone broad. And then on the commercial side, specifically, we've added a whole bunch of products, Commercial Pricing & Profitability, Auto Spreading. We announced an acquisition in earlier this year in March called DocFox, which does commercial onboarding. And then at our user conference a couple of weeks ago in Charlotte, North Carolina, we GA-ed what we call Banking Advisor, which is the marketing brand for our gen AI products.

Awesome. Very comprehensive. So I guess, just turning to the macro, a bit of a standardized question we're asking here. How would you categorize the current demand environment? And maybe just compare and contrast it with similar time last year. Just there's a lot going on there.

Yes. Last year was difficult for us. We sell to banks and credit unions in the United States as our biggest market. And in the March time frame in the spring, we had the liquidity crisis. So our fiscal year starts Feb 1. Come March, Silicon Valley Bank happens, so you kind of throw your plan out the window and regroup. And so Q1 was a challenge for us last year. Really, the whole year was challenging. But I think the farther that we got away from the liquidity crisis, particularly as we ended the year and gone into this year, I think the more we've seen financial institutions be able to lift their heads up and focus on strategic things like nCino. A big driver of that and I think one of the lessons learned through the liquidity crisis is their need to be more efficient. At our user conference that I mentioned, 70% of the respondents at the user conference said efficiency and becoming more efficient was their #1 priority for this year. And so we've seen that play out. And so we've seen banks and credit unions come back to the market. Q4 for us, we had our best gross bookings quarter in 2.5 years. And then this Q1, we announced our best Q1 bookings quarter ever. And so I know there's some challenges in the market in various parts of the software industry. Some of that, we may have actually dealt with last year. And again, I'd like to think that we're maybe ahead of some of the other markets out there.

Yes. And maybe to put a finer point on that, would you say there's any difference between what you're seeing with, I don't know, like a community or a smaller bank versus like a larger bank like a Bank of America, for example?

A wonderful customer, by the way. Well, post-liquidity crisis, interestingly, I think a lot of people expected there to be challenges in the community banking space, but we really didn't see that. We really saw the larger banks pause and really focus internally, making sure their operations were in order and ultimately trying to determine what things that they needed to do to become more efficient. And so that's really what we've seen come back a little bit is those enterprise banks. The community banks, still pretty consistent. And again, the liquidity crisis seemed to have impacted them a lot less than some of the regional and the larger banks.

Yes, counterintuitive. So I guess, let's start here with the -- you guys reported earnings just a week ago. So maybe just some high-level takeaways from there and like maybe some top questions you've been addressing with investors since then.

Takeaways, there's probably a couple of things I'd point to. One is, again, the record first quarter gross bookings, something we're excited about. Q1 is usually our slowest quarter, Q4 usually being our largest. And so we're used to a dip, but it was nice to see that continued momentum now for 2 quarters in a row. And the other thing I think to highlight was the continued performance on our operating income line. I think that the team, the organization has done a great job in embracing -- growing profitably. And so we were able to have a nice beat on the bottom line. Some of that, we flowed through in increasing our guidance on the bottom line for the remainder of the year. But we also withheld a little bit, just as we see demand coming back, to be able to make some specific investments to help drive continued growth.

So is that incremental investment because of what you saw in Q1?

Definitely, and our user conference. And so particularly around the gen AI stuff, I mean, we appreciate that our customers are not going to be kind of at the tip of the spear in terms of adopting gen AI. But it's something that I think they appreciate can be tremendously valuable to their organizations. And so we want to make sure we have the support. And just as we help them go to the cloud, when we were told that banks would never put their data in the cloud, they're looking to us to help them on this AI journey. And so from a sales and support perspective, that's the place that we're investing additional dollars.

Awesome. And that's like the perfect segue. So just thinking about AI and what it means for nCino, I mean how has that changed like the nature of the conversation you have with the customer? I can't imagine like a small credit union really has like too many of their own initiatives, so they're probably relying on someone like you guys to help them with that. So that's one. And then two, you did mention like you guys released Banking Advisor recently. So sort of like how should we expect that to kind of flow through the model? Or like what's the -- what are the implications there?

So I think you're spot on. I think our customers are looking to us for leadership and to help them adopt not just gen AI, but data and analytics, leverage data and analytics to make more informed business decisions. And I think one of the great things about nCino, what we do is we're on the employee screens of the financial institutions all day. They live in nCino. And so I think in terms of the real estate that we have, we're uniquely positioned to help drive intelligence to the point of decision-making for our customers. And again, I think financial institutions are looking to us and need, from a resource perspective, to look to us to help them drive down that path. And so we're excited about that. Banking Advisor, we've been working with early adopters for the last several months. We GA-ed at our user conference. If you heard our earnings call, you heard Pierre, our CEO, mention that we got reprimanded by the fire marshal because of the crowd that was surrounding our Banking Advisor booth, which is a good problem to have. But what you'll see is that is the marketing name for -- again, for our gen AI offerings. We're starting off with 2 skills, as we call them. One is called knowledge, which allows you to interact with any document. And so if you're a bank employee, you can say, what does this credit policy say? Or is this credit policy in line with this loan? And it will come back and it will tell you that. A huge time save. The second one is a skill that we call narratives, which it allows ultimately the employee of a financial institution to accelerate some of their tasks. The main one being credit memos. If you've ever been involved in commercial banking, you know that to underwrite a commercial loan, you need to put together a credit memo, which is a lengthy document about the industry, the market, why this particular loan makes a lot of sense. And instead of an employee taking what can be hours to put it together, Banking Advisor narratives actually will do it for them. And all they have to do is simply review it. And so a huge time save. And so those are the first 2 that are coming out. And then ultimately, we'll expect additional skills to be coming out on a fairly regular basis when we expand the different things that we can do with generative AI.

Awesome. Have you guys talked about pricing or alluded to, I don't know, how you might be charging for it? That sort of interest yet?

I don't think we've talked about it much publicly, but no better time than the present. Ultimately, there's going to be a platform fee, and that will entitle you to a certain amount of usage. And once you exceed that usage, ultimately, there'd be an upcharge. And so that's how we're going in. We intend to make it something so the banks can really start to play around with it, get familiar with it, get comfortable with it, and get them excited about it, particularly as we have more and more skills coming out. And so our -- so we're excited to get it out in the market. GA at the user conference, again, was extremely well received. And so we're looking for that uptick as the year progresses.

Awesome. And you did mention the platform fee. I know last year at the Analyst Day, you sort of highlighted, longer term, there's going to be a bit more of a shift to a platform fee-based model, what's currently a seat-based model. Can you talk about, I guess, what motivated that and where you are in that journey?

Yes. So we are on a transition. And what motivated it was, again, I think we have an appreciation that our technology is making our customers much more efficient. And we've got a whole bunch of data points saying that. We ultimately started on the mortgage side. Some of it was the market where we're working with some customers, who have been under pressure in light of the rising interest rates saying, hey, can you help out? And as part of this first step down this transition, we've been working with them and evolved from seat-based, where they had loan officers, to a platform fee. This is for mortgage specifically. That platform fee entitled them to a certain number of loans, and that was a fixed fee. And again, if they exceed the number of loans that they sign up for, then we would get additional revenue. So as the market comes back, we try to position the mortgage space so that we'd be able to participate in the return of the market. Right now, we have about 30% of our mortgage logos that are using that pricing model. It's a little bit more on the revenue side. But I think that's worked out well. And again, as the market comes back, we're excited to see how that plays out. The next transition is on the consumer banking side, where we're offering or pricing it on a platform basis based on asset size. And that's how financial institutions are used to buying software from their vendors. So we think that -- and we've seen, in terms of the feedback that we've received, banks being happy with that pricing model and then our sales folks being happy. Because historically, they had a debate how many seats do you want to buy and when do we activate them. And then finally, we're working right now, actually with a third party, to attach or attack the final piece to it, which is the commercial side of our business. That will also be on a platform basis pricing like we're doing for consumer. But ultimately, we're spending a little bit more time because of the depth of product that we now have on commercial, as I touched upon earlier. A lot of it is around packaging, right? And we want to make sure we package it very, very -- in a very straightforward manner to make it easy for our customers to buy, to make it easy for our sales folks to sell. And so ultimately, we think the efficiency that we're driving in our customers, we don't want to be penalized by. Because we're going to be able to reduce seats, we want to get the benefit of them. And that really, as we thought about this a year or 3 ago, that really is the catalyst for driving us towards platform pricing.

That's good. I feel like the gen AI debate has sort of opened that up for companies. They are very fixed on a seat-based model, so you guys get ahead of that.

Yes. And we also have other pricing. Like our Auto Spreading is based on this type of platform-plus-consumption model, so it's something we're familiar with. And again, getting it very consistently, we think, will make the sales process that much easier.

Yes. And speaking about the platform, could you remind us, this is a common question we get, like what your relationship is with Salesforce? Does someone have to be a Salesforce customer to use nCino? And I know you guys recently renewed that agreement, so maybe just like the skinny on that.

Yes. So Salesforce has been a great partner since we started the company. We started building on their platform. We renewed our agreement with them many times, including right before we went public, where we put in place a 7-year agreement, knowing that, that was going to be a question on the roadshow and kind of take that off the table. We again amended our agreement with them that we announced in December, which I'll walk you through the details of in a second. But to answer your other question, you do not need to be a Salesforce customer to use nCino. In fact, a lot of, I think, their customers in financial services, we were actually the first entree into leveraging Salesforce. If Salesforce is already in a customer, that's a great opening for us because they're familiar with the software and the technology, and we're able to go in behind them. And I think similarly, if we're in there first, they're able to go behind us and sell more. The amendment or extension we announced in December did kind of 4 main things. The first thing that it did was we both committed, as it relates to Financial Services Cloud and our product, to work on some better integration to make the customer -- our mutual customer experience that much better. And so we did that. The second thing we did was we extended it for another 3 years, so we get back to 7-plus years on the term. The third thing that we did was we committed for the first 4 years of that agreement to a certain revenue level, a committed revenue, which is the first time that we had committed revenue to Salesforce. And we did it at a level that we're comfortable with, consistent with what we were paying them, so we felt comfortable doing that. And then the final piece was just from a gross margin perspective, we worked with them to improve our COGS and really get back to kind of where we started. Over time, as we added more and more products to the relationship, kind of that COGS crept up a little bit. And so we kind of rounded back to where we started from. And so we talked about getting a point of relief for our gross margin line this year. We got 70 basis points in the first quarter, and we feel really good about getting that amendment and extension behind us. And ultimately, I think it's a win-win for us, for Salesforce, and then another win for our customers in terms of the deeper product integration.

Awesome. And back to DocFox, you had mentioned this earlier. I know Pierre was pretty fired up about it at the conference. I think, I don't know, maybe someone like me perhaps underappreciates what it's going to do or what it could offer to customers. So could you walk us through, I don't know, I guess, like the rationale behind wanting that piece of technology for nCino?

So when we think about M&A, we did over the last couple of weeks 2 tuck-in acquisitions. DocFox, we always think about buying from an architectural perspective and so building out the platform, right, but staying true to the single platform vision that we have. And DocFox is a great additional piece that allows our customers to onboard their commercial customers much quicker. It can take months to onboard a complex commercial entity or business. You can have entities all over the globe. You got to look at boards. You got to look at shareholders as you do KYC and AML. And DocFox takes what is a very labor-intensive and paper-intensive process down from months to days and sometimes even hours. And so it is a great add-on for nCino. Again, all of our commercial lending customers should buy DocFox. Right now, we're focused on making sure it is tightly integrated and truly part of our single platform. And as the year progresses and as we get into next year and beyond, we have very high hopes for that transaction, that acquisition. We have a handful of mutual customers. It's a small data sample, but it is one where we're getting about a 50% uplift for what they're paying us on commercial lending with that product. And so we think in addition to helping solve a pain point for our customers, it's also going to be a nice driver of revenue growth as we look to next year and beyond.

How active is that cross-sell motion right now? You mentioned you want to have it really tightly integrated. So is it sort of if they come to you, you'll still talk to them about adding it on? Or is it the sales force is pretty active about selling it into the account base already?

So the first thing we've been doing since we bought it is educating the sales force, right, and making sure they appreciate what a great asset this is, with great technology, with great people, and with the transaction and how it fits in. And then you embark upon a sales cycle, which can take several months, right, selling to financial institutions. And so they are getting educated and going out and having those discussions. And so it's ready, it's available, it's in the market. And ultimately, hopefully, that lines up in terms of the sales processes as we make progress on the integration, and those things come together very nicely.

Got you. Awesome. Let's shift to international and like the go-to-market a little bit. I know international has been a pretty big part of your guys' focus. I feel like the time that you guys started to really branch out and invest in international was sort of during the COVID period. So it was a little unlucky in terms of timing. But just any update there? What are the key markets that you guys feel like you have a good fit for? And where are you sort of adding on to looking to add on capacity?

So launching a joint venture in Japan about 2 months before COVID started...

Yes, so unlucky.

Yes. So no, we've got a lot of excitement about the international opportunity. I mean when you look at our SAM, which is just under $19 billion, majority of it actually sits outside of the U.S. We initially went outside of the U.S. in the summer of 2017 and built up a presence in UKI, Canada, Australia, New Zealand. And ultimately now, in addition to Japan, which we're very, very excited about that opportunity, we see a lot of opportunity in Spain as well as the Nordics. And so it is a growth lever for us. It can be a little lumpy because they're mainly large banks outside of the U.S. And so some of those sales cycles can be long, but we remain incredibly excited about that opportunity. Pierre did mention on the call that with all these new products that we released, they're in the U.S. first. And so as you think about contributions, you should expect to see some type of acceleration in the U.S., which may make the international contribution look a little bit smaller in the near term. But ultimately, again, we would expect that business to continue to grow. And as I said, the SAM is about half of our total SAM. And so we remain excited about that opportunity.

Yes. How do you guys think about the R&D side of that piece? Is there like not too -- it's not too duplicative in the sense that you sort of just have to translate it and make sure it works for companies abroad? And therefore, you're getting a lot of leverage on the R&D side by selling abroad? How should we think about that?

We are getting leverage and that's one of the benefits of being on the Salesforce platform, where you get languages and you get currencies as well as their physical presence. And so that's one of the reasons I think we've been able to grow. And again, I think it's unique when you think about nCino versus other financial services software firms. With one platform, we're the only one that I'm aware of that spans from the community bank space all the way up to Bank of America here in the States as well as travels internationally. It's one product set. It's not different products, dealing with large banks versus small banks, which is what I think you've historically seen. And so we're able to get that leverage, particularly with our commercial product, which best in market. There's a lot of similarities on a global basis with commercial lending. It's a little less regulated than the consumer side as you go from geography to geography, so it's a great starting point for us for commercial. The other great starting point is mortgage. Mortgage outside of the U.S. is really treated just like another loan with the house as collateral. They don't have the involvement of the government like we do here. And so mortgage is also a great use case for us. And so we've gotten, particularly in Japan, where mortgage has been the first sale that we've done, we announced a $150 billion bank a quarter or 2 ago where they were using paper. And they adopted nCino first for mortgage, and they've already come out in the press and said, they expect to expand the rest of their consumer bank as well as commercial.

Got it. And then thinking about competition, how has that changed over the last few years? And also, I guess, what's interesting is like how do you think about competition in the U.S. versus abroad as well?

Most of our competition globally really is concentrated in the community bank space in the U.S., where you see a lot of point solution vendors. So if we have a commercial lending opportunity, you'll see a couple of folks competing there. They'll be different than the ones that you see competing on consumer and then competing on mortgage. Again, we're the only ones that span that entire platform. Not seeing much change competitively in terms of market activity. I do think as -- although there have been some headwinds with mortgage rates, the liquidity crisis, one of the things I'm really proud of for the company and my colleagues is we stayed very focused on executing our product strategy. We did see competitors pull back on R&D, offshore support, and we stayed very focused. And so while it's been somewhat of a challenging time, I think we come out on the other side of this as we were the clear market leader but I think with even more separation because we've been able to continue to invest and make sure each one of our products is market-leading and can go head-to-head against any one of those point products, while we've got the whole platform and value proposition behind us.

And then thinking about the financials and the business model more broadly, around the time you guys went public, it was a bit more of a, hey, look at backlog, look what's happening with RPO, what's -- what we're booking. You mentioned there's more revenue recognized within a quarter now. So how should just investors think about the different metrics, what to put emphasis on and sort of how should they gauge the health of the business?

I think our guidance that we give, we try to provide very achievable prudent guidance as the first thing as well as the commentary. Again, I think we try to provide a lot of commentary in terms of helping you understand what we're seeing in the market at any particular time. And so those are the 2 things that we continue to point to. We're consistent in saying, don't look at RPO because again, there's so many different variables, whether it's duration, whether it's a particular deal that could skew it. And so that can be somewhat misleading. Same with billings, which again can be lumpy. You could have a whole bunch of sales at the end of a quarter, for example, and it could skew your billings. And so continuing to focus on the guidance and commentary. And you're right, we are seeing a quicker turn between bookings and revenue, and that's based on a couple of things. One is the product mix, particularly as we now have more and more of these ancillary products that they can turn on very quickly. And the second, I think you'll see from a platform standpoint, versus selling seats and having these delayed activations, when you sell a platform, you're able to start recognizing revenue quicker. And so I think that also is impacting and will continue to impact in a positive way the financial model.

And then you talked earlier about just all the expansion you guys have gotten on like the profitability side. So walk us through how you've hedged to achieve so much expansion. I think it's like 10% plus on the operating margin side just within a year. So yes, I'd love to hear more about that.

Yes. Again, very much a team effort. Again, we've got a fantastic bunch of employees who embrace this profitable growth claim. But part of it was just conditioning. You take what the market gives you at times. And everything was about grow, grow, grow. And quickly, the market turn and you need to turn with it. But I think what the team appreciated was the answer to every problem is not let's hire 5 people or let's throw 10 bodies at it. And when you kind of point people to, that's not necessarily a solution, right, let's figure out how we make things work, they adjust. And the team has done a great job of doing that. I think we feel very comfortable where our OpEx is. We're still hiring people, bringing them on. But again, I think we feel very comfortable with the infrastructure that we have in place. We've made a lot of investments on a global basis in terms of our geographic footprint. We've made a lot of investments in terms of our product portfolio. And so again, both those things, I think we are excited about. If you look at our OpEx in Q2 on the call, we noted there was a step up. First of all, we had our user conference. And so there was an annual onetime expense of around $2 million to support our nSight user conference. And then also, we brought on these 2 little acquisitions that we did. And the expense for those was mainly in R&D. And so you'll see a step up there. But other than that, from our perspective, it's kind of ordinary course. You see opportunities for growth, you want to invest in them. And we'll continue to do that. We're always going to err on the side of growth in light of the massive opportunity that we see and it still being really early. But hopefully, we've been able to demonstrate the ability to be profitable and generate that bottom line, and that gives people confidence in the model as we continue to scale.

Yes, totally. And then how should we think about the medium-term target? The rule of 50 that you guys sort of unveiled last year at the Analyst Day within that context? Is there any guardrail around how much of that could come from revenue growth versus margin? How should we be thinking about the 2 there?

We laid out a 4- to 6-year long-term target back in our September Investor Day. And we said that we'd have a 35% margin, which by default, if you're with rule of 50, gets you to 15% on the top. We noted that wasn't a CAGR versus where we see growth in those outer years. Again, as I just said, we're going to err on the side of growth. I'd much rather be 20-30, for example, than 15-35. But we continue to see opportunities. Again, when you look at the footprint that we've got, when you look at the product portfolio that we've got, I think we feel good about the progress we've made just since we've laid those out. I've commented before, it's not going to be a straight line. And so what you should expect to see is from time to time, we will pause. Just as you said, we had a big improvement on the bottom line, but we always want to pause to make sure that we're investing in the right places. We've got our products where we want them. We got our geographic footprint where we want it. And then again, we can continue that growth. But we see all of the pieces of the puzzle there in order to achieve that. We just need to focus on executing.

Awesome. We probably have time for one more question, so I'll pause to see if anyone has one. Otherwise, I'll be happy to do one more. Yes. I guess, I'll just do a more open-ended one. Just in terms of how you expect the rest of the year to play out, I think a lot of people, I don't know, maybe earlier in the year, were expecting rate cuts. And obviously, it'll be pretty beneficial to nCino's end market to your business. Pierre on the last call sort of said, none of what we do is predicated on needing rate cuts. So just, I don't know, how are you guys positioned within that context? Like I don't know, walk us through like why rate cuts would benefit you guys. Obviously, there's the mortgage business, but there's also the core. So just walk us through some of that, the thinking, the different scenarios there.

For us, and it happened towards the end of the year, the Fed coming out with really stability, right? We can debate when a rate cut may happen and what it will be and what that looks like. But the expectation, as we sit here today, that there won't be increases was a huge opportunity for our customers just to catch their breath. If you think about it, they've been chasing rates for 2 years, right? And it's really hard to run a business and put together a P&L, put together a forecast, put together a plan, a strategic plan, when you're chasing rates because it's such an impact on financial institutions. And so to Pierre's point, having that stability for us was a huge change. And again, post that, we saw demand come back, right, much more aggressively. It will help the mortgage business. There's no doubt about that. Although what's interesting is you're seeing, as time passes and people appreciate rates are not going to come back down to 3% in anywhere in the near term, life events take over, right? And ultimately, if you have a child, for example, or you're going to move and you need to buy a house, these are the rates, right? And so there was a customer conversation specifically not too long ago where they said, we're starting to see some of that. And so I think even rates for longer, at these levels, people aren't holding back saying, well, maybe in a couple of months, they'll be better and I'll wait until then. Versus if I need to do something, I'm going to do something. So overall, I think it's a positive. But again, I think the biggest thing for us is -- was the stability that came from the Fed. And we've seen that play out and come through the business in terms of the pipe and in terms of ultimately getting deals closed in the pipe, more importantly.

Awesome. Thank you.

Thank you. Yes. Appreciate it. Thanks, everyone, for being here.

Yes. Thank you.