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

Our next presentation comes from nCino. nCino is the leader in cloud-based lending systems. To my immediate left is Sean Desmond, CEO; Greg Orenstein, CFO. This is going to be a fireside chat. If members of the audience have questions, you can e-mail session2@rwbaird. I'll get those on the iPad. But maybe to begin, I'll ask for an intro to nCino and an overview of the investment case.

Sure. Thanks for the time. We appreciate it. It's great to be here. We have been at this for the better part of the past 13 years at nCino, our original mission to transform financial services through innovation, reputation and speed. And we have been known in the marketplace as the worldwide leader in cloud banking. And at this point, we are pivoting the energy of the entire company that we would usher banks, credit unions and independent mortgage bankers into the era of AI, and we will be the worldwide leader in AI banking as we move forward. And so it's a super exciting time for the company. At the same time, we're solving some of the same problems that have been age-old for financial institutions for many years, right? If you think about how organizations are siloed in their operating model as well as in terms of how they house data and make decisions, we democratize and provide digital collaboration across that landscape and deliver outcomes for our customers. But some of those problems, the age-old customer really wants 2 things: it's kind of how much money can I get and how quick can I get it on the borrowing side? How fast can I open an account? Can you onboard me onto your institution in a compliance sort of a way, right? Know your business, all the KYC outages there? And then how can you kind of monitor and service my portfolio in a way that would be proactive for me? And so we deliver these types of outcomes over time in a seamless sort of personalized way. That digital and interactive collaborative nature is in our DNA. And so we bring the middle and back office toward the front office of the bank and, ultimately, toward the banker and their customer, and that's what we've been doing for many years. If you think about the things that we do and where we do them on the platform? nCino is busy doing onboarding for our customers, doing account opening, doing loan origination, doing portfolio monitoring. We do that across commercial, consumer, and mortgage lines of business. And we serve that up in a consistent fashion for the banker and their customer, whether they're in the branch or on a digital online experience. And all of that is underpinned by what we believe is the world's richest data set in fintech, highly differentiated. We have 2,700 customers globally. And we're collecting not PII data, but on aggregate, we have a lens on the process-centric data, and we understand how capital flows through the bank, right, and how people make decisions. And so with that data, we think we're set up perfectly to capitalize on the vertical AI opportunity in banking, and that's exactly what we're busy kind of engineering the company and the resources and our time toward. That global customer base exists across market segments. So we deliver the same solutions in the same code base and the same platform to community banks, credit unions as well as the largest enterprise banks with trillions of assets under management at scale, the world over. 15 out of the top 30 banks in the U.S., 5 of the top 7 in U.K. and Ireland, 3 of the top 5 in Asia-Pac, excited about the momentum we have in Tokyo. So that global customer base, again, I point that out because that it gives us a purview and a lens on the data that is very unique. And in a world where you all hear everybody opining about how folks can run any sort of business, including a bank, which is the most highly regulated business around on LLMs alone, we believe being a vendor that's been on the journey with customers, and has trusted us with their data for many years is differentiating because we have access to the same LLMs, but we have the actual data, and we're going to capitalize on that. So that's a bit about what we do. I don't want to drain the slides too much. Happy to take questions, however this works.

I'm going to stay on you for a moment. So customers are complex. Their workflows are complex. Before you were CEO, you led product, you led customer success. You're probably the best person inside nCino to really understand what customers need and are looking for. How do you kind of take that background and now, as CEO, parlay it into your near-term goals? What longer term you hope to do, kind of your line of sight as CEO?

Yes. And yes, so previous to stepping into this role, I spent a large part of my career in the post-sale world, which is really all about delivering on the promises you made to your customers, right, fulfilling the commitments. And so I take that very seriously, and I believe I'm pretty aligned with how our customers think. If you talk to banks, put the customer at the center of everything you do, right? And so that's how I think about our business. And we have real big opportunities to propel our business forward with some initiatives we have at the company right now that are near and dear to my heart, which would be removing friction from the entire experience and making sure we have faster, repeatable, more streamlined implementations. That's a big initiative for the company that I think is going to be a differentiator for us in the sales cycle. But at the end of the day, we get feedback from our customers, and it's almost always about did you follow through on the promises that you made. And so that's how I think about the opportunity. I would say, in addition to that, I've been through a few of these inflection points in my career, having grown up in the consulting side of the business in the mid to late '90s, seeing mainframe to client server, seeing client server to cloud, seeing big data. And here we are at this inflection point to AI. And I think about the experiences I've had over time running both customer success and product and how uniquely positioned we are, and it's in the DNA of our company to drive change. That's what we do. At the end of the day, the technology is fantastic. We're proud of our products, our solutions work, right? If we can deliver measurable outcomes, those speak for themselves. But you still have to drive change, right? You still have to help financial institutions the world over understand how to make that transition from the old to the new, whether it's manual legacy or we're replacing the existing system. And so we kind of lean into that as we drive change into this AI inflection point.

Great. I have a lot of AI questions. But before getting to that, I'll ask Greg, maybe just recent financials, had a good update last week. Entering this year, maybe how are you thinking about the go-forward budgeting, the outlook? And then as you look to execute this year, what are some of the things you're focused on to set you up for even stronger growth next year?

Absolutely.

Yes. As we came into this year, look, I think our customer base, for the most part, is healthy. Clearly, a couple of years of difficulties with the liquidity crisis, the rapid rise in interest rates. But I think they've gotten through that well. And again, I think we see activity in the pipelines continuing to increase, which gives us optimism. And also, again, with the products that we came out with just a couple of weeks ago at our Annual User Conference, we have more products to go sell. So I think right now, we sit executing on a bookings plan this year that if you look at the midpoint of the guidance that we gave, and it's the first time that we've given ACV bookings guidance as a company, it's just $3 million more at the midpoint than what we did last year. And again, I think we feel like the markets continue to improve, and we have more products to go sell. And so from a top line perspective, it's just very much focused on execution, closing the deals we say we're going to close, and closing them when we say we're going to close them. That's what the focus is. From an expense perspective, I think we've been managing the expenses at the company well over the last couple of years, and I think we'll be able to continue to do that. We continue to find opportunities for efficiencies. And ultimately, again, I think we try to set ourselves up for a year where we continue to build momentum throughout the year. So overall, I think, right now, it's just heads down execution, and that's what we're focused on.

And for those in the audience, when you think about nCino, is this a Rule of 40 business, Rule of 50, where do you see that ultimately settling out?

We said on our Q4 earnings call a couple of months ago that around the fourth quarter of next year, we'll be a Rule of 40. I think some folks were questioning how we would get there. Ultimately, we did not give a specific it assumes X percent or Y percent of growth or bottom line. We just made a commitment that we would get there. And we did take an action last week in terms of a restructuring in the company. Those things are never easy. But ultimately, we felt like it was the right thing to do. But again, I think a big step forward towards meeting and ultimately exceeding that Rule of 40 target. And so that's our next goal is to get that around the end of next year.

Great. Okay. AI. I think a lot of folks are in agreement of all the different industries looking to deploy AI. Financial services is going to be one of the hotbeds, potentially one of the biggest potential implications. And in a lot of ways, I have thought nCino is always early in terms of AI product and intentions. So I think about the first kind of copilot launches, that was on the earlier end. You were very early in talking about agents, and you can kind of plot along to use Salesforce as an example. A lot of people now recognize Salesforce with the Agentforce strategy, but you can often trace nCino as being even earlier and ahead of those communications in this industry. So how do you see the opportunity? And why is it so different than what a lot of SaaS vendors or even vertical SaaS vendors have said about AI for their businesses over time because it does seem with consistency, nCino has been on the early end of thinking about it and introducing it.

Yes. And the opportunity is massive. And I think it's going to be unique in banking. And to your point, in terms of capitalizing on that, everybody sees the potential. At the same time, folks recognize that in a highly regulated environment that is traditionally known as risk averse, what will that journey look like? What will the adoption curve look like for banks in terms of the pace of innovation that they consume. And so we kind of -- we have said since day 1 at this company before AI was even a narrative, right? We said, if we can capture all the data in the context of the workflow and the process-centric nature of that data, and we can serve that up to our customers at the production line, where they need insights to make decisions that good things will happen, right? We said this in 2013. And so we have steadily been accumulating that data all that time, right? And you look at the moves that some of the big players in the space have been making around data recently, right? From a tech standpoint and the horizontal landscape, we've just been doing that all along. And so we have that foundation. And then we kind of lean into the reality that we've been driving efficiency into banks. If we can increase loan application rates by 288% for certain financial institutions, well, that's going to get them more customers. It's going to get them more market share, right? If we can reduce key stroke and data redundancy by 75%, then that's going to drive efficiency. Well, we've been doing this without AI. So now here we are, right? And so our strategy for AI is three-fold. We are continuing to develop out what we are calling our banking adviser skill sets. And that is basically training by persona. We look at each role in the bank, the loan officer, the credit analyst, the underwriter, and we say, "How do they do their job every day and how can we automate that? What have we already done to drive efficiency into their job and how can we do that further with banking adviser skills?" And we've already got 18 banking adviser skills that are live in GA and that our customers are adopting. We had Wells Fargo on our main stage at our conference last week talking about banking advisers. So that's number one. Number two is Agentic AI, and we take all the existing workflows that we have in place across 2,800 customers that are in production today, and we start wrapping our agents around those. So if an agent can actually fire off a loan origination task and then an agent can then gather all the requisite documentation and an agent can do all the checks, can we get to what we call the path to one, which is an end-to-end complex commercial loan origination experience, for instance, one of the things that we do with only 1 human in the loop. Today, that has sometimes 10 humans in the loop, right? And so Agentic AI is powerful. So banking adviser plus Agentic AI. And then the third pillar of our strategy is that data backbone. And we've invested in a company called Sandbox Banking that we acquired 6 or so months ago, and that will serve as the foundation to connect all our solutions and integrate to all the third-party data in the financial ecosystem in a way that will actually exponentially drive value from the data that we already have.

How do you monetize each of those elements? Banking is already an industry where if you look at banker headcount, it doesn't really grow to begin with, and yet we clearly grow loan volume. So automation is good for this industry. You see that already. But going forward, how do you think about automation and maybe changing the pricing of your products?

So we're not just doing this for the fun of it, the AI. Okay. Yes, for sure. This is something that we have active conversations on a regular basis in terms of pivoting and what you see is a shift in the landscape from the kind of old school per user per seat to the new school, which is, it's all about outcomes, right? And how can you connect the value that we deliver to the fees that our customers pay, right? And so banking adviser has a base price. And then as you deliver those outcomes, you actually drawdown on what we call intelligence units. It's a way to kind of track and measure the usage of banking adviser and the more outcomes we deliver, the more fees that we, over time, collect and customers buy into that because they understand. For instance, if you could give me a 0.25% on my commercial pricing and profitability, that can actually mean tens, in some cases, hundreds of millions of dollars, depending on the size of the institution, right? So if you're going to deliver that through AI, and I can see it and I can measure it, and you could read it back to me from an analytics standpoint, then I'm willing to pay for that. And so from a monetization standpoint, banking adviser as well as when you start delivering the Agentic experience, you're delivering the same outcomes with less people, you're taking cost out of their equation.

Do banks tie investment in these new areas or even investment in your core systems into a view on the interest rate cycle, if a bank has a view that we're about to enter a lower rate environment, are they proactively investing more in lending systems now to be ready for that future upcycle?

Yes. At the center of what we do, we drive efficiency into the operating model for banks, right? And so in a down market, in an upmarket, in a low interest rate, in a high interest rate environment, depending on the line of business you're in and the types of products that you're selling to your customers, we drive toward those imperatives, right? So if you think about onboarding account opening, loan origination, portfolio monitoring, you think about doing that across commercial, consumer and mortgage, including small business, and you think about doing that globally. In a high interest rate environment or a low interest rate environment, the permutation of products and services that we cover in there kind of works both ways, right, which is why this has been a sustainable business. And we started in a time when money was free, right? And interest rates were historically low, and the company had tremendous success. We've operated through COVID, through PPP, through high interest rates, through headwinds and the company has proven its durability. And of course, like I would prefer rates to go lower, but we've all had a hard time predicting that for the past couple of years, right? And we think that we continue to take mortgage share in the mortgage game in the IMB space, and we continue to position that solution to large banks. We're getting traction in consumer. We're getting traction in commercial and going deeper in commercial regardless of the rate environment.

One thing you discussed at the Investor Day recently is, even in kind of the original commercial lending products, which is the gold standard, if banks are putting it into place, they're referring to it on their public calls, you're about 30% penetrated there. Now I know there's always debates well is 30% a high number, is that nearing saturation? I guess, I would ask the inverse of that. Where do you still grow into the other 70%? And do you have to do a bit of education with the customers? One of the things I thought was very savvy of nCino early on is the original price point. For a lending system, it maybe was expensive. But in terms of the full capability you get as a sign-on user, you can rip out 4 to 6 other systems you're probably paying for, which makes nCino actually the most cost-effective as well. Do customers really understand that, however, or is that part of growing at an existing account?

Yes. I think they get it. And the larger the bank, the more systems you're taking out, right, the more integrations that you can replace with your platform, and it is the platform play that's differentiating for us because everybody we compete with is a point solution, right? Across the lines of business, it's either a point solution. And most of the competitors we have are only down market or only upmarket or only in the U.S. or only in EMEA, right? And so this global platform is a key differentiator for us at nCino. But to your point about market saturation, listen, I'm excited about the mix of revenue we had in Q1. I mean, we talked about this at Investor Day. And we had about 50% of our revenue in commercial and the other 50% split right down the middle between consumer and mortgage. That seems to be very rightsized with our investments that we have in R&D as well. The small business opportunity is picking up a lot of steam. The credit union opportunity is getting a lot of momentum with our acquisition of Allegro. The mortgage into banks beyond IMBs is exciting and the AI play, and then our upside internationally. In EMEA, we've kind of reinvigorated our leadership team. We're attacking the continent, not only U.K. and Ireland, and we have a tremendous opportunity in Japan. So I say all that because again, 30% is open to interpretation, right? Well, 30% in the community bank market in the U.S., but 0.2% in Japan right? And so it's got a lot of layers to it. And the bottom line is, we just have a tremendous opportunity to reaccelerate growth, and we see the bookings coming this year.

On the -- talk about consumer and mortgage now. So on consumer, I think it was a few fiscal years ago where you got a $200 billion bank. And for those of us that watch vertical software over time, people remember when Veeva won their first top 20 pharma, when Guidewire won the first top 25 insurance carrier, is it the same here where you really needed that 1 Lighthouse account and now you're starting to see like the deal flow pick up, people are picking up the phone and talking, is it kind of flowing like that?

It is the same. And those industry parallels are powerful. And then even the parallels we have historically at nCino, right? I mean our Lighthouse Enterprise Bank and our flagship commercial solution was SunTrust, back in 2016. And now they're obviously part of Truist now, but the reality is we started in the community bank market, we steadily moved up. We signed a $30 billion bank, then we had a $70 billion bank, and all of a sudden, we had SunTrust. Same thing is happening in consumer. Now it's taken us a little longer because that's a rip and replace, right? And we learned some lessons. So it took us a little longer in a different market, to your point, interest rates, COVID, and all the things. But here we are with consumer where we have a nice mix. I mean, we signed 20 community and regional bank customers in the consumer lending solution in Q4 alone. We signed a $50 billion asset bank, about 2.5, 3 years ago. And boom, here we are with the $200 billion bank that was on stage with us at Investor Day. And what I would expect is you're going to have a combination of employees at that institution as well as system integration partners and other folks that then go out in the ecosystem, and they tell the story and they move around, right? Everybody knows folks move from bank to bank, right? So they're wearing a badge for one bank and 2 years now, they're wearing a badge for another bank. And "Oh, by the way, we were on nCino." And so yes, the inbound interest from banks at scale on consumer is going to pick up and is picking up already based on that.

At the Investor Day, you talked about the ACV mix between the 3 legs of the stool, so commercial, consumer, mortgage. And actually, they're all growing kind of around the same at the moment, kind of 10%, give or take. When you think of consumer and mortgage, should those be multiples of what the commercial product is growing by?

Everything should be growing faster as far as I'm concerned. We can never get enough growth. We're insatiable on growth. But listen, I would say that as we have now readied the mortgage solution for banks and credit unions at scale and to sell that beyond the IMB ecosystem, that we should expect really meaningful growth there, 100%. From a consumer lending standpoint, I mentioned the 20 in Q4, I would expect that we continue to go hard and as we go upmarket and cross-sell, we have 15 out of the top 30 banks on commercial. We have 1 on consumer, let's go get the other, 14 that would indicate a nice growth rate.

And just to add to that, I mean, from a guidance philosophy perspective, we said that we were going to get out of the predicting mortgage volume business this year, and so we said we were going to keep our mortgage expectations flat year-over-year. Consumer, we did talk about growing 50% 2 years ago, 33% last year. Sean talked about in Q1, the ACV, the bookings split a little less than half commercial, the other 2 splits. So we do see those as nice growth levers. And that's where, again, for Q1, we were able to -- we beat the top end of our guidance by $1.8 million. $800,000 was for mortgage. We didn't flow that through, but we flew in because of the strength of the core business $4 million through the rest of the year. So again, I think we're feeling pretty good about what we're seeing out there right now.

Just on the mortgage point. So high single-digit growth last year. And obviously, a very brutal environment for a lot of your customers. So I think high single digits is definitely reflective of share gain, at least it would seem to be that way. I think you have a very unique strategy. I think most that have followed nCino probably appreciate what you were buying in SimpleNexus at the time. But maybe you can talk about how SimpleNexus has kind of been blown out and now it's a big part of the overall front-end strategy, and how we've been talking about how nCino is not just a product, it's a platform. I think SimpleNexus kind of was the gateway to a platform in the newer areas of the business. So kind of why you saw that as an opportunity?

Yes. And you're spot on. Absolutely, we entered the mortgage space, particularly in the IMB market with the acquisition of SimpleNexus and now we sit here a couple of years down the road where we're selling that solution at scale to banks of all sizes. But the underlying point there is, we acquired a technology layer from a digital front end and experience point of view that now serves as the single consistent experience that the banker or their customer has with nCino, whether they're having that in branch or digitally, right? And that's kind of the foundation for everything on the front end. Digital experience for nCino was the IP acquired from the SimpleNexus acquisition. And so when I talked about fulfilling some of the promises and commitments we gave -- made to our customers on that platform experience that's a strategic nature of that acquisition. And yes, we continue to gain market share in the IMB space despite the rates, despite the pace. And listen, we have competitors in that space that are buying contracts, right? We have competitors that are going to our customers and saying, we'll pay your nCino contract, and you won't charge us anything, and we'll do that for the next several years. It doesn't seem like a sustainable business model to me. I'm not going to let that happen on our balance sheet. And every once in a while, if you have a churn event, I think that, that might actually take out a competitor along the way, too. So we're good with that.

I think I was going to just add the fact that, that business has grown in probably the most brutal market, certainly in recent memory, but going back to the financial crisis and maybe '08, '09. Every year, I think, says a lot about the technology and the customer base and, ultimately, the opportunity as volumes do. We've seen them as stabilizing, right? Churn has come down in that business and, ultimately, these volumes come back. So I think we believe we're well positioned there.

And maybe worth just touching on the pricing there because that's evolved in an interesting way. And as an analyst, I love this because a lot of the upside is maybe not going to be an RPO anymore, but it's something where you could get some revenue overages, maybe just explaining how that business will work going forward?

Sure. Historically, it was a seat-based model, which, as we looked at pursuing it from an M&A perspective, it was one of the things that was attractive to us versus most all the other companies out there were volume based, right? And so as the volumes kind of dropped over a cliff, the seat-based model was much more resilient, but ultimately, during the difficult time, if you go back with the rapid rise in interest rates, a lot of our customers came to us and said, "Hey, can you help?" Obviously, it's difficult, and we made a strategic decision to say that them going out of business wouldn't be good for either one of us. And so we evolved our model to where instead of it being seat-based, you had a platform fee that for each month gave you a certain number of loans and once you exceed that loan number, ultimately, you pay more, right? And what our sales folks and customer service folks are focused on doing is watching that volume. And to the extent they're consistently exceeding the minimum numbers is to ultimately up that minimum, right? To your point, the only thing that would be in RPO or in our ACV is what's contracted for. And so we do see opportunities for growth as the market does come back. But again, I think to me the best headline right now for mortgage is, we do see it having stabilized. We said Q4 was our lowest churn quarter for mortgage last year and Q1 this year was lower than Q4. So clearly, the trends are in the right direction.

Great. Time for one more question from the audience. This one, we've been talking a lot of deals, some bigger than others, but kind of a good frequency of M&A, do you think you're closer to an end in terms of acquiring maybe what you needed and now the focus is on integration? Or should we expect a continuation of what we've been seeing?

Yes. I think that we are -- we refer in the locker room to ourselves as in digestion mode right now on some of those. We feel great about our expansion of our SAM with the onboarding acquisitions of DocFox and FullCircl, our expansion of our SAM with our entry into the credit union space with the indirect lending capability. And then Sandbox Banking as far as being strategic to our AI play. And so we're going to fully integrate those. Are we always going to be opportunistic out there if something comes out, but an active part of our reacceleration of growth right now assumes that we can do it with what we have.

Great. We're out of time, but please join me in thanking nCino.