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

Hi, everybody. My name is Koji Ikeda. I am one of the software analysts here at BofA. I am super thrilled to have nCino's CFO, Greg Orenstein, here for a fireside chat. Thank you so much for being here. We really, really appreciate it. And so yes, I guess from a high-level perspective, for those in the room that are unfamiliar with nCino or those on the webcast that is unfamiliar with nCino, just to maybe spend a minute or 2 on what does nCino do? What is the opportunity? Who is Greg?

Sure. Pleasure to be here. The easier thing, Greg. I've been at nCino for about 10 years in multiple roles. I took over the CFO role in January of 2023 and been selling software to banks for over 20 years. So background in financial services, software. In terms of nCino, really who are we? What do we do? Why do we exist? Right? If you think about it, we help make banks more efficient. Banks are burdened by a whole bunch of legacy infrastructure, old on-premise licenses, maybe some have shifted some parts into the cloud, very difficult to manage, very inefficient. I think this is going to become even more of a problem in trying to leverage data in the world of AI. And so nCino comes in with a unified platform that we focus on 4 things. We focus on onboarding customers; we focus on originating loans and that's any type of loan; focus on opening accounts, any type of an account; and then portfolio management. And we do those 4 things across commercial line of business, which includes small business in this context, consumer as well as mortgage. And so that's what we do. And at the end of the day, we're there to help banks, like I said, become more efficient, reduce expenses, drive revenues, but ultimately, make sure we help them transition into this new world of being able to interact with their customers and do it in a more profitable and effective manner.

Got it. You guys just reported earnings, last week?

Last week.

Yes, last week. So what were some of the key takeaways from the quarter, maybe your highlights. And then what has been kind of the key debates as you've been speaking with investors post quarter?

Yes. We did have a good first quarter, a good start to the year. We felt good about that. We overperformed top line, but total revenues as well as subscription revenues as well as our operating income. And as part of that, we also reiterated our gross bookings, our ACV guidance, I should say, for the year. And so from a top line perspective for subscription revenues, we outperformed the top end of our guidance by $1.8 million, about $800,000 of that we attributed to mortgage. We came into the year saying that we were going to -- from a guidance philosophy perspective, we changed our guidance philosophy that we communicated 2 quarters ago. But for mortgage specifically, we were going to keep it flat and just manage expectations. So we didn't flow that through, but the $1 million overperformance in the core business outside of mortgage, we flowed through for the year and raised the subscription revenue guidance by $4 million. On the bottom line, we raised the back half of guidance by $5 million for operating income. So $10 million on an annualized basis. And so a good start to the year. I think we're pleased and encouraged with the activity that we're seeing in the pipe. And so really, it's just about execution, heads down, closing deals that we say we're going to close and closing them when we say we're going to close them, and that's the focus of the team.

Okay. Okay. And then maybe on the investor front, what's maybe the 1 or 2 most common question that you've been getting and how you've been answering it?

Yes. I think clearly, folks continue about macro and potential impacts from tariffs or maybe some of our international business. And we feel so far comfortable reporting that we haven't seen that be a negative impact. I think there's optimism in our customer base, banks and credit unions around potential deregulation, particularly with this administration over the coming years. I know there was some excitement about that in January. I know the focus has been on tariffs, but I think that opportunity, which our customers would view as a positive looms out there. And so I think all in all, from our market, the macro has improved quite a bit from what we saw 2 or 3 years ago when they were dealing with a rapid rise in interest rates at an unprecedented level as well as dealing with the liquidity crisis. And so again, I think that's really where it's been focused, a lot of macro stuff. And then for us, more specifically, we have a new CEO in Sean Desmond, who started in February. So questions about Sean and how that transition is taking place. And so we've enjoyed discussing the impact that he's already had in the organization and some of the things that he's making sure we're focused on.

Okay. And you just hosted an Investor Day. And so maybe what were the key takes from the Investor Day? I know you've been pounding the table a little bit on Rule of 40 sometime around the fiscal fourth quarter of next -- of '27, and so how do we think about kind of the key takes of the Investor Day and kind of that progression to that Rule of 40 target?

Absolutely. We were excited to have our second Investor Day. This one we did at our annual user conference, which was important for us because in order, I think, to appreciate the optimism and excitement we have around the business and the growth opportunity in front of us, it's important to get exposure to our customers. And even more, I think beyond that is to see all the product strategy coming together. And so what we really unveiled at the conference where Investor Day was held was the culmination of a multiyear, multi-product R&D initiative. And where we've brought this unified platform together, again, across commercial, small business, consumer and mortgage for the product lines that I said. And so I think that was the major highlight seeing that. And again, I think trying to correlate those products and the opportunity with the optimism that we have that we would expect over time to flow through our financial results. It was also Sean's first exposure really to the investment community. And so I think that was also a highlight as people heard what he's focused on. We did talk about Rule of 40. We put that as a target out in Q4. We purposely didn't say it assumes x percent growth, right, versus we're going to get there around the fourth quarter of next year. I think people have seen over the last couple of years a lot of good progress with our operating income progression, operating margin progression. And I think really the takeaway is that if we can focus on executing our sales with all the product that we've got now. And with the coverage that we have in the field, we added about 14% sales capacity to the field this year that we would expect a growth -- a reacceleration of growth for the top line, and that's what we're focused on executing on.

Remind me, your Rule of 40 composition is revenue growth plus non-GAAP operating margins, right?

Correct? Subscription specific.

Subscription revenue growth non-GAAP operating margins. Why not a free cash flow margin target for Rule of 40? I know a lot of software investors comp Rule of 40 to revenue growth plus free cash flow. So why not free cash flow? And what is the relationship between operating income and free cash flow?

Yes. So when Sean -- when he spoke on his first investor call, he said there's 3 areas that he and we as a team are focused on. The first one is ACV growth, right? The second one is hitting our Rule of 40 targets out there and the third one being free cash flow, and more specifically, free cash flow per share over time. And that hasn't changed Koji. I think right now, we are going through a pricing model transition. And at Investor Day and folks have heard us talk about, particularly with new logos that sometimes you'll see ramped pricing where -- I'll use an example on a 3-year deal, maybe they'll pay you $1 in year 1, $2 in year 2 and $3 in year 3. That approach has always worked for us because we expect these customers to be with us for 10, 15-plus years. People always talk about being generational buying decisions with our software because of the sticky nature of it. And so we always like maximizing that exit rate. But under that model that we evolved to, under rev rec, you actually recognize $2 -- you straight line that, you recognize $2 a year, but you're still billing in year 1, $1, right? So there's a little less upfront on the other side of the contract in the second half. You're actually getting more than you're recognizing. So we want a little bit more progress through this pricing transition. And then on the other side of that, I think it would be reasonable for us to kind of regroup in terms of free cash flow target.

Yes. Let's talk about the pricing model a little bit, the platform pricing model. Maybe for those that are unfamiliar with it, and I can always use a good refresher here is what is the new pricing model change? How far along are we in there, renewal process, et cetera? And what does it essentially look like after you're all done?

Sure. Historically, we were a seat-based pricing model, which I think, particularly where we started on the commercial lending side or the commercial side of the bank made sense, very much relationship driven, right? So the seat model made sense. But if you go back a couple of years, as we were building out our consumer lending offering, which we're very excited about. We talked about 43 consumer lending deals last year, including over 20 in the fourth quarter. We realized that we have the opportunity to automate the entire consumer lending process, and therefore, you don't need seats, right? Now from a regulatory standpoint, I imagine there's always a human in the loop, but ultimately, appreciated that having a seat-based model would not make sense for that. And then I think right around that same time period, the mortgage market faced some challenges. That was a seat-based model. Some of our mortgage customers came to us and said, "Hey, can you work with us and help us navigate these headwinds." And we took a step back and said, them going out of business wasn't good for either one of us. So yes, of course, we'll work with you guys as partners. And we started shifting to a platform model where for mortgage, you pass a minimum fee per month. And for that minimum fee, you get a certain amount of loans. And as loan volumes come back and increase, we've got upside there. So we're excited about that. That was the first kind of step forward in the pricing model. And then subsequent to that, we've now, as of February 1 of this year, we have the rest of our business -- our bank business, I would say, on the new pricing model, and you pay us a flat platform fee. It's an annual theme, and it's based on the assets that you have on our platform. And then every year, we'll go back and we'll assess the growth in the assets that you have on the platform. And to the extent you go from one tier to another tier, we'd be able intra-contract to raise your price to effect that increase. And I think it really has been well received by our customer because I think it aligns us much more from a value standpoint, right? As they're getting more value, as they're building assets on the platform, giving us a little piece of that, it feels good, and I think it feels good in terms of a true partnership that we have versus a vendor relationship. So we're about 15% through the base in terms of that transition, a bulk of that is mortgage because that's where we started. Seasonality-wise, Q4 has historically been our biggest quarter. And so the big next cohort of customers to come through will be Q4 of this year and then we'll go from there. Our average contract length is about 4 years. So in theory, it should take about that time period to get the whole base transition. But we definitely see opportunities as folks, maybe they've got us for consumer, and they want to come buy commercial. Someone comes back and buys a new line of business, we'll use that as a pivot point to transition them to the new pricing.

Would it ever make sense for a customer to renew early on the pricing -- new pricing model and switch early?

Usually -- that happens frequently, and usually, though, it's because they're buying something new, and so that would really be a catalyst for that. As I said, if they come and they want to buy a new line of business, that will be on the new pricing. So we would use that as a transition point. So we think there's opportunities to accelerate that from 4 years. But in theory, that's how long it would be.

So not a real big sales push to push for early renewals right now?

No.

Okay. Okay. A little bit of a micro question on the mortgage origination pricing front. Strategy is that it's based on platform fee plus loan volume? Is it origination of the starting of the loan or the closing of the loan? Is it price -- or is it...

We're the front-end point of sale. And while we're an LOS, a loan origination system, for everything else we do on a global basis, in the U.S., we're just a point of sale on mortgage, and then we'll integrate with a back-end mortgage LOS. So it is that origination that we go through. And yes, as volumes pick up, we would expect to see opportunity there. I think we have a very unique offering in mortgage. It really is around getting the ecosystem to get a loan done together on a mobile in an app and you can do it online as well, where you've got the loan officer, you've got the borrower, you've got the appraiser, everyone working together to get that loan done more quickly. And I think that's one of the things that differentiates us in the market is because the customers want to know, am I getting my mortgage and when am I going to get the money, right? And to the extent you're able to accelerate that, that is a competitive differentiator for us. And so the mortgage business has obviously been challenged over the last couple of years, but our mortgage business has grown every year over the last 3 during this time period. And so I think we're very well positioned with the best technology out there for mortgage.

I recall you've given on an earnings call, a way to think about rates and volume -- or revenue upside. Could you remind us what that was? And has that changed at all?

It's not changed because volumes really haven't seen kind of a meaningful change in volumes. But we said, based on the data that we have, a 20% increase in volumes should generate about a 10% increase in the mortgage customers that are on the new platform. And we also caveated that by saying to get more specific, we really want to see per customer that volume flow, right? Because it could impact some customers differently. But that was just kind of a rule of thumb as a starting point to think about.

No, thank you for that. Vertical software, I always like to ask the TAM question. I'm going to ask it in 2 different ways, one from a target customer, now into the future and then maybe on a competition front, like what does that competition look like from the higher end and the lower end of the customer base or target customer base. And so on the customer side, who is the target customer today? How do you guys think about it? And what does that target customer look like, say, 3 years from now?

Sure. So I think that's one of the things that's unique about nCino in our platform is with the same platform, we span community banks and credit unions in the U.S. all the way up to Bank of America, which we are proud to say it's been a long-standing customer of ours, and that same platform globally as well, right? We had a little over 20% of our business is outside of the U.S. last quarter. And I think that's very unique because when we talk about competition, Koji, it very much is concentrated down market in the community bank space in the United States. And so we really are unique in our ability to scale. And so what's also unique because we're the only ones truly with a platform across the bank. And so where we have competition isn't an apples-to-apples, we'll compete with point solution vendors really in each business line. So you'll have a competitor down market for commercial. You'll have a different competitor down market for consumer. You'll have a different competitor for mortgage, et cetera. And then certainly, when you go overseas, it's a different group of competitors and frankly, a lot more would be more build or leveraging some framework technology. And I don't -- and then also IMBs, which has been a good market for us, notwithstanding the headwinds. So that is the market. We've got just under $20 billion SAM. We've doubled it since we went public in the summer of 2020. So we think there's plenty of run room -- runway, I should say. And I don't think our customer base will evolve more. I think we service all of those customers. And what we've been very focused on doing is making sure we're servicing them with the right teams. And to that end, for example, credit unions, which we've had some success in, historically, we had the same salespeople who service banks, service credit unions. But credit unions, it is a different market. And as our consumer lending product matured, we formed a separate credit union team to go take that more aggressively to market. And so that's how we've been trying to kind of break this massive opportunity we have down into kind of more digestible pieces to make sure we're maximizing the sales that we can get.

Why did the [ Reddit ] Union opportunity require a different team?

It's a different customer, right? We think about the market differently. It's very oriented as other financial institutions and banks are, but very member-driven, right? And so they speak a little bit different language, and we want to make sure they appreciate that we understand some of those nuances, and we're there to support them and make sure from an investment perspective, that they are getting the best product for what they need to do. And a perfect example of that, and I think this is where the platform play really resonates is with credit unions on our Q1 call, Sean talked about an $800 million asset based credit union that had used us for a pretty small product that helped with some portfolio monitoring, a nice product that we've got. But from a cross-sell perspective, they expanded, again, with the platform vision and story. They bought commercial, they bought consumer and they bought account opening. And that's really where we see an opportunity that platform play with those institutions.

Okay. Okay. Let's move to AI.

Yes.

Vertical AI, we think at Bank of America is a very interesting opportunity, attractive opportunity, could be very disruptive. And one of the first places where we might see massive adoption of AI tools, specialized data, lots of data, very specialized. And so what is the nCino strategy with AI? And how are you thinking about it as a growth driver over the next few years? And what are your customers asking for right now from an AI perspective? I mean, I guess the question is, are they ready for it? Or are they just kind of still trying to figure out what to do?

Well, since we do serve banks and credit unions, generally a conservative group. And I think that actually plays incredibly well for nCino because those customers have trusted us with their data for over a decade. When we started the company, Koji, they said that banks would never put their data in the cloud. We created this segment called Cloud Banking. And I think we are uniquely positioned to create and be -- transition from being the worldwide leader in cloud banking to the worldwide leader in AI banking, and it's for a few reasons. One is that trust, right? In some industries, again, maybe a start-up, maybe coming to sell you, you can run your business with leveraging LOMs and we can help you do that. That's not going to work in this highly regulated market, right? And so we are uniquely positioned to take them on the journey. We took them on the cloud journey. We can take them on the AI journey. And we have a unique data set, and we talked about this at our user conference. We launched a research institute where, again, because of the data that we've got access to with the consent of our customers to use, which is something that we've been focused on getting, we're able to see stuff going on and help our banks become more efficient, and ultimately, able from a training standpoint, talk about it. So there's 3 kind of pillars to our AI strategy. The first, we call Banking Advisor, which is basically think about it as generative AI. And these are things that you can do to help make tasks easier. We had 2 in the market last year, knowledge and a credit memo one that would actually help create credit memos, which is something you need to do to facilitate a commercial loan, automating that. And at our Insight conference 2 weeks ago, we came out with 16 more. And in terms of some of our early adopters, we had a different top 4 bank up on stage talking about the efficiency gains that they're already seeing with Banking Advisor, and that was before we came out with the 16 new capabilities. So we're really excited about that. We price that where you pay us a reasonable fee to get access to the technology and then it's on a consumption basis, right? So you'll get a minimal amount of consumption that you can use. And as you go over that consumption, we have opportunities for upside. We'll see how that trends throughout the year. We don't have any of that in our plans for this year from a modeling or guidance perspective, but we think that can be a great growth lever for nCino for years to come. The second is Agentic, right, and wrapping agents around what we do. And again, there, I think we're uniquely positioned. But because we've built the workflow for banks now for about 13 years, we know exactly how they operate. And so we know where to focus the agents to help automate more tasks, to make the software that's already made them efficient, even exponentially more efficient. And so I think Agentic going to be exciting for us. We have some customers who -- large banks who've talked to us about codeveloping agents with us, and so that will be the second leg. And the third one is an iPaaS opportunity, integration as -- integration platform as a service. We acquired a company called Sandbox Banking in February. And it really is a middleware layer, where you can leverage APIs, where we've got hooks not only into nCino, but also into a whole bunch of other data points. As we think about accessing data, it really is a gateway to access data. And at the end of the day, AI is all about the data, and we think we have a unique data set.

Are your customers ready for AI? How do you think about that?

Yes, great question. I think, generally, there -- some are more ready than others. And again, to us, this is very much how we remember the march to the cloud. You've got some early adopters and then you're going to have some laggards. And really, it's incumbent upon us to help educate the market as we've been doing to help some of our customers who are some of those early adopters like the top 4 bank that I mentioned up on stage, have them tell the story and have them talk about why they're comfortable going on this journey within nCino and why nCino is the right one to take them on this journey. And so yes, to us, it's a very similar transformative opportunity. And so like I said, I think some are more ready than others, but it's inevitable. This is the path that we're going down. And again, I think we're kind of at the tip of the spear in terms of what we're doing, leading the march down this path.

Maybe switching gears a little bit, going back to ACV, the relationship with bookings there and the ACV waterfall. As I build models, I always get afraid of the waterfall term. And so walk me through why ACV bookings is the right metric here? And how does that play into revenue with that waterfall effect?

Yes. I think actually, as we've transitioned pricing from the seat base where the waterfall is very relevant, right, because people would buy seats or customers would buy seats and only so many would turn on initially. And over time, that waterfall, as you know, the others would turn on. With the new model, there actually isn't a waterfall, and you can -- there's opportunities to accelerate revenue quicker. And so again, you would take the term, you take the fees that are being paid, you straight line it and you'd start recognizing revenue sooner than I think historically than we did.

So over the next couple of years, we might see a bit of a -- I don't know transition is the right word, but tailing off of legacy waterfall into a more predictable platform consumption revenue model?

I think that's well said. And we're well down that journey as a lot of those seats have been activated over time. So we're -- I think we're nicely down that path. But yes, I think us, we had the waterfall model, which I think was very unique to nCino, not seats, but seats with delayed activation versus, again, this platform model, I think, much more familiar to you guys and investors.

Okay. Maybe in the last few minutes here, I want to talk about M&A strategy. You guys have bought some stuff over the years, a fair amount of stuff over the past year. And I know that in the last quarter or the quarter before, calling out a little bit of a -- taking a little bit more time on the integration and the customers we're waiting for. And so how do we think about -- I guess, 2-part question. How do we think about the M&A strategy going forward from here? And how do we think about the integrations that still need to go with the acquisitions that you have recently done?

Yes. So a little over a year, we did 4 acquisitions. I can tell you, we did not set out the year saying, "Hey, let's do 4 acquisitions." Frequently, these things come your way when you're not looking for them. But I think we feel great about the 4 deals that we did. We did comment that right now, we're in digestion mode. And so absent something kind of coming from left field that we just feel is incredibly compelling. From a capital allocation perspective, we announced our first stock buyback as a company, $100 million. In terms of how we're allocating capital, we actually used a little over $40 million up in the first quarter versus M&A. We're still always looking. I want to make sure we keep a pulse on the market, but we're very focused on, as you said, integrating those which I feel like we are substantially complete, including the onboarding one with DocFox, which we integrated that technology into the platform and really unveiled that integrated solution at our Insight user conference 2 weeks ago. Sandbox, which is a company we've worked with for years, we've already integrated into them, very familiar with the team, the most recent one. And so I think as we sit back right now, we'll continue to tweak and continue to find opportunities to leverage and make sure we're getting the return that we expect from those. But I think we feel real good about those assets. And as we take a step back and look at our product portfolio, I think we look -- we feel good about the breadth and depth of our product portfolio right now. So we have plenty of things to sell. We have this unified -- unique unified platform across business lines. And really, again, it's just about execution. And I think that's what you're going to hear from us in the coming quarters, is just about execution.

As you -- as execution continues, right -- good execution continues and maybe the ability to do M&A comes back for you guys or you're more open to it, would you ever go something big? Is that -- would that be ever in the cards for you guys? I mean, I think more or less the last 4 acquisitions have been more tuck-in. Would you go more or something more transformative, enter a new category or go something big to enter a new geographic region?

Yes. Tough to speculate on what that may look like. For us, everything we do, it's really focused around shareholder value and how do you maximize that. And so that's the driver -- that would be the driver if an opportunity presented itself. But again, as I said right now, I think we feel good about the assets. It's been a difficult couple of years for our market, particularly more on the larger bank side, where I think we have unique exposure versus some of the competitors that I mentioned earlier or referenced that are very much focused down marketing community banks. And so, no, I think we feel -- we kept our head down. We fulfilled this product vision -- Pierre's product vision, we fulfilled. And now it's just about going in deploying that as broadly as we can on a global basis.

Sure. Last question for you, Greg.

Yes.

Thank you for being here. Maybe kind of going back to that Rule of 40 target. And there is some time between that and then and lots of things could happen. Interest rates could go to 0 all of a sudden. We don't know, right? We don't know. And would there ever be a trigger in the market that would signal maybe we should grow faster, maybe we should invest more, maybe we should abandon free cash flow generation, non-GAAP operating -- income margin expansion for growth? Would that ever happen? And what sort of trigger would that look like?

So look, we always want to err on the side of growth. And again, making sure we fulfilled from an investment perspective, this product vision was important because that sets us up for years to come in our minds to grow. And so we will always err on the side of the growth. And I would much rather come to you and say, "Hey, we've had this opportunity. It's going to cost us this. Here's what we think the return is. We think this is the right thing for the business, if that's what makes sense for the long term value of the company and long-term interest of our shareholders." So speculating, but sure that could be. I think right now, we feel very good about our product portfolio and about our path to that Rule of 40.

Yes. Yes. That makes sense. Greg, we're out of time. Thank you so much for being here.

Pleasure.

We really appreciate it. Thank you.

Thanks everyone.