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

Good afternoon. My name is Brent Bracelin, Co-Head of Tech Research here at Piper Sandler. Thank you all for joining us this afternoon. The next fireside chat discussion here is going to be with nCino. We have Greg, the CFO. Welcome to Nashville.

It's great to be here. Always a pleasure to see you, Brent.

Absolutely, absolutely. So listen, if I think about and take a step back on nCino's business. This is a business that actually has tripled ARR since the July 2020 IPO. Growth has clearly slowed. Obviously, we've seen the media and SaaS software company growth rates now at about 13% this year. I'd be curious, putting on your hat what's art of possible, what would need to go right to double ARR again over the next 5, 6 years to $1 billion. What's -- as you think about the art of possible, walk me through that potential doubling.

So we are incredibly excited about our positioning to do that. And that $1 billion threshold across is something clearly we have and that we focus on, right? We're quite a competitive bunch. And so you have to have targets out there and goals to go ahead, and we certainly see that. And so I think the main thing that we need to do is just focus on execution. We've spent quite a bit of time putting together what I think is a very unique, broad and deep product portfolio. So I think we feel very good about where our products are. And then we've also spent time and energy and made investments from a presence perspective around the globe to make sure we're in locations where we see opportunities to grow. And so we clearly have had some headwinds from a market standpoint over the last couple of years going back to whether it's interest rates or liquidity crisis, and I think we find ourselves now in a pretty exciting time. Not only has our product portfolio matured, right? And we feel really good about each 1 of our products being best in market and our ability to land at a customer with any of them. And then bring the platform that we sell along. We're obviously at a technology inflection point with AI. And for us, we created this category called cloud banking. When we started the company, they said banks will never put their data in the cloud. Obviously, that's evolved. And I think we are uniquely positioned to be the worldwide leader in AI banking as well. And some of the excitement around the technology is very prevalent in our discussions, but I think also having discussions around AI and to your point, what is possible creates conversations that maybe otherwise wouldn't have an opportunity to see. And I think some of that's driving some of the activity we see in the pipeline on a global basis as we sit here a little more than halfway through the year.

The AI product road map seems like it's a very critical door-opener conversation starter, even if maybe the products aren't necessarily shipping but having that vision is super important. Let's double-click into a couple of the areas that we get questions on. Commercial. You guys have been a commercial juggernaut in the U.S., right, built that core commercial business. Maybe frame what's your market share kind of in the commercial space? What are the levers to grow and expand the commercial opportunity before we dive into the newer areas you're going after?

In commercial, again, I think we are clearly the leader on a global basis in commercial banking, is something we're very proud of. So I think there's a few things in terms of growth in market share. First off, it's about a $5 billion SAM. And so if you look at the size of the company for just commercial, we have plenty of runway. In the U.S., we've been very fortunate to have signed and gotten live and referenceable a nice number of customers, including 15 of the top 30 banks in the U.S. And so we see continued opportunities with those. If you look at our Q2 financial results, we actually announced 2 expansions with the 2 top 50 banks, specifically for commercial in the U.S. as well as a top 5 bank in Canada. So within each 1 of those logos, we see opportunity to expand just in that core commercial business, right? As well as, again, I think plenty of just greenfield opportunities we don't have all of those top 30, right? So there's opportunities there.

50% market share logos share...

Logos share, yes.

Of the top 30, I think Veeva talks about top 20 pharma companies, they've been able to get to over 80% market share. So as you think about the potential in commercial, is it a winner kind of take most opportunity. Do you think there is a longer-term path to get to an 80% plus market share.

We're certainly focused on doing that. I think 1 of the things that's very unique about our platform, if we're talking just specifically in the U.S. -- on a global basis, but U.S. right now. We're the only platform that's demonstrated an ability to scale. And so we serve community banks. And with that same platform, we scaled to Bank of America and Wells Fargo and a whole bunch of other quite large financial institutions in the U.S. And so I think our biggest competitor there is do nothing, right? And our job is to make sure that the value proposition is meaningful enough for them to actually prioritize coming with us. So we had a nice win in Q4, which was a nice top bank logo in the fourth quarter. And I think 1 of the things that we've seen is we've kind of gotten farther and farther away from the liquidity crisis, which did impact our top market because we saw -- that's where we saw most of the deals slowdown, headwinds. A lot of those banks were very internally focused, making sure from a regulatory standpoint, they were in good shape. As we get -- as we've gotten farther from that, we've seen activity pick up in the U.S.

Any sense your footprint. You talked about 2 big bank expansions this quarter. What's that footprint at the top 15 that you already have existing footprint at? Do you think there's an opportunity to increase revenue there by 50% just through footprint expansion? Or is it more like 20% more expansion and the real growth is going to come from new logos?

So I think if with new logos, there's still plenty of opportunity here, both again, upmarket as well as we go down into the regional and community bank space. So plenty of green space for us here in the States. If we think about new logos again outside of North America, I think you'll see a lot of new logo growth because, again, for us, that's a lot of brand-new opportunity for us. Spain, for example, is a new company -- a new country that we entered into it's our first logo there in the second quarter and so new logos again as we move more aggressively outside of the U.S., I think you'll see that. Within our customer base, we're doing 2 things. One is because we have a platform, we're trying to go across the bank. So leverage our commercial stronghold, right, and go to small business, go to consumer, go to mortgage. But within the commercial bank, whether it's onboarding, which is a newer offering for us or banking adviser, or AI strategy and skills, being able to bring that to what is a very happy customer base overall.

Got it. So incremental opportunities across those new products into that existing installed base, probably the biggest lever outside of new logo growth. Let's shift gears to that retail consumer mortgage, that feels more net new, big cross-sell potential, what your market share there? You have 50% of the top 15 in commercial, what's your share in that retail consumer mortgage space?

And we do have a $200 billion bank on consumer. That was actually our land. Our friends at First Citizens, who at our Investor Day back in May, were up on stage talking about -- that was our first enterprise for consumer.

So 1 of the 15 now is consumer.

And it was a land. So that was our first product with them, which I think is important as you think about cross-selling as you think about cross-selling. But from a -- if you think about consumer and mortgage together, it's about a $10 billion SAM for us. And so it is very early, right? And we've been focused on maturing our consumer product. I think we've been very transparent about it taking us longer to get to a best in market product as we wanted to. But I think we've also highlighted the fact that we think we're there. And I think that's evidenced by -- in Q4, we had over 20 consumer lending wins last year including 2 over $50 billion in assets. So again, I think we feel like we have, again, another best-of-market product that we can land at and/or cross-sell into our customer base.

Is there a value prop, if I'm a bank to do both commercial and all of my mortgage, all of my retail, all my SMB on 1 operating system, essentially Cloud Bank.

I think that's 1 of the differentiators for us is that platform and being able to standardize...

The cost benefit to the bank.

There's a huge cost benefit, there's an efficiency benefit just in terms of the ability to use the software. But I think as important as those, it provides the bank with 1 single 360-degree view of their end customer. And so no matter how you interact with the bank, they know who you are, they'll have your data, they can treat you like they should treat their customers. Historically, financial institutions purchased software by business line. So the commercial part of the bank would have their own tech stack, the consumer, the mortgage, you could be a great commercial customer of a bank, you may go in on the weekend to get a car loan, and they wouldn't have any idea who you are, right, different system, right? Instead, under us, we have all your data, right? We can link it to you as that end user and ultimately make that car buying experience, in my example, a very positive one. And you'll leave there with that experience that you expect now just like if you're doing Amazon, right?

5 years into the IPO first big top 1 customer that's leaned into both commercial and consumer, is it changing? Is the appetite like compare contrast appetite to do both consumer and retail and consumer changing? And if so, why? Why now? Or is it still slow? These are banks.

They are banks, which, again, is a great customer base to have. They do move slow. But again, ultimately, you're there. And I think them looking to us, which again is one of the reasons why we're so excited about AI. Looking for us to take them on the journey, right? And whether it's AI or just one of our products we can move as quickly as they want. Or again, to the extent folks want to kind of crawl, walk, run, we can take them on that journey as well. And so we see the platform resonate on a global basis. I think historically, we've seen it resonating primarily in the community bank, credit union and up to the regional bank market. Larger banks, again, historically have still purchased more in silos. But again, you see opportunities to cross-sell. You see opportunities to leverage the relationship and the success that you've had in 1 part of the bank. And we see opportunities for some of those larger banks to have multiple nCino applications.

As you think about lots of opportunity, lots of runway to grow, but there is some threats. There are some challenges. In 1 case, I feel with AI while it's a great opportunity, there are opportunities for these big banks that have lots of personnel and lots of IT staff to build custom, build their own, leverage their own data, build their own bank software alternative. What do you see there? Have you seen some experimentation on the bank side that trying to do something custom and then coming back to you saying that was just too hard or walk me through how viable and how big a threat is just a custom alternative to nCino.

So if I go back, I have been selling software to banks for 25 years. And when I started, a lot of banks did their own build, right. Back then, it was on-premise stuff, right? Fast forward today, and there's really a small number of banks who have the resources, both from a capital perspective and maybe as importantly, if not more, from a people perspective, right, to build, right? If you think about the kind of war for talent, right. It's tough to compete against some of these software companies if you're a bank to get the best and the brightest help drive. And so if you take a step back and look at the customer base, I think community banks, credit unions, up to a certain size regional bank, very much are going to outsource that, right, just as we've seen with their cloud operations to date. And again, look for nCino, we would expect to help educate them and take them on that journey, like I said, at a pace that they're comfortable going. As you look up market, there's a little bit more, I'd say, optionality that we want to make sure that we facilitate. We've had very healthy conversations with customers around codeveloping agents, for example. But I think what's really important for us to do, and it's still early, right? It's still early in terms of some of the adoption is making sure they understand what our road map is, where we're focused on, whether it's leveraging banking adviser and our GenAI capabilities or where we're building agents. So they can see that. It allows them to go focus maybe on other things, right? And ultimately leverage our agents. But if they want to build some of their own agents, we can work with them around that as well. And again, that gets back to the data that we have that may be again we're able to provide access to our customers, which I think is pretty unique.

You mentioned banking adviser a couple of times when you're talking about AI. Well maybe just for this audience, what is banking adviser? What does it do? And like what's resonating most? You mentioned on the last call actually opening doors with banking adviser winning some business because of the road map around banking adviser, but let's step back. What is it and what's resonating with some customers.

Yes. So maybe to take a step back before. If you think about where we focus in the financial institution. We focus historically on the middle and back office. That's where all the processes are, right, the automation. And so if you think about AI and what AI does, it's just ripe, right, to help further automate what we've already automated by going to the cloud, right? This is just a newer technology to help continue that evolution of the software. And so if we think about our AI strategy, there's 3 pillars. Banking adviser being the first one, which is really our generative AI strategy. And think about us automating various tasks. A couple of examples is we've got data validation. So if you're trying to look through and process a mortgage application, you make sure all the data is there, make sure it's all right. We can automate that. Generally, those things take 20 to 30 minutes a piece without automation. So we can significantly accelerate that, right? Credit memo narrative is one that I think we've -- it's resonated quite well. If you've ever done a commercial loan, you need to put a credit memo together. You need to walk through the opportunity, the industry, the company, the financials and ultimately. It's all manually done. It takes time, right? Credit memo narratives automates that instead of spending maybe hours putting that together. It does it seconds, minutes, and then you can just spend a little bit of time checking it, making sure it's right and going. So think about how quickly you can accelerate a loan decision, right? And how quickly you can get back to your customer and let them know if they were approved and for how much.

I can see how the bank loan officer would want that, but is the bank willing to spend on that?

Again, it comes with nCino. And as you use banking adviser, there's a usage opportunity for us, right? The more you use it, right, you get credits and you'll go through those credits. But yes, it does because ultimately, what we're doing with banking adviser, we have an operational analytics dashboard. And as we drive efficiency, we present that back to the customer. So they see the efficiency gains that they're getting and they can take that information and extrapolate it to their P&L and truly see the savings that they're getting, right, which will allow them to make decisions about do we need to hire more, do I need less. Do I want to take -- have 2 people don't want to go put 1 person and have them more focus on business building business outside of the office, while this person can handle all of the back-office tasks, if you will. So I think it's exciting. We had 2 skills last year. We came out with 16 more this year in May. But ultimately, over time, that's just how the software will evolve. And imagine down the road, we'll stop talking about banking adviser and it will just kind of be part of the software.

Part of the software, part of the automation spend. Yes, it feels like people don't necessarily buy AI, they buy a solution and they buy automation so interesting. Walk me through this business model change. We have a lot of discussion around SaaS pricing changes, right? And this move away from seats and maybe walk through how the product was historically priced, what the new platform pricing is going to be and where we're at on that journey.

So we saw -- going back now a couple of years, actually, that the software we were providing, we're making our customers more efficient, which is great, right? They're happy, we're getting the outcomes that they want, and we're doing our job.

Automation software works.

Right. The challenge from our perspective is the more efficient we make them, the less seats that they need, and we had a seat-based model, right? And that particularly, I think, came to us because commercial was much more high touch, low volume. So that seat thing wasn't as much of an issue. But as we went into consumer, we see it it's much more low touch and high volume. And so we saw the opportunity to automate the way all seats and all human intervention, again, subject to the financial institutions comfort levels with risk. And we said, we're going to -- seat model won't work, right? So we spent a lot of time over the last couple of years evolving our model away from seats. Our new model, which formerly went into effect on Feb 1 even though we've been testing it for quite some time. So we've had plenty of it -- is an asset-based model. And so you're going to pay us based on your assets. And then every year, we go back and calculate the assets that you have on nCino. And to the extent that your asset growth has gone from 1 tier -- they are bands, I should say, 1 band to another. The next year, you're going to pay us under the new band.

Okay. And the umbrella there would be, if you're only doing commercial, that's just the commercial assets they have.

That's right, on nCino.

If you layer in retail, it's a whole new revenue opportunity.

That's exactly right. That's exactly right. And so for our customers, I think they purchased software frequently. A lot of the core is priced that way. So that asset-based model wasn't new to them. And I think for us, getting away from seats, how many seats do you need and our contracts are 4 years on average. And so for someone to predict how many seats they need 3 years from now, actually is a little bit more complicated than it may sound in terms of...

In terms of 4-year contracts on average, you just started in February. So think about this as a 4-year transition kind of.

That's right. That's what it should be. We're actually...

And it changes upon renewal.

Yes. And so we're about 21% of the way through. About 1/3 of that is mortgage, so about 14% on the non-mortgage base of our ACV. And yes, in theory, you'd have 25% each year. it gets a little fluid because when someone comes back to buy a new product, we would use that as an opportunity to pivot. And then Sean mentioned this on our earnings call a couple of weeks ago, the AI discussion because in order to use our AI capabilities, you need to be on the new model. And we've actually seen that as an accelerator of certain conversations.

So early renewal to the new pricing if they want to have some AI capabilities. Could that speed things up twice as fast to have move things over or it's hard to say.

It's hard to say, but I think we do view that as a catalyst to accelerate it. And so yes, our focus is moving them as quickly as we can. And when we see an opportunity, whether it's through a new product purchase or an for banking adviser or AI stuff to do that.

Early days. But once you get a customer on asset-based platform fees, does it reduce the procurement barrier to expand? Or would it have to still go through a whole new procurement process to add consumer or add mortgage.

It's going to depend on the bank and their procurement processes. But generally, the great thing is you have a contract in place. And so adding a new product, it's -- it should be a much more streamlined process because the framework is there. And so generally, you have a little amendment with a new product and those we can do very quickly.

Sure. Yes. Let's spend time on the growth algorithm as you think about this business, and maybe over a 2- or 3-year period, lots of opportunity in consumer. You have opportunities still in your core commercial product. You have this whole banking adviser, AI opportunity. You get opportunity around the change to asset-based pricing. Yes. Three years from now, out of possible. Is there a path to get this back to a 15%, 20% kind of grower? Or do you think the banking world you live in it's regulated, they move slow mid-teens growth is probably the right way to think about your business?

So I will not look that far into the future. As we've evolved our guidance philosophy this year and want to make sure we stay -- you see me smiling, we don't get ahead of our skis. But look, I said on our Investor Day in May, in September of 2023, we put out a rule of 50 framework. And we said that was 35% non-GAAP operating margin. And I reiterated that we felt confident and maybe even more confident in that in light of some of the efficiency opportunities we were seeing with AI, even going back several months ago.

So that's a Veeva-like model then. You're talking mid-teens kind of growth with a 35-plus percent up margin model to get to rule of 50.

Right. So as we said, we believe that framework is still intact from when we first set it. That said, again, in light of our revised guidance philosophy, we also said we're not going to talk about the long-term growth algorithm. First, we're going to focus on rule 40, before we talk about rule 50. And we said around the fourth quarter of next year, we would be a rule of 40 company. We did not make an assumption around what the components would be, but hopefully, we've been consistent in terms of the market opportunity. We think we have the early stages now I think we're at a new inflection point with AI and an opportunity to truly ride that wave and lead that wave on a global basis. And so we do want to err on the side of growth and we would certainly love to see growth drive as much of that rule of 40 as possible. But again, we made the commitment around the fourth quarter of next year of getting there one way or the other.

Fair. One last question for me. Any from the audience here before I ask my last question. Great. So I'd like to think about future facts, right? I think Jimmy Dimon talks about leaders focus too much on what's happened in the past. I don't spend enough time thinking about what could happen. And so thinking out a year from now, what's that trend or a product or something in your business that you think investors would be really excited about there, they're not really talking about today.

I'm not really talking about today. There's probably a couple of things I would highlight. In fact, I'd probably put it under the 5 growth initiatives that we laid out at our Investor Day. So AI, obviously, being a big part of that. And in terms of not talking about, I think, maybe the data asset that we have in terms of the data from our customers that we have, and we've got rights to use under various circumstances as well as in that process data, right, where we truly understand how the bank operates and how we can make them better, right? So I think that, I think, hopefully, that appreciation comes out more and more as we help folks understand that better, right? So that's something we're focused on doing. But AI. The second thing that we've talked about is the credit union space. As our consumer lending product matured, we formed a credit union team is such a big part of credit unions is consumer lending and we see a nice opportunity there. And I think that platform story resonates where consumer, small business, mortgage, commercial standardizing on that platform, we think there's an opportunity there. And again, landing anywhere, right? And so if someone doesn't want to change consumer right now, we can start with small business. We can pull consumer in later, pull mortgage in, et cetera. So I think we're excited about that. International.

It's been a big push for the last couple of years, still untapped.

Still untapped. We think there's opportunities that from an execution perspective that we have made some changes for us to go focus better, particularly in EMEA on the continent. So again, we brought in a new leader, built that team around them. So far, we are very pleased with what we've seen. And so we're excited about that as well as Japan. I think you've heard us talk about Japan for a while. Great geo, I think, opportunity for us. It moves at a pace that it moves. So never as quickly as I want. But again, we see a lot of opportunities. So international would be the third piece. And then the final 2 would be mortgage. Our mortgage business as challenging as that market's been has grown every year that we've owned it, which I think is exceptional, including growing 22% year-over-year last quarter. And so that cross-sell motion into the depositories and into our customer base in addition to continuing to focus on the IMB space, I think, is an opportunity, particularly upmarket. A lot of our best customers when they made their mortgage buying decisions, we did not have a mortgage solution, right? We do now. And we've invested to make sure that from a scalability standpoint, we've got all the boxes checked. And so we're excited about that. And then the final one is onboarding. We made some strategic acquisitions over the last little over a year with DocFox and then FullCircl in November. And we think onboarding is a global opportunity for us, particularly as we think about the commercial lending and kind of close off where we started the opportunity in commercial, the onboarding of complex commercial customers we think we have a unique offering where it's on an integrated basis so you can onboard a customer and go immediately into doing a loan or opening an account. And we think that is a unique functionality in the market.

Well, great. We're out of time. Thank you so much for sharing insights here. Thank you.

Always a pleasure.