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

All right. Good morning, everyone. My name is Alex Sklar. I'm one of the application software analysts here at Raymond James. Very pleased to have nCino with us again this year. We've got Greg Orenstein, Chief Financial Officer. We also have Katie summing in the audience, who is the VP of FP&A, if you have any questions after. We're going to do a fireside chat. If there's time at the end, I'll open up to the audience for questions. But Greg, thanks for joining us.

Always good to see you, Alex.

So maybe just to get us started, background on nCino. How do you serve financial institutions? What are the key value propositions of the nCino platform?

We focus on 4 main things, right? Lending, any type of lending, whether it's commercial, consumer, small business or mortgage; account opening; onboarding of customers; and then portfolio monitoring. And we do that all on a platform, a single unique platform across the financial institution. Same platform serves community banks here in the U.S. all the way up to Bank of America and Wells Fargo, which we're pleased to have as customers. Same one travels internationally, folks like Barclays in the U.K., Macquarie in Australia. Approximately 21% of our revenues -- subscription revenues last quarter were outside of the United States. And so we're able to grow with the financial institution throughout their life cycle. And the other thing that we do with that is we leverage the data that we have to inject AI, of course, obviously, top of mind as well as to inject information to help financial institutions make better decisions when they need to make them. And so that's what we focus on doing.

Yes. We'll definitely hit on some of that, especially the AI here. But you just reported third quarter results last week. Very nice results. In terms of the amount of upside, it was, I think, a little bit higher than prior quarters, really nice beat on the profitability side. What were the key kind of takeaways from your seat in terms of the quarter? Anything you thought was maybe underappreciated?

Yes. So it was a solid quarter. Really pleased with the team for focused execution. Another beat and raise quarter. I'll call out our 600 basis points year-over-year and quarter-over-quarter increase in operating margin as something to highlight as well. Our U.S. Mortgage business, if you exclude the tough comp from last year, grew over 20% again for the second quarter in a row. And then I'd also say, if you exclude U.S. Mortgage in the U.S., our organic subscription revenue growth accelerated 200 basis points to 9%. So pleased with the overall performance and just also just with the overall momentum. In terms of underappreciation, Alex, to me, I think it does get back to the AI story. We announced over 110 banking adviser customers. That's our AI family that we've come out with. And as I sit and think about just the beginning of the company, I think it took us about 5 years to get to 100 customers. And most of those 110 have happened this calendar year. And so I think we've got a lot of momentum there, and I think we are uniquely positioned to be the worldwide leader in AI banking.

Yes. Maybe we jump ahead and we go into AI right from that. But I think I had some conversations coming out of the quarter, effectively the proof points of the amount of adoption on your AI tier at 110 with kind of getting early renewals to get there. What's kind of -- what is it that people are getting value out of now? Or what is it they're testing to see what kind of value they could get out within your kind of AI suite? Any solutions that are moving the needle? And then talk about what that actually means financially in terms of uplifts from adopting Banking adviser or what the usage component can mean for the model?

Yes. Over time -- look, over time, we expect our whole software to evolve to be AI, right? People say, what's your AI revenue? Over time, it's all going to be AI revenue, right? But we have -- from a capability perspective, we've come out with -- we started last year, we had 2, what we call banking adviser capabilities. We increased that by 16 at our user conference in May, and we said that exiting the year, we expect to have over 100. And so a tremendous amount of innovation from our R&D team. And it's various things. It can be simple in terms of just chat communications, right, your basic stuff, locate and file, which can automate finding, recovering and filing away stuff to save time to more substantive things like continuous credit monitoring, right? You go home, you get a sleep, you wake up through our AI technology, wake up in the morning and you get to work. And you can actually have red flags highlighted for you because of potential concerns with some of the loans in your portfolio. So tremendous value add we're bringing. And the other thing that we're doing with that, Alex, is through our operations analytics functionality. We actually have a dashboard that we present to our customers so they can see the efficiency gains that they're getting with our technology and certainly be able to extrapolate that in terms of value for them using nCino.

Is that seeing how fast they can generate and fund a loan? Is that -- what are some of the things that people are tracking in terms of the efficiency side on getting value out of it?

Great example. And that's something we've always done, right? We're in the business of making our customers more efficient. AI now is just a new technology to help accelerate that and take that to even the next level. And so yes, so it's things like that. And Sean talked about on our earnings call last week, customers taking loan approval times from 23 days down to 2 days, right? And so that's always the business that we've been in. And for us, like I said, this is just a new technology to help make the efficiency even more efficient, if you will. And the other thing I think about AI that we highlighted, of course, there is a revenue impact in terms of using the AI itself and what we call intelligence credits that get used up through capabilities being addressed. But also, we've seen it accelerate sales, right, for folks who bought into our strategy as well as accelerate renewals. And so what we see in the marketplace is customers who are looking to nCino to help them on this AI journey. And for us, it's somewhat of a -- it reminds us of when we started the business, when there was no such thing as cloud banking, and we created this category called cloud banking where banks looked at us to take them on that cloud journey.

And when you look at kind of your portfolio of AI skills today, talk about like what can't be replicated. So you have 110 customers. That means they're opted into sharing their own data. I don't know maybe it's the data aspect of it, maybe it's embedding into the workflows that they're already doing process-wise. What is it that you think you bring from a vertical specific that can't be replicated?

First off, it's the deep banking knowledge that we've got, right, that's in the DNA of the company. It's the fact that we've got hundreds and hundreds of customers where we understand as well as anyone in the world, we have a very unique view of how banks should operate, right? And historically, customers, we've been able to point to them and say, "Hey, stage 3 of your commercial loan, it's taking you x amount of time, where it's taking the bank down the street a significantly less amount of time. Let's work with you to revisit that stage so you can be more efficient." Now we're using that same type of discussion to have those conversations, but also know in terms as we prioritize where to build agents. Let's have the agents go do some of that work that may have been slowing down the process, right? Because at the end of the day, what the customer cares about is, "Am I approved and how quickly am I going to get the money." And so it's just a continuation from our standpoint of the business that we've been in since we started the company.

Got it. So maybe switching gears, new KPI this year, pretty top on all the quarterly calls is around ACV growth. And I think the messaging this year is kind of -- the target is to kind of accelerate ACV versus where it's been in the last couple of years. You've got, I think, a target for 8% to 9-ish percent growth. How do you feel about the progress to that year-to-date?

Yes. That is a new KPI. As you noted, we came out with it on our Q4 call in April. And we said it was an annual metric. It's the first time we're going through it. So we've talked about while we haven't quantitatively updated it throughout the year, which was the expectation that we gave, I'd say after our second quarter call, we talked about our confidence in meeting or exceeding that number. And then on this call as well, talked about the fact that we felt like we were very well positioned relative to that, while acknowledging, yes, we have to go finish out the year. But overall, I think we felt better incrementally after Q2 than Q1 and then incrementally better after Q3 than we did Q2. So...

Definitely had some inbounds trying to diagnose the word choice of exceptionally well positioned versus kind of well positioned to meet or exceed. It clearly seemed like an uptick from our end?

Yes, we are feeling incrementally better. And yes, we're a choice, we appreciate what matters. And we were trying to provide some context for people in light of the fact that, hopefully, they appreciated that we were not going to update that throughout the year, certainly not the first year of having a new metric for us.

So Q4 historically is kind of your biggest bookings quarter, assume no different this year. But what are some of the big swing factors kind of investors should be aware of, whether it's timing of renewals, whether it's kind of broader demand environment? What else are you kind of watching from your seat as you kind of progress towards those targets and specifically kind of going into this Q4 selling season?

Yes. I think it's just execution. I think we feel good about the business that's out there. I think we feel good about the sales activity, as I commented on the call. And so it's just heads down execution. And I will contrast this. If I go back 2 years ago, I think that it's a better market for us. Our customer base is generally healthy, right, healthy balance sheets. AI is a catalyst for discussions with every customer and prospect, right? So I think that increases the interactions as well, which leads to opportunities. And so -- and I think also, we're seeing just deals -- just overall from a pure geographic perspective, we're just seeing better deals in terms of size, right? That was certainly something that we saw post Silicon Valley Bank and liquidity crisis, some of those larger deals that we've historically been used to getting kind of dry up specifically with the enterprise banks here in the U.S. And on a global basis, we've seen some of that come back, which I think positions us well. And like I said, then it just comes down to we just got to finish the game to finish the quarter.

So on the execution front, go-to-market, there's been some changes in Europe. New Head of Sales has been in place for a little over a year now. Sean, as CEO has been in place, I don't know, a few quarters now. What's kind of been the big changes on the go-to-market side? What kind of in your seat do you feel better about incrementally in terms of the team actually executing here exiting this year and for kind of the years to come?

Yes. So the consistent constant drumbeat from Sean is focus and accountability. And I think that everyone appreciates that throughout the organization. We have, as we've -- over the last year or 2, as we've looked at our sales organization and the opportunities that we see, we've appreciated the fact that we started as a one-product company, right, specifically in the U.S., we went international, and that was commercial lending. And I think we had early success having former commercial lenders come in and sell for us, right, because they could talk to their former peers across the table and say, I know exactly the problems that you have and nCino is here to solve them. We still have that in the company, which is great and very useful. But over time, we've evolved to a global enterprise sales company. And we've appreciated that it helps to insert some different DNA into the sales organization to balance some of that kind of banker sales. And so that's what we've done, and we've been focused around that. And we've got, I think, a great sales organization, again, very focused. It's -- again, it's a better environment for them, right, kind of slogging it out 2023 into 2024 post liquidity crisis. And so everyone's heads down looking to finish the year strong.

So better operating environment, getting a little bit better productivity, it sounds like as well. You did hire quantity-wise, I think you talked about double-digit kind of growth in sales capacity. What's been kind of the growth you've seen from -- are those folks productive yet? What have you seen in terms of growth from that kind of new cohort?

Yes. As we came into this year, we were investing in sales and marketing. And again, I think that's a reflection around the opportunity we're seeing and the improved macro. I think if you go back 24 months ago, you could have thrown as many salespeople out in the market as possible, but just the environment wasn't there as a lot of banks were internally focused, making sure they weren't going to be subject to regulatory scrutiny post SVB. And so yes, I think we've -- Europe, here in the States. We continue to be very bullish about our opportunity in Japan. And so continue to make sure we've got the right number of folks on the ground. We also stood up a credit union team to specifically focus on credit unions here in the U.S. And so that was an expanded go-to-market motion as well.

You have good international coverage already. Is there still more room kind of on sales capacity as you think about going into next year? Is that something that's still talked about in the executive team?

Yes. I think overall, we feel good about our headcount. But yes, we will continue to look for opportunities to add sales capacity where we think the market is receptive to it and warrants it. I mentioned Japan, that's a perfect example of where I could see additional headcount and then continuing to build out as we get more and more aggressive on the continent in Europe, continue to build out our sales force -- our sales force there.

So you've got the team on the ground you need. It sounds like there's some pockets maybe of opportunity. But one of the things that I think has been particularly exciting for the stock this year is the incremental margins have really stepped up. And so you've done this kind of potential reacceleration in growth with some leverage. What's kind of the outlook on the margin side? Where are some of these efficiencies coming from? How much is still to come as you think about maybe framing it as part of your Rule of 40 target that's out there for the end of next year?

Yes. So we went through the difficult process of having a reduction in force in late May, something we thought through, and again, always difficult to do. But as Sean says, let's start with the folks who do the work and work backwards from there in terms of who we need and let's make sure we don't have managers, managing managers, managing managers. And so it really was an effort to streamline the organization and to be more efficient, and frankly, just to make everyone's day easier to get their work done. And so you did see, like I said, a 600 basis point increase year-over-year and quarter-over-quarter in margin. Hopefully, that gives folks confidence in terms of our ability to manage that bottom line towards that Rule of 40 target around the fourth quarter of next year. And then it gets back to the growth. We definitely want as much of that Rule of 40 driven by subscription revenue growth as we can. We've got 5 growth initiatives we came out this year that we've been trying to update as the year progressed in terms of the progress that we made. We talked on the call about each one of those being accretive either to ACV or to our pipeline, right? Some of them are just a little bit -- take a little bit longer. And as we go into next year, I would expect not only to continue those, but to add another initiative or 2, again, continue to sprinkle these growth seeds. We sit and see ourselves with a $20 billion SAM, and we're just shy of $600 million this year in revenue in our last guidance. And so there's plenty of opportunity for growth.

Why don't we kind of hit on some of those growth vectors? We talked about AI already. So maybe I'll start with mortgage. I think it's 15-ish percent of revenue. It's starting to get accretive to growth again after what's been a tough few years just given interest rate environment. What are you seeing on kind of the gross new booking opportunity side and as far as that driving some of the reacceleration this year versus what's been just a more stable volume environment?

So we're in the lending business. We didn't have a mortgage solution, and we went and bought what we believed. And I think time has reinforced as the best solution out there. Despite the headwinds in the mortgage market, that business has grown every year that we've owned it, which to me is incredibly impressive in an incredibly difficult market. And then again, when you think about the last 2 quarters, removing the tough comp from Q3, over 20% growth. And so we are incredibly excited about that. It's a great product. We've been able to leverage that technology beyond mortgage in our organization. And as I think about the U.S. mortgage market right now, clearly, there's optimism around interest rates coming down and ultimately reduction in interest rates translating to a reduction in mortgage rates, right? But right now, it feels like the market is generally stable. And for us, building from here, we are -- we think it's a great baseline. Churn has dropped significantly and has fallen into our hopes and kind of aligning towards historic numbers. And so I think that bodes well. And I think one of the things that we're really proud of is the team did a fantastic job during some of those challenged times, getting market share and taking logos. And we've seen some of that with some of those new logos coming on board. You sign them, you got to implement them, you got to get them live and then you got to roll the software out throughout the organization and then you need the loans to start coming through the platform. And I think that's been some of the, call it, overperformance we've seen is from some of those great logos that we were able to add. And so overall, we feel good about it. It's, again, great product, great gross margins. And the headwind that we navigated, to think that there may be a tailwind out there is exciting for us.

Do you feel like your overall visibility is kind of significantly improved given some of those headwinds have gone away? Like are customers kind of operating at a consistent level when you look at the apples-to-apples amount of volume coming through that might change or how you kind of think about providing an outlook in that sector, which has a little bit more volatility? Or it's kind of the thought process is we're happy with how we've been approaching on an external standpoint and probably keep more of the same there?

Yes. Right now, I think -- look, what we -- so last year, we made some assumptions and we ended up -- it ended up biting us, right? And I think we decided that if all the folks who predict mortgage volumes can't get it right, why do we think we know better. And let's just be very transparent about the numbers. And so we took a conservative approach and again, have been highlighting in detail the overperformance so people can see it and make their own assumptions. That approach and the feedback we have gotten this year has been incredibly well received. Will we change that going into next year? That's something we'll talk about as we prepare for our Q4 call and the setup for next year. But I think it has been very well received this year.

Okay. You talked about one of the things, the other benefits you got from mortgage is you were able to bring that front end that you acquired from SimpleNexus and bring it to other parts of the organization. So on the consumer non-mortgage part of the business, what kind of unlock have you seen since you kind of fully stood up and launched kind of the new front end for that solution?

Yes, it really helps from a sales cycle because, again, the cross-sell motion between consumer and mortgage, if the end user has the same experience, it just makes sense, right? And that's very consistent with our single platform approach that we've taken, get out of all these different silos that organizations have grown up where maybe the commercial business line would have their own tech stack, the consumer line would have their own tech stack, mortgage their own, et cetera, and be able to have the organization have one 360-degree view of the end user wherever they interact with the institution. So yes, it resonates and we expect continues to drive some of that cross-sell motion. We did comment on the call, a mortgage user, I think, a $5.5 billion institution that started with mortgage and indirect lending with us, expanded to commercial and consumer. And that, again, uniform user experience, standardizing on one platform, I think, really resonates for an institution.

It's still newer. Do you think that's an opportunity down the road where you could actually see lands that include mortgage and consumer collectively at kind of the outset for a new customer? Is that something that you're seeing kind of bubble up in the pipeline at all?

Yes, that's certainly part of the go-to-market motion and one of our tools in the sales bag, if you will.

Yes. Okay. On international, it's one of the biggest pieces of the TAM. Obviously, a slightly different value prop in different geographies. But ultimately, you've got proof points in some of the major geos you're operating in. What kind of needs to happen from your seat to reinflect the international business to start being accretive to growth? I think this year, you called out the most recent quarter, mid-single-digit type growth. What's out there in terms of aggregate opportunity? And what kind of changes things from an inflection standpoint?

Yes. So in the third quarter, we had 3% growth internationally. And that's really a byproduct of the bookings from last year, which we've been transparent, were disappointing. Great team, great opportunity, but we made some changes and particularly around the sales organization. And we do have a tough comp in Q4 that I'll call out internationally, but we would expect executing on our plan this year that, that will drive accretive growth next year. And so in terms of overall SAM, it is about half of our SAM. We see great opportunity in various geos. Japan, we've called out. But on the continent, EMEA, including also just our UKI business, which is where we kind of started and had early success. We did make an acquisition, the FullCircl, a little over a year ago, and that's to help drive the onboarding opportunity and experience. And we see broader application of that and the ability to take that on the continent as well. And so yes, heads down, let's finish the year strong, execute on our plan. And if we do that, then it should lead to accretive growth next year.

And when you talk about accretive growth for next year, is that the kind of reported subscription growth? Or is that how you think about future kind of bookings for that region?

Well, ultimately, the bookings from this year translating into accretive subscription revenue growth for next year.

Yes. So one of the other new things kind of that you started this year is the platform pricing model shift. So moving from what historically on the commercial side of the business has been a seat-based model to more of an asset-based pricing model. Can you talk about kind of the drivers behind that, the progress to date, what it actually means for the financials as you've gone through that progress?

An important transition for us. It's something that we started talking about now a couple of years ago. With the efficiency gains we were bringing our customer, we saw that they're going to need less seats, right? And that's not a good business model, Alex. And so a lot of time spent thinking through what the right model was and ultimately transitioning to an asset-based pricing model is where we ended up. We did some testing if we go back last year in terms of getting feedback from our wonderful customer base and ultimately kind of locked it down into the year as we came into this year. And so as we -- through the third quarter, we've now transitioned 27% of our customers to platform pricing. About 1/4 of that is mortgage. Our biggest renewal customer quarter is the fourth quarter just based on historic sales activity. But we feel really good about that. And it really, I think, aligns us from a value standpoint with our customers. As their assets grow, we get a little piece of that based on the efficiency gains that we're bringing to them. And so the transition has gone very well so far. And we feel good about it. Customers get it. Some of the other vendors in the space, some of the cores, particularly, they price on an asset-based model, and so it's not new to them. And it gets us out of the seat game, right? And I think particularly with AI coming, from a timing perspective, I'd like to say well thought-out plan. Maybe sometimes it's good to be lucky as well or have some luck along with it. But I think it positions us really well as we ultimately do monetize AI with our customer base. We have said that we've been targeting about a 10% uplift on an apples-to-apples basis from a product standpoint. So far, we feel pleased with that. We do want to get through the fourth quarter before we kind of more definitively say, lock that into our model, not quite there yet. But so far, I feel good. And things have gone, I'd say, better than we would have expected or hoped. So I feel good about it.

Okay. Another future kind of growth tailwind bubbling up is your end market bank M&A, so the customer M&A. You gave a new stat on the quarter. I think you said over maybe a decade-long period, there's been 270 customer transactions and you were the winner effectively in 95% of those. So maybe just as bank M&A starts inflecting again, maybe talk about what that's kind of meant for the model historically. And especially under the new pricing model, could it actually be more of a driver going forward than it has in the past?

So under the new model, yes, because particularly if you have 2 nCino customers. When there's M&A done, I mean, you inherit 2 contracts and you end up working with your customer and bringing them together and working through the economics. But ultimately, you would think there would be less seats, right, because there would be some efficiency gains by bringing the 2 organizations together. With the asset-based model, it's based on assets. And M&A, that is a trigger point to go recalculate upon the closing of a deal to go recalculate the assets on the platform and have an opportunity to change the price accordingly. And so for us, yes, over 270 M&A deals in the U.S. for banks over the last 10 years that we saw our customers involved in. As you noted, go-forward platform, 95% of the time. I knew it was high, Alex. To me, I didn't appreciate it was that high. So great work by the nCino Research Institute to come up with that. But when I take a step back to me, it actually makes sense. If you think about our customers, generally forward thinking, cloud adopting. But again, I get back to we're the only platform that's ever demonstrated an ability to scale from a community bank all the way up to the largest banks in the world. So if you have any growth aspirations and you want to have a platform that you know you can grow on forever, from our perspective, we're the only one to do that with. And so to me, when you think about it from that perspective, it resonates why that would be such a large percentage versus if you had 2 small community banks who merged and maybe that wouldn't be such a focal point for them.

All right. More to come there. Maybe we'll open up to the audience if there's any questions. All right. So you've got -- you made several acquisitions over the last, I'll call it, 18 months. But as you've been integrating Sandbox and FullCircl and DocFox, how are you seeing those kind of start to impact kind of aggregate pipeline growth?

We feel good about those. We have talked with DocFox, the integration. I think we had hoped to get it done a little bit sooner, but it was complicated, and I think we feel good about where that is. And so we unveiled that at the end of May and then you go into your general 6- to 12-month sales cycles. And so we'd expect as we exit this year into the first half of next year to start seeing some bookings progress on DocFox. If you look at FullCircl, Sandbox and Allegro, the indirect lending, again, I think we feel good about those -- the time lines, the customer receptivity and the opportunity. Sandbox is a great example, which was the most recent one that we did. We talked about 2 deals that we were able to cross-sell into our base at nice uplifts. One was the first international deal for that technology at a Czech bank and then we also had another bank here in the U.S. And so additive. And again, I think we feel good about all 4 of those acquisitions. We do look forward to highlighting DocFox's success more as we get into next year. But we do think that onboarding opportunity is real and that every one of our commercial lending customers will want that -- what was the DocFox technology that we've now integrated. And really, from our perspective, competitively, it's unique. And so we're helping them understand how they can change the way that they onboard complex commercial customers in a much more automated fashion.

And maybe with the exception of FullCircl, which today is mostly U.K., Ireland, maybe going to Mainland Europe, but applicability across your entire installed base for the rest of those. Is that a fair way to think about it?

Yes, Allegro would be indirect lending in the U.S. The other 3 would be global applicability, just really timing. Yes.

Okay. Maybe just we're out of time here, so just to wrap up. But I don't know if this is coming out of the quarter or the year, but what do you think is still kind of the most underappreciated aspect of the nCino story? And what might change that as we kind of go into calendar '26?

Yes. Our hope is that folks have seen us very focused on execution and delivering solid results. As I think about what's underappreciated, I'd probably go back to where we started, which is our AI strategy. The conversations we're having with our customers every day around AI, what they're looking for, what they need, I think, is in stark contrast to what we're hearing from investors as they think about concerns in the marketplace. We think we are uniquely positioned with the trust that we have with our customers, the relationships that we've built, being in a highly regulated, historically very conservative vertical market with a data set that is unique to anybody. And so we see our customers looking to us to take them on this AI journey, and we're in a position to go at whatever speed they're comfortable going, right? Some may be more aggressive, some are going to be slower to adopt. And so I'm not sure people appreciate when you talk about over 110 customers in a year in terms of buying into that vision, and we go back, it took us 5 years with our flagship commercial lending process to get over 100 customers. To me, I don't know if people understand how uniquely positioned we are.

And still obviously very early days. There is more to come.

Still, very early. To come...

All right. Well, thanks, Greg, for joining us. Thanks, everyone, in the audience.

Appreciate it. Thanks, Alex.