nCino, Inc. (NASDAQ:NCNO) Q2 2024 Earnings Call Transcript

nCino, Inc. (NASDAQ:NCNO) Q2 2024 Earnings Call Transcript August 29, 2023

nCino, Inc. beats earnings expectations. Reported EPS is $0.09, expectations were $0.07.

Operator: Good day and thank you for standing by, and welcome to nCino Second Quarter Fiscal Year 2024 Financial Results Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would like to introduce your host for today’s call, Harrison Masters, Director of Investor Relations. Please go ahead.

Harrison Masters: Good afternoon and welcome to nCino’s second quarter fiscal 2024 earnings call. With me on today’s call are Pierre Naude, nCino’s Chairman and Chief Executive Officer; Greg Orenstein, Chief Financial Officer; and Josh Glover, President and Chief Revenue Officer. During the course of this conference call, we will make forward-looking statements regarding trends, strategies, and the anticipated performance of our business. These forward-looking statements are based on management’s current views and expectations, entails certain assumptions made as of today’s date and are subject to various risks and uncertainties described in our SEC filings and other publicly available documents, the financial services industry, and global economic conditions.

nCino disclaims any obligation to update or revise any forward-looking statements. Further, on today’s call, we will also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. A reconciliation to comparable GAAP metrics can be found in today’s earnings release which is available on our website and as an exhibit to the Form 8-K furnished with the SEC just before this call, as well as the earnings presentation on our Investor Relations website at investor.ncino.com. With that, I will now turn the call over to Pierre.

Pierre Naude: Thank you, Harrison and thank you for joining us this afternoon to review our second quarter fiscal 2024 performance. We are very pleased with the results and the momentum we saw both throughout the quarter. Both total and subscription revenues increased 18%, while we again outperformed on profitability, posting a 10% non-GAAP operating income margin for the quarter. We saw strength in sales activity across all parts of our business. We said last quarter that we expected a recovery in the second quarter and we certainly saw that with second quarter sales up 22% year-over-year. Our solid results mirror what we are hearing from customers. The U.S. banking industry has largely stabilized with the liquidity crisis behind us.

Essentially, banks have caught their breath and most have refocused on their long-term strategy, which includes optimizing their technology infrastructure and providing a superior customer experience. The nCino platform was architected for just these purposes. It provides banks and credit unions of all sizes, a 360-degree view of the customer, allowing them to create a personalized, differentiated experience on a single platform. Leveraging this holistic view of the customer, nCino facilitates gathering deposits, originating any loan product, onboarding customers, and portfolio management all from one platform. In addition, our nIQ products such as commercial pricing and profitability, allow financial institutions to broaden their customer relationships, cross-sell, and optimize for profitability.

This of course ultimately enhances their ability to successfully compete in an evolving market by balancing risk and reward. With high interest rates still in effect, financial institutions are seeing pressure on net interest margins. The most effective way to offset margin compression, while maintaining credit quality is by driving greater efficiency. nCino’s platform was built to drive efficiency, while the automation at the core of the platform helps accelerate the industry’s move to increased self-service. Building out the capabilities of the platform has always been a key growth driver. With many of our new products now reaching maturity, we are pleased by the increased number of products utilized per customer. In fact, over 40% of Bank Operating System, new logo deals in the second quarter included more than one solution.

Another focus has been building out our footprint with current customers. This quarter, over 60% of sales were cross-sell and up-sell within the installed base. As we continue to expand the functionality of the platform, I can’t overstate the value of our satisfied and the referenceable installed customer base. We are also seeing this expanding footprint reflected in our sales pipeline. As of the end of the second quarter, more than 50% of the pipeline is for products other than commercial lending. Let me reiterate that point, retail, small business, treasury, mortgage, and nIQ, all of the products we have created to supplement our traditional commercial lending business now represent over 50% of sales opportunities in the pipeline. I cannot tell you how excited we are to reach this level of demand for nCinos’ technology beyond commercial lending.

As a reminder, the SAM outside of commercial is twice as large. So we have a significant opportunity ahead. At nCino we diversified beyond products in customers. We are also diversified geographically. This has been particularly important with the uneven macro recovery. For example, in the second quarter we saw solid demand in EMEA, and APAC, including adding another large ESG customer in this case, a U.K.-based global bank, while many of the challenges bankers face outside the U.S. are universal, our ability to develop products specific to the needs of respective regions has been a key differentiator. Switching to the U.S., and in particular our continued progress with the nCino mortgage suite. The integration of the nCino and SimpleNexus’ teams continues to accelerate our penetration of the banking channel.

This quarter, we saw seven cross-sells, in addition to six competitive takeaways. We also closed the number of large pipeline deals we noted last quarter, including a seven-figure upsell deal with a top 10 mortgage lender. We ended the second quarter with another strong pipeline of mortgage deals, as mortgage lenders understand the need to become more efficient in order to compete in this market. I couldn’t be prouder of the mortgage team for their continued revenue growth, again both year-over-year and quarter-over-quarter in this difficult and volatile mortgage market. I will let Josh provide additional details around U.S., mortgage. But first, I want to highlight our data capture and analytics capabilities are key differentiators for our mortgage offering.

When surfaced through our compensate and Nexus vision products. One upsell deal with a top 100 mortgage originated this quarter involved adding these analytics offerings to round out the mortgage suite from existing SimpleNexus point of sale customer. Increasing ACV by over 50% for that account. But this is just one area where our data analytics expertise is core to our product roadmap. Let me spend a minute reviewing our ongoing nIQ strategy around intelligence including AI, machine learning, and analytics. With our single platform, we process vast amounts of data, including customer onboarding, loan origination, account opening, and bank customer financial information and we continue to invest to further automate every stage of production across the platform.

As we’ve done with auto spreading, where we removed layers of manual work to accelerate the underwriting process for loans, we’ll continue to develop solutions to help bankers make faster, more informed decisions. Our team has deep domain expertise in banking and is hard at work developing thoughtful solutions to the most complex issues our customers face. Recent internal demonstrations highlighted numerous use cases, including interactive virtual assistance and automated portfolio reviews. With our philosophy of an open ecosystem enabled by our API strategy, we are also attracting an impressive group of partners that are augmenting their nCino customer experience. Together, we are developing thoughtful solutions powered by AI, data, and analytics, to automate an increasing number of workflows within our single platform allowing financial institutions to eliminate reliance on legacy point solutions and become more and more efficient.

We were pioneers, when bankers were reluctant to embrace the cloud. We prove that value proposition and today, cloud banking is considered the industry standard. Our original vision continues driving the evolution of financial services as we anticipated demand for AI and data when we launched our nIQ initiative over four years ago. It is exciting to see the industry embracing this technology as we continue on our journey to embed intelligence throughout our platform and change the financial services industry once more. To quote one of our customers, Ron Nix, CTO at VeraBank. What’s important for technology vendors, is not to evaluate your needs today. But to predict where you are going to be in five years. We know in five years, nCino is going to be at the forefront of lending and we’ll be right there with them.

VeraBank, a community bank headquartered in Henderson Texas, partnered with nCino to modernize its lending processes and streamline employee and customer experiences. The bank has taken a full platform approach, adopting deposit account opening, portfolio analytics, retail lending, and commercial lending, including order spreading. We see them as a textbook example of how nCino could be adopted, across an organization to drive operational efficiency and we appreciate the trust in our vision for where the industry is headed. The makeup of our sales pipeline proves that nCinos’ influence now extends far beyond commercial lending. With the continued expansion and maturity of our platform, we are poised to extend our market leadership to retail, small business, mortgage, data, analytics, and AI, matching our success in commercial loan origination.

Our progress and positioning reinforce our optimism for the second half of fiscal 2024 and the years to come. Now let me turn the call to Josh to provide specific examples of our solid execution in the second quarter.

Josh Glover: Thank you, Pierre. We’re very pleased with our second quarter results. In the United States, we saw customers coming back to the table with a renewed focus on digital transformation projects. One such example is an expansion within the top four U.S. bank, who added additional users for small business lending. This deal is a great example of the white space we see in even our largest accounts to add additional lines of business and to expand user bases within our existing footprint. We closed the retail lending add-on in conjunction with the merger of equals between two community banks. The combined bank will standardize in nCino for retail and commercial lending, their deployment will also include auto spreading, deposit account opening and treasury onboarding.

As we’ve experienced with many past M&A transactions within our customer base, nCino platform’s ability to extend across multiple products and lines of business, while scaling with the bank as it grows, will combine the lending operations for the new bank. Integrating credit cultures and portfolio management are key to the success of the bank merger and we’re proud to see another growth minded bank leveraging nCino to help with these mission critical merger activities. We believe and the market has validated that financial institutions using a single platform have the tools to grow more efficiently, while also delivering great differentiated customer experiences. For example, one of our regional bank customers like 291% increase in average monthly new deposit accounts opened online after implementing nCino.

And expansion opportunity in over $10 billion bank that added retail and commercial lending, provided another proof point of our single platform strategy. These products join an existing small business lending deployment, bringing all the bank lending operations onto one platform with nCino. The State of Colorado was quite good to us this quarter. nCino was selected by yet another foreign credit institution for commercial lending and we did an expansion within a community bank for deposit account opening and treasury onboarding. This Colorado Community Bank already used nCino for commercial lending and for the mortgage homebuying journey. As Pierre noted, our U.S. mortgage business continues to benefit from nCino’s well established brand and market presence within financial institutions.

Our 19 new mortgage logos in the quarter were primarily with depository institutions, proving the value of our approach. We are particularly pleased by two net new logo deals where our mortgage suite was included in greenfield Bank Operating System deals. The first was a community bank retail lending deal that included portfolio analytics and mortgage. The second was a community bank committing to nCino for commercial lending, portfolio analytics, and mortgage. We’re excited to see our customers look to nCino as the single trusted vendor across all their business lines, as they also incorporate our nIQ solutions to accelerate the value they receive from our products. We’ll continue to see our product strategy focused on the value, nCino delivers across three pillars of intelligence, automation, and experience.

These multi-solution greenfield deals illustrate the impact that strategy is providing for nCino’s customers. Our global footprint continues to provide stability to our growth profile. This quarter we added another new logo in Australia, this time a top 10 Australian bank that will be deploying nCino’s market leading commercial lending solution. nCino was selected to help the bank simplify their operating model, reduce cycle times, and improve the customer experience. I’m particularly, excited to note that this greenfield commercial loan origination deal also included nIQ’s commercial pricing and profitability solution. This is yet another proof point of the opportunity for this solution in banks worldwide. Another recent area of focus for us has been addressing demand from the world’s top 500 financial institutions beyond established nCino’s geographic footprint, with great partnership from Accenture, our emerging markets team signed one of the largest banks in the UAE and our first customer in the Middle East for commercial lending.

Our global partner ecosystem is a true force multiplier not only in delivering customer success, but also in our go-to-market efforts. System integrator ecosystems, unique combination of global reach, and local relationships, is helping nCino uncover sales opportunities in both new and emerging markets. Expansion within existing customers made a strong contribution to nCino’s international success in the second quarter. An enterprise bank in the Netherlands expanded their adoption of our commercial lending solution and renewed their agreement with nCino for another five years. Also, beyond the borders of the Continental U.S., we had an over $10 billion asset Caribbean subsidiary of a global bank for commercial lending. We also signed a community bank in U.S. territory for retail lending, portfolio analytics, and for the mortgage homebuying journey, an exciting multi-solution deal.

Sustained success in any market requires happy referenceable customers. We are pleased to take another early customer from the Japanese market live on nCino’s commercial lending solution. We are appreciative of the opportunity early adopters have provided us in Japan and we look forward to highlighting more examples of success in that market. We also proudly celebrated Go Live milestones in other markets, for commercial, retail, small business, commercial pricing and profitability, and deposit account opening. As a customer-focused organization, we have continued appreciation for client feedback. We’re extremely proud in the second quarter to receive the highest NPS score in company history, an average score of 74%. In addition to the talented customer success teams we feel around the globe, the maturity and stability of our single platforms are yielding demonstrable business value.

And our recent investments in intelligent and usage analytics are allowing nCino’s customers to benchmark and accelerate their own success. Greg, over to you for the financials.

Greg Orenstein: Thank you, Josh and thanks everyone for joining us this afternoon to review our second quarter fiscal ’24 financial results. Please note that all numbers referenced in my remarks are on a non-GAAP basis unless otherwise stated. A reconciliation to comparable GAAP metrics can be found in today’s earnings release, which is available on our website and as an exhibit to the Form 8-K furnished with the SEC just before this call. Total revenues for the second quarter of fiscal ’24 were $117.2 million, an increase of 18% year-over-year. Subscription revenues for the second quarter were $99.9 million, also an increase of 18% year-over-year and representing 85% of total revenues. Subscription revenues benefited from strong sales in the quarter with some of those deals contributing to revenues in the quarter.

Professional services revenues were $17.3 million in the quarter, growing 14% year-over-year. Revenue growth outside the United States accelerated this quarter as a result of increased sales momentum that began in the second half of last year. Non- U.S. revenues were $21.9 million or 19% of total revenues in the second quarter up 47% year-over-year or 48% in constant currency. Non-GAAP gross profit for the second quarter of fiscal ’24 was $76.5 million, an increase of 18% year-over-year. Non-GAAP gross margin was 65% compared to 65% in the second quarter of fiscal ’23. Non-GAAP operating income for the second quarter of fiscal ’24 was $11.2 million compared with $2.8 million loss in the second quarter of fiscal ’23. Our non-GAAP operating margin for the second quarter was positive 10% compared with negative 3% in the second quarter of fiscal ’23.

We exceeded, non-GAAP operating income guidance with continued solid execution against expense budgets and from our revenue performance. Non-GAAP net income attributable to nCino for the second quarter of fiscal ’24 was $9.9 million or $0.09 per diluted share compared to a net loss of $4.9 million or negative $0.04 per basic and diluted share in the second quarter of fiscal ’23. Our Remaining Performance Obligation or RPO increased to $928.6 million as of July 31st, 2023, up 2% over $907.4 million as of July 31st, 2022 with $636.2 million in the less than ’24 months category, up 8% from $588.8 million as of July 31st, 2022. In addition to a strong sales quarter, RPO also benefited from a solid renewal quarter. As Josh noted, there were significant expansions, meaning an increase in annualized subscription revenues that accompanied several renewals.

As we regularly highlight, we do not manage the business to RPO, but I do want to reinforce what Pierre mentioned earlier, it was a strong sales quarter with sales achievement up 22% year-over-year. Note that sales in the second quarter were greater in June and July. So some corresponding billings were occur in the third quarter. We ended the quarter with cash and cash equivalents of $103.4 million including restricted cash. Net cash provided by operating activities was $12 million compared to $9.5 million in the second quarter of fiscal ’23. Capital expenditures were $859,000 in the quarter, resulting in free cash flow of $11.1 million for the second quarter. Please note that we expect to generate positive free cash flow through the balance of the fiscal year.

Also note that we repaid the outstanding balance of $15 million on our $50 million revolving credit facility and have no amounts outstanding thereunder. Finally, please note that in July, through mediation, the company and the plaintiff and a putative class action complaint filed on March 12, 2021 in the United States District Court for the Eastern District of North Carolina reached a settlement agreement in principle of approximately $2.2 million that remains subject to court approval. The company has accrued for the proposed settlement agreement, which is included in accrued expenses and other liabilities as of July 31st, 2023 on the company’s unaudited condensed consolidated balance sheets. We have excluded this expense from our non-GAAP results as it is outside the ordinary course of our business.

Now turning to guidance. For the third quarter of fiscal ’24, we expect total revenues of $120 million to $121 million with subscription revenues of $102.5 million to $103.5 million. This guidance assumes year-over-year subscription growth of 17% at the midpoint of our range. Non-GAAP operating income is expected to be approximately $13 million to $15 million and non-GAAP net income attributable to nCino per share to be $0.10 to $0.12 for the third quarter. This is based upon a weighted average of approximately $115 million diluted shares outstanding. Churn in the second quarter was in line with our expectations, but we are conscious that the IMB segment of our U.S. mortgage customer base continues to navigate the heightened interest rate environment.

Accordingly, we intend to be prudent with full-year expectations by raising the low end of our revenue guidance for both total and subscription revenues, while maintaining the top end of our guidance for both. Despite this conservatism, our strong performance in the second quarter, the market stabilizing following the liquidity concerns earlier this year and the opportunities we see in our pipeline drive our optimism for the second half of the year. For fiscal ’24, we expect total revenues of $475 million to $478.5 million with subscription revenues of $406 million to $409 million. This full-year guidance assumes year-over-year subscription growth of 18% at the midpoint of our range. We are increasing both the low and top end of our non-GAAP operating income guidance for fiscal ’24 to $51 million to $54 million.

Non-GAAP net income attributable to nCino per share is expected to be between $0.38 to $0.41 based upon a weighted average of approximately $115 million diluted shares outstanding. The top end of our subscription revenues and non-GAAP operating income guidance reflects our continued commitment to the Rule of 30 objective for the full fiscal year. With that, I’ll open the line for questions.

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Q&A Session

Operator: [Operator Instructions] And our first question comes from Terry Tillman from Truist Securities. Your line is now open.

Terry Tillman: Hi there, good afternoon. Usually on these calls, when we have important new lighthouse accounts in different regions, but I tried to stay higher, some sort of greeting in local language. I’ve done it in German and French. Arabic, I don’t know if it’s Holon, but I tried my best. But great to see the UAE win. Maybe the first question for Pierre or Josh, is 22% sales growth, I’d like to unpack that a little bit more. Is that like an ACV bookings? And do you think that coming out of the thawing out that the business can keep picking up momentum versus 2Q sales activity, I’m talking about the second half of the year? And then I had a follow-up for — as well. Thank you.

Pierre Naude: Terry, thanks for that question. Yes, just a reminder that 22% is year-over-year. Okay, and not quarter-over-quarter, which makes it more remarkable. I think it shows the pent-up demand and it also shows the momentum we see in the market. As I look at the global markets, including the U.S., I would say the only place where people are still careful is the U.S. enterprise market, where the regional and big banks are strategically aligned and moving forward, but very careful to buy. Apart from that, and the rest of the segments community region in the U.S., we see strong demand and internationally we see very strong interest. I believe the current economic environment for net interest margin squeezes, is truly a driver for review to efficiency. And as we mentioned, we’ve got the platform and that’s being reconfirmed as visit customers and drive around it. Josh, anything to add?

Josh Glover: No. Nothing to add to that.

Terry Tillman: That’s great to hear. And I guess maybe the follow-up question for Greg. Greg, I mean, I think what you said is that some of the activity in June and July really doesn’t show up much in RPO. But then you did talk about the sales activity up year-over-year, people are going to be thinking about what you’ve done year-to-date and then what might happen in the second half of the year as we start to foretell how revenue looks next year? But I’m just kind of curious, as it relates to the metric because we do look at it the RPO or CRPO. Do you feel like based on what you see just those reported metrics are troughing in 2Q and they could start perking up in the second half of the year? Thank you.

Greg Orenstein: Hi Terry. My comment around the activity and the heightened activity towards the end of the quarter was related to billings, where we got some deals signed that would have been reflected in RPO, but ultimately from a billing standpoint that would have happened post quarter end. But overall to Pierre’s comments and what you heard in our prepared remarks, we definitely saw momentum pickup as the quarter progressed. And going back to my comments when I was kind of on the investor circuit last quarter, we said that we expected second quarter to be better than first quarter and obviously we demonstrated that. And we expected the second half of the year from a sales/bookings perspective to be better than the first half. The momentum we’re seeing right now will enforces that belief.

Greg Orenstein: That’s great, good job in the quarter. Thank you.

Operator: And, thank you. And one moment for our next question. And our next question comes from Charles Nabhan from Stephens. Your line is now open.

Charles Nabhan: Good afternoon and thank you for taking my question. It’s good to see the momentum in the mortgage business cross selling into the FI customer base. But I’m just curious given the recent uptick in rates, if you’re seeing any stabilization in churn within the legacy IMB base for SimpleNexus?

Greg Orenstein: Yes, again as I mentioned in my remarks, the churn was in line in the second quarter with our expectations. We’re not seeing increased churn from a forecasting our guidance perspective, we did really roll some of our overperformance not through really to account for, I’d say unexpected churn in the second half of the year, there’s nothing as we sit here today that has us or leads us to believe that we’ll have heightened churn beyond our forecast, but ultimately just in this market going back to your comments around mortgage rates we wanted to take a conservative view. I think what’s amazing about that business is despite the challenge of the mortgage market, the fact that they’ve continued to grow year-over-year and quarter-over-quarter since we acquired the business and I think that positions us incredibly well when the market ultimately does stabilize and then ultimately rebounds, particularly as we’ve aligned with a lot of the larger better capitalized IMBs. And as we’ve had additional sales into the nCino financial institution customer base.

So I think while we’re focused a little bit on churn now, I think as we think into the future as things settle down, I think that’s going to be a significant opportunity for us from a growth standpoint.

Charles Nabhan: Got it. And as a follow-up, just looking at the full year guide for ’23, it looks like you’re well on track to hit that Rule of 30 target exiting the year. But you’ve also talked about hitting the Rule of 40, at some point as well. So my question is, given the shift in the pipeline away from commercial and momentum in cross sell activity. I’m curious, how we should think about the long-term trajectory of the margin of progress towards that Rule of 40 and how we should think about that from both on margin and a revenue standpoint?

Pierre Naude: Yes. We look forward to share our future models at our Investor Day. And actually explain how we see the future, it’s been three-years since we’ve been public. The business mix has changed. We made some acquisitions and all those impacted models. I can just tell you from purely looking at sales activity and performance, as well as the pipeline size as well as the pipeline mix, which to me is really interesting. I want to make sure that they sort of pullback in commercial. It’s more of the adoption of newer products across the platform as well. So we are full speed ahead to maintain our market leadership in commercial, while we are rolling out additional new platform products, which is really showing up now in our sales as well as in our customer base. Just add for clarification.

Greg Orenstein: And Chuck, just one other thing to add. Again we said Rule of 30, was kind of a stake in the ground this year, but the expectation should be that we’ll increase that as the years progressed to get to 40 and beyond. And so from our perspective, this is really the first step in that journey, we again put that stake in the ground this year. And kudos to the whole team in terms of how we’ve been executing through what’s been a difficult first half of the year from a customer standpoint.

Charles Nabhan: Got it. Appreciate the color, guys, and look forward to hearing more at the Analyst Day. Thank you.

Pierre Naude: Thank you.

Operator: And, thank you. And one moment for our next question. And our next question comes from James Faucette from Morgan Stanley. Your line is now open.

James Faucette: Thank you very much. I guess for me, I’m looking at kind of this cross-sell and some of these activities. And you mentioned that you’ve had an increase in customers that are adopting more than one product. Historically, nIQ module adoption tends to result in around 20% uplift to ACV in an existing commercial customer. Given the potential for difference in seat count and pricing between commercial and retail. I’m curious to learn if your — you front similar math on ACV uplift, if the existing commercial customer adopts retail, just trying to get a sense of potential leverage there on that cross-selling opportunity.