nCino, Inc. (NASDAQ:NCNO) Q3 2023 Earnings Call Transcript

nCino, Inc. (NASDAQ:NCNO) Q3 2023 Earnings Call Transcript November 30, 2022

nCino, Inc. beats earnings expectations. Reported EPS is $-0.01, expectations were $-0.02.

Company Representatives: Pierre Naud̩ РChairman, Chief Executive Officer David Rudow РChief Financial Officer Josh Glover РPresident, Chief Revenue Officer Harrison Masters РInvestor Relations

Operator: Thank you for standing by and welcome to nCino’s, Third Quarter Fiscal Year 2023 Financial Results Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. . As a reminder, today’s program is being recorded. And now I would like to introduce your host for today’s program, Harrison Masters, Investor Relations. Please go ahead sir.

Harrison Masters: Good afternoon, and welcome to nCino’s Third Quarter, Fiscal 2023 Earnings Call. With me on today’s call are Pierre Naudé, nCino’s Chairman and Chief Executive Officer; David Rudow, 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, including, without limitation, the acquisition and integration of SimpleNexus. These forward-looking statements are based on management’s current views and expectations, entail 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 the 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. With that, I will now turn the call over to Pierre.

Photo by Luke Chesser on Unsplash

Pierre Naudé: Thanks, Harrison, and thank you all for joining us today. I am extremely proud of our team’s execution in the third quarter as we once again exceeded top and bottom line expectations. We generated $105.3 million in total revenues, including SimpleNexus, a 50% increase over the third quarter of fiscal €˜22. Subscription revenues were $88.3 million, an increase of 55% year-over-year. Excluding SimpleNexus, subscription revenues grew 28% organically. This quarter marked our first quarter with over a $100 million in total revenues and also our first profitable quarter on a non-GAAP operating income basis. For the past two earnings calls, we have emphasized our commitment to profitability in fiscal €˜24 and I’m very happy with the progress we have made to-date.

We plan to significantly increase our non-GAAP operating income next year, and I will touch upon that shortly. On the customer front we were pleased to issue a press release shortly before this call, announcing that the Bank of New Zealand has selected the nCino Bank Operating System as a foundational technology platform, making the bank of New Zealand one of our largest customers globally. With over $55 billion U.S. dollars in assets, Bank of New Zealand is one of the country’s largest financial institutions. We couldn’t be prouder to be in business with them and greatly appreciate the opportunity to showcase the value our solutions can bring to financial institutions around the globe. I’m also pleased that following the announcement last month of a successful Go-Live with Kiraboshi Bank in Tokyo, we have two additional Go-Lives in Japan in the quarter, including SMBC Trust Bank.

We are excited to see good momentum and traction in the market, representing an estimated $1 billion opportunity. Among numerous other Go-Lives in the third quarter, our first customer in Germany is now live. Hamburg Commercial Bank or HCOB was recently recognized by Euromoney as the €œWorld’s Best Bank Transformation for 2022€. We are honored to be their partner as they continue optimizing systems and processes to maintain their market leadership position. As I mentioned before, getting customers live and referenceable is what we truly celebrate at nCino and this is of particular importance in our newer markets. I also would like to highlight the performance of SimpleNexus business, which had another strong quarter under difficult market conditions.

SimpleNexus grew total revenues 38% organically year-over-year and had six competitive takeaways and five cross-sells through nCino customers. Despite the current headwinds in the U.S. Mortgage Market, we believe the quality of this business, including its people, technology and recurring subscription based revenue model, positions us to continue to take market share and emerge on the other side of this rising interest rate environment as the clear leader in this space. Obviously, the macro environment remains top of mind. We have spoken with numerous customers and prospects about market conditions and their feedback has generally been positive. With banks and credit unions sharing that they are well capitalized, realizing improved net interest margins and that credit risks are in check.

This bodes well for nCino over the long term. Financial institutions remain focused on the need to digitally transform in order to be competitive and to better serve their clients, and as a result our sales pipeline remains healthy and continues to grow nicely. That said, we are not tone deaf to external conditions and the bottom line expectations of the market, which have changed materially over the past year. Against the backdrop of macroeconomic and geopolitical uncertainty, we are seeing a more measured buying environment and increased executive scrutiny on purchasing decisions, particularly in Europe, which extends sales cycles and the time required to close deals. Additionally, FX headwinds and a challenging U.S. mortgage market persisted through the third quarter.

So what does this mean for our business? Well, we actually view this more challenging macro environment as an opportunity to aggressively evolve from a best-in-class growth SaaS company into a best-in-class profitable growth SaaS company. With the investments we have already made in sales, products, customer support, professional services and geographies, we are very well positioned to grow market share and continue leading the digital transformation of financial institutions around the world. On the bottom line, you have seen a significant improvement in our performance during the course of this fiscal year, and we expect that trend to continue next year and beyond as we further optimize our cost structure and drive more meaningful leverage on the expense side of the P&L.

We have been able to accomplish this improved bottom line performance without changing our strategy or investment priorities, but instead through a more conservative approach to managing headcount and disciplined investment decision making with an even more relentless focus on ROI. We have also been able to realize cost synergies from the SimpleNexus acquisition as the two businesses work more closely together and our integration activities accelerate. On the top line, the fourth quarter has typically been our strongest sales period and we still have two months left in the fiscal year, so we will wait until our Q4 earnings call to provide specific financial guidance for fiscal €˜24. However, we think it is important in uncertain times to provide even greater visibility into our current thinking as we factor in the impact of the three headwinds I mentioned earlier, and the overall macro environment we are currently planning for nCino to be a rule of 30 company next fiscal year with a mix between total revenue growth, and non-GAAP operating income margin trending towards 20% and 10% respectively.

We will accomplish this without changing our investment priorities, which remain making sure we have the right sales coverage for our investable markets; that our support and professional services organizations provide the best customer experience in the industry, and that we continue investing our product portfolio to extend our track record of innovation. With that, I’ll turn the call over to Josh to go through more business highlights from the quarter. Josh.

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Josh Glover: Thanks Pierre. The Bank of New Zealand win was certainly a highlight of our continued success in Asia-Pac. We were pleased this quarter to also add a new logo in Australia with the government sponsor lender and an expansion deal within a New Zealand Bank for commercial pricing and profitability. The ability of our nIQ product to embed intelligence, insights and data into the Bank Operating System is a huge differentiator. Our nIQ offerings are resonating with our customer base and are now a standard part of prospecting and expansion conversations. Also in the quarter, we signed an expansion deal for a new line of business with A Big-4 U.K. bank, again, demonstrating our success and adding value across business lines within our customer base.

That customers’ initial contract was signed in the first quarter of fiscal €˜23, so we expanded to a second business line in less than nine months. We also closed several solid multi-product commitments with new customers in the community and regional market this quarter. A few examples include, our single platform vision resonating with a $14 billion bank in Oklahoma as they selected nCino for both commercial and retail lending. An agricultural lender selecting us for commercial and retail lending, deposit account opening and treasury sales and onboarding, which will provide a true 360 degree view of their customer relationships. And a $3 billion bank in Virginia embracing nIQ with their initial nCino contract, selecting us for a commercial lending, pricing and profitability and automated spreading, which will enable their commercial lending employees to compete with the largest financial institutions.

We also had significant expansion deals with existing customers in the community and regional market, including a $7 billion Colorado bank expanding their use of nCino from commercial lending to add deposit account opening and treasury sales and on-boarding, and a $7 billion bank in Hawaii, adding retail lending and deposit account openings. Another highlight of the third quarter was our Portfolio Analytics team, signed the biggest deal in the history of that business with the addition of one of the largest trade unions in the world as a loan analytics customer. As Pierre mentioned, Go-Lives are a key measure of success here at nCino, and this quarter marked a record for successful implementations headed by a significant contribution from the portfolio of analytics team as the CECL adoption deadline approaches.

Our first commercial lending customer in German, a business banking customer in Canada, Japanese market early adopters, and a retail lending customer in the U.S. regional market were all beneficiaries of focused efforts from nCino Professional Services Teams and certified system integration partners. As always, I’m deeply appreciative of the trust our customers and partners place in nCino and I’m proud of the team’s commitment, energy and results as we continue to tell the story globally. David, can you take us thought the numbers?

David Rudow: Thank you, Josh, and thanks everyone for joining us this afternoon to review our third quarter fiscal €˜23 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 our Form 8-K furnished with the SEC just before this call. We again delivered strong results for the third fiscal quarter. Total revenues were $105.3 million, an increase of 50% year-over-year, including a negative $2.3 million impact from FX. Subscription revenues for the third quarter were $88.3 million, an increase of 55% year-over-year, representing 84% of total revenues.

Organic subscription revenues were $72.9 million, representing 28% year-over-year growth. Professional services revenues were $17 million in the quarter, representing 31% year-over-year. Professional services revenues included approximately $1.5 million of SimpleNexus services and other revenues. Non-U.S. revenues were $15.9 million or 15% of total revenues in the third quarter, up 36% year-over-year or 55% growth in constant currency. Non-GAAP gross profit for the third quarter of fiscal €˜23 was $68.6 million, an increase of 54% year-over-year. Non-GAAP gross margin was 65% compared to 64% in the third quarter of fiscal €˜22. Our gross margins again improved due to subscription product mix as enterprise and international customers comprise more of our revenues, as well as the impact from subscription revenues being a larger contributor to total revenues.

Non-GAAP operating income for the third quarter of fiscal €˜23 was $2.5 million, with a $3.2 million loss in the third quarter of fiscal €˜22. Our non-GAAP operating margin for the third quarter was positive 2%, compared with negative 4% in the third quarter of fiscal €˜22. As Pierre mentioned, this profitability was achieved through a more conservative approach to managing headcount, particularly in R&D and G&A, as well as savings on insurance and synergies from the SimpleNexus acquisition. Non-GAAP net loss attributable to nCino for the third quarter fiscal €˜23 was negative $1.4 million or negative $0.01 per share compared to negative $3.7 million or negative $0.04 per share in the third quarter of fiscal €˜22. Our remaining performance obligation or RPO increased to $919.2 million as of October 31, 2022, up 28% over $717.7 million as of October 31, 2021, with $603.9 million and less than 24 category, up 43% from $420.9 million as of October 31, 2021.

New and expansion sales contributed more to the sequential increase in RPO than renewals this quarter. Turning to cash. We ended the quarter with cash and cash equivalents of $111.8 million, including restricted cash. Net cash used in operating activities was negative $4.1 million, compared to negative $19.1 million in the third quarter of fiscal €˜22. Capital expenditures were $4.6 million in the quarter, resulting in free cash flow of negative $8.7 million for the third quarter of fiscal €˜23. During the quarter, we drew down approximately $30 million on our line of credit as the fourth quarter is a seasonally slower period for customer collections. In providing Q4 guidance and updating our full year outlook, we are taking a few factors into account.

First, longer sales cycles, particularly in Europe. Second, the state of the mortgage market, including elevated churn in the IMP space in SimpleNexus. And finally a 2% to 3% negative revenue impact from FX. For the fourth quarter, we expect total revenues of $104 million to $105 million, with subscription revenues of $90 million to $91 million. This guidance assumes year-over-year subscription growth of 44% at the midpoint of our range, with approximately 28% organic subscription growth for the fourth quarter. As a reminder, the fourth quarter is typically seasonally slower for professional services revenues. Non-GAAP operating loss is expected to be approximately negative $3 million to negative $4 million and non-GAAP net loss attributed to nCino per share to be negative $0.04 to negative $0.05.

This is based upon a weighted average of approximately $111 million basic shares outstanding. Note that we expect our non-GAAP operating loss in Q4 to be impacted by elevated payroll taxes, professional services fees and additional investments in marketing, technology and automation. For fiscal €˜23, we expect total revenues of $403 million to $404 million with subscription revenues of $342 million to $343 million. This full year guidance assumes the year-over-year subscription growth of 52% at the mid-point of our range, with approximately 28% organic subscription growth. For SimpleNexus we now expect full year subscription revenues of approximately $59 million versus the $60 million we previously expected for the year. We are improving our non-GAAP operating loss guidance for fiscal €˜23 to negative $7 million to negative $8 million.

Non-GAAP net loss attributable to nCino per share is expected to be negative $0.15 to negative $0.17 per share, based on a weighted average of approximately $110.5 million shares outstanding. We are proud of the financial milestones we achieved in the third quarter, and remain focused on serving our customers and continuing to improve profitability. With that, we will open the line for questions.

Operator: Certainly. . And our first question comes from the line of Terry Tillman from Truist Securities. Your question please.

Terry Tillman : Yeah, thanks for taking my questions. Hi, Pierre, Josh and David! I’ve got a couple of questions. One might be a multipart question, so technically it could almost be three questions, but it’s good to see the profitability in the quarter at the operating line €“ operating profit line. The first question might be a kind of two-fold question or two part is, David on the $603.9 million for the current or 24 months RPO, can you kind of double-click in terms of the organic growth, and then the second part of this question is the SimpleNexus run rate. How do you think about that going into next year given the independent mortgage brokers and then the headwind there? And then I have a follow-up.

David Rudow : Yes. On the RPO side, organically nCino grew total RPO by 18% and less than 24 months at 28% and the long term at 4%. And then on SimpleNexus run rate, we took our guidance down for SimpleNexus subscription revenues from $60 million to $59 million. So we expect to see a slight decline sequentially into Q4 for subscription revenues from SimpleNexus. I think it’s too early to look at next year given what we’re seeing in the mortgage market, it’s quite volatile right now. And so we are currently in the planning stage, and we will update you on SimpleNexus numbers for next year when we report numbers for Q4.

Terry Tillman : Understood. And just a follow-up question. I don’t know if this is €“ or who this is for, but Pierre, I really appreciate the, some of the perspective for next year, and you typically don’t guide, but those are some good kind of guardrails for us. I think the 20% growth and potentially 10% EBIT margin, are any of those kind of run rate dynamics, or is that actually kind of like, that would be like for FY €˜24? And is it assuming that maybe you just, the seasonally strong 4Q bookings, it just doesn’t play out like you typically would expect? Thank you.

Pierre Naudé: Yes, thanks Terry. You know it’s very early and we’re in the planning stages here. We look at SimpleNexus and Europe and those two combined make up 50% of our SAM. And if half of your market has got serious headwinds and you’ve got FX on top of that, then you have to look at what that macro environment impact will be, so 50% of our SAM is impacted, as I mentioned. Our view was, we’re still in the planning stages. We’ve not finalized the plans. The fourth quarter looks great. Our pipelines are healthy. So the demand for the product is there. Deals are not going away, but they are just slower to close. We don’t see a slowdown in the U.S., but we are picking up a sentiment of caution, which is different than Europe, where we clearly see a slower decision-making and just like in mortgage.

So you know when you take all of that mixed bag and you put it in there, and we decided at this stage it’s wise to give an indication to our investors of how we’re thinking about next year, but its early stages in planning.

Terry Tillman : Understood. Thank you and good luck!

Pierre Naudé: Thank you

Operator: Thank you. One moment for our next question. And our next question comes from the line of Brent Bracelin from Piper Sandler. Your question please.