nCino, Inc. (NASDAQ:NCNO) Q4 2023 Earnings Call Transcript

nCino, Inc. (NASDAQ:NCNO) Q4 2023 Earnings Call Transcript March 28, 2023

Operator: Good day, and welcome to the nCino Fourth Quarter and 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. I would now like to turn the call over to Harrison Masters Director of Investor Relations. You may begin.

Harrison Masters: Good afternoon and welcome to nCino’s fourth quarter fiscal 2023 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, 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 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. Good afternoon and thank you all for joining us today. We are pleased to share the details and accomplishments of our fourth quarter and 2023 fiscal year with you. But before we walk you through those results, I would be remiss if I did not acknowledge the events of the past few weeks, which have been impacting the banking sector. We are all aware there has been significant turmoil and uncertainty surrounding financial institutions, particularly certain regional banks in the United States. As you will recall, A few weeks ago, we filed an 8-K regarding our known impacted customers, Silicon Valley Bank and Signature Bank, which were both taken over by the FDIC. These financial institutions collectively represented less than 2% of the Company’s total revenues in the third quarter of fiscal year 2023.

That was true for the fourth quarter as well. Since that 8-K was filed, we received notice from the FDIC that Bridge Banks have been established to assume the contractual obligations both banks had within nCino, and that they have the full ability to make timely payments to vendors. Subsequently, we took note of announcements that First Citizens and New York Community Bank would acquire assets of Silicon Valley Bank and Signature Bank, respectively. We will continue to monitor the situation and see how this plays out just as we would with other bank M&A situations. Let me remind you that nCino has a large and diversified customer base, representing more than 1,850 financial institutions of all types and sizes around the globe. We remain well positioned while capitalized and confident in our ability to support our customers as they navigate through current conditions.

What we continue to focus on is taking care of our customers, developing innovative cloud-based software and strengthening our partnerships across the financial services ecosystem. As a management team, those have always been and will continue to be our key priorities. We are incredibly passionate about the Company we have built and the future promise and growth opportunities we see for this business. We will continue to focus on controlling what we can control, and the markets will do what markets do. We have a great business model, a healthy balance sheet, industry-leading software and a seasoned management team that has been through many different economic cycles. I am confident in the team’s ability to manage through the short-term challenges while continuing to position nCino for long-term growth.

And now with that, let me turn back to the results of the fourth quarter. We are pleased that in Q4, we once again exceeded expectations. Total revenues grew 46%, and we posted another profitable quarter on a non-GAAP basis, $5 million better than the midpoint of our non-GAAP operating income guidance. We improved our full year loss by $32 million compared to the midpoint of the guidance we provided at the beginning of the year. I’m proud of the team’s successful execution toward accelerating our path to profitability, which we first committed to during the second quarter last year. The difficult mortgage market made SimpleNexus fourth quarter performance, especially impressive. The team had its largest sales quarter ever, including signing three of the largest initial deals in its history.

There were also seven cross-sells into the nCino installed base, along with five competitive takeaways. We again increased market share, which will be particularly valuable as mortgage demand rebounds. Two additional points to highlight on SimpleNexus. First, SimpleNexus has been making solid progress expanding its footprint into banks and credit unions as evidenced by their mix of new customers this past year which was almost evenly split between banks and credit unions and independent mortgage banks as compared to prior years where it was much more heavily weighted to IMBs. Second, we are seeing SimpleNexus getting engaged in larger sales opportunities. These are just two of the many benefits we have seen from the SimpleNexus acquisition.

To that point, we are now on nCino with all of the SimpleNexus and nCino teams integrated, including engineering, sales and marketing. I’m very excited by the progress we have made to date, integrating the SimpleNexus technology with the nCino platform. And by the continued traction, we see cross-selling to banks and credit unions within the nCino customer base. In Q4, the macro uncertainty definitely had an increased impact on banks and their ability to move forward with buying decisions. We continue to see strong interest from financial institutions in modernizing their operations with our platform. The issue we saw in Q4 was an unprecedented level of deal scrutiny, particularly with larger opportunities. We highlighted this issue in Europe earlier in fiscal ’23.

In Q4, we faced similar behavior in North America, including Canada. The good news is that just as we saw some deals that were delayed in Europe last year get signed in Q4, as Josh will discuss shortly. We still believe the deals that slipped in Q4 will close in the coming quarters. The reality is that banks need to digitally transform. That was true when we started nCino and it’s even more relevant today. In order to thrive, financial decisions must provide the personalized customer experience and ease of use of a fintech while benefiting from a bank’s lower cost of capital. The health of our pipeline only reinforces that banks are embracing this view. Even if moving from a prospect to a signed customer is taking longer than we would like.

The extended sales cycles and increased deal scrutiny, I mentioned led to fourth quarter net bookings that did not meet our expectations, which is reflected in RPO. Yet, we remain focused on achieving Rule of 30 profitable growth for fiscal ’24, specifically subscription revenue growth and non-GAAP operating income margin, thanks to the durability of our business model. But let me be clear, our cost efficiencies, including with the integration of SimpleNexus are at the center of our ability to increase profitability, our overriding focus remains on driving growth. We are continuing to invest in product development, especially around daily utilization and integrating SimpleNexus technology into the front end of the nCino platform. We are also prioritizing sales and customer success by deploying teams to cover the global SAM and maintaining the touch points key to our success in renewing and expanding with our customers.

The excitement and enthusiasm from the global team at our company kickoff last month set a solid turn for the year ahead. We’ll share this enthusiasm and we welcome over 1,000 strategic partners and customers from global, enterprise, regional and community banks and credit unions to Insight 2023 in May. This year, we have moved our annual conference to Charlotte, North Carolina, to accommodate the increased demand. And we are excited together for three days of keynotes, breakout sessions, product demonstrations and networking across the nCino ecosystem. Greg will provide the details on our fiscal ’24 guidance, which takes the more difficult banking and macro environment into account, even as we remain confident in our strategy, product portfolio and ability to execute.

Now let me turn the call over to Josh so he can provide operational highlights for the fourth quarter as well as the thoughts on our positioning for fiscal ’24.

Josh Glover: Thanks. And as Pierre noted, our teams experienced a more challenging selling environment last quarter, above and beyond the typical lumpiness of enterprise and global banking. Even still, we signed marquee new logos and recorded significant expansion deals with strategic accounts. For example, our EMEA team added one of the largest banks in Ireland as a new customer as well as the U.K. division of a global bank with over $75 billion in assets for commercial lending. With the addition of these customers, five of the top U.K. Ireland banks use Athena. In the U.S., we saw leading financial institutions continue adding multiple solutions to their initial contract with nCino. Johnson Financial Group, a Wisconsin-based privately held financial services company with more than $6 billion in assets, selected nCino for commercial, retail and small business lending, along with deposit account opening and treasury onboarding.

As we know, banks are focused on growing and retaining the organic deposits in this environment, and we believe that offering a broad set of products since filling them with a great experience is critical to maintaining a healthy deposit base. Johnson Financial is a great example of a financial institution fully embracing the nCino platform to modernize their front, middle and back offices across product lines. They also adopted nIQ with this initial contract, purchasing auto spreading and commercial pricing and profitability. Adoption of our nIQ offerings continued to expand in the fourth quarter with 30% of bank operating system customers now utilizing at least one nIQ solution, up 50% year-over-year. New nIQ customers included signing a top 50 U.S. bank for commercial pricing and profitability following a process that evaluated multiple vendors.

This agreement represents our largest commitment to date for a commercial pricing and profitability solution. We also saw good upsell activity in the quarter, representing over 40% of our sales. An existing customer with $25 billion in assets, continued expanding nCino across their commercial lending business, adding eight new divisions in the fourth quarter. This customer tripled their commitment with nCino over the course of FY ’23, expanding their adoption across multiple divisions in the Western United States. Our professional services practice and system integration partners completed a record year for go live, including activating two lines of business in Q4 for a top 10 U.S. bank. nCino’s updated small business lending offering also gained traction in Q4, as shown by proof points from Peoples Bank’s adoption of that small business solution.

When we began talking to the bank, they shared that their corporate mandate was to find ways to spend less time line transactions and more time on value-added interactions. I’m so pleased that working with nCino has allowed the bank to do just that, focusing on customers and not administrative tasks. These two examples, pre-nCino, a bank employee would rekey client information 37 times. Today, they key it in just once. They also shared that qualification for approval for a small business loan is happening 5x faster with nCino. And if business climate where speed and efficiency matter more than ever, nCino is helping People’s Bank and others offer a high-tech, low-touch experience with our platform. Finally, in the fourth quarter, our mortgage business signed its largest three contracts in the history of that business, a remarkable accomplishment in this environment.

The largest of these was with one of the nation’s premier homebuilders and the other two were cross-sells into the nCino customer base. As Pierre noted, the SimpleNexus team is now fully integrated into nCino, and our execution as one team is key to our strategy in fiscal ’24. By combining the two sales teams, we are activating our footprint in the banking and credit union channels, which expands SimpleNexus’ cross-sell opportunities, and we will definitely maintain a focused team to continue supporting our critical efforts in the independent mortgage bank market. Our go-to-market efforts will be enabled by investing in new digital marketing tools, along with the continued focus on partner-driven lead generation around the globe and the addition of proven nCino sales leaders to the ranks in EMEA.

Greg, can you take us through the financial results?

Greg Orenstein: Thank you, Josh, and thanks, everyone, for joining us this afternoon to review our fourth quarter and fiscal 2023 financial results. I’m very excited to work with you all more closely from the Chief Financial Officer Chair. Before I begin, I would like to thank the members of our accounting, finance and tax teams for all of their hard work and efforts and for making my transition to the CFO role so seamless. 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. With that, I’ll share some of the financial highlights from the quarter and full year, starting with revenues.

Total revenues were $109.2 million in the fourth quarter, an increase of 46% year-over-year and $408.3 million for fiscal ’23, an increase of 49% year-over-year. Subscription revenues for the fourth quarter were $92.8 million, an increase of 48% year-over-year and $344.8 million for the full year, an increase of 53% year-over-year. Organic subscription revenues were $77 million for the fourth quarter and $285 million for the full year, representing 30% and 29% growth year-over-year, respectively. Our performance on subscription revenues in the fourth quarter was due to add-on sales and favorable activation terms from new customers. As Pierre and Josh noted, SimpleNexus had another strong quarter in a challenging mortgage market, organically growing total revenues by 27% and subscription revenues by 28% year-over-year.

Professional services revenues were $16.4 million in the quarter, growing 35% year-over-year with the improvement due to higher utilization. Non-U.S. revenues were $16.7 million or 15% of total revenues in the fourth quarter, up 39% year-over-year or 51% in constant currency. On an organic basis, non-U.S. revenues were 18% of total revenues in the fourth quarter, up from 17% in the fourth quarter of fiscal ’22. Non-GAAP gross profit for the fourth quarter was $70.9 million, an increase of 52% year-over-year. Non-GAAP gross margin was 65% compared to 62% in the fourth quarter of fiscal ’22. Our gross margins continue to improve due to subscription product mix, including a higher nIQ mix as well as subscriptions becoming a larger contributor to total revenues.

Non-GAAP operating income for the fourth quarter was $1.8 million compared with a non-GAAP operating loss of $8.3 million in the fourth quarter of fiscal ’22. Our non-GAAP operating margin for the fourth quarter was positive 2% compared with negative 11% in the fourth quarter of fiscal ’22. Restructuring charges incurred during the fourth quarter were $5 million including severance and employee benefits with the associated cash payments made in the first quarter of fiscal ’24. The year-over-year improvement in non-GAAP operating margins was a testament to the Company’s discipline and focus on achieving operational efficiencies, including completing the integration of SimpleNexus. Non-GAAP net income attributable to nCino for the fourth quarter of fiscal ’23 was $4.4 million or $0.04 per diluted share compared with a loss of $9.3 million or $0.09 per basic and diluted share in the fourth quarter of fiscal ’22.

Our remaining performance obligation increased to $944.1 million as of January 31, 2023, up 3% over $912.3 million as of January 31, 2022, with $634.8 million in the less than 24 months category, up 18% from $538.4 million as of January 31, 2022. As Pierre noted, some large deals slipped out of the fourth quarter, which negatively impacted the total contract value added from new sales during the quarter. Duration on renewals in the quarter was in line with what we have observed since tracking RPO. But due to timing, the volumes of renewals were significantly lower in the fourth quarter of fiscal ’23. This tough compare on renewals resulted in an approximate 7% headwind to total RPO growth and foreign exchange also created a 1% headwind year-over-year.

The contribution to RPO from new and existing customer sales was roughly evenly split. We ended the quarter with cash and cash equivalents of $87.4 million, including restricted cash. $30 million remain drawn from our line of credit. Net cash used in operating activities was $22 million compared to $21.1 million in the fourth quarter of fiscal ’22. Cash used in operations included approximately $800,000 to exercise an early termination clause to exit a facility during fiscal ’24. As a reminder, the fourth quarter is our strongest billings quarter, which should generate greater cash collections in the first and second quarters of fiscal ’24. Capital expenditures were $4.4 million in the quarter, resulting in free cash flow of negative $26.5 million for the fourth quarter and free cash flow of negative $33.7 million for the full year.

Approximately $5 million of restructuring charges accrued in the fourth quarter of fiscal ’23 will be reflected in cash from operations in the first quarter of fiscal ’24, Capital expenditures should begin to moderate as we complete improvements to our facilities in Wilmington this year, and we expect to generate positive free cash flow for the full fiscal year ’24. We ended fiscal ’23 with over 1,850 customers, up from over 1,750 at the end of fiscal ’22. 465 of these customers contributed greater than $100,000 to fiscal ’23 subscription revenues, an increase of 72% from the end of fiscal ’22. Of these 465 customers, 73 contributed more than $1 million to fiscal ’23 subscription revenues, an increase of 55% from the end of fiscal ’22. Our subscription revenue retention rate for fiscal ’23 was 148% or 125%, excluding SimpleNexus.

Elevated churn from independent mortgage banks and approximately $7 million of annualized PPP churn or headwinds to our subscription revenue retention rate for fiscal ’23. As we have previously communicated, we have historically had a churn rate of approximately 2% to 3%, but last year, we experienced elevated churn from independent mortgage banks bring our total company churn to just under 5% in fiscal ’23. In developing guidance for this fiscal year, we are taking three main factors into consideration. First, we are assuming unique and historically high annualized subscription revenue churn of approximately 6% for the combined business from independent mortgage banks impacted by adverse conditions in the mortgage market, the remaining PPP churn and over $3.25 million from two bank operating system customers that are being acquired by noncustomers.

While we have frequently been the beneficiary of M&A, that was unfortunately not the case in these two specific transactions. Second, we are taking into account the extended sales cycles and increased deal scrutiny in the fourth quarter, Pierre mentioned, which, along with the churn referenced above, led to fourth quarter net bookings that were below our expectations. The third main factor is that we are assuming some delays in closing deals in light of the more difficult macro environment and the current challenges facing some of our customers and prospects. We think this will be particularly true in the first quarter of fiscal ’24 in light of the distractions caused by the events over the past couple of weeks, which we anticipate will cause some subscription and professional services revenues we would have otherwise expected to recognize in the second half of fiscal ’24 to be pushed into fiscal ’25.

That said, our subscription revenue backlog, including expected churn and anticipated renewals and currently provides for approximately 95% visibility to the 20% growth at the top end of our fiscal ’24 subscription revenue guidance. Additionally, our pipeline remains healthy and supports our plan this year. And with more products available to sell than ever before, we are well positioned to execute on our top line goals for the year, notwithstanding the current environment. We also expect revenue growth from outside the U.S. to accelerate for the full fiscal year ’24 in constant currency. We continue to see and invest in opportunities outside of the U.S. as our brand builds globally and we expect accretive growth from all of the markets we participate in outside of the United States.

The strong fourth quarter finish for our EMEA team was a testament to that. Note that our guidance assumes foreign exchange rates in effect as of January 31, 2023. Further subscription gross margin accretion will be dependent on product mix, and we anticipate normal seasonal variability in our professional services margin. We do expect to see leverage on all operating expense lines. With the integration of SimpleNexus effectively complete, we will provide guidance and results for the consolidated business going forward. For the first quarter of fiscal ’24, we expect total revenues of $111.5 million to $113.5 million, with subscription revenues of $95.5 million to $97.5 million. Non-GAAP operating income is expected to be approximately $7 million to $9 million and non-GAAP net income attributable to nCino per diluted share to be $0.04 to $0.05 for the first quarter.

This is based upon a weighted average of approximately 114 million diluted shares outstanding. For fiscal year ’24, we expect total revenues of $476 million to $483 million, with subscription revenues of $407 million to $412 million. We expect non-GAAP operating income for fiscal ’24 to be $45 million to $50 million. Non-GAAP net income attributable to nCino per diluted share is expected to be $0.36 to $0.40 based upon a weighted average of approximately 115 million diluted shares outstanding. Please note that notwithstanding current market conditions, we remain focused on achieving Rule of 30 profitable growth this year specifically with subscription revenue growth and non-GAAP operating income margin with a dedicated effort on increasing that number in the years to follow.

As market conditions evolve throughout the year, we will continue to emphasize growth over profitability and how we evaluate the proper balance between the two. In closing, Pierre and I were officers of a publicly traded company that sold software to financial institutions during the ’08, ’09 financial crisis, and one of our main takeaways from that experience was that challenging times can present incredible opportunities. With our experienced team, resilient business model, strong balance sheet, broad product portfolio, global presence and diverse customer base, we believe we are very well positioned to navigate this environment and gain market share. With that, I’ll open the line for questions.

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Q&A Session

Operator: Our first question comes from James Faucette with Morgan Stanley. Your line is open.

James Faucette: I guess I’m wondering a little bit of clarification in terms of your expectations around some of the affected banks, et cetera. The FDIC put out a statement on March 14, which effectively stated that bridge banks were obligated to and have the full ability to make timely payments to vendors. I guess I’m wondering, how should we think about SIVB and Signature Bank as any headwinds to your fiscal year ’24 revenue? And if not, when do you think we would ultimately see an impact from those affected banks?

Greg Orenstein: Yes. Thanks, James. I mean, based on what we know today and referencing the FDIC disclosure that you just noted in our prior experience dealing with customer M&A, we’re expecting both those banks to be customers throughout the year. Ultimately, as Pierre noted in his comments, we view this as an M&A opportunity, no different than we’ve dealt with over time. Consolidation is not a new trend and certainly in the U.S. financial institution space. And so from our perspective, there’s a playbook here that we’ve executed. Even though this quarter, we noted that we did not — we’re not the beneficiary of two M&A transactions. Historically, we have been the beneficiary numerous times and that’s what we’ll focus on.

James Faucette: Got it. And I just — I guess, there’s a lot of places we could go. But I’m wondering if you can help us domestically decomposed ACV or at least provide some directional color on the differences in exposure between small banks, credit unions, regional banks and in top 20 banks. And I guess that question is tied to kind of that those loss of customers via acquisition and just trying to get a sense of where your exposures are. And do your contracts typically have deconversion allowances or payments that would be due in those events?

Josh Glover: This is Josh. I can speak to the ACV spread. If you’ll recall, we started off in the community and regional space. We have a really nice business there, and those are accounts that we’ll continue to take care of then we spend a lot of time speaking about the big banks on these calls. So, I would say ACV is pretty evenly spread across the enterprise, the regional bank market and the community bank market and these are times where we’re grateful for the resilience that we get from that balance. Relative to our contracts, we have guaranteed contracts. And so at this point, we don’t see a near-term impact from those.

Operator: Thank you. Our next question comes from Nick Altmann with Scotiabank. Your line is open.

Nick Altmann: I have two quick ones. The first one is just for Josh. Josh, can you just kind of compare how your conversations with customers were before sort of all this turbulence in the banking sector and sort of what they look like today?

Josh Glover: Absolutely, and we’ve had a lot to discuss because it’s been busy. I think if you play it back to the end of last year, the interest rate environment has forced these banks to spend a lot of time looking at their portfolios. So even over the last couple of weeks, I don’t see any change in the narrative about credit quality. I would say we did see some deposit flows. It feels like that has calmed down. Some of that was from smaller accounts to bigger. Sometimes that was just bank to bank and sometimes that was people willing to spread out risk. What I see now from a lot of our accounts in the U.S., particularly in the community and regional market, where a lot of the energy in narrative has been lately is a realization that those organic deposits are a real source of strength.

And you can’t compete for organic deposits on rate and expect to retain them, that’s a race to the bottom. The way you compete for organic deposits is to offer your customers a really broad set of products that you can fulfill very well and that you can fill across multiple channels. We’ve heard lots of conversations since COVID started about the need to go all digital. What I’ve heard from my customers recently is that when things get tough, they want to talk to a person. You still want to offer them the convenience of the digital channel, but we don’t want to just throw them at a website or in an app. So, the smart banks are trying to figure out how do we provide that diverse set of products and how do we engage our customers to fill those products well across multiple channels.

The other piece that I’ve seen that I found interesting is that commercial and business deposits are a little bit more mobile than organic consumer deposits. Big, bigger businesses have treasurers and it’s their job to look at where the deposits what are my rates, they look at the risk and they try to spread them out. Whereas if you have a commercial customer, that’s their job, a family or an individual that has a personal banking relationship with you is going to see a lot stickier deposits if you take good care of them. So that’s what I hear from the market today.