Good afternoon. My name is Brent Brayson, Co-Head of Tech Research here at Piper Sandler. Thank you all for joining us this afternoon. The next fireside chat discussion here is going to be with nCino. We have Greg, the CFO. Welcome to Nashville.
Thanks. It's great to be here. Always a pleasure to see you, Brent.
Absolutely, absolutely. If I think about and take a step back on nCino's business, this is a business that actually has tripled ARR since the July 2020 IPO. Growth has clearly slowed. Obviously, we've seen the BD and SaaS software company growth rates slow at about 13% this year. I'd be curious, putting on your hat, what's the art of possible? What would need to go right to double ARR again over the next five, six years to a billion dollars? As you think about the art of possible, walk me through that potential doubling.
Yeah, so we are incredibly excited about our positioning to do that. That billion dollar threshold to cross is something clearly we have and that we focus on, right? We're quite a competitive bunch. You have to have targets out there and goals to go ahead. We certainly see that. I think the main thing that we need to do is just focus on execution. We've spent quite a bit of time putting together what I think is a very unique, broad, and deep product portfolio. I think we feel very good about where our products are. We've also spent time and energy and made investments from a presence perspective around the globe to make sure we're in locations where we see opportunities to grow.
We clearly have had some headwinds, some headwinds from a market standpoint over the last couple of years, going back to whether it's interest rates, the liquidity crisis. I think we find ourselves now in a pretty exciting time. Not only has our product portfolio matured, right, and we feel really good about each one of our products being best in market and our ability to land at a customer with any of them and then bring the platform that we sell along. We're obviously at a technology inflection point with AI. For us, you know, we created this category called cloud banking. When we started the company, they said banks will never put their data in the cloud. Obviously, that's evolved. I think we are uniquely positioned to be, you know, the worldwide leader in AI banking as well.
Some of the excitement around the technology is very prevalent in our discussions. I think also having discussions around AI and to your point, what is possible creates conversations that maybe you otherwise wouldn't have had an opportunity to see. I think some of that's driving some of the activity we see in the pipeline, you know, on a global basis as we sit here a little more than halfway through the year.
Yeah, the AI product roadmap seems like it's a very critical door opener, conversation starter, even if, you know, maybe the products aren't necessarily shipping. Having that vision is super important. Let's double click into a couple of the areas that we get questions on. Commercial. You guys have been a commercial juggernaut in the U.S., right? Built that core commercial business. Maybe frame what's your market share in the commercial space? What are the levers to grow and expand the commercial opportunity before we dive into the newer areas you're going after?
In commercial, again, I think we are clearly the leader on a global basis in commercial banking, something we're very proud of. I think there's a few things in terms of growth in market share. First off, it's about a $5 billion SAM. If you look at the size of the company for just commercial, we have plenty of runway. In the U.S., we've been very fortunate to have signed and gotten live and referenceable a nice number of customers, including 15 of the top 30 banks in the U.S. We see continued opportunities with those. If you look at our Q2 financial results, we actually announced two expansions with two top 50 banks, specifically for commercial in the U.S., as well as a top five bank in Canada. Within each one of those logos, we see opportunity to expand just in that core commercial business, right?
I think plenty of just greenfield opportunities. We don't have all of those top 30, right? There's opportunities there.
50% market share, logo share.
Logo share.
Of the top 30. I think Viva talks about top 20 pharma companies. They've been able to get to over 80% market share. As you think about the potential in commercial, is it a winner can take most opportunity? Do you think there is a longer term path to get to an 80%+ market share?
We're certainly focused on doing that. I think one of the things that's very unique about our platform, if we're talking just specifically in the U.S., on a global basis, but U.S. right now, we're the only platform that's demonstrated an ability to scale. We serve community banks, and with that same platform, we scaled a Bank of America and Wells Fargo and a whole bunch of other quite large financial institutions in the U.S. I think our biggest competitor there is do nothing, right? Our job is to make sure that the value proposition is meaningful enough for them to actually prioritize coming with us. We had a nice win in Q4, which was a nice top bank logo in the fourth quarter.
I think one of the things that we've seen is we've kind of gotten farther and farther away from the liquidity crisis, which did impact our top market because that's where we saw most of the deal slowdown headwinds. A lot of those banks were very internally focused, making sure from a regulatory standpoint they were in good shape. As we've gotten farther from that, we've seen activity pick up in the U.S.
Any sense your footprint? You talked about two big bank expansions this quarter. What's your footprint at the top 15 that you already have existing footprint at? Do you think there's an opportunity to increase revenue there by 50% just through footprint expansion? Or is it more like 20% more expansion and the real growth is going to come from new logos?
I think with new logos, there's still plenty of opportunity here, both again up market as well as as we go down into the regional and community bank space. There is plenty of green space for us here in the States. If we think about new logos, again, outside of North America, I think you'll see a lot of new logo growth because, again, for us, that's a lot of brand new opportunity for us. Spain, for example, is a new country that we entered into, announced our first logo there in the second quarter. New logos, again, as we move more aggressively outside of the U.S., I think you'll see that. Within our customer base, we're doing two things. One is because we have a platform, we're trying to go across the bank. Leverage our commercial stronghold, right, and go to small business, go to consumer, go to mortgage.
Within the commercial bank, whether it's Onboarding, which is a newer offering for us, or Banking Advisor, our AI strategy and skills, being able to bring that to what is a very happy customer base overall.
Got it. The incremental opportunity to cross all new products into that existing solve is probably the biggest lever outside of new logo growth. Let's shift gears to that retail, consumer, mortgage. That feels more net new, big cross-sell potential. What's your market share there? You have 50% of the top 15 in commercial. What's your share in that retail, consumer, mortgage space?
We do have a $200 billion bank on consumer. That was actually our land. Our friends at First Citizens, who at our investor day back in May were up on stage talking about their first big, that was our first enterprise for consumer.
One of the 15 now is consumer.
It was a land. That was our first product with them, which I think is important as you think about cross-selling. If you think about consumer and mortgage together, it's about a $10 billion SAM for us. It is very early, right? We've been focused on maturing our consumer product. I think we've been very transparent about it taking us longer to get to a best of market product as we wanted to. I think we've also highlighted the fact that we think we're there. I think that's evidenced by in Q4, we had over 20 consumer lending wins last year, including two over $50 billion in assets. I think we feel like we have another best of market product that we can land at and/or cross-sell into our customer base.
Is there a value prop if I'm a bank to do both commercial and all of my mortgage, all of my retail, all of my SMB on one operating system, essentially cloud banking?
I think that's one of the differentiators for us is that platform, and being able to standardize.
There is cost benefit to the bank.
There's a huge cost benefit. There's an efficiency benefit just in terms of the ability to use the software. I think as important as those, it provides the bank with one single 360-degree view of their end customer. No matter how you interact with the bank, they'll know who you are. They'll have your data. They can treat you like they should treat their customers. Historically, financial institutions purchased software by business line. The commercial part of the bank would have their own tech stack. The consumer, the mortgage, you could be a great commercial customer of a bank. You may go in on the weekend to get a car loan and they wouldn't have any idea who you are, right? Different system, right? Instead, under us, we have all your data.
We can link it to you as that end user and ultimately make that car buying experience, in my example, a very positive one. You'll leave there with that experience that you expect now, just like if you're doing Amazon, right?
Five years into the IPO, first big top one customer that's leaned into both commercial and consumer. Is it changing? Is the appetite, you know, like compare and contrast appetite to do both consumer and retail and consumer changing? If so, why? Why now? Is it still slow? These are banks.
They are banks, which again is a great customer base to have.
They move slow.
They do move slow. Ultimately, you know, you're there. I think them looking to us, which again is one of the reasons why we're so excited about AI, looking for us to take them on the journey.
OK.
Whether it's AI or just one of our products, we can move as quickly as they want. To the extent folks want to kind of crawl, walk, run, we can take them on that journey as well. We see the platform resonate on a global basis. I think historically, we've seen it resonating primarily in the community bank, credit union, and up to the regional bank market. Larger banks historically have still purchased more in silos. You see opportunities to cross-sell. You see opportunities to leverage the relationship and the success that you've had in one part of the bank. We see opportunities for some of those larger banks to have multiple nCino applications.
As you think about lots of opportunity, lots of runway to grow, there are some threats. There are some challenges. In one case, I feel with AI, while it's a great opportunity, there are opportunities for these big banks that have lots of personnel and lots of IT staff to build custom, build their own, leverage their own data, build their own, you know, bank software alternative. What do you see there? Have you seen some experimentation on the bank side that's trying to do something custom and then coming back to you saying that was just too hard? Walk me through how viable and how big a threat is just a custom alternative to nCino.
Yeah. If I go back, I've been selling software to banks for 25 years. When I started, a lot of banks did their own build.
Yeah.
Right back then, it was on-premise stuff, right?
Yep.
You know, fast forward to today, and there's really a small number of banks who have the resources, both from a capital perspective and maybe as importantly, if not more, from a people perspective, right, to build.
Yep.
If you think about the kind of war for talent, right?
Yep.
It's tough to compete against, you know, some of these software companies if you're a bank to get the best and the brightest to help drive. If you take a step back and look at the customer base, I think, you know, community banks, credit unions, up to a certain size regional bank very much are going to outsource that, right? Just as we've seen with their cloud operations to date. For nCino, we would expect to help educate them and take them on that journey, like I said, at a pace that they're comfortable going. As you look up market, there's a little bit more, I'd say, optionality that we want to make sure that we facilitate. We've had very healthy conversations with customers around co-developing agents, for example. I think what's really important for us to do, and it's still early, right?
It's still early in terms of some of the adoption, is making sure they understand what our roadmap is, where we're focused on whether it's leveraging Banking Advisor and our generative AI capabilities or where we're building agents. They can see that. It allows them to go focus maybe on other things.
Yep.
Right? Ultimately, leverage our agents. If they want to build some of their own agents, we can work with them around that as well. That gets back to the data that we have that maybe we're able to provide access to our customers, which I think is pretty unique.
You mentioned Banking Advisor a couple of times. We're talking about AI. Maybe just for this audience, what is Banking Advisor? What does it do? What's resonating most? You mentioned on the last call, actually, opening doors with Banking Advisor, winning some business because of the roadmap around Banking Advisor. Let's step back. What is it? What's resonating with some customers?
Yeah, maybe to take a step back, if you think about where we focus in a financial institution, you know, we focus historically on the middle and back office. It's where all the processes are.
Automation.
Right, the automation. If you think about AI and what AI does, it's just ripe, right, to help further automate what we've already automated by going to the cloud, right? This is just a newer technology, right, to help continue that evolution of the software. If we think about our AI strategy, there's three pillars. Banking Advisor being the first one, which is really our generative AI strategy. Think about us automating various tasks. A couple of examples is we've got data validation. If you're trying to look through and process a mortgage application, you know, you make sure all the data is there. Make sure it's all right. We can automate that. Generally, those things take 20 to 30 minutes apiece without automation. We can significantly accelerate that.
Yeah.
Right? Credit memo narratives is one that I think has resonated quite well. If you've ever done a commercial loan, you need to put a credit memo together. You need to walk through the opportunity, the industry, the company, the financials, and ultimately.
That's all manually done today.
It's all manually done. It takes time, right? Credit memo narratives automate that. Instead of spending maybe hours putting that together, it does it in seconds, minutes, and then you can just spend a little bit of time checking it, making sure it's right and going. Think about how quickly you can accelerate a loan decision, right? How quickly you can get back to your customer and let them know if they were approved and for how much.
I can see how the bank loan officer would want that, but would the bank want to spend on that?
It comes with nCino. As you use Banking Advisor, there's a usage opportunity for us, right? The more you use it, you get credits, and you'll go through those credits. It does, because ultimately what we're doing with Banking Advisor, we have an operational analytics dashboard. As we drive efficiency, we present that back to the customer. They see the efficiency gains that they're getting, and they can then take that information and extrapolate it to their P&L and truly see the savings that they're getting, right? Which will allow them to make decisions about, do I need to hire more? Do I need less? Do I want to take, you know, have two people?
Do I want to go put one person in, have them more focused on business, you know, building business outside of the office while this person can handle, you know, all of the back office tasks, if you will.
Sure.
I think that's exciting. We had two skills last year. We came out with 16 more this year in May. Ultimately, over time, that's just how the software will evolve. I imagine down the road, we'll stop talking about Banking Advisor, and it'll just kind of be part of the software.
Part of the software, part of the automation stack.
That's right.
It feels like people don't necessarily buy AI. They buy a solution. They buy automation.
That's right.
Interesting. Walk me through this business model change. We have a lot of discussion around SaaS pricing changes, right? This move away from seats and maybe walk through how the product was historically priced, what the new platform pricing is going to be, and where we're at on that journey.
We saw, going back now a couple of years, actually, that the software we were providing was making our customers more efficient, which is great, right? They're happy. We're getting the outcomes that they want, and we're doing our job.
Automation software works.
Right. The challenge from our perspective is the more efficient we make them, the less seats that they need. We had a seat-based model, right? That particularly, I think, came to us because commercial was much more high touch, low volume. That seat thing wasn't as much of an issue. As we went into consumer, we see it, it's much more low touch and high volume. We saw the opportunity to automate away all seats and all human intervention, again, subject to the financial institution's comfort levels with risk. We said, you know, our seat model won't work.
Nope.
Right? We spent a lot of time over the last couple of years evolving our model away from seats. Our new model, which formally went into effect on February 1.
Feb 1.
Even though we've been testing it for quite some time, we've had plenty of at-bats, it is an asset-based model. You're going to pay us based on your assets. Every year, we go back and calculate the assets that you have on nCino. To the extent that your asset growth has gone from one tier of the bands, I should say, one band to another, the next year, you're going to pay us under the new band.
OK.
And.
The umbrella there would be if you're only doing commercial, that's just the commercial assets they have.
That's right.
If you layer in retail, it's a whole new revenue opportunity.
That's exactly right.
OK.
That's exactly right. For our customers, I think they purchase software frequently. A lot of the core is priced that way.
Yep.
That asset-based model wasn't new to them. I think for us, getting away from seats, you know, how many seats do you need? You know, our contracts are four years on average. For someone to predict how many seats they need three years from now, it actually is a little bit more complicated than it may sound in terms of four.
Four-year contracts on average. You just started in February, so think about this as a four-year transition, kind of.
That's right. That's what it should be. We're actually.
It changes upon renewal.
Yeah, we're about 21% of the way through.
21 already. OK.
About a third of that's mortgage, so about $14 million on the non-mortgage base.
OK.
Of our ACV. In theory, you'd have 25% each year. It gets a little fluid because when someone comes back to buy a new product, we would use that as an opportunity to pivot. Sean mentioned this on our earnings call a couple of weeks ago, the AI discussion, because in order to use our AI capabilities, you need to be on the new model. We've actually seen that as an accelerator of certain conversations.
Early renewal to the new pricing if they want to have some AI capabilities. Could that speed things up twice as fast to have move things over, or it's hard to say?
It's hard to say, but I think we do view that as a catalyst to accelerate it.
OK.
Our focus is moving them, you know, as quickly as we can. When we see an opportunity, whether it's through a new product purchase or, again, you know, for Banking Advisor or our AI stuff to do that.
Early days, but once you get a customer on asset-based, you know, platform fees, does it reduce the procurement barrier to expand? Would it have to still go through a whole new procurement process to add consumer or add mortgage?
It's going to depend on the bank and their procurement processes. Generally, you know, the great thing is you have a contract in place, so adding a new product should be a much more streamlined process because the framework's there. Generally, you'd have a little amendment with a new product, and those we can do very quickly.
Sure.
Yeah.
Let's spend time on the growth algorithm as you think about this business. We have, over a two or three-year period, lots of opportunity consumer. You have opportunity still in your core commercial product. You have this whole Banking Advisor AI opportunity. You get opportunity around the change to asset-based pricing. Three years from now, art of possible, is there a path to get this back to, you know, a 15%, 20% kind of grower? Do you think the banking world you live in, it's regulated, they move slow? Mid-teens growth is probably the right way to think about your business.
Yeah. I will not look that far into the future. As we've evolved our guidance philosophy this year, I want to make sure we stay.
You're trying to get ahead of that, yeah.
You see me smiling. We don't get ahead of our skis. Look, I said on our investor day in May, you know, in September of 2023, we put out a rule of 50 framework.
Rule of 50.
We said that was 35% non-GAAP operating margin.
Yep.
I reiterated that we felt confident and maybe even more confident in that in light of some of the efficiency opportunities we were seeing with AI, even going back several months ago.
That's a Viva-like model then. You're talking mid-teens kind of growth with a 35%+ margin model to get to rule of 50.
Right. As we said, we believe that framework is still intact from when we first said it.
OK.
That said, again, in light of our revised guidance philosophy, we also said we're not going to talk about the long-term growth algorithm. First, we're going to focus on rule of 40, right, before we talk about rule of 50.
Fair.
We said around the fourth quarter of next year, we would be a rule of 40 company.
OK.
We did not make an assumption around what the components would be.
Sure.
Hopefully, we've been consistent in terms of the market opportunity we think we have, the early stages. Now, I think we're at a new inflection point with AI.
Yep.
An opportunity to truly, you know, ride that wave and lead that wave on a global basis. We do want to err on the side of growth, and we would certainly love to see, you know, growth drive as much of that rule of 40 as possible. Again, we made the commitment around the fourth quarter of next year of getting there one way or the other.
Fair. One last question from me. Any from the audience here before I ask my last question? Great. I like to think about future facts, right? I think Jamie Dimon talks about leaders focus too much on what's happened in the past, don't spend enough time thinking about what could happen. Thinking out a year from now, what's a trend or a product or something in your business that you think investors would be really excited about that they're not really talking about today?
They're not really talking about today. There's probably a couple of things I would highlight. I'd probably put it under the five growth initiatives that we laid out at our investor day. AI, obviously being a big part of that. In terms of not talking about, I think maybe the data asset that we have, both in terms of the data from our customers that we have, and we've got rights to use under various circumstances, as well as, again, that process data, where we truly understand how the bank operates and how we can make them better.
OK.
Right. I think that hopefully that appreciation comes out more and more as we help folks understand that better.
Sure.
Right. That's something we're focused on doing. AI. The second thing that we've talked about is the credit union space. As our consumer lending product matured, we formed a credit union team. That's such a big part of credit unions is consumer lending.
Yeah.
We see a nice opportunity there.
OK.
I think that platform story resonates where consumer, small business, mortgage, commercial.
Bundle.
Standardizing on that platform.
Yeah.
We think there's an opportunity there. Again, landing anywhere, right? If someone doesn't want to change consumer right now, we can start with small business. We can pull consumer in later, pull mortgage in, et cetera. I think we're excited about that. International.
A big push the last couple of years.
Yes.
Still untapped.
Still untapped. I think we think there's opportunities from an execution perspective that we have made some changes, and for us to go focus better, particularly in the middle on the continent.
Yeah.
We brought in a new leader, built that team around them. We are very pleased with what we've seen. We are excited about that, as well as Japan. I think you've heard us talk about Japan for a while. Great geo, I think opportunity for us. It moves at a pace that it moves, never as quickly as I want. We see a lot of opportunities. International would be the third piece. The final two would be mortgage. Our mortgage business, as challenging as that market's been, has grown every year that we've owned it, which I think is exceptional, including growing 22% year over year last quarter. That cross-sell motion into the depositories and into our customer base, in addition to continuing to focus on the IMB space, I think is an opportunity, particularly up market.
A lot of our best customers, when they made their mortgage buying decisions, we did not have a mortgage solution. We do now. We've invested to make sure that from a scalability standpoint, we've got all the boxes checked. We are excited about that. The final one is onboarding. We've made some strategic acquisitions over the last little over a year with DocFox and then Full Circle in November. We think onboarding is a global opportunity for us, particularly as we think about the commercial lending and kind of close off where we started the opportunity in commercial, the onboarding of complex commercial customers. We think we have a unique offering where it's on an integrated basis. You can onboard a customer and go immediately into doing a loan or opening an account. We think that is a unique functionality in the market.
Greg, we're out of time. Thank you so much for sharing your insights here. Thank you.
Always a pleasure.