Right. And I'm like, turn it off. No, no. But then yeah. Okay. Okay. Well, excellent. Well, hey, good morning, everyone. Welcome to day one of the Barclays TMT Conference. My name is Zach Cacaglia. I cover software here at Barclays. Really honored to have with us, Greg Orenstein, Chief Financial Officer of nCino. We've got about 30 minutes together. Let's maybe take the first 20 or 25 minutes to go through some fireside chat with Greg, which I know is gonna be fun. A lot of stuff to talk about from last quarter, and then we'd love to make this interactive. So if anyone's got any questions, just pop up your hand and we can get a mic around for the benefit of the webcast. So with that, Greg, thanks so much for being with us here today.
Pleasure being here. Always, always good to spend time with you.
Wouldn't be Barclays Conference without nCino. So, you know, for those of us that remember nCino back from the 2020 IPO, we remember a leading platform in commercial lending here in the U.S. and a growing international story. Can you just talk about how the story has evolved since then and what focus areas and new markets are sort of top of mind? Maybe we'll start there.
Sure. It does seem like quite some time ago.
Yeah. Yeah. Seriously.
and the company has evolved quite a bit, so you're right. We started as you know focused on commercial lending, but we always had this vision of building out a platform across the financial institution. We started with commercial, expanding into small business, consumer, ultimately mortgage, and we do that through lending, right? Account opening, onboarding, and then portfolio monitoring. We do that all on a single, unique platform, and we do it globally, and the same platform that we serve a community bank here in the U.S. that scales to Bank of America and Wells Fargo also is the same platform that we are thrilled to say supports Barclays in the U.K.
And I think that's one of the unique things about the company, the geographic presence that we have, as well as, again, that platform that's demonstrated an ability to scale up market to the largest banks in the world as well as globally. In terms of the international expansion, we really started in the U.K. In UKI, we had some nice success. We are very focused on expanding on the continent. We see that as a really nice opportunity. In Japan is a geo that we've been quite bullish about. And over the past several quarters, you've seen some nice commentary around some wins that we've had.
Absolutely.
That we've had there. Overall, SAM's actually about half outside of the US, and so it's right now about 21% of sub-revs, and we see a big opportunity globally while we continue to take customers and gain market share here in the US.
Yeah. Absolutely. I'm gonna zoom in just a little bit, right? I mean, we just reported third quarter results last week. Maybe just for the benefit of the group, can we just recap some of the key takeaways that maybe you were most proud of as you look back at nCino's third quarter?
We thought it was a very solid quarter.
Thank you.
Thank you. Thank you. Another really solid quarter of execution. So really proud of the team and the focus that we've had throughout this year. And so another beat-and-raise quarter, which we were excited about. I think of particular note was the 600 basis point increase year- over- year and quarter over quarter in our operating margin. I think that stood out. And the other thing I think that stood out was the traction that we're getting with our AI and our Banking Advisor. We announced over 110 customers have now signed up to use Banking Advisor. And that's really exciting. We have a lot of initiatives focusing on making sure the adoption is where we want and expect it to be. But I think overall just solid results from the team and for the quarter. And you know I think right now we're feeling, we're feeling good.
We still have to finish out the year. Fourth quarter, as you know, is always our biggest quarter bookings-wise, but I think in terms of the sales activity that we see, you know, we're feeling like we're in a good spot right now. We just need to keep focused on executing as we have throughout this year.
Absolutely. Maybe that's a good segue just to talk about your end market and kinda maybe how that's evolved. You know, obviously we had an uptick in interest rates and kind of the liquidity crisis a couple of years ago, which led to, you know, some sluggishness, I think, in kinda end market spending, but over the last few quarters, it's kinda felt like things have picked up nicely, right? I mean, just going back to your point just on bookings and year to date and hopefully looking into Q4, maybe the question, Greg, is how would you say the end market is faring currently, and sort of what do you feel like as you keep your finger on the pulse, what's customers' willingness to spend and invest right now?
Overall, we spend time with our customers every day, right, and overall, I think it's a positive environment. Financial institutions, you know, balance sheets in general are healthy, right? We did come through some difficult challenges as an industry. Obviously, you know, rising interest rates, you know, rising at such a speed over such a short time period really shook the industry, obviously leading to the liquidity crisis. The farther that's gotten behind us, I think the more we've evolved back to a more normalized environment from our perspective, and so bank spend feels good. You can't deny that, you know, AI, obviously, it's top of everyone's mind, but it is a catalyst for discussion, right? It's a catalyst to engage with customers and with prospects.
And I think that has also increased the sales activity that we see out there, particularly in light of all the innovation that we've been investing in and we're able to showcase with live product, you know, out in the marketplace. And so yeah, it feels much better. And we had such headwinds that just the headwinds subsiding, I think, is a big change for us.
Absolutely.
You know, we always welcome tailwinds, but yeah, right now it feels good. I think it feels, you know, more like what we were used to, you know, frankly going back to pre-COVID days, and then you had the COVID hangover after that.
Yeah.
So, again, it comes back to focus and execution and accountability. That's what Sean Desmond, our CRO, is constantly beating the drum on. And I think that the entire organization has embraced that drumbeat.
Yeah. Absolutely. Maybe we can dig into some of the specific businesses here. And I wanna start with U.S. commercial lending. So that's really where nCino got its start. And I think an investor question that I get once in a while is how much more runway is there for growth in U.S. commercial, in terms of like adding new bank logos, for example, right? Like the international story is very clear, right? But in the U.S., how do you think about where we are in kind of that adoption curve?
We still think there's plenty of opportunity, and even if we have a logo, you know, we still think that there's opportunity in many cases within the commercial part of the bank that we haven't fully been deployed at, and so just because we have a logo, don't assume that that has ended the opportunity we have for whatever product that we may have, you know, with that financial institution. Even last quarter, we announced two expansions with top banks, right, and so you know, that product continues to, I think, lead the market on a global basis, and the other thing I think that we're able to leverage with that product is across the financial institution, and this is why our platform story, I think, is so important and it resonates.
We can land, I think, with any one of our products, but once we land, we can expand across the bank. So if they did buy us for commercial and let's just say that we are fully saturated, right? I think our customer base is generally a very happy customer base. And we have the opportunity because of the faith that they've put in us and the trust they have to go back and say, "Okay, we had such success with commercial. Let's go to small business. Let's go to consumer, right? Let's go to mortgage. Let's account opening." And so I think all of that provides opportunities for, for sales. And then within the commercial side of the bank, this gets back to our Banking Advisor AI functionality as well as Onboarding with an acquisition that we did.
You know, we have more things to go back and sell into that same bank if just kind of the general commercial lending, if they're fully adopted there.
Gotcha. Gotcha. Maybe we can talk about the other side of the lending business, which is international. You know, those markets can be a bit of an S-curve, right, in terms of, you know, getting your initial reference customers. You brought up some great examples from Japan and where you started in UKI, for example. Maybe, maybe a two-part question. Remind us what are some of the other key international markets where nCino has a presence? And then secondly, you know, how would you sort of describe the competitive landscape? Because I think one of the strengths of the business here in the U.S. is that this is really the leading platform when it comes to U.S. commercial lending. Is it the same internationally as well?
From our perspective, absolutely. I mean, we don't see, you know, a competitor that does what we do, and so our biggest competitor by far, we always say, is just do nothing. Right? Just kick the can down the road. You know, you historically saw a little bit more build mentality or, you know, buy a framework and build on that, but again, you know, with the success that we've had at the largest institutions in the world on a global basis, you know, I think we have a very compelling thing. Why would you wanna go through that pain, right, and take the risk of it not being successful when we demonstrated such success on a global basis, and so I think competitive landscape for us is very, very favorable, and it's really more about us focusing and executing.
And so we did get our start, internationally in UKI. We had a lot of early success there. It was great. We do see opportunity on the continent this year. Earlier in the year, we talked about Spain and the Nordics being focus areas. We were pleased to see our first Spanish logo in the second quarter.
You had a new leader there, if I'm not mistaken, right?
We did. That's right.
In nCino.
He came on at the end of last year.
Yep.
And so again, we've been obviously tracking the progress. And I think so far we've been pleased. We've been very pleased with what we've seen from him and the team that we've built around him. And so we'll continue to kinda go country by country, right? Stay focused. The first win's always the hardest.
Yep.
Right? Get that customer live, successful, and then, you know, generally our success is driven by word of mouth, and then again, I mentioned Japan earlier. I can't reinforce the opportunity that we see there with one of the largest financial services markets in the globe.
That's right.
Yeah. So feeling good, and again, focus, execute, hold people accountable.
Absolutely. So we've talked about kinda commercial lending, right, both U.S. and internationally. I wanna maybe move to consumer banking as well. Since I think at investor day back in May, we heard that that was the fastest growing portion of ACV. And you correct me there if I'm wrong. But would you say that most of the opportunity in consumer banking is white space, kinda similar to what commercial was, I think, earlier in the journey? And maybe relatedly, how is that competitive landscape sort of maybe talk us through the competitive landscape on that consumer side?
Yeah. I think at investor day, we were highlighting its growth, not necessarily that it was the fastest growing.
Understood.
Sorry.
Fastest growing product.
No, no. But to that point, it was growing and has been growing nicely for us. It is a rip and replace for the most part, with that product. And so we see competitors out there. Again, I think we have a different value proposition, not just with the functionality that we've built for consumer, but also as part of our single platform story, right? And so again, if you have us for commercial, for example, you know, it makes sense to have us for consumer and small business and mortgage, right, and really have all of that information around the customer versus having different tech stacks where a customer can interact with you with one, you know, tech stack.
But if they go into a different part of the bank, that bank actually has no idea who you are as a customer because it's a completely different system.
Right.
Right? And so where we've seen a lot of success, I'd say where we see the most success with our consumer is that platform play and commercial customers adopting it. You know, that said, at investor day, you know, there was a $200 billion bank that stood on stage and talked about them adopting consumer. That was actually where we landed with that financial institution, right? And so I think that reinforces the fact that product is best of market. We can land with it and then drag commercial along.
Yep.
Right? You know, which is something that we focus on doing as well.
Sure.
So feel good about that. To me, it's kinda just steady as she goes, progress.
Yep.
And, you know, I think that product's matured quite a bit. I think our spend has been aligned with the market as we kinda got over some investment hurdles. And, now again, it gets back to executing.
Got it. Got it. You know, I think the pricing model for consumer banking is platform-based. So I'm gonna use this as a segue to touch on that topic 'cause I think it's important. You know, remind us how, right? 'Cause you talked about a $200 billion bank. I mean, remind us how platform pricing works versus kinda the current seat-based model on the commercial side. And maybe, you know, what inning are we in in sort of that transition, if you will, to platform pricing?
All of our pricing now is based on assets, commercial, consumer. Mortgage is based on loan volume.
Right.
Right? So let's leave mortgage to the side for a minute. We started that officially this year in terms of transitioning, as you know, from our old seat-based pricing model to based on assets and its assets that are actually sitting on the nCino platform. And, we did that for a couple of reasons. The main one was we saw the efficiency gains our customers were getting from our software and therefore the need for less seats over time. And we said that's not really an ideal business model.
Yep.
Right? But we also saw the growth that they were getting from an asset standpoint. And so by transitioning to platform pricing, we've been able to align to the value that they're getting. As their assets grow, we get a little piece of that. They're happy. We're happy. And you keep going together. And so we officially started that this year. We did quite a bit of testing over the prior year. At the end of the third quarter, we said about 27% of our overall ACV was on the new platform pricing model. And that does include mortgage, about a quarter of it on mortgage. And that is our only model going forward. And so whether it's a new sale or someone comes up for renewal, that's the discussion that we have.
And the other thing that we've been really excited about is, in order to use our Banking Advisor AI skills, you need to be on the new model.
Right.
And so not only have we seen that helping us, you know, getting deals closed with net new customers and moving things along the pipeline, but also from a renewal perspective, accelerating some renewals. Our average contract length, I guess, about four years, as you know. So in theory, it would take about four years to convert the whole base. But we see opportunities to accelerate that, and get more folks converted sooner because they want to start using our AI capabilities.
Maybe that's a good reminder. I mean, I think that, you know, 27% just a few quarters through. I think you've talked about this phenomenon of kinda early renewals. Is that what's driving it? Do customers really wanna get that Banking Advisor? And that's why maybe they're coming back to the table a little sooner than they typically would? Talk about that early renewal kinda, you know, kinda aspect that we've seen.
Yeah. We've absolutely seen that, and I would expect as that momentum continues to build, you know, that we would see more of that, which is great, and so yes, in order to use the AI capabilities, you need to be on the platform and the pricing.
Got it.
and we also use, you know, if we're gonna go sell them something new, let's say they're a consumer customer, we're gonna go sell them commercial. We also use that as a pivot point to get them on the new platform pricing.
Got it.
So, again, aligning value and outcomes, right, with what they're paying, we think is, you know, makes a lot of sense. And it's gone very well. We've talked about, again, a lot of planning went into this. You know, we got a lot of lessons learned from seeing other folks go through pricing transitions. And so we feel good about that. And we also feel good so far about the price uplift that we're getting just purely on apples-to-apples basis. We said that we were targeting about a 10% price uplift, and that would include getting an initial bucket of AI credits to use. And so far we felt good about getting that overall. We said before people plug it in their model, let's get through Q4 'cause this is our biggest renewal quarter. But I think that's gone well.
primarily on the old seat-based model, price was locked for the term.
Right.
Which, on average, was four years. And so as inflation ripped over the last few years, you know, our customers weren't compensating for that. And so I think it makes for an easier conversation to go in and say, you know, kinda, let's start with making up for lost time and then we can build from there.
Yeah. Yeah. Absolutely. You know, so we've talked about commercial. We've talked about consumer. I wanna hit on one of the last pieces here, which is mortgage, which has actually been growing pretty nicely this year, right? So, and I think some of that has been driven by just sort of mortgage volumes as interest rates have eased a little bit. You know, talk to us a little bit about that business. What's your outlook on kinda how mortgage volumes could kinda contribute, maybe just a quick detour in the mortgage business and kinda the state of the union?
Very pleased with the mortgage performance. As you know, the second quarter it was up 22% year- over- year. This quarter we had a tough comp. As you know, if you exclude that, it was also up over 20% in the third quarter, and I think that's really a reflection of a few things. One is I do think the mortgage market in the US overall has become more stable. You know, obviously there's an expectation that rates are gonna come down and ultimately translate into lower mortgage rates, even though we haven't really seen that play out.
Right.
And I also think that it's really a byproduct of a lot of hard work and effort from our team during, I'll say, some of the mortgage turmoil going back two or so years ago where the team stayed very focused on executing the strategy and the plan. I believe we took market share. And I believe that you're seeing some of the output of those customers coming onto nCino's mortgage platform, getting live and loan volume starting to go through the platform. And so, while it's obviously been difficult a few years, that mortgage business has grown every year that we've owned it. Right? Even in those more difficult time periods.
And so I do think, as you know, we think about potential tailwinds, you know, going into next year and beyond, coming from what I believe is a state of general stability, you know. I think that we have, you know. I think that could be a nice tailwind for us. And hopefully we build from here.
That's great to hear.
Yeah.
That's really great to hear.
Great technology, and you know, we've been able to take that technology outside of mortgage and expand further across various parts of nCino as well, so we feel good about where we are now, again, after a tough couple of years.
What's great about mortgage businesses having covered Ellie Mae in the past, I mean, as you gained share in tough markets, the upswing only becomes that much more fun.
Yes.
Right? So, so knock on wood, right?
We're looking forward to that.
Absolutely. Absolutely. I wanna shift over to the model a little bit, and maybe start with ACV, which is a new S disclosure you made this year and has been super helpful. You know, you've been able to raise the revenue guide through this year all while keeping your ACV guide unchanged. Can you just talk about that dynamic a little bit? And I think more importantly, how should we think about ACV this year being a leading indicator for revenue in future years?
So we did come out, you know, with a whole new guidance framework and philosophy this year, which we've gotten a lot of good feedback on, which is great. And we took a lot of feedback in what we ended up kinda finalizing on for this year. So we very much appreciate our investors and their thoughts. And so for ACV, it was a new KPI for us. We said it was an annual guide. We've always been, I'd say, reluctant or concerned to get into that quarterly game, where again, because our customers are generally we say they're generational customers or they make generational buying decisions. The last thing you wanna do is make, you know, a short-term decision to meet a, you know, what is ultimately just a random KPI.
Correct.
Right? That gives us, you know, value over what could be 10, 15, 20 years of that customer being, and so we thought it was an annual metric, and I think if we, as we've challenged ourselves through the year, that's made sense. That said, qualitatively, we have given commentary both after Q2 and Q3 around where our heads were in terms of the progress and noting that we felt incrementally better after Q2 than Q1 and incrementally better after Q3 than Q2, and so we believe we are, you know, well-positioned, we have to finish the year and execute, no doubt about that, but I think it is helpful to get to your point. We said that if we hit our ACV guide, that should help re-accelerate revenue next year.
Organically.
Organic.
Right.
Organic revenue. That's right. Which we're around, you know, exiting this year based on the guide around 8%. You know, that has been going down, whether it's been churn by unnatural churn, or macro. And so just to have that inflection point pivot and then us to be able to build from there is what we're focused on.
Yep.
And, again, right now it's heads down. Let's finish the year strong and, you know, set ourselves up for that re-acceleration that we're excited about. And in the meantime, if we're able to go do that, you know, going back to where our operating margins are going and operating income and so, you know, creating value, on the bottom line as well.
Right. That path to Rule of 40, right? By the, you know, exiting next year, right?
That's right.
I think has always been that north star. So, boy, do you wanna talk about ACV? Wanna keep on? What last question on ACV? ACV slash revenue, one of the things about the new platform pricing model was a change in RevRec, right? Like faster RevRec. Because going back to the IPO, this was a, you know, it was a seat-based kind of activation model. So it would really take a long time for kinda bookings to waterfall into revenue. But I think with platform pricing, that could potentially change. Remind us, is that happening right now? You know, is there anything that we should be thinking about that with that RevRec item vis-à-vis platform pricing going into future years? If that makes sense.
It does. And yes, the model changed and that does, you know, drive different RevRec, right? Before we would have someone commit to a certain amount of seats. And again, we would work with them on when those seats would turn on and actually flow through revenue.
Right.
Now they're committing to a platform pricing, and so we'll see the revenue start. It gets straight line through the term, just based on the accounting rules. Sometimes from a cash flow in the first half of the contract term, you'll see less cash because we can ramp a deal, right?
Yep.
Three-year deal is an example. You'll pay us $1 year one, $2 year two as you ramp, and then kinda exit at year three. The RevRec is $2 across each one of those years. Cash, you'll get $1 year one, $2 in year two and three.
Right.
And we have a slide in our earnings presentation, for folks to be able to see that. But that's right. And so we feel good about that. You know, we've had good visibility on revenue. It does focus us on making sure from a deal and timing standpoint, you know, we're aligned with where that comes as we do planning. But that is the model. And again, we tested it out for a while. We feel good about it. And then it just gets back to just continue to execute on the sales front.
Yeah.
As we feel like we've been doing.
Absolutely. Maybe just to move to margins, right? Going back to kinda that Rule of 40 that you've talked about. You know, I think nCino was up to over 25% operating margins here this past quarter. Again, you've been targeting to get back to get to Rule of 40 exiting next year, kinda through a combination of re-accelerating organic growth as we talked about, and then also continuing to expand margins. Maybe the question, Greg, is what are some of the key levers for margin expansion that come to mind, as you think about that plan, right? Kinda exiting next year.
You know, one of the things that we've highlighted going back to our investor day in May is an opportunity to improve our gross margins for our professional services. And so the team has done a good job of, you know, getting more prescriptive from an implementation standpoint. And also we've invested in tooling. Internally, we have something we call Project SevZero, which is leveraging AI to help accelerate implementation timelines. And so we said, you know, with that, focusing on improving that margin is our focus versus driving more professional services revenue. 'Cause frankly, the more efficient we can get, the more efficient we can implement something, right? The shorter it should take us to do that.
Actually, we can go in with for a customer and give them maybe a better price point, right, to implement it and us actually have better margins from that. So that is, I think, a lever. Then I think also, you know, we've continued to tweak the organization in terms of where we see pockets of opportunity. We did hold back some dollars and savings from the reduction in force that we did in May. We held back $2 million in the third quarter. We didn't see really an area to spend it. So we passed that through. We still have $2 million-ish that we held for this quarter. We'll do the same thing. Either we'll pass it through or, if there's something that we think is gonna drive growth, we still think there's a massive growth opportunity with this, with this business.
You know, then happy to come and say we took $X and invested it here and here's the return that we think we're gonna get.
Right.
Yeah.
You know, I think that professional services item is really interesting, and kinda the, you know, obviously this is a SaaS business. That's really that higher gross margin piece. That's very high lifetime value as well. Talk to us about sort of where you think the services revenue mix goes, right? 'Cause there are two aspects of the gross margin. You could obviously improve things like utilization and pricing and whatnot, right? But then also as a mix of the total business, that headwind can also kinda change over time. So what's the right mix of professional services revenue as you think about the, you know, future?
Yeah. From a percentage standpoint, and we've been saying this for a while because for us, we're a product company, right? and we've really, you know, we've got great SI partners historically that we've worked with where they've been the lead for implementations, particularly at larger financial institutions around the globe. So we've really never tried to focus on, you know, growing that. But over time because of, you know, I think the subscription and the software and with that mindset, the mixes continue to creep more and more towards the subscription line.
Got it.
And so we've been trending down, you know, towards and past the 10%. We would expect that to continue, slowly trending down, particularly as we get more and more efficient with implementations and can, you know, implement them quicker. Again, saves money from a customer perspective. For us, we want that margin to increase. And again, both of us would be real happy with that approach.
Yeah. Absolutely. You know, I wanna wrap up here just on capital allocation. You know, nCino I think did a $100 million buyback authorization that finished this past quarter. And of course this week, you know, you authorized a new $100 million buyback to replace it. And I think this is kinda the first time that we've returned capital through buybacks before. You know, how do you and Sean and the board kinda think about just about, you know, that capital allocation strategy going forward? Open-ended.
Sure. And I touched upon this a little bit on the call. You know, as we thought about going into this quarter and into the end of the year, obviously we had been active from an M&A standpoint, you know, over the prior 12-18 months. I think we've been very vocal about our focus internally on making sure, you know, we're comfortable with the integrations and we're comfortable ultimately getting the return from those investments and acquisitions before we went off and potentially pursued others. We keep our eyes and ears open because it is, you know, a quickly changing market. But again, I think we feel very good about the product portfolio we have, right? And there's not, as I sit here today, some big hole that I say we need to go fill.
Frankly, like when we are a lending company and we didn't have a mortgage solution, to us that was.
Right.
Something that we needed to go do.
Right.
And so I talked about really a combination of stock buyback, you know, and/or building up some cash on the balance sheet, which is obvious as a CFO is never a bad thing, as well as, you know, we do have a credit line and potentially paying that down. But ultimately, again, as we, you know, see where we were at the end of last week, you know, I think we certainly spoke up in terms of where we view the trajectory of the business and the excitement and optimism that we have while continuing to beat the drum. We gotta keep executing. But it was great to see the board's confidence in the strategy. And, you know, ultimately our shareholders are pleased to see that as well.
Yep. I think, I couldn't think of a better place to end. So with that, Greg, thank you so much for the time. Really enjoyed it.
Always a pleasure.
Same here.
Thank you very much.
Thank you.