nCino, Inc. (NASDAQ:NCNO) Q3 2024 Earnings Call Transcript
nCino, Inc. (NASDAQ:NCNO) Q3 2024 Earnings Call Transcript November 29, 2023
nCino, Inc. beats earnings expectations. Reported EPS is $0.14, expectations were $0.11.
Operator: Thank you for standing by, and welcome to nCino's Third Quarter Fiscal Year 2024 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. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to turn the call over to your host, Mr. Harrison Master, Investor Relations. Please go ahead.
Harrison Masters: Good afternoon and welcome to nCino's third quarter fiscal 2024 earnings call. With me on today's call are Pierre Naude, nCino's Chairman and Chief Executive Officer; Gregory Orenstein, Chief Financial Officer; and Josh Glover, President and Chief Revenue Officer. During the course of this conference call, we will make forward-looking statements regarding trends, strategies and the anticipated performance of our business. These forward-looking statements are based on management's current views and expectations, 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.incno.com. With that, I will now turn the call over to Pierre.
Pierre Naude: Thank you, Harrison, and thank you for joining us this afternoon to review our third quarter fiscal 2024 performance. We had another solid quarter despite the continued unsettled macroeconomic environment. We exceeded the high end of our revenue guidance with subscription revenues of $104.8 million, up 19% year-over-year, and total revenues of $121.9 million, up 16% year-over-year. Once again, we significantly increased profitability, posting a 17% non-GAAP operating income margin even as we continue to invest in the business, specifically in product innovation. Our positive view of the quarter reflects a number of significant product wins across the platform. In particular, we are very excited to announce signing our first consumer lending deal with an enterprise bank in the United States, an over $200 billion institution.
Over the past several quarters, we have been highlighting the progress we have made maturing our consumer lending product, and we view landing this customer for consumer lending as another validation of that momentum as well as of our overall single platform product strategy. We also continued to strike in our U.S. mortgage business. Our financial results reflect double-digit U.S. mortgage revenue growth. Even despite lower volumes of originations and an uptick in IMB churn, driven by generationally high mortgage rates. These results demonstrate the benefit of cross-selling into our installed base of banks and credit unions, the differentiation of our mortgage technology, and we believe the durability of our business model. A pivotal win for our U.S. mortgage business in the quarter came with our first cross-sell to a regional bank in the U.S. that has been using nCino for both consumer and commercial lending.
Our market-leading mortgage technology further enhances our ability to grow wallet share in an account once a customer experiences the value of our technology. These wins are the result of having our products available on a single integrated platform, and we are excited to deliver an enhanced omnichannel experience for consumer lending in the spring, further leveraging the technology we acquired in the SimpleNexus transaction. As our first generally available point-of-sale journey beyond mortgage, this offering will empower our consumer lending customers to deliver the exceptional point-of-sale experience we offer for mortgage across a broad spectrum of consumer lending products. We expect this offering to further accelerate sales for both our consumer and mortgage lending solutions.
As we continue to innovate and expand the capabilities of the platform, I'm also excited by the AI capabilities being introduced through banking adviser, which leverages our data expertise. Over the past four years, we have been working with our customers to create a large differentiated pool of commercial and consumer banking data, including mortgage data. Today, we are well positioned to provide valuable and actionable insights from data aggregated across our customer base and integrated into our single platform. Access to this data is a powerful enabler and our deep domain expertise is informing our AI strategy. The industry has taken notice of this expertise as evidenced by the over 1,200 people who registered for our initial AI webinar in September.
When available early next year, banking adviser will help usher in the next wave of intelligent automation, delivered on a single platform for originating any loan product and opening any account type at critical decision points. Turning to our international business. In Q3, we added our largest customer to date in Japan by signing Yamaguchi Financial Group, YMFG, which occupies a top spot in the sizable regional Japanese banking market, saw an opportunity with nCino to improve the efficiency of their processes and the user experience they offer to their customers through digital transformation, beginning with their mortgage business. We are excited about the large opportunities we see in the Japanese market and are pleased to see our investments over the past few years there bearing fruit.
Despite this list of Q3 accomplishments, the selling environment does remain challenged in certain parts of our business. Enterprise banks, in particular, continue to be slower signing deals. And unlike the second quarter, we did see a few deals get pushed out of the third quarter as these customers further evaluate their budgets and the potential impact of an evolving interest rate environment on their business. Over the past few weeks, I have traveled to see customers and prospects across North America and Europe. I've come away from these conversations incredibly energized about our opportunity as their needs align so closely with the value proposition of nCino's single platform and product strategy. We built this company and continue to innovate our technology.
So the world's best financial institutions can more efficiently run their operations on a single platform. In this environment, risk reduction and cost savings are paramount, and nCino was proving efficiency and greater security while leveraging data to provide unique insights into our customers' businesses. As the backhoe environment settles down, the institutions leveraging and senior will be better positioned for market share gains, profitability, success and longevity. Our sales pipeline, which remains healthy, reinforces we are on the right path, notwithstanding some lumpiness we have seen this year with enterprise sales opportunities. We are excited to close the year with a strong Q4, positioning nCino for further growth next year and beyond.
Now let me turn the call over to Josh to provide additional details on some of the operational highlights of Q3.
Josh Glover: Thank you, Pierre. We are pleased with our third quarter results and the continued momentum we see in the business. On the sales front, we signed key strategic wins across market segments, geographies and solutions. We added our largest customer to date for consumer lending in this last quarter, signing a $200 billion bank in the United States. This new customer will leverage nCino across all of their consumer lines of business with both in branch and digital workflows to modernize their go-to-market approach. We're extremely proud of the work our product teams have done to enable a best-of-breed consumer lending solution for even the largest banks in the U.S. Also in the quarter, we signed an expansion agreement with an existing regional bank customer for mortgage point of sale, bringing mortgage point of sale, consumer and commercial lending all into a single platform for this over $35 billion bank.
This is an exciting proof point for the scalability of our mortgage technology, having passed a rigorous selection process with one of our most sophisticated customers. We expect to deliver exceptional time to value with a quick go live in the fourth quarter. Our thesis that a mortgage point-of-sale offering would resonate in our legacy bank customer base is proving out, with half of the eight new mortgage logos signed in the third quarter belonging to financial institutions. Our mortgage customer base is now 46% financial institutions on a logo basis versus 25% at the time of the acquisition of SimpleNexus. And our mortgage pipeline on a dollar basis is now comprised 60% of financial institutions. As interest rate pressures continue to drive consolidation of the long tail of IMBs in the industry, we are working with existing customers to see them through this downturn but we are aggressively cross-selling into the underpenetrated banking and credit union markets.
We continue to see our competitive differentiation of mortgage proven out by the market with two additional competitive takeaways this quarter. We continue seeing success with multi-solution net new deals in the quarter, including a $6 billion bank that selected nCino for commercial lending, portfolio analytics and auto spreading and a community bank that picked nCino for commercial and consumer lending as well as auto spreading. A more streamlined and efficient tech stack is resonating even in the current environment, as banks see vendor consolidation as a way to gain critical efficiencies across their operations. Our pipeline for solutions beyond commercial lending continues to develop, making up half of the total pipeline as of quarter end.
Risk management is another key value proposition of our solutions that drove new business in the third quarter. We signed our largest portfolio analytics bank deal to date for commercial real estate stress testing, trend analysis and concentrated risk reporting. We also signed our largest ever portfolio analytics credit union deal this quarter for CECL. Turning to international markets. As Pierre noted, in Japan, our team signed a record deal with Yamaguchi Financial Group, a $150 billion asset bank, making this our largest customer to date in Japan. This opportunity is for a mortgage use case by which prospective homebuyers can apply entirely online, 24 hours a day, replacing a traditional paper process. Jointly, we see a clear expansion path across both corporate and consumer lines of business to help YMFG realize a goal of originating all loan products from a single platform.
We are pleased with the receptivity we're seeing in the Japanese market, a SAM opportunity, we size at $1.4 billion. This win represents another critical lighthouse account and is still relatively new and still underpenetrated market for nCino. Lastly, we completed a year seven-figure ACV expansion deal with an existing UKI customer that first signed in fiscal 2019. This opportunity was for corporate and institutional banking, small and medium enterprise banking, commercial pricing and profitability, ESG and end-to-end mortgage origination. While embracing these newer offerings, this bank also extended their commitment with nCino for another five years. Our broad and diverse customer base continues to be an asset, particularly in a complex macro environment.
Approximately 60% of our gross ACV bookings in the quarter came from existing customers. With 50% of platform customers now using more than one product and 25% year-over-year growth in NIC adoption by platform customers, I cannot overstate the strategic long-term value of our customer relationships. Looking to the fourth quarter, we remain confident in our ability to execute and are well positioned with ample pipeline coverage for a seasonally high fourth quarter sales performance. Greg, can you take us through the financials?
Gregory Orenstein: Thank you, Josh, and thanks, everyone, for joining us this afternoon to review our third quarter fiscal '24 financial results. Please note that all numbers referenced in my remarks are on a non-GAAP basis, unless otherwise stated. A reconciliation to comparable GAAP metrics can be found in today's earnings release which is available on our website and as an exhibit to the Form 8-K furnished with the SEC just before this call. To echo Pierre and Josh, I am pleased with our third quarter financial results. Total revenues for the third quarter of fiscal '24 were $121.9 million, an increase of 16% year-over-year. Subscription revenues for the third quarter were $104.8 million, an increase of 19% year-over-year, representing 86% of total revenues.
Professional services revenues were $17.2 million in the quarter, growing 1% year-over-year. Professional services revenue growth was impacted by pressure on bill rates even as utilization from a billable hours perspective improved year-over-year. As I noted during my Investor Day comments, we will continue to focus on leveraging our extensive SI ecosystem to provide professional services to our customers and prioritize subscription over professional services revenues. Non-U.S. revenues were $23.4 million or 19% of total revenues in the third quarter, up 48% year-over-year. Subscription revenues growth outside the United States outpaced respective total revenues growth with particular strength coming from our Australia and New Zealand operations.
Non-GAAP gross profit for the third quarter of fiscal '24 was $81.1 million, an increase of 18% year-over-year. Non-GAAP gross margin was 67% and compared to 65% in the third quarter of fiscal '23. The gross margin improvement was due to efficiencies realized in our customer support organization while maintaining customer satisfaction ratings of 3.9 or about 98% with 5x the respondents documented versus the year ago quarter. Non-GAAP operating income for the third quarter of fiscal '24 was $20.4 million compared with $2.5 million in the third quarter of fiscal '23. Our non-GAAP operating margin for the third quarter was 17% compared with 2% in the third quarter of fiscal '23. This impressive bottom line performance reflects continued operational discipline and leverage from our business model.
Our non-GAAP results this quarter also include approximately $2.8 million of accrual reversals for tax equalization within sales and marketing and for certain employee benefits across the organization. Non-GAAP net income attributable to nCino for the third quarter of fiscal '24 was $16.2 million or $0.14 per diluted share compared to negative $1.4 million or negative $0.01 per basic and diluted share in the third quarter of fiscal '23. As I noted during our Investor Day, during the third quarter, we rebranded the SimpleNexus solution to nCino Mortgage, resulting in a change to the trade name useful life. As a result, we recorded accelerated amortization to fully amortize the remaining trade name intangible asset. The effect of this change in estimate for the third quarter was an increase in sales and marketing, amortization expense of $10.1 million or $0.09 per basic and diluted share.
The impact of this accelerated amortization expense has been excluded from our non-GAAP results. We ended the quarter with cash and cash equivalents of $105.8 million, including restricted cash. Net cash provided by operating activities was $5.9 million compared to negative $4.1 million in the third quarter of fiscal '23. Capital expenditures were approximately $600,000 in the quarter, resulting in free cash flow of $5.3 million for the third quarter of fiscal '24. You will note incremental spend on the investments line of our balance sheet and statement of cash flows and related disclosures this quarter for a $2.5 million investment in Rich Data Co, an Australia-based leading AI decisioning platform that helps banks make high-quality lending decisions efficiently and safely.
We announced a partnership and reseller arrangement with RDC in February of this year and are proud to cement our relationship with this investment to enable even tighter collaboration between our two organizations. Our remaining performance obligation, or RPO, was $917.1 million as of October 31, 2023, and -- compared with $919.2 million as of October 31, 2022, with $627.6 million in the less than 24 months category up 4% from $603.9 million as of October 31, 2022. As you heard from Pierre and Josh, we saw a great validation of our solutions across market segments, products and geographies in the third quarter. Gross bookings in the third quarter were lower than in the second quarter, but we continue to expect gross bookings in the second half of the year to be better in the first half of the year as previously communicated.
We did see elevated churn in the third quarter from IMBs in our U.S. mortgage business of approximately $5 million of annualized subscription revenues as some IMB struggled with mortgage rates peaking in October to their highest level in over 20 years. This level of churn exceeded our internal churn forecast by about $2.5 million. Fortunately, despite the rate pressure, we are seeing the top performing originators earn a positive production profit as reported in the latest MBA quarterly mortgage bankers performance report. The mortgage industry has come a long way towards rightsizing for current volumes and with our U.S. mortgage business continuing to take market share and grow revenues despite the interest rate pressure and elevated churn, we believe this business is very well positioned for healthy top line growth for years to come.
Churn and down sell for the rest of the business were in line with expectations in the third quarter. But in light of the elevated IMB churn, we are adjusting our churn rate expectation for the full year to about 9% of prior year subscription revenues, up from 6%. Although the outlook for our fourth quarter revenues has been tempered by this heightened churn, we are increasing both the low and high end of our outlook for full year subscription revenues guidance. Please note that this heightened churn rate of 9% also includes the impact of our relationship with one of the three customers that was acquired during the liquidity crisis, ending about nine months before the expiration of their contract which was scheduled to be in May of 2024. This event had a negative impact on deferred revenue of approximately $900,000.
Positively, we expect to maintain the other two customers that were acquired and, in fact, have already expanded our relationship into one of the acquiring banks. Turning to guidance. For the fourth quarter, we expect total revenues of $123.5 million to $125.5 million, with subscription revenues of $105.5 million to $107.5 million. This guidance assumes year-over-year subscription revenues growth of 15% at the midpoint of our range. Non-GAAP operating income is expected to be approximately $15 million to $16 million and non-GAAP loss attributable to nCino per share to be between $0.11 to $0.13 for the fourth quarter. This is based upon a weighted average of approximately 115.5 million diluted shares outstanding. For the full fiscal year '24, we expect total revenues of $476.5 million to $478.5 million, with subscription revenues of $407.5 million to $409.5 million.
This full year guidance assumes year-over-year subscription revenues growth of 18% at the midpoint of our range. We are again increasing the range of our full year non-GAAP operating income guidance to $57.5 million to $58.5 million. Non-GAAP net income attributable to nCino per share is expected to be between $0.40 to $0.42 based upon a weighted average of approximately 115 million diluted shares outstanding. With that, we'll open the line up for questions.
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