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nCino OpCo, Inc.
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Thank you for standing by and welcome to nCino’s, Third Quarter Fiscal Year 2023 Financial Results Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. As a reminder, today’s program is being recorded.
And now I would like to introduce your host for today’s program, Harrison Masters, Investor Relations. Please go ahead sir.
Good afternoon, and welcome to nCino’s Third Quarter, Fiscal 2023 Earnings Call. With me on today’s call are Pierre Naudé, nCino’s Chairman and Chief Executive Officer; David Rudow, Chief Financial Officer; and Josh Glover, President and Chief Revenue Officer.
During the course of this conference call, we will make forward-looking statements regarding trends, strategies and the anticipated performance of our business, including, without limitation, the acquisition and integration of SimpleNexus. These forward-looking statements are based on management’s current views and expectations, entail certain assumptions made as of today’s date and are subject to various risks and uncertainties described in our SEC filings and other publicly available documents, the financial services industry and the global economic conditions. nCino disclaims any obligation to update or revise any forward-looking statements.
Further, on today’s call we will also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. A reconciliation to comparable GAAP metrics can be found in today’s earnings release, which is available on our website and as an exhibit to the Form 8-K furnished with the SEC just before this call.
With that, I will now turn the call over to Pierre.
Thanks, Harrison, and thank you all for joining us today. I am extremely proud of our team’s execution in the third quarter as we once again exceeded top and bottom line expectations. We generated $105.3 million in total revenues, including SimpleNexus, a 50% increase over the third quarter of fiscal ‘22.
Subscription revenues were $88.3 million, an increase of 55% year-over-year. Excluding SimpleNexus, subscription revenues grew 28% organically. This quarter marked our first quarter with over a $100 million in total revenues and also our first profitable quarter on a non-GAAP operating income basis.
For the past two earnings calls, we have emphasized our commitment to profitability in fiscal ‘24 and I’m very happy with the progress we have made to-date. We plan to significantly increase our non-GAAP operating income next year, and I will touch upon that shortly.
On the customer front we were pleased to issue a press release shortly before this call, announcing that the Bank of New Zealand has selected the nCino Bank Operating System as a foundational technology platform, making the bank of New Zealand one of our largest customers globally. With over $55 billion U.S. dollars in assets, Bank of New Zealand is one of the country’s largest financial institutions. We couldn’t be prouder to be in business with them and greatly appreciate the opportunity to showcase the value our solutions can bring to financial institutions around the globe.
I’m also pleased that following the announcement last month of a successful Go-Live with Kiraboshi Bank in Tokyo, we have two additional Go-Lives in Japan in the quarter, including SMBC Trust Bank. We are excited to see good momentum and traction in the market, representing an estimated $1 billion opportunity.
Among numerous other Go-Lives in the third quarter, our first customer in Germany is now live. Hamburg Commercial Bank or HCOB was recently recognized by Euromoney as the “World’s Best Bank Transformation for 2022”. We are honored to be their partner as they continue optimizing systems and processes to maintain their market leadership position. As I mentioned before, getting customers live and referenceable is what we truly celebrate at nCino and this is of particular importance in our newer markets.
I also would like to highlight the performance of SimpleNexus business, which had another strong quarter under difficult market conditions. SimpleNexus grew total revenues 38% organically year-over-year and had six competitive takeaways and five cross-sells through nCino customers.
Despite the current headwinds in the U.S. Mortgage Market, we believe the quality of this business, including its people, technology and recurring subscription based revenue model, positions us to continue to take market share and emerge on the other side of this rising interest rate environment as the clear leader in this space.
Obviously, the macro environment remains top of mind. We have spoken with numerous customers and prospects about market conditions and their feedback has generally been positive. With banks and credit unions sharing that they are well capitalized, realizing improved net interest margins and that credit risks are in check. This bodes well for nCino over the long term.
Financial institutions remain focused on the need to digitally transform in order to be competitive and to better serve their clients, and as a result our sales pipeline remains healthy and continues to grow nicely. That said, we are not tone deaf to external conditions and the bottom line expectations of the market, which have changed materially over the past year.
Against the backdrop of macroeconomic and geopolitical uncertainty, we are seeing a more measured buying environment and increased executive scrutiny on purchasing decisions, particularly in Europe, which extends sales cycles and the time required to close deals. Additionally, FX headwinds and a challenging U.S. mortgage market persisted through the third quarter.
So what does this mean for our business? Well, we actually view this more challenging macro environment as an opportunity to aggressively evolve from a best-in-class growth SaaS company into a best-in-class profitable growth SaaS company. With the investments we have already made in sales, products, customer support, professional services and geographies, we are very well positioned to grow market share and continue leading the digital transformation of financial institutions around the world.
On the bottom line, you have seen a significant improvement in our performance during the course of this fiscal year, and we expect that trend to continue next year and beyond as we further optimize our cost structure and drive more meaningful leverage on the expense side of the P&L.
We have been able to accomplish this improved bottom line performance without changing our strategy or investment priorities, but instead through a more conservative approach to managing headcount and disciplined investment decision making with an even more relentless focus on ROI. We have also been able to realize cost synergies from the SimpleNexus acquisition as the two businesses work more closely together and our integration activities accelerate.
On the top line, the fourth quarter has typically been our strongest sales period and we still have two months left in the fiscal year, so we will wait until our Q4 earnings call to provide specific financial guidance for fiscal ‘24. However, we think it is important in uncertain times to provide even greater visibility into our current thinking as we factor in the impact of the three headwinds I mentioned earlier, and the overall macro environment we are currently planning for nCino to be a rule of 30 company next fiscal year with a mix between total revenue growth, and non-GAAP operating income margin trending towards 20% and 10% respectively.
We will accomplish this without changing our investment priorities, which remain making sure we have the right sales coverage for our investable markets; that our support and professional services organizations provide the best customer experience in the industry, and that we continue investing our product portfolio to extend our track record of innovation.
With that, I’ll turn the call over to Josh to go through more business highlights from the quarter. Josh.
Thanks Pierre. The Bank of New Zealand win was certainly a highlight of our continued success in Asia-Pac. We were pleased this quarter to also add a new logo in Australia with the government sponsor lender and an expansion deal within a New Zealand Bank for commercial pricing and profitability. The ability of our nIQ product to embed intelligence, insights and data into the Bank Operating System is a huge differentiator. Our nIQ offerings are resonating with our customer base and are now a standard part of prospecting and expansion conversations.
Also in the quarter, we signed an expansion deal for a new line of business with A Big-4 U.K. bank, again, demonstrating our success and adding value across business lines within our customer base. That customers’ initial contract was signed in the first quarter of fiscal ‘23, so we expanded to a second business line in less than nine months.
We also closed several solid multi-product commitments with new customers in the community and regional market this quarter. A few examples include, our single platform vision resonating with a $14 billion bank in Oklahoma as they selected nCino for both commercial and retail lending.
An agricultural lender selecting us for commercial and retail lending, deposit account opening and treasury sales and onboarding, which will provide a true 360 degree view of their customer relationships. And a $3 billion bank in Virginia embracing nIQ with their initial nCino contract, selecting us for a commercial lending, pricing and profitability and automated spreading, which will enable their commercial lending employees to compete with the largest financial institutions.
We also had significant expansion deals with existing customers in the community and regional market, including a $7 billion Colorado bank expanding their use of nCino from commercial lending to add deposit account opening and treasury sales and on-boarding, and a $7 billion bank in Hawaii, adding retail lending and deposit account openings. Another highlight of the third quarter was our Portfolio Analytics team, signed the biggest deal in the history of that business with the addition of one of the largest trade unions in the world as a loan analytics customer.
As Pierre mentioned, Go-Lives are a key measure of success here at nCino, and this quarter marked a record for successful implementations headed by a significant contribution from the portfolio of analytics team as the CECL adoption deadline approaches. Our first commercial lending customer in German, a business banking customer in Canada, Japanese market early adopters, and a retail lending customer in the U.S. regional market were all beneficiaries of focused efforts from nCino Professional Services Teams and certified system integration partners.
As always, I’m deeply appreciative of the trust our customers and partners place in nCino and I’m proud of the team’s commitment, energy and results as we continue to tell the story globally.
David, can you take us thought the numbers?
Thank you, Josh, and thanks everyone for joining us this afternoon to review our third quarter fiscal ‘23 financial results. Please note that all numbers referenced in my remarks are on a non-GAAP basis unless otherwise stated. A reconciliation to comparable GAAP metrics can be found in today’s earnings release, which is available on our website and as an exhibit to our Form 8-K furnished with the SEC just before this call.
We again delivered strong results for the third fiscal quarter. Total revenues were $105.3 million, an increase of 50% year-over-year, including a negative $2.3 million impact from FX. Subscription revenues for the third quarter were $88.3 million, an increase of 55% year-over-year, representing 84% of total revenues.
Organic subscription revenues were $72.9 million, representing 28% year-over-year growth. Professional services revenues were $17 million in the quarter, representing 31% year-over-year. Professional services revenues included approximately $1.5 million of SimpleNexus services and other revenues.
Non-U.S. revenues were $15.9 million or 15% of total revenues in the third quarter, up 36% year-over-year or 55% growth in constant currency. Non-GAAP gross profit for the third quarter of fiscal ‘23 was $68.6 million, an increase of 54% year-over-year. Non-GAAP gross margin was 65% compared to 64% in the third quarter of fiscal ‘22.
Our gross margins again improved due to subscription product mix as enterprise and international customers comprise more of our revenues, as well as the impact from subscription revenues being a larger contributor to total revenues. Non-GAAP operating income for the third quarter of fiscal ‘23 was $2.5 million, with a $3.2 million loss in the third quarter of fiscal ‘22.
Our non-GAAP operating margin for the third quarter was positive 2%, compared with negative 4% in the third quarter of fiscal ‘22. As Pierre mentioned, this profitability was achieved through a more conservative approach to managing headcount, particularly in R&D and G&A, as well as savings on insurance and synergies from the SimpleNexus acquisition.
Non-GAAP net loss attributable to nCino for the third quarter fiscal ‘23 was negative $1.4 million or negative $0.01 per share compared to negative $3.7 million or negative $0.04 per share in the third quarter of fiscal ‘22. Our remaining performance obligation or RPO increased to $919.2 million as of October 31, 2022, up 28% over $717.7 million as of October 31, 2021, with $603.9 million and less than 24 category, up 43% from $420.9 million as of October 31, 2021. New and expansion sales contributed more to the sequential increase in RPO than renewals this quarter.
Turning to cash. We ended the quarter with cash and cash equivalents of $111.8 million, including restricted cash. Net cash used in operating activities was negative $4.1 million, compared to negative $19.1 million in the third quarter of fiscal ‘22. Capital expenditures were $4.6 million in the quarter, resulting in free cash flow of negative $8.7 million for the third quarter of fiscal ‘23.
During the quarter, we drew down approximately $30 million on our line of credit as the fourth quarter is a seasonally slower period for customer collections. In providing Q4 guidance and updating our full year outlook, we are taking a few factors into account.
First, longer sales cycles, particularly in Europe. Second, the state of the mortgage market, including elevated churn in the IMP space in SimpleNexus. And finally a 2% to 3% negative revenue impact from FX.
For the fourth quarter, we expect total revenues of $104 million to $105 million, with subscription revenues of $90 million to $91 million. This guidance assumes year-over-year subscription growth of 44% at the midpoint of our range, with approximately 28% organic subscription growth for the fourth quarter. As a reminder, the fourth quarter is typically seasonally slower for professional services revenues.
Non-GAAP operating loss is expected to be approximately negative $3 million to negative $4 million and non-GAAP net loss attributed to nCino per share to be negative $0.04 to negative $0.05. This is based upon a weighted average of approximately $111 million basic shares outstanding. Note that we expect our non-GAAP operating loss in Q4 to be impacted by elevated payroll taxes, professional services fees and additional investments in marketing, technology and automation.
For fiscal ‘23, we expect total revenues of $403 million to $404 million with subscription revenues of $342 million to $343 million. This full year guidance assumes the year-over-year subscription growth of 52% at the mid-point of our range, with approximately 28% organic subscription growth.
For SimpleNexus we now expect full year subscription revenues of approximately $59 million versus the $60 million we previously expected for the year. We are improving our non-GAAP operating loss guidance for fiscal ‘23 to negative $7 million to negative $8 million. Non-GAAP net loss attributable to nCino per share is expected to be negative $0.15 to negative $0.17 per share, based on a weighted average of approximately $110.5 million shares outstanding.
We are proud of the financial milestones we achieved in the third quarter, and remain focused on serving our customers and continuing to improve profitability.
With that, we will open the line for questions.
Certainly. [Operator Instructions]. And our first question comes from the line of Terry Tillman from Truist Securities. Your question please.
Yeah, thanks for taking my questions. Hi, Pierre, Josh and David! I’ve got a couple of questions. One might be a multipart question, so technically it could almost be three questions, but it’s good to see the profitability in the quarter at the operating line – operating profit line.
The first question might be a kind of two-fold question or two part is, David on the $603.9 million for the current or 24 months RPO, can you kind of double-click in terms of the organic growth, and then the second part of this question is the SimpleNexus run rate. How do you think about that going into next year given the independent mortgage brokers and then the headwind there? And then I have a follow-up.
Yes. On the RPO side, organically nCino grew total RPO by 18% and less than 24 months at 28% and the long term at 4%. And then on SimpleNexus run rate, we took our guidance down for SimpleNexus subscription revenues from $60 million to $59 million. So we expect to see a slight decline sequentially into Q4 for subscription revenues from SimpleNexus. I think it’s too early to look at next year given what we’re seeing in the mortgage market, it’s quite volatile right now. And so we are currently in the planning stage, and we will update you on SimpleNexus numbers for next year when we report numbers for Q4.
Understood. And just a follow-up question. I don’t know if this is – or who this is for, but Pierre, I really appreciate the, some of the perspective for next year, and you typically don’t guide, but those are some good kind of guardrails for us. I think the 20% growth and potentially 10% EBIT margin, are any of those kind of run rate dynamics, or is that actually kind of like, that would be like for FY ‘24? And is it assuming that maybe you just, the seasonally strong 4Q bookings, it just doesn’t play out like you typically would expect? Thank you.
Yes, thanks Terry. You know it’s very early and we’re in the planning stages here. We look at SimpleNexus and Europe and those two combined make up 50% of our SAM. And if half of your market has got serious headwinds and you’ve got FX on top of that, then you have to look at what that macro environment impact will be, so 50% of our SAM is impacted, as I mentioned.
Our view was, we’re still in the planning stages. We’ve not finalized the plans. The fourth quarter looks great. Our pipelines are healthy. So the demand for the product is there. Deals are not going away, but they are just slower to close.
We don’t see a slowdown in the U.S., but we are picking up a sentiment of caution, which is different than Europe, where we clearly see a slower decision-making and just like in mortgage. So you know when you take all of that mixed bag and you put it in there, and we decided at this stage it’s wise to give an indication to our investors of how we’re thinking about next year, but its early stages in planning.
Understood. Thank you and good luck!
Thank you
Thank you. One moment for our next question. And our next question comes from the line of Brent Bracelin from Piper Sandler. Your question please.
Thank you. Good afternoon. Despite the challenging macro here, it looks like organic CPR growth actually ticked up this quarter. Your Q4 guide here implies subscription growth organically will remain I think for the fourth consecutive quarter in this 28% range.
So my question here is, what is resonating with the platform with banks at least willing to send money here? Is it cost savings that’s primarily still enticing some banks to continue to lean in on the software stack? Just be curious to hear any sort of color commentary on what’s resonating, just given the consistency that we’re seeing in subscription growth and a slight uptick in CRPO.
Yes. First thing, in general Brent – thanks a lot for your question. The platform approach that we take and digital transformation in general are compelling value propositions, and it’s very interesting. The drivers of digital transformations, very slightly as you go around the world markets.
As I mentioned before, when you look at Japan, there’s some aging population and a reduction in the workforce. That is a massive issue for that economy. If you come down to Australia and New Zealand, it’s more of a modernization, profitability drive. If you go to Europe, it’s actually driven by compliance regulations, etc. and visibility into their lending practices as well as ESG. When you come to the U.S. and its profitability, market share drivers, efficiency, cost reductions and compliance.
So it varies and the emphasis is just slightly different in different places. But digital transformation is here to stay. Banks know it’s not a decision anymore. It’s actually an impediment, and then some are leaders and some are laggards. But that’s what we’re seeing in the market in general. So the trend for us for the long-term future is fantastic and I see it in the pipeline. I just think we have to get through this slight sentiment of uncertainty as we get through the economic turmoil.
Great! And then David, just a quick follow-up here. As you think about kind of 20% growth next year to 10% EBIT margins, to the extent that business maybe starts to pick up, would you look to invest towards the back half of the year in hiring capacity for the following year or how are you kind of thinking about the balancing kind of growth and profitability going forward?
Yes. Our number one priority is growth. We are committed to that rule of 30 model, as we’re – because we are just starting planning now, we’ve got an important Q4 in front of us, so it’s early in the process. But we are looking to make investments as the market improves. So if the mortgage market improves, if FX turns, that could change that, but for now we’re planning on 20% revenue growth, and that will be 20% subscription, 20% total and targeting that 10% margin target for the year.
It makes sense and certainly encouraging to see the progress this quarter. Thank you.
Thank you.
Thank you. One moment for our next question. And our next question comes from the line of Brad Sills from Bank of America. Your question please.
Hi! This is Carly on for Brad. I just wanted to ask a follow-up on the macro. I guess it’s glad to hear that new expansion momentum remains strong. But just curious, in the U.S. I guess in particular, what have you been hearing from, you know your conversations with the CIOs with regard to their willingness to take on these, I guess new digital transformation projects for loan origination for the upcoming quarter and also on the upcoming year 2023?
Yes. In the U.S. as I’ve mentioned, we still see strong demand. We see good pickup. You have to divide the U.S. in two segments. There’s a community regional, which had a little hangover from COVID because they were busy with PPP, plus coming back to the office, etc. We see some nice progression on that front and that market is performing well for us.
On the enterprise side it’s more of a lumpy market, because its big deals and they only come so often. But if you look at overall the IT spend and the budgets we’ve heard so far, it looks very positive. However, as I mentioned earlier, there is a slight sentiment of caution creeping in, where people just take a little bit longer to make a decision or scrutinize it a little bit deeper, but we feel very good about the direction of the business.
I also firmly believe, in times like this that healthy companies with the benefit of being able to show they can be profitable and growing actually can keep our investment levels high on product as well as our sales and marketing. And as such, we are keeping our coverage of our SAM on a global basis in place. And as soon as these markets turn, nCino will be the brand that is known for their customer service, for the quality of innovation, as well as market coverage, and that’s how we plan to proceed.
Yes. Thank you for that, very helpful. I guess just a follow-up on the non-U.S. performance, I guess it’s really positive to see that you guys landed the deal with you know the Bank of New Zealand, and also the U.K. expansion deal seems impressive. But what are some other, I guess outperformance in Europe especially. Just any color that you could provide on the non-U.S. outperformance and any other like emerging areas, I guess?
Yes. We see Asia Pacific is strong. South Africa is developing a nice market for us. Europe overall is going through a very difficult time. As you may know, the energy crisis or price increases there. The war of Ukraine is much of a real thing there. It’s not far away from the home front when you talk to the people. So there clearly is a psychological impact. There’s a level of conservatism creeping in. There’s a different regulatory emphasis in Europe, as well as ESG has a bigger role, and so all of these different factors is putting Europe a bit more in a conservative mode as far as we can see.
We have optimized our organization there. We maintain the investments to keep the market coverage as we see these deals slowly moving forward. So we are committed to the continent, and I am pleased we’ve got marquee brand names there. And as that market loosens up, we will actually expand our footprint.
Yeah, that makes sense. Thank you very much.
Thank you. One moment for our next question. And our next question comes from the line of James Faucette from Morgan Stanley.
Hey everyone! It’s Michael [inaudible] for James. Thanks for taking our question. I appreciate there are a lot of moving pieces here, and you’re still a couple of months away in terms of your outlook formulation. But how should we sort of think about how conservative the directional commentary you provided on FY ‘24 was, particularly given it looks like loan growth is expected to decelerate from roughly 12% this year to almost half that next year? I just wanted to sort of pressure-test what you’re seeing in terms of the relationship to loan growth broadly.
I can speak to that. This is Josh. Look, in most of the commercial accounts that we serve, new credit is actually not the majority of the volume that they do within the commercial bank. Most of the banks that we serve would see 50% to 75% of their loan volume would actually be renewals and modifications, and they also have to monitor that portfolio. Monitoring it is even more important with the challenging economic environment, because at the end of the day, regardless of the environment, these banks are trying to do their best to balance risk and reward while growing as much as they can.
So even if growth does slow, they’re going to want to run their banks efficiently. They are going to want to minimize risk where they can and have transparency into their portfolios and they are going to want to upside their reward as much as possible.
So our nIQ offerings, pricing and profitability, our auto spreading offering obviously add a lot of value to those renewals and modifications and monitoring activities. Our portfolio analytics tool also helps with visibility into the portfolio. So we’re confident in the value that we’ll provide even if loan volume does compress. Does that answer your question?
Yes, that’s great. Thanks Josh. Maybe just one other one on SimpleNexus. I think it’s pretty impressive, the sequential growth we’re seeing there, just given all the data points that we’re observing in the mortgage market sort of speak to the resilience of the model you guys have talked about previously.
I just wanted to quickly hit on the composition of contract duration there. Is there any particular skew we should be aware of between one, two and three years? And then as a follow-up to that, you previously talked about you know elevated SimpleNexus churn in the back half. I was just curious how you know renewal discussions have been faring for SimpleNexus in this environment?
Yes, what we see on SimpleNexus side, the contract duration, it really hasn’t changed much. We see one to two years and it kind of averages about one and a half years, that’s not really changed. We are seeing a higher level of churn though in the business on the IMB side. I mean it’s a little more volatile market for us.
You know the refis happened, you know they corrected their cost structures. Now the originators are correcting their cost structures. So we would assume that churn will remain elevated for some time.
Got it. Thanks David.
Thank you. One moment for our next question. And our next question comes from the line of Alex Sklar from Raymond James. Your question, please.
Great! David, some nice OpEx leverage in the model again this quarter. As your thinking about that 10% margin outlook for next year, how should we think about overall hiring plans? Do you think you can achieve kind of that level just through revenue growth and some mix improvements or is there any kind of re-evaluation on the hiring side?
Yes, we’re still early in the planning process as we said earlier. We’re looking at all costs, so it’s not just headcount. We’re looking at non-headcount related costs as well. We’ve done a nice job this year by moderating spending and headcount ads for the year to come down to the level that we’re at. We will be looking to gain more efficiencies next year though too.
Okay, great. And then Pierre or Josh, just in terms of overall deal sizes, I know you’ve been talking about some of the larger digital transformation type deals that are in the pipeline, that Bank of New Zealand one. It’s a nice one that just closed. How should we think about kind of the overall appetite though, particularly in the U.S. for some of those larger digital transformations versus kind of smaller, quicker ones.
Each of our segments or deal sizes are in line with where they’ve been. As Pierre commented earlier about just the timing in the market, it’s less of a size impact than it is on a sales cycle duration impact from our perspective.
Okay, great. Thank you.
Thank you. One moment for our next question. Our next question comes from the line of Bob Napoli from William Blair. Your question please.
Hey! Good evening guys. This is a [inaudible] on for Bob. Our first question was on around gross margin. Could you kind of remind us and speak to your confidence of tracking towards your 70% gross margin target over time. Some of the drivers that we might see some margin expansion from. I think in the past you’ve talked about international as being accretive to margins, that would be helpful. Thank you.
Yes, we are still you know at kind of the long term model at 70%. We do have a product mix of benefit as we sell less to the community regional space. We have higher margin on that business, because we can’t bundle sales force feed into that. Also as we expand our nIQ product offering, that’s on AWS and that comes at a much higher gross margin. We will see efficiencies in support. We’ve made a lot of investments on the support side. And then on the professional services side you know we would expect to see margins continue to improve as we look out over the next couple years as well.
Great, thank you. And just for the follow-up, could you kind of give an update on some of the competitive dynamics in retail I guess since the last quarter if they’ve changed at all meaningfully, as well as any update on cross sell of retail with commercial clients? Thanks.
You know our retail count is up 30% year-over-year. The competitive landscape hasn’t really changed there. It’s a rip-and-replace market, we’re making good progress. I believe our platform story is superior and people like that. It’s a client centric approach to banking. So we are on track there and meeting and beating our expectations.
Deposit account opening is up 25% year-over-year. So that whole client centric platform story is playing well with us. We are finding our small business offerings to include a retail-like experience, as well as the low end of small business and all of those road maps, as people see what we are doing and how we are client focused helping the bank to actually get there and continue to invest in innovation. I think that innovation mindset is playing out in the market and is making us the preferred vendor, so I feel good about those new products.
Also, we spoke about it in the prepared comments, but the validation points of the single platform deals, multiple community regional accounts, those are really nice accounts that came onboard with our known commercial solution, but they also rolled in retail, because they want to be able to connect with their customers, to take care of them really well across multiple products. From our perspective, that’s a good validation point.
Understood. Thanks very much.
Thank you. [Operator Instructions] And our next question comes from the line of Jason Adler from – Ader, pardon me, from MoffittNathanson SVB. Your question please.
Great! Thanks. Hey guys! Thanks for taking my question. The first one is on the pipeline. It’s like you’re kind of seeing customers’ maybe – I understand take a little bit longer to sign the deals. But do you expect when the pipeline starts to build and there’s a little bit of a backup or a backlog in there, have you seen customers in the past be anticipatory on the other side? You know when things start to look a little bit better, do they go ahead and does the sales cycles start to actually contract or are these just conservative banks and they wait for the coast to be absolutely clear before they start resuming normal transactions again?
You know I would say, remember we started the company in 2012, and so we’ve been on a quite a phenomenal economic run from ‘12 to ‘22 in an interest rate environment that was very low with a roaring economy.
In a previous life I have experienced going through ‘08, ‘09, ‘10, ‘11, ‘12 selling to banks, etc. and what you’ll find is initially there will be a pause to get a full understanding of the market landscape, and then very quickly the ones who stop investing realize they are going to fall behind and then it comes back, okay. I’ve seen this in the financial crisis. I expect the same thing to happen right now, and people regret when they start putting these investments on hold, because they are competitors.
People talk a lot about competition to banking coming from the outside banks and I remind bankers all the time, they’ve got a massive benefit over any other industry coming in there, because of the cost of funding, which they have to achieve deposits, and so your biggest competition in banking is another bank. And if the other bank in your town or your city is innovating and driving innovation through technology, then you better keep up. So I believe this is a short term pause year or a slowdown or a caution, which is normal, but it always comes back.
Okay, all right great, thank you. And then just on the segment outlook for next year, what kind of you know mortgage banker or loan origination officer headcount growth is baked into that rule of 30? Do you expect things to get worse, better, stay the same?
Yes, we’re – we’re at very early stages of planning. As you can imagine, we’re in beginning December, January. We’re going to see how that market evolves over the next few months and we cannot comment yet what’s going to happen to that mortgage market. You see how the market reacts just based on Colin – on Powell’s [ph] comments today. So we have to see how they develop before we finalize our plans.
Okay. All right, that’s fair. Thank you.
Thank you. One moment for our next question. And our next question comes from the line of Nick Altmann from Scotia Bank. Your question please.
Great! Thanks guys. I just wanted to ask a question about the margins next year. You know over the past couple of quarters you guys have made comments around how the core nCino business is profitable today and investments in the SimpleNexus were really the drag on margins. So I guess, with that 10% target for next year in mind, is there any way to sort of parse out the margin profile between core nCino versus SimpleNexus?
For next year the 10%, we’re going to look at the business as a whole and we’ll make decisions as a company as a whole, not by segments. SimpleNexus did – is going to lose money this year and nCino is a profitable legacy business.
If you take it like the next layer, I think SimpleNexus would have to get breakeven. I think we were greatly positioned there. We have the number one product in the space. The mortgage market will return, so we don’t want to leave the market or any opportunity for the competition to catch up with us. So the idea is to maintain investments as we can and look as we start seeing the market return to normal, invest more money and just be better positioned coming out of this.
Great! Thanks. And then just maybe one for Josh. Just given the challenging demand environment, how are you sort of thinking about making go-to-market tweaks heading to next year? Are there maybe plans in place to shift sales resources into the upsell side, you know given that new customer side of the equation might be a little bit more difficult or maybe kind of focused on smaller, higher velocity deals with shorter sales cycles. Just any commentary around you know go-to-market tweaks, maybe that you’re planning for heading into next year just given the macro backdrop would be really interesting. Thanks.
Absolutely! And I would say – I’ll start with international. If you look at the proof points that we hit earlier, great wins in New Zealand, Go-Lives in Japan and Germany, expansion within London and Go-Lives in Canada. We are committed to the countries that we’re in. So we’re going to make sure we’re there to help those customers succeed and continue to – to continue running at the opportunity in those markets.
Within the U.S., we don’t do Hunter-Farmer from our perspective. It makes sense to have one account executive that covers the account for the long run, sets us up for better expansion and longer term relationships. So we don’t intend to do any major changes there. We’re going to play the long game with those accounts and ensure that just as they are going to want to come out of the other side of any headwinds stronger, we’ll be there with them.
Yes, I would like to emphasize that even as we’re going into a profitable growth company, our posture will always be to favor growth. We believe market share gains is important for our long term health, as well as long term profitability.
When you look at our footprint in these strategic accounts, 23 of the top 50, a lot of those were conversations that have played out over time and we’re going to make sure we’re there for them.
Great! Thank you.
Thank you. One moment for our next question. And our next question comes from the line of Josh Beck from KeyBanc. Your question please.
Thank you team for taking the question. You know I wanted just to ask a little bit the higher level about you know the visibility that you have going into the next fiscal year. Obviously you benefit from multiyear, time based milestone types of contracts. So I feel like in general that gives you pretty good visibility. However, you know the macro is very fluid. You certainly talked about European sales cycle, churn and SimpleNexus and FX.
So I guess my question is like, as we go through Q4, you know what are going to be some of the really key items? You know is it U.S. sales cycles? Is it what happens with mortgage rates? You know what are going to be some of the key items that you’re tracking to kind of maybe get a little more precision about how fiscal Q2 could play out?
I would say firstly, we’re in the planning stages and as you can imagine, we track all these various factors literally on a daily and a weekly basis, but the U.S. keep on performing. I would say, I would love to see FX stabilize and improve in our favor. That will be a great little bonus.
Secondly, if we get any indication that mortgage rates just top out and start coming down, you’re going to see refi volumes go back up and you’re going to see people get like a new lease on life in the mortgage business and that will just rip that market open, okay? And then realizes those companies who then is going to expand by using tools like SimpleNexus will actually buy from stable financial companies that’s profitable and has proven that they do their development and their work in the U.S.
And then finally, I think the European story is a bit longer term. We’ve got some great customers there and great prospects, but I would say that is the third one that probably could be on the upside as that environment improves, but I can’t see around the corners.
Okay, that’s very helpful. And then just in terms of maybe how banks are approaching, you know at least the next calendar year for them, obviously you know things like unemployment, things like credit losses have all been pretty actually encouraging thus far this calendar year. We heard from Credit Karma yesterday that banks to some degree, it may be the lower end of the market kind of near prime and below, are starting to be a little more conservative with respect to their marketing budgets, which are obviously very discretionary.
So when they are maybe trying to be prepared you know let’s say, from whatever the scenarios are next year, you know where would you rank the priority around modernizing certainly some of their loan and deposit account systems, maybe versus other investment initiatives at some of the banks?
As I mentioned earlier, digital transformation is an imperative long term, and most banks that we talk to do not ask us why we justify to do it anymore. They just want to know how to get there, because it is difficult you know to take out all the systems, change processes, etc. So I would say that the demand will be there, the question is whether they prioritize it.
I would also tell you that whether we like it or not, the way to get inflation under control is at some point to get the labor market under control and that will impact the consumer, which will impact consumer credit. And we – I need to wait and see, because the banks we talk to will all tell you that they are well capitalized and that their credit risk is in good place, so it must be somebody else, which is of course interesting – somewhere, somebody is going to pay the price.
We see some caution like I mentioned, a cautious sentiment, but I don’t see in the U.S. necessarily a slowdown yet.
And we just don’t see a lot of banks telling us today that they want a more manual process or that they want less digital engagements with their customers. So the long run opportunity is still there.
Very helpful. Thank you team.
Thank you. One moment for our next question. [Operator Instructions] Our next question comes from the line of Saket Kalia from Barclays. Your question please.
Hey guys! Thanks for taking my questions here and fitting me in. Pierre, maybe for you, great to see the Bank of New Zealand win. You know I’m wondering, as you’ve made more headway internationally, are you starting to see any of the changes? Are you starting to see any changes in the sales cycles and competitiveness of those deals? I guess I’m just curious because you’ve had multiple wins now in numerous international markets. So I wonder if it’s just getting easier and maybe what type of competition you’re seeing?
Hey Saket! This is Josh. Yes, we see lots of banks that want to be early, but very few that are willing to be first. So getting that first press release out, getting that first Go-Live helps us go to that market with a story based on banks that look and feel a lot like our prospect being live and enjoying nCino. So it absolutely helps.
Yes, and as you look at – you know these are critical mass countries, okay. If you look at New Zealand now, it’s got critical mass and then the deals come. If you look at Canada, you win one, two, three and then boom, we’ve got the majority of the banks, okay. And the difference between the U.S. and internationally is I have to win each of those countries, because it only in country is referenceable. You know Australia and New Zealand may be slightly an exception, but the Germans want to see that other German banks are successful. We’ve got a great example, but now we have to get that market to accelerate.
But the markets where we have that critical mass like New Zealand and Canada, absolutely. South Africa is coming around. We’ve got two, three customers there now. The U.K. is like that, but we would still like to see France, Spain, Germany, etc.
Got it, got it, that makes sense. David, maybe for you for my follow-up. Can you just talk about the health of underlying bookings in the quarter? I mean clearly the visibility on revenue is super high. You gave a helpful framework for how to think about revenue growth for next year. But I'm curious, how are the leading indicators looking now qualitatively of course, for just revenue growth drivers in the future. Does it make sense?
That does. And we do not disclose bookings, but I can talk about sales activity. So sales activity in the quarter despite Europe being slow, we had some FX impact and SimpleNexus, it was pretty much in line with our expectations. We talked about this earlier, about the year you know. We returned to a more normal cycle in terms of sales for the year, where the second half is higher-weighted than we saw over the last couple of years during COVID. So Q4 this year will be our biggest quarter of the year, but activity in the third quarter was pretty much in line with our expectations.
Very helpful. Thanks guys.
Thank you. Our next question – just one moment for our final question for today. And our final question for today comes in the line of Charles Nabhan from Stephens. Your question please.
Great! Good afternoon and thank you for fitting me in. So my question is on the impact of the elongated sales cycles and the delays in decision-making on your existing customer base. So I would imagine it's more pronounced on potentially new deals, but you know land and expand has been really the centerpiece of your strategy. So I'm curious, in terms of what you're seeing within your existing customer base, in terms of a reluctance or an acceptance to expand existing relationships. And I guess sort of as a follow-up to that, to put a finer point on it, I'm curious what that could potentially mean for net retention levels and ACV expansion going forward.
Absolutely! And we do value those customer relationships and we're – in the nCino journey, we have seen headwinds. We find that those customer conversations are the easiest to keep going. So we continue to see ongoing success and proof points of our ability to cross-sell these solutions. We talked about adding retail and DAO into the $7 billion bank in Hawaii. We added CPP into a New Zealand enterprise account. This one we're particularly proud of. That was a competitive deal and a fantastic account.
And we're also seeing, despite everything we discussed and reported, a good validation of SimpleNexus value in the bank market, right. Five cross-sales into nCino banks and credit unions and frankly, those are our larger deals that we would sell into IMBs. So we feel that is something that we'll continue to focus on, and we always aspire, because we deliver for our accounts to be continuing into those conversations from a position of success and partnership.
Got it. And just as a quick follow-up, and I apologize if I missed this somewhere. But can you talk about LBA Ware and the impact or contribution that had to SimpleNexus, as well as what you're seeing in that business in terms of traction?
Yes. I mean we've had some cross-sales into the base of nCino, but we don't have any more details. We're not going to break down details because that really is integrated into the SimpleNexus platform now and so that's all the detail we can give.
And we also see that as a real differentiator for them. You look at six competitive takeaways. You look at the logos that they are adding, even this challenged marketing is because of that fantastic package, not just a POS but the full home buying journey and integrated tools like LBA Ware it helped them differentiate.
Got it. Thank you very much.
Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Pierre Naudé for any further remarks.
Thank you, and thank you everyone for attending today. Thank you for your support and we appreciate you attending today. You have a great day!
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day!