#87- nCino
Understanding the business model, and key learnings for SaaS founders building for banks
Brief
nCino is a US-based niche vertical SaaS (vSaaS) company offering an operating system for banks. It started in 2011 as a subsidiary of Live Oak Bank and was later spun off. Unlike its Silicon Valley or New York City counterparts, nCino chose to stay and build from Wilmington, North Carolina away from the venture crowds. The company made its public debut in 2020.
Snapshot [Q1FY24]
Subscription AARR: $389Mn (Q1 x 4)
Customers >$100k in subscription revenues: 465
Customers with >$1mn in subscription revenues: 73
Gross profit margin%: 65% (Subscriptions gross margin 75%)
Cash from operations: $31.3Mn
Free cash flow: $29.7Mn
Net dollar retention: 133%
CAC Payback: 24 months (subscription)
Sales efficiency: 69%
The solution is built on the Salesforce platform (license until 2027) and Salesforce is a large investor (10+%) - the perfect strategic investor. The go-to-market strategy is top-down enterprise sales with cycles ranging from 6-18 months across small to large banks.
Deep dive
Origins
nCino Bank Operating System was developed in-house at Live Oak Bancshares (a small business loan originator) to improve the traditional commercial lending process. Over time, the company was spun out into an independent entity in 2011. It became a Salesforce OEM partner and built its operating system on the Salesforce platform. In 2012, the company signed up early customers including a community bank and a credit union and started nCino University to train bank employees, customers, and partners. The company is led by veterans from the banking industry.
Today speed, convenience and trust are of utmost importance to a bank’s customers - and the entire experience rests between customers and employees. Banks face regulatory pressure to be compliant, employees push for alternatives to mundane and inefficient processes, and customers want speed and convenience. It has become imperative for banks to adopt better technology to meet the needs of all their stakeholders.
Funding
2013: $9Mn from friends and family (John Mack, Gene Ludwig, Chip Mahan)
2013: $10Mn from Wellington Management
2015: $29Mn Series B led by Insight
2016-17: $33Mn from existing investors
2018: $51Mn led by Salesforce Ventures
2019: $80Mn led by Salesforce Ventures & T. Rowe Price
2022: $1Bn post IPO
Overview
nCino offers a banking operating system for banks. The company has solutions to manage account opening, customer onboarding, loan disbursal, and regulatory compliance across the front, middle, and back office of a bank via a single platform. The platform is built on Salesforce and Salesforce Ventures is a large strategic investor in the company with a 10+% stake.
The company manages all aspects of a customer's workflows such as onboarding new clients, making loans, opening accounts, and managing regulatory compliance, all in one digital platform that connects front, middle and back office employees and third parties across business lines. The company's entire platform is built on the Salesforce platform (similar to Veeva) and has deep ties with Salesforce (Salesforce Ventures is also an investor). While financial institutions are not known for being tech-forward, nCino wants to change that and its mission is to "transform financial services through innovation, reputation and speed." nCino started with commercial and small business lending for community/regional banks and launched its solution to enterprise banks in 2014. The company serves financial institutions of all sizes including enterprise banks, regional banks, community banks, credit unions, and new market entrants such as challenger banks.
Meritech Capital’s nCino IPO | S-1 Breakdown
ACV & expansion by cohort
Just a cursory look into the Average Contract Values of the past 10 years shows nCino’s ability to get expansion revenues from its clients. For example, customers onboarded in FY 2017 are now giving the company 2.0x revenue in FY 2023. Even customers onboarded in FY 2022 are giving the company 1.1x revenues. This shows great strength!
Learnings
Key takeaways from Q1 FY24 transcript
It announced its Q1 2024 earnings recently and held a call soon after. Sharing key learnings from both which will help the larger B2B software audience:
User Conference
nCino's user conference, nSight, experienced record attendance, highlighting the strong interest and engagement from customers and partners. nCino's nSight conference showcased satisfied clients and their success stories, highlighting how nCino has helped reengineer processes and deliver streamlined production and faster decision-making.
Judo Bank, an Australian small and medium enterprise vendor, experienced significant growth in their loan book after implementing nCino's solutions, resulting in increased application completion rates, improved Net Promoter Score, and decreased customer support calls.
nCino demonstrated new product enhancements and features, including improved borrower experiences, integrations and automation for small business lending, strategic partnerships for intelligent consumer credit decisions, and the use of SimpleNexus mobile technology to expand the usage of the nCino bank operating system.
Customer base
nCino has a unique customer base, representing significant percentages of C&I lending assets, U.S. farm credit association assets, Canadian bank assets, and U.S. mortgage loans originated last year.
nCino's product portfolio addresses challenges faced by financial institutions, such as commercial real estate softening, credit monitoring, and interest rate fluctuations, by providing intelligence and automation throughout the loan lifecycle.
The company showcased how it leverages intelligence to help customers identify default likelihood, visualize tenancy and vacancy in commercial real estate portfolios, make automated credit decisions, price loans based on customer relationship, and automate loan reviews.
Growth outside the USA
nCino experienced strong growth in non-U.S. markets, with the EMEA team securing important customer wins, renewals, and expansions in the U.K. and France.
Non-U.S. revenues contributed $19.2 million or 17% of total revenues, with a significant increase of 35% year-over-year or 43% in constant currency. The APAC region drove strong sequential growth, primarily in subscription revenues.
The company's Europe team performed well in the first quarter, with momentum in greenfield accounts and existing accounts benefiting from the expanding portfolio of products.
The signing of a property lender in Europe is seen as a positive indication of the retail story and the team's execution capabilities.
Growth within the USA
The nIQ solutions gained traction in the U.S., with notable deals signed for commercial lending, portfolio analytics, and automated spreading.
In the U.S. mortgage industry, nCino continues to acquire new customers, cross-sell additional products, and win market share from competitors, demonstrating growth in revenues despite the challenging environment.
The company is nearing completion of integration work to connect with more third-party mortgage loan origination system (LOS) providers, enabling increased sales of SimpleNexus in large U.S. financial institutions.
Truly a SaaS company
nCino's first quarter results showed positive growth, with total revenues reaching $113.7 million, a 21% increase year-over-year.
Subscription revenues accounted for $97.3 million, representing an increase of 23% year-over-year and 86% of total revenues.
Churn in annualized subscription revenues for the quarter was $8.6 million, in line with expectations. However, some churn from independent mortgage banks occurred sooner than anticipated, impacting second-quarter and full-year subscription revenues negatively. The company expects churn rates to return to historical norms of 2% to 3% in future years.
Insights on customers
Larger enterprise-level financial institutions are showing buying propensity and are expected to proceed with delayed initiatives in the second quarter and beyond.
The worst of the liquidity shock is over, and deals are expected to pick up in the second, third, and fourth quarters.
Europe is ahead of the US in terms of a positive buying approach, providing further optimism for the rest of the year.
Hero product(s)
Intelligence is another key focus area, with nCino offering products utilizing data analytics, machine learning, and AI through their nIQ suite.
The company's SimpleNexus and nIQ offerings have faster activation schedules compared to traditional bank operating systems.
The recent conference (nSight) provided great exposure for the company, with particular interest in the nIQ offering.
The nIQ product is resonating well, with approximately 30% of bank operating system accounts leveraging it.
The company sees a long-term opportunity for nIQ, with a current TAM (Total Addressable Market) lift of about 20% on the current base and potential for further expansion and product additions.
SimpleNexus, a mortgage solution offered by the company, has gained market share due to its intuitive and well-adopted product, customer focus, corporate stability, and integration capabilities with the nCino platform.
Expanding the SimpleNexus front end to include other retail and small business products has been well-received, and it opens up opportunities for core nCino platform access through APIs.
Insights on sales & business development
Despite flat year-over-year investment in sales and marketing, the company aims to maintain growth momentum by optimizing sales cycles, leveraging cross-sales, and ensuring market coverage.
Sales and marketing have been relatively unaffected compared to other parts of the organization, and the company continues to make the necessary investments for long-term growth.
The company is forecasting a subscription revenue growth of around 16% in fiscal 2Q and the second half of the year, with Q2 being the low point due to churn.
The focus is on stabilizing revenue growth in the second half of the year, and the expectation is to return to 20%+ growth next year.
Leverage across operating expense lines is leading to better margins, and the company remains focused on growth and is willing to reinvest to seize market opportunities.
The company's shift from pure growth to profitable growth has driven efficiency and productivity improvements, resulting in continued leverage on the cost line.
There is a possibility of an acceleration of deals in 2024 as deal cycles lengthen and organizations catch up after a temporary slowdown.
The company feels that the financial markets have stabilized and that the mortgage business is now concentrating on a few larger players, providing an opportunity for the company.
Cross-selling efforts have been successful, with add-on solutions being implemented for existing customers and progress being made in cross-selling SimpleNexus.
Banks are recognizing the value of a single platform and a 360-degree view of the customer to drive total business value and prevent deposit flights.
The company's strategic direction and product offerings are well-received in the banking sector, and there is a revisiting of basics to maintain organic deposits and fulfil a broad set of products across multiple channels.
Larger enterprise banks are focusing on expense management and resource optimization, aiming to be efficient and thoughtful with new investments while watching the macroeconomic environment.
The banks acknowledge the importance of modernization and digitization but also consider their expense lines, driven by CFOs who prioritize cost control.
Some banks have prioritized addressing liquidity matters, diverting their focus away from certain projects in the near term.
Historically, there are no long-term slowdowns in technology spending among banks, as modernization is necessary to stay competitive and avoid falling behind.
While there may be a temporary slowdown in spending, the overall trend is expected to accelerate in the second half of the year.
Banks face net interest margin pressure, making operational efficiency crucial. nCino's solutions contribute to higher efficiency ratios and loan close rates, aligning with banks' needs.
The second half of the year is anticipated to mark a return to normal spending patterns, although the process may take some time.