nCino, Inc.

Good day, and thank you for standing by. Welcome to Encino Second Quarter Fiscal Year 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today. Harrison Masters, Investor Relations. Please go ahead.

Good afternoon and welcome to Encino's second quarter fiscal 2023 earnings call. With me on today's call are Pierre Naudet, Encino's Chairman and Chief Executive Officer, David Rudeau, 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 global economic conditions. CONSINO 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 is 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.

Thank you, Harrison, and thank you all for joining us today to discuss our second quarter fiscal 23 results. Our team executed extremely well in the second quarter, highlighted by our strong top-line performance of $99.6 million in total revenues, a 50% increase over the second quarter of fiscal 22, which includes simple nexus revenues. Excluding Simple Nexus, we grew subscription revenues by 29% organically. During the second quarter, we saw continued global demand for our platform, including strong growth across our newer product solutions. As illustrated by the Rabobank announcement we issued shortly before this call, Rabobank selected our NIC automated spreading solution to transform their financial spreading capabilities within Australia and New Zealand. This partnership represents a multi-currency, cross-country commitment and is our largest auto-sparing deal to date. We all know we're in a challenging mortgage market, but despite that, our SimpleNexus teammates had another strong quarter, growing subscription revenues 73% year-over-year or 47% organically. You will hear more about SimpleNexus from Josh shortly, but we believe the strength in the quarter further highlights the unique quality of this business, including its mobile-first cloud-based home ownership platform and superior subscription-based business model, which is fueling continued growth and market share gains in a difficult mortgage market. The uncertainty in the economy isn't just tied to the mortgage market, so let me spend a minute on the macro outlook, as it is top of mind for all of us right now. Overall, I would characterize the global market as having become more complex, with different dynamics in different geographies. On the plus side, higher interest rates are generally positive for financial institutions, and the demand we see in our sales pipeline for our products has never been stronger, reflecting the ongoing need for financial institutions to digitally transform in order to stay relevant and competitive, specifically We are seeing strength in the US, Canada, and Asia Pacific markets. However, we are seeing some weakness in Europe, highlighted by longer deal cycles. We continue to closely monitor how the macro environment is impacting the market. In the meantime, I am pleased that we are once again increasing our full year revenue guidance. David will provide more details later on in the call and how we view the second half of the year. I would like to highlight the progress we made in the second quarter towards profitability and reinforce that we remain committed to achieving non-GAAP profitability next year, even as we continue to invest in the business. In fact, we are improving our non-GAAP operating loss guidance by $12 million for the full year from our guidance last quarter. The key focus for us has been a more measured approach to hiring. We believe we have plenty of opportunity within our existing employee base to support future growth while driving incremental operating leverage. That said, we will continue to responsibly invest in growth, which remains our top priority, and we will make additional strategic hires where needed to drive growth and revenue expansion. We are in the early innings of growing a global business and capturing a $16 billion serviceable addressable market. And we see the current environment as a time to invest with discipline to extend our market leadership. The executive appointments announced recently proved this point. I am sure you all saw our announcement last month of Matt Hanson's appointment as Encino's Chief Product Officer. After conducting an extensive external search, It became evident that we had the strongest candidate right here in the Encino family. Matt, founder of SimpleNexus, is now overseeing all of Encino's product development and engineering organization globally. We also appointed Ben Miller, co-founder of SimpleNexus as its CEO, taking over for Kathleen Shriner-Gates, who is staying on with us in an advisory capacity. And we announced two other appointments to our executive leadership team during the quarter, including Jamie Punishill as our chief market officer and Chris Ainsworth as our first chief people officer. I am excited about the deep domain expertise and diverse perspectives each of these individuals brings to Encino. These additions to our leadership team will enable us to further scale, maximize market share, and drive profitable growth while continuing to attract and retain top talent and deliver the best products in the industry. And with that, I'll turn the call over to Josh to go through more business highlights from the quarter. Josh?

Thanks, Pierre. We had a solid second quarter with a strong mix of go-lives, renewals, upsells, and new logos across our portfolio of products, asset classes, and geographies. As Pierre addressed earlier, the Rabobank win is a great example of the increased interest in our NIC solutions, as well as our momentum across APAC. Earlier in the quarter, we announced that ASB, one of New Zealand's leading commercial banks, went live on the Encino bank operating system following a primarily remote implementation during COVID. With Encino, ASB sought to replace and consolidate 16 existing legacy systems and tools, focusing on one platform to streamline the lending process for their bankers, and to reduce overall complexity for the bank. Additionally, in APAC, our team added a new logo in Japan, marking our fourth customer in that country. We also expanded our international footprint with new customers in the Netherlands and South Africa during this quarter. We had a number of knit cross-sales within our existing customer base in the quarter, including an automated spreading deal with a $7 billion U.S. bank and a commercial pricing and profitability upsell with the $2 billion community bank. The number of bank operating system use customers using our nix solutions including portfolio analytics automated spreading and commercial pricing and profitability increased 119 percent year over year reflecting the growing demand we see for these solutions for example during the quarter we announced that mbkc a 1.1 billion dollar community bank in kansas city went live on both automated spreading and commercial pricing and profitability as well as our commercial small business, and retail lending solutions. MBKC eliminated numerous systems and manual processes in favor of the Encino platform to drive efficiency, transparency, and real-time data insights across the entire lending originations journey. Insight, our annual user conference, was a huge event for us during the second quarter, and it was wonderful to be together again with over 1,400 of our customers, partners, and Encino teammates from around the globe. We were honored to have many customers on stage with us sharing their Encino journey, including Kevin Nielsen, Director of Product Management at NVKC, as well as Shane Loper, Chief Operating Officer of Hancock Whitney. You may recall last quarter I spoke about our retail go-live at $36 billion Hancock Whitney, which is Encino's largest upmarket retail lending deployment to date. I'm pleased to share that the bank is live not only on retail, but is also now live on commercial lending. We are deeply appreciative of the Hancock Whitney team's continued partnership. Our single-platform vision continued to resonate with the market in the second quarter, with five new customers selecting Encino for both our commercial and retail solutions. Our team with Simple Nexus had another strong quarter. In a tough mortgage market, we continued to win new deals, grow revenue, and take market share. During the second quarter, Simple Nexus signed 26 new customers across banks, credit unions, and IMBs. Of these, four were Encino cross-sales, including one with an over $30 billion asset regional bank, and six were competitive replacements. To highlight our strong competitive position, Simple Nexus had more competitive replacements in the second quarter than in all of the prior fiscal year. Simple Nexus continues to be a critical part of our consumer retail strategy, which is one of our four key pillars for growth, along with Nick, maintaining our commercial market leadership, and our international expansion. Looking at the third quarter, we're excited to spend more time in person with customers across the globe. Many of us were in Dallas this week with a large group of our customers from the farm credit system, and there was so much energy and enthusiasm from everyone in the room. Over the next several months, we will be hosting customer events and executive forums from Wellington to London to Sydney to Toronto, and I'm excited to show these customers how Encino can deliver digital transformation to financial institutions of all sizes all around the world. And with that, I'll turn the call over to David.

Thank you, Josh, and thanks, everyone, for joining us this afternoon to review our second quarter fiscal 23 financial results. Please note that all numbers reference in my remarks on a non-GAAP basis unless otherwise stated. A reconciliation of comparable GAAP metrics can be found in today's earnings release, which is available on our website as an exhibit to the form 8K furnished with the SEC just before this call. We are pleased with the second quarter results, and in particular, our progress towards achieving non-GAAP profitability in fiscal 24. Total revenues for the second quarter of fiscal 23 increased 50% to $99.6 million, which included a negative $1.5 million impact from FX. Subscription revenues for the second quarter were $84.4 million, an increase of 57% year-over-year, representing 85% of total revenues. Organic subscription revenues, excluding SimpleNexus, were $69.4 million, representing 29% year-over-year growth. SimpleNexus subscription revenues increased approximately 73%, including LBA aware revenues, or about 47% organically. SimpleNexus, again, exceeded our internal expectations, despite the difficult mortgage market. Professional services revenues were $15.2 million in the quarter, growing 21% year-over-year. Non-US revenues were $14.9 million, or 15% of total revenues in the second quarter, up 38% year-over-year, or approximately 52% in constant currency. International revenues continue to see strong subscription growth, while professional services growth lags as we engage our partner ecosystem more frequently in new deployments. Non-GAAP gross profit for the second quarter of fiscal 23 was $64.9 million, an increase of 55% year-over-year. Non-GAAP gross margin was 65% compared to 63% in the second quarter of fiscal 22. Our gross margins continue to improve largely from subscription product mix as enterprise and international customers comprise more of our revenues. The increasing adoption of NIC products along with the growth of subscription as a percentage of total revenues. Non-GAAP operating loss the second quarter of fiscal 23 was negative 2.8 million compared with negative 1.8 million in the second quarter of fiscal 22. our non-gap operating margin for the second quarter was negative three percent flat with negative three percent in the second quarter of fiscal 22. non-gap net loss attributable to encino for the second quarter of fiscal 23 was negative 4.9 million or negative four cents per share paired with negative 2.5 million, or negative 3 cents per share, in the second quarter of fiscal 22. Non-GAAP net loss attributable to Encino included approximately $1 million of non-cash unrealized loss on intercompany loans due to the strengthening dollar. Our remaining performance obligation, or RPO, increased to $907 million as of July 31, 22, up 28%, from $707 million as of July 31, 2021, with $589 million in the less than 24-month category, up 45% from $406 million as of July 31, 2021. Organic RPO increased 19% year-over-year, with $528 million in the less than 24-month category, up 30% from July 31, 2021. As a reminder, the second quarter of fiscal 22 saw a significant increase in total RPO from several large enterprise deals signed in the quarter. The stronger dollar also had approximately negative $2 million impact on total RPO. As we've discussed, the business can be lumpy from quarter to quarter. Turning to cash, we ended the quarter with cash and cash equivalents of $91.5 million, including restricted cash. Net cash provided by operating activities was $9.5 million compared to $13.3 million in the second quarter of fiscal 22. Capital expenditures were $4.6 million in the quarter, resulting in free cash flow of $4.9 million. As a reminder, we also have an untapped $50 million line of credit that we signed earlier this year. So overall, we had a good first half of fiscal 23 with strong revenue growth focused investments for future growth, and significant momentum towards achieving non-GAAP profitability. Let me echo Pierre's comments. We are keenly aware that we are addressing a big market and are strategically building a business for the long term. We'll continue to invest, optimizing our spend in areas of greatest opportunity, while working toward being non-GAAP profitable and cash flow positive next year. In providing Q3 guidance and updating our full-year outlook, we are taking a few factors into account. First, longer sales cycles in Europe. Second, a measured outlook for Simple Nexus in light of the challenging mortgage market. And finally, a 1% to 2% negative revenue impact from FX. That said, for the third quarter, we expect total revenues of $103 to $104 million with subscription revenues of $87 to $88 million. This guidance assumes year-over-year subscription growth of 53% at the midpoint of the range, with approximately 27% organic subscription growth for the third quarter. Non-GAAP operating loss is expected to be approximately negative $750,000 to negative $1.75 million, and non-GAAP net loss attributable to Encino per share to be negative $0.02 to negative $0.03 per share for the third quarter. This is based on a weighted average of approximately 111 million basic shares outstanding. Turning to guidance for the full year, we are now increasing our revenue outlook. For full fiscal year 23, we now expect total revenues of 401.5 million to 403.5 million, with subscription revenues of 341.5 million to 343.5 million. This full-year guidance assumes year-over-year subscription revenue growth of 52% at the midpoint of a range with approximately 28% organic subscription growth. We are also improving our non-GAAP operating loss guidance for fiscal 23 to negative 12 to negative 14 million. Non-GAAP net loss attributable to Encino per share is expected to be negative 17 to negative 19 cents based on a weighted average of approximately 110.5 million basic shares outstanding. The second quarter was another strong one thanks to the hard work of the Encino team around the world. Your dedication to the success of our customers is what makes Encino the global leader in cloud banking. And with that, we will now open the line for your questions.

As a reminder, to ask a question, you'll need to press star 1 1 on your telephone. Please stand by while we compile the Q&A roster.

All right.

Our first question is from James Fawcett with Morgan Stanley. Please proceed with your question.

Great. Thank you so much. Really great performance here. You mentioned a little bit of slowing and at least sales cycles in Europe and that you'd taken that into account in the outlook for the second half of the year, et cetera. But I'm wondering if you can talk to us about how we should expect those to progress or beyond just the delays, are you seeing reassessment of scope or of scale, et cetera, and And what's your sense as to actual timing to close and the like in that market?

Thanks a lot for the question. You know, we are fortunate to have a global footprint, including Japan, Asia Pacific, Australia, New Zealand, South Africa, of course, Europe, UK, Ireland, Canada, and the U.S. And what I've seen over the history of the company since 2017, when we expanded on a global basis, is that these markets take a long time to develop. There are macro influences. Sometimes it's just by country that they're slower or more conservative. But fortunately for us, it's always that one market pops ahead of another one, et cetera. So just like our solutions, some are more mature than others, and then we lean on the more mature ones to carry us through. What I'm seeing on a global basis is very exciting stuff out of Canada as well as Australia and New Zealand. We've got a good presence on Africa right now. I see good momentum in Japan. The European thing is really a macro influence where we do see an impact with the energy crisis as well as the Ukraine war, whether it's psychological or not. On the other hand, we see a great opportunity with the ESG. So what we're doing is we've got the right team in place there. We are tracking the deals on a per country basis. But we clearly saw that there was less of an aggression on adopting this in the short term. In the long term, those markets have no choice but to actually move to cloud-based flexible solutions. So we are maintaining our investment, and I'm bullish on it, but we just realized that in the short term, there's macro influences. Josh, do you have anything to add?

No, we've not seen a change. and the conviction of our customers that they need to continue to digitize and modernize. That commitment is very clear. For us, it's lots of uncertainty, and we see them continue to evaluate the timing of those investments.

Got it, got it. And I'm wondering if you can help us nuance a little bit what's happening with Simple Nexus. Obviously, really strong growth that they're seeing, but at the same time, it sounds like you're a little bit aware of obviously the way that the market is developing as you formulate your outlook. And we have started to see headlines, at least from some mortgage originators that they're planning to cut back heads, et cetera. So how are you thinking about like what's reasonable for SimpleNexus and what the work is that they need to do to kind of assure that they do as well as they possibly can in the current environment?

You know, we've included a very conservative forecast for them, and it's reflected in our guidance. But I would like to emphasize six competitive takeaways, how many new logos, 26 new logos the past quarter. Realize, even though they're cutting back heads, and our – Estimation typically is middle back office when these mortgage volumes go down. Also remember that market is shifting to a purchase market versus a refi market, and we are very strong on the purchase side. Then if you look at the comparative landscape and the financial strength of different companies, I think we are a standout there. We can continue to invest, and that's why you're seeing a shift in market share to us. So I'm very optimistic. Our technology is superior. The experience is superior for the loan officer as well as the ecosystem around them versus purely a mortgage application. We think we got this asset at the right time. In difficult times like this is when good companies actually take market share and land logos that will expand rapidly when this market turns around. Josh, do you want to add to that?

I think you also have to think about the opportunities that we have to continue cross-selling Simple Nexus into the bank customer base. We're proud of what we did this quarter. And it's hard to draw it as a proxy, but I think you need to understand how we go to market. When you say 119% year-over-year increase of bank operating system customers who have adopted NIC, that is a well-defined cross-selling motion. The team is executing well on that. So when you look at SimpleNexus as we continue to bring these teams together, we look to continue driving that cross-sale further into the bank operating system customer base. We cross-sold SimpleNexus into a $30-plus billion bank this last quarter. Sophisticated institution, great validation point for us, and we have a fantastic customer base that needs this software.

Yeah, and James, on the numbers for SimpleNexus, we had anticipated $60 million for the year. We did have a little better performance than we anticipated in the quarter, and we're going to maintain that $60 million for Simple Nexus for the year, accounting for a little bit higher churn that we're seeing. There's some M&A, one or two deal went against us in the quarter, but we do anticipate within our guidance an elevated level of churn, too. And on top of that, we expect to also grow revenue sequentially in Q3 and Q4 from where they ended in the second quarter.

That's great nuance and color, gentlemen. Thank you. Thank you.

One moment while we go for our next question. All right, our next question is from the line of Brad Sills with BOFA Securities. Your line is open.

Wonderful. Thanks, guys. And congratulations on a nice quarter here in a tough environment. My question is on SimpleNexus. Obviously, you're seeing traction here with CrossCell into the base. Is there a point in which we might see this drive more new deals in retail now that you've got this more complete solution across mortgage, credit card, auto, personal? You've got the full suite now. Could this be a situation where Simple Nexus starts to lend to new deals coming in the retail segment?

And you saw our comments on the five platform wins that we had, people who purchased a commercial plus a retail solution. I absolutely think that these validation points of our single platform strategy are going to help us across the board. I would hope it helps us with all of our solutions because as banks look to digitize, they just don't want more point solutions. So from our perspective, it's our job to tell that story. But I think you have to look at all of these to continue to strengthen that strategic message.

Yes, the other thing I want to emphasize is, remember, in the community bank space, we sell a full platform story, and we can deploy that in one fell swoop. When you start going to very large banks, top 25, et cetera, they buy more piecemeal because they cannot absorb the whole thing. So we would sell commercial. We would sell small business. You might sell into the mortgage division. That gives us a foothold. We get to know the senior people in that retail division, and we sell retail products, okay? We've done this across the base for a long time. We feel very good about that strategy. And SimpleNex is just one more arrow for us to get into retail, get a foothold, get to know the people, become influential, and penetrate deeper. So I feel very good about that penetration point.

Great to hear, guys. Thanks. And if I could ask one on the macro, you called out earlier, Pierre, that, you know, rising interest rate is a positive for banks we all understand that but yet the risk of recession is coming in more and recession is obviously not a positive for banks so in the u.s in particular what are you hearing from cios with regard to their willingness to take on these new digital transformation projects um you know for for loan origination thank you yeah you know what's great for us is we actually sell to the business i just spent a day on monday with

the head of a top 25 bank on the commercial side, listen to their book of business, what is their credit quality, how do they feel about it. And Josh comes back from trips in the field, and we talk to them all the time. Not to technology people, we do talk to them as well, but we talk to the heads of business and begin to understand how do they manage credit, what are they seeing, a weakening of the book, et cetera. And I can tell you, Everyone says it must be the other guy because none have ever told me that their book is looking weakened. They're beginning to worry about it, which is, to me, extraordinary. So our banks are moving full speed ahead on transformation. They see it as a competitive advantage, and they keep on spending. We also saw a global survey around IT spend for banks, and for next year, it's going up by 5%. So we believe the momentum will continue, and with our reputation and our installed base, I feel good about it.

Great to hear. Thanks so much.

Thank you. Please stand by for our next question. Our next question comes from the line of Terry Tillman with Truist Securities.

Hey, Pierre, Josh, and David. Thanks for taking my questions. And, David, great perspective in all the color you're providing. It's really helpful, particularly even with the simple nexus and giving us the update for the full year. So thanks for all the color and transparency. My first question was related to, with, like, NIC, And like Robobank, was that the entry point you all expected to get in there? I'm kind of curious about Nick in terms of in the environment we're in where people are trying to like control costs and efficiencies. Is Nick potentially kind of tip of the spear and something that could actually even get you into some of the other top 25 banks you're not into in the U.S.? And just a little bit more color on how you got Nick in the door at Robobank and then had a follow-up for David.

We're proud of that press release. That was our entry point. It's the largest auto spreading deal that we've done in history. So I think sometimes these things are viewed as cross-sales or up-sales. The fact that it's an entry point and we're going to execute really well there is something that we're quite excited about. So, Terry, I would say we should think about continuing this template and using these next solutions as an entry point.

Okay, got it. And I guess, David, you know, going into this quarter, I mean, you gave us a heads up we were going to have a tough comp for like RPO and total RPO, so 24 months, and then total RPO because of the enterprise transactions last year. But you definitely were ahead of what I was expecting, so it's good to see that. But as we think about the second half of the year, are there any call-outs in terms of like anniversary and tough comps in the second half of the year? And then also kind of, you know, not trying to pin you down on RPO guidance, but given the puts and takes we have, any more color you can share about how we should be thinking about RPO in the second half? Thank you.

Yeah, for the second half of RPO, we don't guide RPO. I think it's a metric that I think is important. The issue with it is it's lumpy from quarter to quarter, as you saw. Last year, we closed Wells and a couple other large enterprise deals. We had some FX impact as well that affected it. And I think the thing to note with the current quarter, second quarter, is that we didn't have any big deals or any large renewals in the quarter that were longer duration. I would expect to see kind of continued balance renewals versus new bookings for the balance of the year. And I think that's the update on RPO. All right, thanks.

Thank you. Please stand by for our next question. Our next question comes from the line of Saket Kalia with Barclays. Your line is open.

Okay, great. Hey, guys, thanks for taking my questions here. Hey, maybe a question for Pierre and Josh to maybe tag team. Can we just talk a little bit about just the broader retail opportunity? The five platform customers, Josh, great to hear. I guess just zeroing in on retail specifically, there's been some nice traction. Hancock Whitney was a great win. What are customers saying broadly about their willingness to explore a replacement to that legacy retail solution with something like an Encino?

So look, if you look at the community retail base, so let's make that, Hancock-Whitney is a $36 billion bank, so let's go up to that level. There, we see some consolidation happening in the banking space, and they need to standardize on platform technologies. And when you put two of those size banks together, they cannot continue on with point solutions that's not attached to the customer full 360 CRM records, et cetera. So we see great traction on the platform story and banks up to that size. When you go above that, you start selling more into certain divisions for certain product types to solve a problem they've got today. That's why simple next is important for us. We get in there, we're on the mortgage side, okay? You can, for instance, sell a HELOC on its own into that market because that's what somebody wants to automate and do it on a cell phone and so on. We see good traction. Internationally, we also see good traction interest on the retail side. Back to the platform story. They want to see a consolidation of their customer records into their fulfillment supply chains. And customers cannot run anymore, be competitive when it's point solutions. So we're actually beginning to see traction on a wider basis with retail. And the investment to us is going to pay off.

Got it. Got it. That's very helpful. David, maybe for you, maybe a metric that we haven't talked about as much but was great to see was the subscription gross margin, I think about 74% or 75% non-GAAP. Can you just talk about sort of what's helped with that expansion as we've looked over the last few quarters and how sustainable this level might be as we think about, again, that path to profitability for next year?

Yeah, thanks, Zach. Yeah, it's really from the product mix. We're selling more enterprise and international, which has a higher margin than we see on the community regional side. At the lower end of the market, we are able to sell Salesforce at $5 billion and below. a premium seat, which comes at a lower gross margin. So we're selling more enterprise than international. We get the natural lift. Then also you look at the NIC products. Those are based on AWS, and those have a much higher gross margin. So the mix of that allows us to elevate the gross margins over time. And then in terms of outlook on gross margins, I'd say that 74% to 75% range still holds true as you look out to build your model.

Very helpful, guys.

Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Brent Rachel with Piper Sandler. Your line is open.

Thank you. Good afternoon. I wanted to basically drill down a little bit into the current environment for Pierre and Josh. I clearly understand larger deals will take longer given just the complexity out there in this space, but a little surprised to see the momentum around Simple Nexus, the number of competitive takeaways, momentum around Nick. Obviously, we know labor costs are going up here in a meaningful way. I think a 40-year high in growth in labor costs. How much is... automation and software automation helping you win some business. Is that resonating with end users love to get your view on kind of what is resonating across either Nick simple Nexus at a high level is automation and the benefits of the platform. The reason why you're you're winning here or not love to drill down a little bit into that. Thanks.

Let me take the whole automation and intelligence first, and then Josh will take simple nexus for you, okay? The first thing we have to remember is, how do you use in a bank, AI, machine learning, analytics, etc., unless you have a platform to deliver the insights to the people on the front line? And that's been the age-old problem. You know, the people on the 36th floor of a bank, they've got all the people around them with all the answers, but you have to get that out to 24,000 people working in your branches, etc. So what we've established is a workflow platform that everybody touches from the moment they step into the office that morning whether that be at home or in the office until they leave for the day and so now everybody works in exactly the same system all the way from the first touch point with a customer through the loan origination or account opening the underwriting the closing etc since you've got everybody in the same system You can start developing systems like an integrated commercial pricing and profitability system that now gives you an experience end-to-end that can be influenced by anyone on the line. Because you have to think of this as a production line, okay? That level of intelligence is now beginning to become much more of a differentiator. So think about this. You have to adopt this, you know, get your processes in place, and then you drive intelligence, insights, integrations, and data into that platform. There's nobody else in the market that has done this at this level of sophistication. Then you start with your unique products and you become a lot more sticky and more differentiating as you go forward. And that's why we have the market share we've got and we continue to penetrate these markets overseas. So they can see that our vision and execution is aligned and they actually see the outcomes of banks using Encino. Can you imagine competing with a bank in a territory if you don't have Encino? You don't have these automated processes? So that's how we've driven this. So Nick becomes a penetration point as well as a differentiating point when we sell the platform. Josh can now comment a bit on SimpleNexus.

I will add one more point on the automation aspect. One change I've seen in the last 12 months or so as I've talked to business leaders is that this talent market is causing them to think about software investments, not just how do I run my organization more efficiently, but how do I actually compete for talent? So something like spreading that takes 85% of the effort out of taking an unstructured financial statement or a tax return and getting that into a spread tool helps them compete for the best talent out of university. And it's been really fascinating to see how that message continues to resonate. On Simple Nexus, what I will say is their strength in the purchase market, particularly as they digitize that home buying journey and the MBA outlook for sustained interest in the purchase market, is something that differentiates them. The refi shops are having a hard time, but if you do a lot of purchase, there's no one better than Simple Nexus. The other thing I think that I've seen from engaging with that market is that you have a lot of business leaders in the mortgage space today who've seen this before, and they understand that facing a competitive market, facing market challenges, is the time to actually invest, not to cut back. So we do believe that's driving a lot of their continued momentum. When you look at the number of new logos added this quarter, It feels that they're leaning into the opportunity to differentiate in a tough market.

Yeah, we also see with banks, you know, traditionally banks tend to be a bit more stable. And with our focus on banking, bringing that solution over to banks and the purchase market, we feel pretty optimistic about that business.

That's a very helpful color there. I guess last follow-up here for David, I'd remiss not to take a look at that guide on on narrowing the operating loss here in the second half of the year. Is that tied to a slowdown in hiring or is that tied to just greater leverage? You think about the momentum of the business, trying to think through the levers and how you're narrowing losses here in the second half of the year. Thanks.

Yeah, so it was really in the second quarter we paused hiring and then we re-evaluated with the entire team around the headcount ads for the balance of the year. So it really is around optimizing each and every team and increasing productivity. We've done that work. The plan's in place. We're still hiring for the balance of the year as well, just at a more measured pace. So you'll see those cost savings kick in this year, but then really it will benefit us next year in achieving our profitability and cash flow positive status.

Good to hear. Thank you.

Thank you. And as a reminder, to ask a question, you will need to press star 1-1 on your telephone. please stand by. Our next question comes from the line of Brian Peterson with Raymond James. Your line is open.

Hi, gentlemen. Thanks for taking the question. So, David, one for you. So, I'm coming up with a 19% implied organic growth outlook for subscription revenue for the fourth quarter. I realize you guys aren't guiding to next year at this point, but is that something that investors should use maybe as a reasonable starting point for next year? I know there's some potentially larger seat ramp deals that are coming in, but

are any contacts that that you could add there would be helpful yeah that's not um we we guided for the year at 28 percent uh and 27 percent for q3 so um that 20 19 is um not correct and it should be you can i mean it's it's higher than that and you should run the numbers. It's just solve for Q4, and it will end up being in the 27% to 28% range. 19% is not correct, and it should be. I mean, it's higher than that, and you should run the numbers. It's just solve for Q4, and it will end up being in the 27% to 28% range for Q4, I believe.

Understood. All right.

Apologies. I messed up the M&A math. One on some of the sales cycles or kind of following up on some of those questions. I mean, is that really differentiated by the size of any of your customers? I just kept looking to double click on that a little bit. And as we think about maybe the linearity of some of the slowdowns that you guys have mentioned, did that change throughout the quarter? Just would love to get some perspective there.

Thanks, guys.

I would say the macroeconomic sentiment is pretty standard across the customer base. The difference I would give you is when you look outside of the U.S., you have just a more enterprise-heavy market. They don't have as many small institutions as we do here. That's the only difference I would see, but that's more of a market composition question, not really a sentiment question.

Yeah, and then on the quarter, you talk about linearity in the quarter. I'd say linearity was normal. I think we had some deals in the early in the quarter that were closed earlier than we expected in May, which is part of the reason why we saw upside in subscription revenue. So linearity was more normal, but I would say heavier weighted to the balance to the beginning of the quarter.

Understood. Thanks, gentlemen.

Thank you. Please stand by for our next question. Our next question comes from the line of Robert Napoli with William Blair. Your line is open.

thank you and uh good afternoon uh i'm nick and just uh anything you can give on the sizing of nick or gross margins uh in which products i mean auto spreading obviously is on fire but how is uh loan pricing those portfolio analytics is that is that becoming more important yep so uh

We're really proud of what we did with auto spreading. Today, within my bank operating system customer base, I have 26% of those customers have at least one NIC solution, which is exciting progress, but that means we still have a very long runway there to get them hopefully to adopt all of those. Pricing and profitability, we included in our notes here, we saw momentum in a $7 billion bank signing, a $2 billion bank signing. And I'm frankly pleased with the upmarket momentum that we have and the way that's being received, both in the U.S. and internationally. So we feel like we have good proof points. The product's coming along. We're going to continue trying to drive that into the customer base because they all need it.

And, Bob, did you have a question on growth? The first part of your question didn't come through. Did you have another part of it?

Yeah, David, if you could give any color on the sizing of NICs. today, given the growth it has and gross margins. I mean, your gross margin momentum has been pretty impressive, I guess, as Nick contributing to that.

Yeah. So in terms of total revenues, it's about 5%. And remember, we added Simple Nexus, which is about 15% of revenue. So that percentage has come down a mix. On the gross margin side, we do use AWS. So I would view those gross margins similar to what you see with other SaaS companies in that range.

Okay. And then last quarter, you had announced you added a trillion dollar bank, I think, in the UK. You know, with the are there elongated onboarding cycles as well. And in that market, I mean, that's a, I think that was for commercial and auto spreading. Now, when does that customer onboard?

We're not seeing an impact to project duration. I think we've seen the industry has figured out how to work either remotely or hybrid. One proof point that we gave from our press release is ASB going live. That was a program that we kind of kicked off right into the teeth of COVID, and they're live with this, and they're out there publicly with us. So no impact on that program's timeline relative to onboarding that's in line with our typical expectations for a program of that size.

Yeah, it's a normal enterprise-type seed activation schedule that you would see with that as well.

Thank you. Appreciate it.

Thank you. Please stand by for our next question. And our next question comes from the line of Fred Havemeyer with McQuarrie. Your line's open.

Hey, thank you very much for the question here, and congratulations on a strong quarter despite the macro environment. It's really great to see the narrowing in the non-DAF operating loss guidance of the year. I wanted to ask about just generally how, rather, a little bit of additional context in what you're describing in terms of doing more with your existing headcount. In terms of R&D initiatives, are you just finding that the headcount that you have in place is sufficient for the product innovation and your product roadmap that you have, or have you decided on any changes to your cadence of product delivery?

Yeah, so if you look at the breadth of the portfolio, you know, we used to be mostly commercial, a little bit of small business. Then you started building these different teams out, commercial lending, small business lending, retail lending, deposit account opening, treasury management, onboarding, okay? And then you add simple access in. And then we started adding customer-facing technologies for each of those solutions. We had to build a foundational infrastructure in place. Then you go to international, and all of a sudden, London, your team, to put in place for integrations, et cetera. We acquired a company in Australia, Print Street, that became the auto-spreading thing. If you put that whole footprint in place and you onboard 100 to 200 people per year like that, it takes a lot of management time as well as effort by the teams to bring them in. We're very fortunate. We always had a fairly much lower than the industry churn rate of people or a turnover rate. So what we've recognized is the percentage of revenue that we spent on R&D was always traditionally quite high. It was 27%, I believe, up to last month. That if we stabilize that organization, keep the headcount more fat, we're actually still adding, but a much slower growth rate. We have all of these teams populated and let them focus on bringing out new product, do quality improvements, et cetera. That stabilization effect could have quite a big boost for productivity and focusing on processes and optimization of software development and time to value where we actually write code and get it quicker to the customer. Dosin is a great little breather for a company like us. For 10 years, this went go, go, go, and add more heads, okay? I would say that if you look at growth companies like us, the answer later on becomes, I need more heads. And I think what we've done now is change that mentality to looking at optimization methods, improving our processes and so on. And I'm seeing great progress and I'm pleased with my teams. So I think it's a good thing and it's good corporate hygiene to do this. But I'm satisfied that each of these teams are populated to the extent needed for their solutions.

I'll say big congrats to the teams that have been working. The auto-spreading always impresses when I see that. I wanted to also ask about, generally, your channel ecosystem and how that is also shaping up as you're continuing to scale, as you're going more globally. And just generally, how do you see the maturity of your channel ecosystem and global systems integrators shaping up around Encino? And how do you think that could impact professional services as a mix of your total revenue over time? Thank you.

Yeah, we appreciate you calling that out because we do believe that's a differentiator for us and has allowed us to execute as we've executed this global strategy. We see about 2,800 partner practitioners to date that are certified to implement Encino. A lot of that increase since we last spoke was driven by international interest, which is a great thing that we're proud of. When the earlier question about you signed a large account in the U.K., are they implementing Well, it's because we have that partner ecosystem and a proven model. So from our perspective, uh, that is, that is going to continue to be how we go to market globally, uh, and how we can put our reputation behind these strategic accounts. And I'll let David to speak to the revenue side of that. Yeah.

On the revenue side for total services, it's 15% is kind of what we see for the year. Um, The, the partner channel, they deploy the majority of our, if not all of our large solutions. and so they have their own revenue stream for that. But we would expect, as we continue to expand onshore onto the continent in Europe, that those partners will be up, trained, and running and deploying the solutions on the continent as well, as we've seen with the initial projects that we have.

There is a demand for our services because we are the specialists, and I don't have a problem coexisting in the ecosystem with services between 15% to 20% of total revenue. But... We are very careful to complement our partnerships and not compete with them. But sometimes customers just ask for our people because it's closely related to the engineering teams, et cetera. So it's a nice equilibrium, but we'll continue to grow services as well.

Great. Thank you very much.

Thank you. Please stand by for our next question. And our next question comes to the line of Joe Brunwick with Baird. Your line's open.

Great. Hi, everyone. I wanted to go back to the hiring topic, and Pierre, you touched on it a little bit a few answers ago, but one thought is maybe recalibrating to a new trajectory of demand can enable a moderation in hiring, but productivity has come up a few times in this discussion. So are you seeing something from an efficiency standpoint where you actually feel a certain rate of growth can maybe be sustained at this point and a different headcount gets you there?

So our priorities for growth is as follows, or actually headcount. The very first thing we do every year when we start the year is to plan to make sure we've got enough salespeople, back-carrying salespeople on the field to cover the quota and the sales goals for that year. And so there is no restriction on that. If Josh tells me the pipeline supports a certain amount of sales, we will make sure that we've got that team on the field to accomplish that. So that's your very first thing. The second one then is to complement that with a support team to support the existing customers and the professional services team to implement. Those three things go lockstep, and we don't cut back on them. We don't hold back. We plan that first. Once that's in place, we look at PD&E for product, and then finally at G&A. Because we're a large global organization, we have complex tax structures. We have people to support accounting, finance, entity involvement, or entity creation, okay, as we go around the globe. All those infrastructures are in place because we always had a plan to build this global company. So I feel we're going to get leverage on the G&A side. We're getting leverage on our global infrastructure because they've been in place. The management structure is in place. And the people you add now is more from a capacity standpoint to maintain the growth rates. And as I explained before, the product organization has got all the necessary resources. teams, as well as structures in place to continue building out each of our portfolio elements. So I think we're just reaching a level of maturity where you can scale and drive growth without having to add overhead.

To summarize, we're making measure business decisions in an uncertain environment, and that's the real driver.

By the way, if you bring me a great idea and I can make a lot of money quickly, we'll invest.

Okay. I think I have a lot of...

but maybe the make a lot of money aspect, I'll work on that. You know, on the international side of things, revenues, I think, there have grown close to 60% the last few quarters. Where did that stand in the second quarter? And how might you be thinking about international growth, just given we seem to be having this divergence now between APAC and Europe?

Yeah, international growth in total grew at 38%. The majority of the growth, though, is coming on the subscription side. We have seen a slowdown in the services growth because we are pushing more of our projects to our partners. And then also FX. We had a big FX hit in the quarter on the international side, which I believe constant currency was at 52%. Okay. Thank you very much.

Thank you. Please stand by for our next question. And our next question comes from the line of Charles Nabon with Stevens. Your line is open.

Hi. Good afternoon and thank you for taking my question. So we're about a year, year and a half removed from the Wells Fargo win and had a pretty significant add-on back in September. I just wanted to get a quick update on how that's going in terms of the integration and the impact that can have on ACV expansion going forward.

That we were really proud to do both of those press releases, not only on the the broad commercial deal, but also the expansion into small business. I won't comment on the details of their program, but there's been no change to landscape there.

And the seat activation schedule. Hey Charles, on the seat activations, we've talked about that in the past. It's it's a normal larger deal, probably a little longer in duration to activate those seats. And so those are ongoing. Those are all contracted by date and so no update there either.

Got it. And if I go back to the conference in the spring, I thought the commercial pricing and profitability tool was one of the more interesting product shows. So I was hoping to get an update on that and any traction you're getting on that front reception you're getting from your customer base.

You were a little bit broken. Just to read that back, you're asking for an update on how pricing and profitability is progressing?

Yes, that's right. I apologize. Yes.

So we commented, we brought on a $7 billion bank and $2 billion bank. We were also really proud to do a press release with NBKC, who went live. That's a great replacement sale, and we're proud to have them live. We're continuing to take that to market in the accounts that we can serve within the customer base, and I'm quite excited by the momentum in accounts of the size that I referenced and also in some of our larger accounts, both in the U.S. and globally.

You know, I would tell you what surprised me about that product is because I thought we will focus for an extended period on the community regional space and then eventually get to the enterprise. And we are beginning to see serious interest in the enterprise business, even internationally, which tells me that the integrated experience that we've built and the complexity of the models we included there, as well as the flexibility, is actually resonating. And so I'm very positive around that. how that product is coming about and the proof points we're seeing from these customers evaluating it. So I feel very good about what we've done there.

So much of the initial value prop with those customers was the opportunity to connect the front and the middle back office end-to-end on one platform. You look at the way we price these loans is so central to the connection of the front office and the risk function of the institution, the overall profitability. That message has really resonated nicely.

Yeah, my view is, you know, in the end, every commercial customer – should get profitable and should get automated spreading from us as these next solutions roll out. So there's a significant upside penetrating the existing base.

Thank you. I appreciate the caller.

Thank you. Please stand by for our next question. Our next question comes in line of Ken Suchowski with Autonomous Research. Your line is open.

Hi, everyone. Good afternoon, and thanks for taking the questions. I wanted to ask about the ability to pass on higher expenses and higher inflation that we're seeing in today's environment. And my understanding is that, you know, the contracts don't have annual inflation escalators. So can you just talk about your – your interest and your ability to add those into your contracts? Or is the plan to kind of wait until the end of the contract to put through some of that pricing? Thank you.

Yeah, so when we sell a deal, we have whether it's a three or five or five plus year deal, we have an activation schedule built into that for customers as we deploy the product. By contract, we are allowed to increase pricing upon renewal. What we normally try to do, though, is go in and sell them additional products or lines of business or additional seats to expand the relationship with the customer. And the idea is to grab as many seats as possible with the customer. And then in the future, you would have the ability to raise prices. But our idea now is to grab as much share as we can. And then hopefully, as we service our customers and make them happy, we have the ability to maintain them as customers and increase prices at inflation or whatever the number is in the future.

Okay. That makes a lot of sense, David. And just as my follow-up, I wanted to ask a simple nexus. I think you mentioned the new logos, the competitive takeaways. Can you just talk about what you're seeing across your customer base and I guess the industry more broadly from a seat and employment perspective? I mean, are you seeing layoffs or are you seeing sea growth at your existing customers? Thank you.

We hear some of that, but historically what you'll see is into a challenging market, the mortgage industry will look to cut the middle and back office first because those are salary employees. They want to keep their good loan officers because they're more commission-based and they drive the revenues. So I think David spoke about some of our moderated approach to ensuring that we're buffering for some churn there. But no change to that. David, do you want to elaborate? No, no. I think you summarized it well.

Okay. Thank you.

And just a friendly reminder to ask a question, you will need to press star 1-1. Please stand by for our next question. Our next question comes from the line of Maddie Schrage with KeyBank Capital Markets. Your line is open.

Hey, guys. Congrats on the quarter and thanks for taking my question. My first question for you is I'm wondering if you could provide some color on the competitive landscape. Wondering if you're seeing any changes in pricing mainly from your competitors and then internationally if there's a new entrance or anything like that.

Yes. So if you look at our competitors, you have to look at it by segment because they vary by product type and segment, okay? So let's start with the community regional space. But when you look at commercial there, we do have at the lower end of the banking space some competitors. We respect them. They come with a different approach, a much more packaged approach. We're competing well, but we see competition there that wasn't there a few years ago, okay? If you look then at the enterprise market, it typically is still they can build it themselves if they want to do it, which, you know, For the life of me, I wouldn't know why you want to do it, but every now and then you'll still see a bank in the enterprise or even in the national space to try and do that. Pega is a platform provider we see more active in Europe where people might contemplate that. So the landscape since we went public hasn't really changed on that front. When you look at the mortgage markets, As a matter of fact, that landscape has changed. Some of our competitors are public companies. You can clearly see that their business models are different than ours and the resultant outcomes of that. So we see that as a big opportunity for us to be more aggressive and grab logos and do a land grab in that space. So in the consolidation, that market is going to help us as well because we're a very stable financial company with growth aspirations and we invest in our products. So I feel optimistic that in turbulent times, companies like us with a very stable management team and a strategy that's been proven over time will actually expand and take market share.

Awesome.

And then just to follow up for you guys, have you guys been reevaluating your M&A standpoint with the current macro uncertainty?

You know, there's Some nice assets out there and obviously prices came down, but right now we're focused on execution. Our customers are looking at us critically to see that we focus on their needs and the integration of SimpleNexus. As you could see from the appointment of Matt and Ben and integration into my executive team, those two teams are coming together very well. We had a whole team of Simple Nexus people today here in the office training on cross-selling and cross-pollination of people. And I can tell you the excitement in the room is infectious. So we're focused on execution, get through the rest of the year, as always, beat and raise, make our numbers, and then we'll evaluate as the market develops.

Thank you. Always appreciate it.

I am showing no further questions at this time. I would now like to turn the conference back to Pierre Nodet for closing remarks.

Thank you, operator, and thank you all again for joining us today. We look forward to talking with you next quarter and seeing many of you at upcoming conferences.

This concludes today's conference call. Thank you for participating. You may now disconnect.