nCino, Inc.

Thank you for standing by and welcome to Encino's third quarter fiscal year 2023 financial results conference call. At this time, all participants are in listen-only mode. After this feature's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Harrison Masters, Investor Relations. Please go ahead, sir.

Good afternoon and welcome to Encino's third 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 SimpleMexis. 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. Encino 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 8K 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'm 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 Simple Nexus, a 50% increase over the third quarter of fiscal 22. Subscription revenues were $88.3 million, an increase of 55% year over year. Excluding Simple Nexus, subscription revenues grew 28% organically. This quarter marked our first quarter with over $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 Encino Bank operating system as a foundational technology platform, making the Bank of New Zealand one of our largest customers globally. With over 55 billion US 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 Kiriboshi Bank in Tokyo, we had 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 H-Corp, 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 reputable is what we truly celebrate at Encino, 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 to Encino 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 Encino 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 US 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 simple Nexus 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 Encino to be a rule of 30 company next fiscal year with a mix between total revenue growth and non-gap operating income margins. 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 addressable markets, that our support and professional services organizations provide the best customer experience in the industry, and that we continue investing in 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 AsiaPAC. We were pleased this quarter to also add a new logo in Australia with a government-sponsored lender and an expansion deal within a New Zealand bank for commercial pricing and profitability. The ability of our NIC products to embed intelligence, insights, and data into the bank operating system is a huge differentiator. Our NIC 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 the Big Four UK Bank, again demonstrating our success in adding value across business lines within our customer base. That customer's 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 Encino 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 NIC with their initial Encino contract, selecting us for 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 and the community and regional market, including a $7 billion Colorado bank expanding their use of Encino from commercial lending to add deposit account opening and treasury sales and onboarding. and a $7 billion bank in Hawaii, adding retail lending and deposit account opening. Another highlight of the third quarter was our portfolio analytics team, signing 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, good lives are our key measure of success here at Encino, and this quarter marked a record for successful implementations, aided by a significant contribution from the portfolio analytics team as the CECL adoption deadline approaches. Our first commercial lending customer in Germany, 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 Encino professional services teams and certified system integration partners. As always, I'm deeply appreciative of the trust our customers and partners place in Encino, and I'm proud of the team's commitment, energy, and resolve as we continue to tell the story globally. David, can you take us through 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 8K 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 percent year-over-year. Professional services revenues included approximately $1.5 million of Simple Nexus services and other revenues. Non-U.S. revenues were $15.9 million, or 15 percent of total revenues in the third quarter, up 36 percent year-over-year, or 55 percent growth in constant currency. Non-GAAP gross profit for the third quarter of fiscal 23 was $68.6 million, an increase of 54 percent 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 comprised 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 Simple Nexus acquisition. Non-GAAP net loss attributable to Encino for the third quarter of fiscal 23 was negative $1.4 million, or negative one cent per share, compared to negative 3.7 million, or negative four cents 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 in less than 24 month category of 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 and simple nexus. 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 attributable to Encino per share to be negative 4 cents to negative 5 cents. 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 a year-over-year subscription growth of 52% at the midpoint of our range with approximately 28% organic subscription growth. For Simple Nexus, 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 seven to negative eight million. Non-GAAP net loss attributable to Encino per share is expected to be negative 15 to negative 17 cents 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.

Ladies and gentlemen, if you have a question at this time, please press star 1-1 on your telephone. One moment as we compile our roster. One moment. And our first question comes from the line of Terry Tillman from Tua Securities. Your question, please.

Yeah, thanks for taking my questions. Hi, Pierre, Josh, and David. A couple questions. One might be a multi-part question, so technically it could almost be three questions, but the It's good to see the profitability in the quarter at the operating line, operating profit line. The first question that might be kind of a two-fold question or two-part is, David, on the $603.9 million for the current or 24-month RPO, can you kind of double-click in terms of the organic growth? And then the second part of this question is the simple nexus run rate, how do you think about that going into next year given the independent mortgage brokers and the headwind there? And then add a follow-up. Yep.

On the RPO side, organically, Encino grew total RPO by 18% in less than 24 months at 28% and the long term at 4%. And then on Simple Nexus run rate, we took our guidance down for Simple Nexus subscription revenues from $60 million to $59 million. So we expect to see a slight decline sequentially into Q4 for subscription revenues from Simple Nexus. 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 Simple Nexus numbers for next year when we report numbers for Q4.

Understood. And just the follow-up question, I don't know who this is for, but Pierre, really appreciate 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 FY24? And is it assuming that maybe, you know, you just – the seasonally strong 4Q bookings, it just doesn't play out like you typically would expect? Thank you.

Yeah, thanks, Terry. You know, it's very early and we're in the planning stages here. We look at simple taxes and Europe. And those two combined make up 50% of your 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's impact will be. So 50% of your 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 a mortgage. So, you know, we 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 it's 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 Priceland 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 spend 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 the slight uptick in CRPO?

Yeah, 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 transformation vary slightly as you go around the world markets. As I mentioned before, when you look at Japan, there's an aging population and the 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, regulation, et cetera, and visibility into their lending practices, as well as ESG. And you come to the U.S., and it's 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 yet to stay. Banks know it's not a decision anymore. It's actually an impediment, and 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 pipelines. 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 quick follow-up here. As you think about kind of 20% growth next year, 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 balancing kind of growth and profitability going forward?

Yeah, our number of priority is growth. We are committed to that rule of 30 model. Because we're 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 would be 20% subscription, 20% total, and targeting that 10% margin target for the year.

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. I'm for Brad. I just want 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 your conversations with the CIOs on you know, with regard to their willingness to take on these, I guess, new digital transformation projects for a long origination for the upcoming quarter and so on the upcoming year, 2023? Yes.

In the U.S., as I mentioned, we still see strong demands. 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-19, because they were busy with Triple P 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 it's 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, Encina 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.

Yeah, 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 blended The deal with Bank of New Zealand and then 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 a non-U.S. outperformance and any other 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, and 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 Fawcett from Morgan Stanley.

Hey, everyone. It's Michael in Fontana for James. Thanks for taking our questions. Appreciate there are a lot of moving pieces here, and you're still a couple months away in terms of your outlook formulation, but how should we sort of think about how conservative the directional commentary you provided on FY24 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 and sort 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're going to want to minimize risk where they can and have transparency into their portfolios. And they're going to want to upside their reward as much as possible. So our NIC 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?

Yeah, that's great. Thanks, Josh. Maybe just one other one on Simple Nexus. 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 speaks 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 elevated simple nexus churn in the back half. I was just curious how renewal discussions have been faring for simple nexus in this environment.

Yeah, what we see on simple nexus side, the contract duration, it really hasn't changed much. We see one to two years. 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 Gull from Raymond James. Your question, please.

All right, great. David, some nice OPEX leverage in the model again this quarter. As you're 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 reevaluation on the hiring side?

Yeah, 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, 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 Vancouver, 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 transformation versus kind of smaller, quicker ones?

Each of our segments, our 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 Adip Chaudhary on for Bob. Our first question was 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 this margin expansion from? I think in the past you've talked about international as being accretive to margins, but that'd be helpful. Thank you.

Yes, we are still kind of a long-term model of 70%. We do have a product mix benefit as we sell less to the community regional space. We have higher margin on that business because we can bundle a Salesforce seat into that. Also, as we expand our NIC product offering that's on AWS, and that comes at a much higher gross margin. we will see efficiencies and support. We 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, can 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 an upper-place 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. The positive count opening is up 25% year-over-year. So that whole client-centric platform story is playing ball with us. We are finding our small business offerings to include a retail-like experience as well at the low end of small business. And all of those roadmaps, 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 unprepared comments, but the validation points of the single platform deals, multiple community and regional accounts, those are really nice accounts that came on board with our known commercial solution, but they also rolled in retail because they wanted to be able to connect with their customers, take care of them really well across multiple products. From our perspective, that's a good validation point.

Understood. Thanks very much.

Thank you. And as a reminder, ladies and gentlemen, if you have a question at this time, please press star 11 on your telephone. And our next question comes from the line of Jason Adler from ADDR, pardon me, from Moffitt Nathanson SVB. Your question, please.

Great. Thanks. Hey, guys. Thanks for taking my question. The first one is on the pipeline. So 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 cycle start to actually contract? Or are these just conservatives? you know, 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 a in a interest rate environment that was very low with a roaring economy. In a previous life, I've experienced going through 08, 09, 10, 11, 12, selling to banks, et cetera. And what you'll find is initially there'll be a pause to get a full understanding of the market landscape. And then very quickly, the ones who stop investing realize they're 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're competitors. People talk a lot about competition to banking coming from 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 with cheap 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 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 mortgage banker or loan origination officer headcount growth is baked into that rule of 30. Do you expect things to get worse, better, or stay the same?

Yeah, we're very early stages of planning. As you can imagine, we're in the beginning of 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 Powell's analysis. 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 Altman from Scotiabank. Your question, please. Great.

Thanks, guys. Just wanted to ask a question about the margins next year. Over the past couple of quarters, you guys have made comments around how the core Encino business is profitable today and investments in the Simple Nexus were really the drag on margin. 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 Encino versus Simple Nexus?

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. Simple Nexus is going to lose money this year, and Encino is profitable, legacy business. If you take it like the next layer, I think Simple Nexus 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 into next year? Are there maybe plans in place to shift sales resources into the upsell side, 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 uh i'll start with international look at the proof points that we that we hit earlier great wins in new zealand uh go lives in in japan in germany expansion within london a go live 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 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 a 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're going to want to come out of the other side of any headwinds stronger, we'll be there with them.

Yeah, 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 KeyBank. Your question, please.

Thank you, team, for taking the question. You know, I wanted just to ask a little bit higher level about, you know, the visibility that you have going into the next fiscal year. Obviously, you benefit from multi-year, you know, 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 simple nexus 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 u.s sales cycles is it what happens with mortgage rates you know what are going to be some of the key um items that you're tracking to kind of maybe get a little more precision about how fiscal 24 could 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 US keep on performing I would say I would love to see FX stabilize and improve in our favor that'll be a great little bonus secondly I 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 realize this, 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 corners.

Okay, that's very helpful. Well, And then, you know, 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, you know, 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, you know, are maybe trying to be prepared, you know, let's say for whatever the scenarios are next year, you know, where would you rank, you know, the priority around modernizing certainly some of their, you know, 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 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. 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, James. Thank you. One moment for our next question. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 1-1. Our next question comes from the line, Osaka 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. I'm wondering, as you've made more headway internationally, 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, Sackett. This is Josh. 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 Encino. So it absolutely helps.

Yeah, and if you look at – these are critical mass countries, okay? If you look at New Zealand now, we've got critical mass, and then the deals come. You look at Canada, you win one, two, three, and then boom, we've got the majority of the banks. And the difference between the U.S. and internationally is I have to win each of those countries because 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 had 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, et cetera.

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 that make sense?

That does. And we do not disclose bookings, but I can talk about sales activity. So sales activity in a quarter, despite Europe being slow, we had some FX impact and simple nexus. It was pretty much in line with our expectations. We talked about this earlier about the year. We returned to a more normal cycle in terms of sales for the year, where the second half is higher weighted than we saw 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 from the line of Charles Nivhan from Stevens. 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, Landon 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 where in the Encino 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 a $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. We're also seeing, despite everything we discussed with mortgage, good validation of Simple Nexus' value in the bank market, right? Five cross-sales into Encino Banks and credit unions. And frankly, those are larger deals than 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 accountants, to be coming 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 LBAWare and the impact or contribution that had to SimpleNexus as well as what you're seeing in that business in terms of traction?

Yeah, I mean, we've had some cross-sales into the base of Encino, but we don't have any more details. We're 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're adding. Even this challenge marketing is because of that fantastic package. Not just a POS, but the full home buying journey and integrated tools like LBAWare help 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 Nadeh. 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