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spk08: good day and thank you for standing by welcome to the encino first quarter fiscal year 2025 financial results conference call at this time all participants are in a listen-only mode please be advised that today's conference is being recorded after the speaker's presentation there will be a question and answer session to ask a question please press star 1 1 on your telephone and wait for your name to be announced to withdraw your question please press star 1 1 again I would now like to hand the conference over to your speaker today, Harrison Masters, Director of Investor Relations.
spk02: Good afternoon, and welcome to Encino's first quarter fiscal 2025 earnings call. With me on today's call are Pierre Naudet, Encino's Chairman and Chief Executive Officer, and Greg Ornstein, Encino's Chief Financial Officer. During the course of this conference call, we will make forward-looking statements regarding trends, strategies, and the anticipated performance of our business. These forward-looking statements are based on management's current views and expectations, entail certain assumptions made as of today's date, and are subject to various risks and uncertainties described in our SEC filings and other publicly available documents, the financial services industry, and global economic conditions. 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, as well as the earnings presentation on our investor relations website at investor.ensino.com. With that, I will now turn the call over to Pierre.
spk01: Thank you, Harrison, and thank you all for joining us today. We are very pleased with the start to the year. We built on the sales momentum from Q4, with gross sales in the first quarter exceeding our plan and establishing a company record for gross sales in the first quarter. We saw strength across the business with existing customers expanding their adoption of our platform, most notably in the US enterprise and community and regional markets. Last quarter, I noted that we expected net sales for fiscal 25 to increase approximately 50% over last year. Our strong Q1 performance certainly increases our confidence in achieving that goal. At year end, we pointed to stabilization of interest rates as key to the improving tone of customer conversations and more normalized buying behavior. The December 2023 Federal Reserve Open Market Committee meeting provided stability that was missing in the US market for almost two years. With more visibility into their own financial performance, more and more financial institutions have been able to refocus on strategic initiative to improve their operations, create additional operating efficiencies, provide better user experiences for their clients, and improve their competitive positioning. This is translating to more technology spent. 72% of the executives we polled in an internal survey this month responded that their IT budgets have increased from last year, with 44% citing an increase of over 5%. While interest rate stability has been a positive for most of our business, rates being higher for longer have kept the mortgage market under pressure. Despite the difficult market conditions, our U.S. mortgage business continued to perform well, adding 15 new logos and again exceeding internal quarterly gross sales targets with strength in both the FI and IMB market segments. The difficult mortgage market over the past couple of years has reinforced the imperative for mortgage lenders to leverage technology to improve profitability, provide a more enjoyable and efficient customer experience and attract the best talent. Our results again reflect our success in displacing competitors and cross-selling into our banking installed base. We are currently in a waiting game for the first Fed rate cut and the puts and takes of the demand equation do add up a level of difficulty in predicting how and when rate cuts will impact mortgage volumes. That said, We are confident that our market-leading technology and our ongoing commitment to product innovation will continue to yield share gains. Obviously, there are nuances by market, but we see priorities generally aligned across all of the markets we serve. The liquidity crisis a year ago and the ensuing difficult business cycle imparted some lasting lessons for our customers and prospects. Operational efficiency matters. and quality, digital experiences are table stakes for their clients. As the only cloud native single platform that spans lending, onboarding, and account opening operations across business lines within a financial institution, we are uniquely positioned to bring efficiency and a modern digital experience to financial services. This was on full display for over 1,600 attendees at Insight, our annual user conference, held in Charlotte just two weeks ago. In responding to a registration survey, more than 70% of attendees confirmed that improved efficiency was the number one priority for their institution in 2024. This aligns directly with our mission of bringing people, processes, and data together on a single, customer-centric platform. As the first steps toward digital transformation can begin anywhere within a financial institution, we've been focused on ensuring that all of our solutions are market leading. For example, in the first quarter, an over $15 billion asset bank expanded their use of Encino from treasury onboarding to include small business and consumer lending, as well as deposit account opening. We expanded ACV by nearly seven times within this account in Q1, even though They are not yet a customer of our flagship commercial lending solution. In April, we announced a number of announcements to our consumer lending solution, including the Omnichannel experience we've discussed for the past few quarters. Inside was the GA launch of Omnichannel, and we couldn't be more excited about the incredibly positive reaction and feedback from our customers for this product as we make the same truly mobile-first, point-of-sale experience. already an important differentiator for our U.S. mortgage solution, available across all of consumer lending. Rounding out our consumer lending enhancements are new capabilities for indirect auto lending made possible through the recent tuck-in technology process of Allegro. In evaluating the built partner by decision to solve for indirect lending, we decided the most efficient way to accelerate development for the specialized verticals. was to acquire the technology from a valued partner in the credit union space, ThruStage Financial Group. You'll also recall we discussed the acquisition of DocFox on our last earnings call. This acquisition provides us with new onboarding and account opening capabilities for small business and commercial banking. Insight was the first opportunity for many of our customers to see how the solution digitizes and streamlines a traditionally high touch, inefficient, and time-consuming process. The feedback has been tremendous, including over 100 new sales and leads generated at Insight. We continue working with early adopters on an integrated product initially targeted at the community and regional banking market in the U.S. One mutual customer has reported onboarding time for business accounts being cut from two weeks to under an hour with DocFox. In our early testing of the market, we have found solving the commercial onboarding platform for FIs can yield around half of the ACV we expect for commercial lending. We are incredibly excited about the opportunity for DocFox, which will be referred to as the Encino Commercial Onboarding and Account Opening Solution, and look forward to expanding this offering for U.S. enterprise customers later this year. Having laid a foundation with an integrated platform of best-in-class solutions, we are uniquely positioned to continue leading the digital transformation of financial services with automation, data, and intelligence. Our newest NIC offering does exactly that. Continuous credit monitoring leverages our partner rich data companies' AI decisioning platform to automate what were previously manual loan review tasks at the customer and portfolio level. Through this collaboration, we are setting a new standard in how financial institutions manage credit risk. We were pleased to announce M&T, an Ancino customer since 2016, as our first U.S. customer on continuous credit monitoring. This solution will enable M&T to detect more early warning signs and provide insights to M&T's employees to drive even more timely and tailored banking experiences for their clients. This is just one example of how key partnerships extend and enhance our platform. And perhaps the most innovative developments shown at Insight were the banking advisor products. We demonstrated how we have productized generative AI to automate the creation of deal and credit memos, to quickly interpret policies, to chat with, upload, locate and file documents, and to turn PDFs into data. Our customers are so excited by this breakthrough technology that we actually got reprimanded by the fire marshal for overcrowding at the Insight Banking Advisor booth. As a reminder, Encino first earned our customers' trust as we led them on the journey of cloud adoption. Our goal is to install that same trust as their partner in the journey to adopt AI. Encino is differentiated as a vendor in financial services, not only by our global reach and inability to serve institutions of all sizes, but by being home to the mission critical lending, account opening, and onboarding processes across a single platform. for all of our financial institutions' products and services. Encino's roots are in the business process re-engineering, and with AI, we have the ability to drive intelligence and automation like never before. With that, I'll turn the call over to Greg to take us through the financials.
spk12: Thank you, Pierre, and thanks everyone for joining us this afternoon to review our first quarter fiscal 2025 financial results. Please note that all numbers referenced in my remarks are on a non-GAAP basis unless otherwise stated. A reconciliation to comparable GAAP metrics can be found in today's earnings release, which is available on our website and as an exhibit to the Form 8K furnished with the SEC just before this call. We are very pleased with our first quarter financial results. Total revenues for the first quarter of fiscal 25 were $128.1 million, an increase of 13% year over year. Subscription revenues for the first quarter were $110.4 million, an increase of 13% year-over-year, representing 86% of total revenues. As previously discussed, revenue growth rates this year are being impacted by the heightened churn we saw last year, particularly in the IMB market. Churn in the first quarter did moderate as expected, and while we will continue to closely monitor the interest rate environment, Our churn expectations for the rest of this year remain in line with the $20.5 million we discussed for the full year. Professional services revenues were up $17.7 million in the quarter, growing 8% year over year. Non-U.S. revenues were $25.8 million, or 20% of total revenues in the first quarter, up 34% year over year. Non-GAAP gross profit for the first quarter of fiscal 25 was $84.4 million, an increase of 14% year over year. Non-GAAP gross margin was 66% compared to 65% in the first quarter of fiscal 24. Our subscription gross margins reflect approximately 70 basis points of benefit from improved unit economics under our agreement with Salesforce. We expect continued subscription gross margin improvement in line with the 1% increase for fiscal 25 we discussed last quarter as we lap annual billing events for existing customers and have the opportunity to move more of them on to our new Salesforce pricing. Non-GAAP operating income for the first quarter of fiscal 25 was $24.4 million compared with $10.9 million in the first quarter of fiscal 24. Our non-GAAP operating margin for the first quarter was 19%, compared with 10% in the first quarter of fiscal 24. Our operating margin benefited from hiring being slightly behind plan in the quarter, favorable insurance renewals, and improvement in bad debt expense, particularly in the IMB space. Non-GAAP net income attributable to Encino for the first quarter of fiscal 25 was $22 million, or 19 cents per diluted share, compared to $8 million or 7 cents per diluted share in the first quarter of fiscal 24. Our remaining performance obligation, or RPO, increased to $1.07 billion as of April 30, 2024, up 17% over $914 million as of April 30, 2023, with $702 million in the less than 24 months category up 13% from $623 million as of April 30, 2023. We had another strong expansion quarter with contract extensions accompanying those deals, so we had healthy contract duration ads that accompanied the incremental ACV. We ended the quarter with cash and cash equivalents of $134.8 million, including restricted cash. Net cash provided by operating activities was $54.4 million, compared to $31.3 million in the first quarter of fiscal 24. Capital expenditures were $342,000 in the quarter, resulting in free cash flow of $54.1 million for the first quarter of fiscal 25. As a reminder, the first quarter is typically our seasonally strongest cash generation quarter. You will note our statement of cash flow reflects investing activity net of acquired cash of $91.2 million. This reflects $19.9 million of all cash purchase consideration for Allegro and $74.3 million for DocFox, including approximately $2 million of purchase consideration that was recorded as post-combination expense, which was excluded from our non-GAAP results. With the addition of indirect lending functionality, Allegro expands the market opportunity for our consumer lending product to a larger number of banks and credit unions, which we expect will further increase our competitiveness in consumer lending, though the revenue contribution expected this fiscal year from this technology is immaterial. We borrowed $75 million on our revolving credit facility to finance the DocFox acquisition and subsequently repaid $20 million within the quarter. We plan to pay down the remaining $55 million of borrowed principal during the rest of this fiscal year as we continue to generate cash. We use cash on hand to fund the acquisition of Allegro. Turning to guidance, for the second quarter we expect total revenues of $130.5 million to $131.5 million with subscription revenues of $112.5 million to $113.5 million. This guidance assumes year-over-year subscription revenues growth of 13% to 14%. For full fiscal year 25, we continue to expect total revenues of $538.5 million to $544.5 million, with subscription revenues of $463 million to $469 million. This full-year guidance assumes year-over-year subscription revenues growth of 13% to 15%. Non-GAAP operating income in the second quarter is expected to be approximately $17 million to $18.5 million, and non-GAAP net income attributable to Encino per share to be 12 to 13 cents. This is based upon a weighted average of approximately 117 million diluted shares outstanding. Insight is expected to add approximately $2 million of incremental sales and marketing expense in the second quarter on a sequential basis. Additionally, annual merit increases affected in April, plus salaries and wages of people onboarded with the acquisitions, will contribute to a higher quarterly operating expense run rate. Also, in light of the incredible customer demand we saw at Insight for our expanded product capabilities, we plan to reinvest some of the Q1 bottom line overperformance in sales and marketing to drive even greater adoption of our newer solutions and to more aggressively pursue the consumer lending opportunity in the credit union market. That said, we are increasing our non-GAAP operating income outlook for the full year and now expect non-GAAP operating income for fiscal 25 to be $86 million to $89 million. Full fiscal year 25 non-GAAP net income attributable to Encino per share is expected to be 65 to 68 cents based upon a weighted average of approximately 117 million diluted shares outstanding. With that operator, we'll open the line for questions.
spk08: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment for questions.
spk05: Our first question comes from Adam Hotchkiss with Goldman Sachs.
spk08: You may proceed.
spk00: Great. Thanks so much for taking the questions up here. I appreciate the comments you gave around insight. We'd love for you to just take a little bit more into, um, what are some of the key things you learned from customer conversations? Um, what are they asking for around, uh, themes like AI and innovation and then, uh, any incremental color you can give around the, the a hundred new sales leads, uh, generated there, uh, what products are people most focused on? Really appreciate it.
spk01: Yeah. Thanks a lot for that question. Um, you know, it's interesting. AI has got this hype since October of being around the market. You get lots of very important senior people like Jamie Dimon talking about it. But then there's a problem. We're a regulated industry, lots of laws and regulation, lots of privacy, a lot of data issues. If you feed bad data into AI, you get bad outcomes. So what I'm seeing is The majority of people are very excited, but they need guidance. They need to understand what tools can be used. How do I stay compliant? How do I do? Don't do the wrong things with it. So what we've seen is, and that's why the fire muscle concept and the climate comes in as well. They are really hungry for solutions that will drive efficiency and help them to operate the bank better. And they need people like us to actually build those tools to be very purpose built. and very narrow in the focus of what solutions or what problems they solve, okay? That way they feel secure. And so we have to take this journey with them and actually build solutions that's very purpose-driven. It's within a very specific focused problem set. And that way the industry will come along over time. Because as you can imagine, banking is a conservative business and it's about money and regulation and compliance. So that's where I saw most of the excitement was at. was that the fact that we have the platform in place, but you have to do that first, get all your business processes right, get the platform laid out, and then after that, you can literally start taking that platform steps and compress them through automation and the usage of data and analytics.
spk12: And Adam, just on your question about the 100 sales leads, that was specifically for DocBox, which we're now calling our commercial onboarding and deposit account opening solution, but that was specifically at their booth. So a lot of excitement about bringing that technology into the Encino family.
spk00: Okay, great. That's really helpful. And then, Greg, just on the margin consideration there, I think you talked about I'm hiring being a little bit behind plan. What do you need to see, uh, either from a revenue perspective or other signals to, to lean in on the hiring side? And then, you know, how do we think about, you know, some of the sales and marketing expense within the context of that, uh, relative to the, the margin expansion plans that you laid out at investor day last year.
spk12: So from a hiring perspective, again, our folks have got, you know, the green light to hire. Um, I think what we've seen over the last quarter or three is more and more talent in the market. And I think our teams are being very methodical about who they're hiring and bringing in to help drive the company going forward. So from that perspective, it's nothing from the CFO's office, for example. And it's all around making sure we've got the right people who can help drive growth, particularly when we talk about the breadth of products that we have. um you know going forward so that's that um you know as it relates from a margin perspective again we're going to take a little bit of jumping and our opex lines in the second quarter as i talked about and gave some reasons but you know once we get beyond that again we expect it to be fairly stable as the year progresses um you know i think we've talked about you know our last column before we feel very comfortable with the head count that we've got we're continuing to add in places where we see opportunities again to drive growth and drive efficiencies you'll note that our headcount is up, but that's really solely related to the acquisitions that we did and the employees that we bought on from those two transactions.
spk00: Okay, super helpful. Thanks, Pierre. Thanks, Greg.
spk08: Thanks, Adam. Thank you. One moment for questions. Our next question comes from Ryan Tomasello with KBW. You may proceed.
spk14: Hi, everyone. Thanks for taking the questions. Pierre, last quarter you talked about needing to hit roughly 40% of your annual bookings target to hit the guidance for the year. So, you know, just given the strong start to the year, can you provide some context around where that visibility stands today and maybe somewhere where the puts and takes have been? And just given the strong bookings performance to start, you know, the year, maybe just help us understand the drivers of the maintained top line guide for the year. Thanks.
spk01: Yeah, so look, firstly, first quarter was a continuation of the momentum of fourth quarter, and that gives us confidence to maintain the guidance, and that's exactly how expressed our market sentiment is at this point. If you look at just further color on the bookings, it was about 60-40 commercial, and I want to emphasize for all of you that remember, if you look historically at commercial, you look at a workflow solution that We want to cover all the people. That is the breadth. We've taken that breadth and expanded that into small business as well as consumer deposit account opening and now onboarding. So that's how we get users. But now there's a depth issue. And the depth is all about intelligence, data, AI, analytics, machine learning. And we're literally going to go deeper into the bank and look at very specific roles and see how we can replace that. And that adds tremendous value. to the efficiency and the operations of the bank. So we see that customer base of commercial as a tremendous asset to drive more automation and to actually get more customer value out of it. So I would say that the first quarter confirmed for me our confidence. On the downside, you have to remember, we have to look at churn and we always have to understand what is the churn impact gonna be. And since I haven't seen any cuts in rates, Although mortgage is only about 15, 16% of total revenue of the company, it does have an impact. And that mortgage business is still running flat, although we're taking market share all the time because we're growing our mortgage business. But obviously it's dilutive to growth overall because it's growing slightly slower than the rest of the company. So I'd say for right now, we're going to hold what we have and we'll see how the market develops by mid-year.
spk12: Yeah, just to expand on that, Ryan, you know, from a mortgage perspective, you know, that business still growing almost double digits this quarter. Again, the team continuing to do a great job in a difficult market. We added 15 new logos in the quarter. But it is it is dilutive to growth. And, you know, you would have heard my comments around bad debt, particularly on the IMB side, subsiding a little bit. And so I think what we've seen is somewhat what we experienced mainly last year was a lot of these IMBs, these mortgage lenders who are just shutting their doors. We've seen that, I'd say, you know, slow. You know, I still expect some of those to happen, but not with the frequency what they did maybe last year. And really, as we think about churning this year, and I think I touched upon it on the last call, it's really more around M&A. As, you know, you're left with a smaller number of larger, better capitalized IMBs, and some of those are becoming aggressive and taking market share. You know, fortunately, we think many of those are our customers, so we hope that there's opportunities for for growth through M&A there. But again, sometimes you end up on the wrong side of a trade. And so as we think about the guidance, you know, you guys in late March, we gave that guidance. We want to be prudent as we think about the rest of the year.
spk14: Great. I appreciate all that color. And then, you know, just a bigger picture one here, Pierre, as you think about potential catalysts on the horizon, driving demand and bookings over maybe the next six to 12 months. I was hoping you can just help us contextualize the importance of the different variables in play between some of the more obvious ones like rates, the US presidential election, maybe just broader urgency that AI is putting on the industry to innovate. How would you rank order the importance among those and any other major variables that come to mind as you think about the bookings environment over the next six to 12 months?
spk01: The first thing you have to realize is that banks this year operate under a lot more stability and a stable macro environment with the rates being stable. Last year was all about survival. When you have a liquidity crisis, the management teams turn all their focus to a very tactical mindset to just survive. This year, I would say they bruised from that experience, but they are carefully moving forward with more strategic options. So what I find is a lot of scrutiny in deals and really making sure that they prioritize their spending in the right places. Fortunately, with what we do, we get prioritized at the top of the list many, many times. However, there is still a posture of conservatism that you can see. Now, what's going to happen as time goes and the rates stay stable and then start coming down? maybe coming down a little bit and look when it's cut, it's going to be a quarter point cut. So it's not material in dollar terms, but it's more of a sentiment and a signal to the market. What you'll see is that banks will become more aggressive and realizing they have to run an efficient operation. Um, when you come to the election, the changes of administrations, we started this company under Obama. Uh, we ran it under Trump for four years. We now under Biden. So these administrators come and go. If it's more compliance-oriented, we've got the tools to solve that for you. If it's more growth-driven, we've got the tools to help you grow. If it's more about profitability and efficiency, we've got the tools to drive automation and help you to become more efficient. But all the bankers know they have to come to an efficiency ratio around 50%, 51%. Some of my top banks run around 39%, 40%. So you can operate these banks at very efficient and highly profitable margins by utilizing Encino. And that's a message we take out, and that's a message that they confirm for us in our surveys and the feedback we're getting.
spk05: Great. Thanks for taking the questions. Thanks, Ryan.
spk08: Thank you. One moment for questions. Our next question comes from Brent Braceland with Piper Sandler. You may proceed.
spk04: Good afternoon. Appreciate that. I guess, Pierre, for you, if I... Look at DocFox, Allegro. It looks like you're reinvesting here in that community bank, small business area. What's driving the need or the opportunity? Is there some pull there where you decided to buy versus build because the demand was there? Walk us through the logic and what you're hearing today the sense of urgency from some of those community banks and why you're leaning in here now.
spk01: Yeah, so let me talk about onboarding first. Look, onboarding has always been an interest of ours, but it came in pecking order. I wanted to do small business and consumer lending and deposit account opening first. But onboarding for commercial businesses, it's a highly complex And it literally is as big an effort as it is to regenerate the loan. Some of these deposit account openings, because of regulation and money laundering, could take up to six months for them to get the account open, depending on how complex and if it's an international business. So automating that and helping banks with that is a tremendously attractive market. And DocFrogs, as you know, we always start building for the community bank market. And with DocFrogs, I can accelerate that. And the moment they're fully integrated, that product will go all the way up the enterprise. So there's tremendous pool for that. And that, by the way, will then go internationally and be a global product. So the onboarding of commercial customers was always an interest of us, was a natural next step in building out the platform. Then we come to Allegro. Allegro was more of an impediment in the credit union market where a lot of indirect auto lending happens. Some banks are doing it. That business falls out of favor and back in favor depending on economic climates. But The credit union markets, they see it as an essential member service. So they actually have many of these dealers signed up, and you can, like you know, you go to a dealer, you get the man behind the curtain, and you get your financing, okay? And that's where the solution is helping them to connect with these dealerships and do that indirect lending. And it's a highly complex, deeply integrated solution, and for us to have built that would have added no value. It's more of a commodity, and this product, I see as more as an add-on to consumer lending. So when you go in, you can replace all our new technology with the old stuff they've got. And then I'm covering this indirect lending issue that if you don't have that, they cannot select you because then they have multiple vendors. That's where that one came from. By the way, indirect lending does apply also to credit unions, to banks, and it goes all the way up the enterprise. And it's a US-based product.
spk12: Yeah, Brent, I think I would also view that I'd view that, the Allegro again, as we think about how far our consumer lending solution has come and the confidence we have in it, you know, as evidenced by that enterprise bank that, you know, we highlighted a quarter or two ago that purchased it. I think it's really rounding out the functionality to bring to market. And as Pierre noted, frequently you'd have an RFP where, you know, it's a box we would not be able to check and you'd get, you know, dinged for that. But ultimately, now we're able to give this net new technology, and we think the market is asking for it because we don't see other net new technology like what we have on the consumer side out there.
spk04: Great. A helpful color there. And just, Greg, for you, one quick follow-up on CRPO. The growth did accelerate here on a year-of-year basis in the quarter. It sounds like you're flagging continued uncertainty in that mortgage market, but Was all of the backlog build here, the quarter, tied to kind of commercial? Was it like strong renewal? Just any additional color on why that CRPO growth actually accelerated, even in an arguably very tough environment.
spk12: Yeah, look, it was a good quarter. And also just the mix that we had, which we always highlight, can impact. RPO came into play. We talk about the commercial side. You know, we had three commercials. I know we frequently get questions about commercial saturation. We had three customers that each expanded with us over 40% from an ACV perspective, just solely expanding their commercial usage of us this quarter. And so we still see plenty of opportunity on the commercial side. You know, the other thing with mixed rent shows a little bit of the enterprise customers, again, coming back to buy. as the events of last year and the liquidity crisis get further and further in the rearview mirror. So that's another thing that I'd highlight. And I guess finally, just to Pierre's earlier comments, when we talk about commercial, and again, people talk about commercial lending, we have the historic workflow commercial lending business that we started from. But as we think about commercial, and as you guys think about commercial, we really would urge you or encourage you to think about it more broadly and with all of the other things that we're bringing to those commercial customers, like the continuous credit monitoring that we announced with M&T, like Banking Advisor, like DocFox, like auto-spreading, like commercial pricing and profitability. And so as we look at that commercial customer base, again, we view it as a tremendous asset, and we think there's a lot of runway there for us.
spk04: A lot of cross-sell, for sure. Very clear. Thank you.
spk12: Thanks, Brent.
spk08: Thank you. One moment for questions. Our next question comes from Alex Sklar with Raymond James. You may proceed.
spk03: Great. Thank you. Pierre, great to hear on the record first quarter bookings. I want to dig into your comments in particular on the U.S. Tier 1 and enterprise activity. I think you said it kind of can't start coming back. What do you see from that segment in the quarter, and how should we think about that segment contributing to bookings this year relative to kind of its current mix of your business today?
spk01: What I'm seeing is the same excitement. Obviously, there are bigger staffs and a bit more sophistication on the IT side, but the same excitement with the same questions around the usage of AI and data. Remember, if you look at the critical mass of data by bank, you know, you could say that JPMorgan Chase and maybe Wells Fargo has got critical mass, but the rest of them don't have enough of a loan book to actually have a representative picture of all the areas and states in the U.S. With our data lake and the products we're building on and the way we actually anonymize and take these data into a big data lake and then provide to them much deeper insights into the activities of commercial lending as well as automating the review processes. You know, we all love to think about commercial loan origination. Most of the work actually sits in quarterly and six monthly and annual reviews of existing loans and making sure the book is priced as well as collateralized and covered in the right way. So there's a massive middle back office operation happening without loan origination at all. Okay. And that's where the opportunity to drive this automation, and that's where RDC, or its data corporations, partnership with us is so helpful. And then you pair that next to the generative AI tools we're putting together in there, and it's going to literally remove chunks of processes that we've built over 12 years into the workflow. And that's the interesting part here, is that we can now take a broad footprint of what we laid out for a bank, Because we know exactly what they do, we can automate some of this and drive a lot more efficiency in a lower-cost operation. And we will share in that efficiency as they pay us for these products.
spk03: Okay, great. Yeah, I know RDC was a big part of the Insight keynote this year, so good to hear in that color. One more for you, Pierre, or if Paul's on, I don't know if he's taking part in the Q&A, but can you just talk about what the launch of SimpleNexus, the front end, the omni-channel capabilities, and maybe I'll just lump in some of the indirect auto functionality that you talked about in response to Brent's question. What does that mean for the retail lending segment? I know Greg called out that's one of the areas you're going to spend more on in the back half of the year. So what's changed there in your mind on consumer lending? Thanks.
spk01: So let's talk about the consumer facing side of this. Okay. What if American Airlines changed their whole booking operations and issuing tickets, et cetera, but you still had to make a phone call. You know, you'd go out and fill the old stuff. It didn't help you much. It helped them in the middle back office for us putting up probably the most sophisticated, elegant front end solution where consumers now can do this stuff and go self service. It removes the burden from the bank. It gives them a modern platform. It drives self-service to an extent not known in banking today. So now all of a sudden, people start believing that all that hard work we did for the middle back office, if you plug that front end in, it drives that consumer adoption and self-service they were always coveting for. And that's the difference that this front end is making. It is the final piece of the puzzle. but we never wanted to do it until we've got the middle back office clean. Otherwise you've got this cool front end and you wait three days for an answer. Okay. We are moving to a world where five years from now, um, I believe consumer and small business banking at the low end should be mostly driven by self service and intuitive tools that drives intelligence behind the scenes to advise and help consumers to be totally self service. This should be so simplistic, just like your iPhone come in a box. You don't get a manual. You don't go to a training course. The same is going to happen. We're going to take banking to that same level of efficiency and automation. The Allegra one is just to fill a hole on indirect lending because that's what the market space wants. And if they get this end-to-end solution that can do that as well, they can literally rip and replace their current disparate systems. They've got between 10 and 15 systems doing all the stuff we're doing. We can go in with a single platform, elegant front end, totally different self-service. You come halfway through your application, walk into the brands, everything is right there. The brands first of all pick you up, say, here's where you left off, I'll finish it for you. So lots of excitement around that. And if you hear the feedback we get from some of our largest customers around the mortgage experience where people literally wrote them letters to say, I want to take the dog for a walk and apply it for a mortgage on a very complex product and solution, that's the kind of elegance we want to drive into the market.
spk05: All right. Thanks for that call, Pierre. Thank you, Alex. One moment for questions.
spk08: Our next question comes from Saket Kalia with Barclays. You may proceed.
spk03: Okay, great. Hey, guys. Thanks for taking my questions here. Hey, Pierre. Hey, Greg. Pierre, maybe for you, I'd like to just double-click a little bit on just the consumer business a little bit. To your earlier point, you're kind of building a whole sort of end-to-end system there on consumer. Maybe we could just talk about it from a demand perspective. Qualitatively, How do you feel about the pipeline for consumer lending this year? And as that tool set has matured, how are you kind of looking at competitive win rates right now? Of course, all and totally.
spk01: Yes. So I would remind you that consumer includes indirect lending, mortgage, consumer finance unsecured, secured non-real estate, And then when you get to real estate, it's mortgage plus, HELOCs, etc. So it's a fairly big bundle. And anyone who's been to Insight, it's actually one of the things I noticed is we've got all these consumer products in a different booth and you walk around and it's actually one big consumer platform. What we are seeing is that banks have done the commercial piece with us. And now the single platform story is resonating. They're beginning to see that not only do we do an investment. All right. And I'll point you that $15 billion asset bank that grew ACV 7X by signing up with us, even without having commercial on there yet. I'm seeing demand coming. By the way, it's just like the iPhone. On day one, you loved your BlackBerry. I've never seen you using the BlackBerry, but I'm 100% sure you had one, okay? And so it takes people a little bit to say, okay, it's real now. And here's what you have to realize. Banking cannot afford the personal services for products that's unprofitable. That's a simple math in banks today. I meet with many, many CEOs of banks, and that's the most common theme apart from efficiency is we cannot keep on spending time and money with people on products that's unprofitable. So the automation drive and the efficiency drive is going to do that. So by the way, the pipeline is healthy. We feel good about it. The customer reference is healthy. And the existing projects where we're installing consumer is healthy. So I feel overall that as we have more success, that demand will actually grow.
spk03: Got it. Got it. That makes a ton of sense. Greg, maybe for my follow-up for you – I'd love to just get your thoughts just about the services business right now. I think strategically we've talked about in the past how it might be nice to maybe work with more SI partners there to sort of balance some of the work. And it looks like some of that services mix is going down as just a percentage of total revenue. Maybe the question is where are we on that journey and how do you think about that mix longer term?
spk12: Yes, Zach, and I think that journey just continues as is. I think us, as we've talked about pretty consistently, wanting to push services as much as we can to our SI partners continues to be the strategy. And you may see some lumpiness from time to time based on a project not going to a partner because maybe they wanted us to do it or going to a partner. But ultimately, we think that's a fairly steady state business. and it provides a lot of value for our customers, whether it's us directly implementing it, supporting the customers, or working with our SI partners. And again, that's how our folks here really learn more and more about the product and get more and more feedback from our customers about the product, which then goes right back into our R&D organization and helps drive the continued innovation.
spk01: I just want to emphasize or add to that that projects go better when Encino has people on it. So we always emphasize, regardless of the size of the bank, even SIs involved, that Encino put some people on the project. So just because of the closeness to the product people, they come home on weekends, they come home on Fridays, they go talk to product, they understand how it was built. And so you'll see the current percentage of revenue will probably continue. We don't de-emphasize services, but we try to keep a nice balance to make sure customer satisfaction stays up. We get the product feedback.
spk03: That makes a lot of sense. Thanks, guys.
spk05: Thanks, Agat.
spk08: Thank you. One moment for questions. Our next question comes from Terry Tillman with Truist Securities. He may proceed.
spk03: Yeah, thanks for taking my questions, Pierre, Greg, and Harrison. Maybe the first question. I remember on prior calls, I would attempt to do a local language when you would have an international win, whether it's French or Dutch or I think maybe one time in New Zealand. You talked about the enterprise business being strong in the U.S., community banks, and just generally you're seeing that pick up in the U.S. It seemed like international revenue was strong at 34% year-over-year growth, but how was it in terms of new business with new logos and or expansion sales with international customers? And then I had a follow-up.
spk01: Yes. Yeah, you can make an English accent. We had a great UK institution that signed up for us that we're proud of. But I would remind you that the international business is more of an enterprise business. So it's lumpy, you know, the pipe is healthy. We feel good about that. Um, plus I'll remind all Americans on the call that Canada is not America. So we've got Canada, you've got the UK Island. Um, I would say we're very excited about Spain. Um, we've got a nice operation in Spain going and realize we've got Spanish banks outside of Spain as customers. And what we're beginning to see since we put a focus on Spain, the Nordics, and around the Netherlands and Belgium, or the Benelux, we are seeing increasingly demand in those regions. But specifically Spain, we're very excited about. Spain is also the entry point for us into Latin America, where those very large Spanish banks want platforms to do global business with. And so that's an exciting development. And I should also mention that Japan looks very healthy. There's some very exciting developments. As you can imagine, it's a slow-moving market as we get more traction and get more references. But we had two different institutions from Japan coming out to Insight. I had meetings with them in general. And just exciting developments because of the size and the breadth of what they want to do with us. And Salesforce also has a big presence in Japan, so that's also helpful for us. So I feel good about the international business, but I want to comment. In the short term, because of the addition of DocFox and Allegro and the emphasis on going deeper into the Korean space and adding sales and marketing there, you may see that the U.S. accelerated growth a little bit, and then the international will catch up again. that does not diminish the size or the opportunity internationally. I just say over time as we invest, because when we start building for community regional, then we grow it up, okay? You may see that phenomena a little bit.
spk03: Got it. Well, maybe I'll just go ahead and give a little bit of Japanese. So the second question, and then I'll stop for everybody's sake. is on the NIC side, I think 39% of platform customers are using at least one of the solutions at the end of last quarter. I assume that maybe that ticks up a little bit. Just anything Greg could share on that. And then secondly, look, it seemed like after you launched auto spreading, you had a lot of good early wins. And I didn't hear a lot about new auto spreading deals, but maybe you had them. But it does seem like it's a really great efficiency play. So is there still more in the tank, so to speak, in terms of getting more customers to subscribe to that? Thank you.
spk01: Yes, we do see a great interest there. If anybody was at Insight will remember I talked about data consumption and the excitement with AI around that. Today, a lot of that technology is based on OCR technologies. And in the future, it's going to be based on AI with vision capabilities, which is going to give you a 5-9 accuracy percentage. And so I think that whole auto-spreading document ingestion business is going to train tremendously over the next six to 18 months okay and we have the tech we have the people building it I get personal demos on the stuff so there's great excitement around how that continuous end-to-end value prop is playing out and I think that's going to accelerate that product again correct anything to add yes Terry you can assume again it's just you know from a quarter ago that there would have been a small tick up in that percentage and
spk12: The other thing, just to get him back to the UK accent, is that that lender that we announced did purchase auto spreading as well. And so we didn't highlight it. But I think more and more, again, as we bring these products to market, they'll be packaged. And ultimately, again, this is about a platform and all the things that we can do for a bank on a single platform. And so, you know, the lines may get blurred a little bit over time as we, again, continue to expand, you know, broader and broader and deeper and deeper in a financial institution.
spk08: Okay, thank you.
spk01: Thank you, Terry.
spk08: Thank you. One moment for questions. Our next question comes from James Fawcett with Morgan Stanley. You may proceed.
spk07: Hi, everyone. It's Michael in Fountown for James. Thanks for taking our question. Really interesting use cases on the banking advisor front. Pierre or Greg, I was curious, I think you previously mentioned that you weren't expecting any revenue contribution from banking advisor and FY25. Is that still the right way to think about it, despite the product velocity and customer excitement that you guys are seeing, or do you think we can see some uplift this year?
spk12: Yeah, it's still not part of our plan, Michael. You know, and again, I think getting back to... to the banking advisor. Same with DocFox. You know, we highlighted what we brought on to Encino when we purchased it. Again, the focus this year is on making sure we integrate that and really make it fully part of the single platform versus having a separate product. So nothing's changed in either one of those cases at this point in time.
spk07: Got it. That's helpful. Maybe, Pierre, just a high-level strategic question for you and a follow-up on the earlier question. But obviously, there's been some developments just in terms of Basel III Endgame. I'm curious It seems like we'll probably get some form of resolution towards the end of this year, but it seems like just in terms of easing of capital requirements more broadly, it could be a potential uplift just in terms of tech spend more broadly. But just any higher-level conversations that you're having with either current or prospective customers on that front would be helpful. Thanks.
spk01: I think the banks are in a wait-and-see mode on that. There clearly is an appetite in some pockets for more banking mergers. And I think there's a common assumption under the current administration that will be very difficult. So there's all of that waiting in the wings for the election, for the administration, for seeing what's happening at the FDIC. So I think that's one element where the bankers are sitting waiting in a year like this year to see what's going to play out. But apart from that, you know, when you're inefficient, you're inefficient. And if you're behind on your tax spend, you're behind on your tax spend. And what I'm hearing is that people don't want to be caught the same way as in 2009, 10, 11, and 12. When we started the company, we literally could feel the pent-up demand of people who didn't spend and then realized they fell behind. And the people who keep up with tech, they are the winning banks, and they attract the best people. So I'm seeing more of a a careful strategic move forward to actually not fall behind.
spk05: That's helpful. Thanks. Thank you. Thanks, Mike.
spk08: Thank you. One moment for questions. Our next question comes from Adam Berger with Bank of America. You may proceed.
spk09: Hey, thanks for taking my question. Just to clarify, overall it sounds like customer activity improved in Q1. But would you say for the mortgage business in isolation that that had ticked down, and that's ultimately what informed the choice to maintain the full-year guide?
spk12: No, I wouldn't say it ticked down. Again, we signed 15 new logos, including some competitive takeaways. And again, that business still grew almost double digits, again, in this difficult market. And so, again, I think that positions us incredibly well know as we get through this year and beyond um you know ultimately again we gave guidance a short time ago right at the end of march um and you know it may just be a hangover from last year but again we're sensitive on the churn side um like i said it seems like some of the imbs closing has settled down a little bit but we can't say that it's over and it's hard to predict m a And like I said, I think we would hope to be on the winning side to the extent that there is any M&A in the IMB space. But, you know, we just don't know. And so, again, just trying to be prudent. And, again, you saw the overperformance on the bottom line and what we did with that. And as the year progresses, you know, we're able to update our guidance. You know, we will based on the information we've got next time we speak to you.
spk09: Awesome. That's helpful context. And as a quick follow-up, Are you able to break out any inorganic contribution to RPO, CRPO, or billings from DocFox at all? Thank you.
spk12: Yeah, no. You know, yeah, DocFox, and I'll say this, DocFox, just like our mortgage business and also the indirect lending business we have, just note that those things are billed on a monthly basis. And so, again, from a deferred perspective, you're not going to necessarily see it sitting there. If you think about billings, you're not going to see it sitting there as well. And so, we haven't broken those out. Again, those are pretty small pieces of the overall RPO bucket.
spk05: Awesome. Thank you. Thanks, Adam.
spk08: Thank you. One moment for questions. Our next question comes from Charles Navan with Stevens, you may proceed.
spk10: Good afternoon, and thank you for taking my question. I had a high-level strategic question and a quick follow-up on the model. On the high level, on the strategic question, one of the themes coming out of Insight was the modernization of your APIs and the growth in your partner ecosystem. So I was hoping you could touch on that a little bit in terms of the investments you've made and the strategic importance of that channel.
spk01: Yes. Depending on the market segment you're in, some banks like their own front end, some banks want to build maybe their own gen of AI models interfacing to Encino. Some banks have got big data links they want to share with us and we have to integrate with it. There's multiple reasons for people who want to integrate with Encino as this central platform. A few years ago, we decided that we're going to have this API strategy And then we're going to eat our own dog food, which means the same APIs we use for our consumer front ends, our commercial front ends will all be exactly the same APIs that we make available to the market, including to SIs to build to our products. For instance, in the case of generative AI now, we will open up that modeling so that SIs can work with our customers and add more skills. That's our benefit. It's through the bank's benefit to the SI's benefit. So that this whole ecosystem can proliferate throughout the bank and be everywhere. That is the whole goal of a platform play. That's the whole goal of making available the intelligence and the assets that's sitting under the platform. And I think that's good for Encino. So we feel the direction of open APIs, which, by the way, you could monetize, is a good thing for the company as well as our customers.
spk10: Got it. That's helpful. And just as a quick follow-up on the model, you had highlighted some factors that led to the outperformance on operating income, including bad debt and slower hiring. Could you speak to the degree to which those factors are built into the second quarter guide, as well as any variables we could potentially think of as we move through the year in terms of expenses?
spk12: Yeah, Charles. You know, that was taken into consideration as we looked at Q2 and the rest of the year. You know, all those things we wanted to highlight, so you guys appreciated, again, the overperformance, what drove it. And, again, we elaborated a little bit further around, you know, what would impact specifically Q2. But as you look at our guidance and the updated bottom line guidance that we provided, that takes those factors into account. Got it.
spk08: Thank you. Thanks, Charles. Thank you. One moment for questions. Our next question comes from Robert Trout with Macquarie Capital. You may proceed.
spk13: Yes, I thank you, Pierre and Greg and Harrison. Just one quick question because I know we're running out of time. It wouldn't be a quarter if I didn't ask about the pricing shift and the momentum that you're getting there. Given what seems like it's been a pretty positive reception for a few quarters now on the consumer side, is there any change to your timetable? Would you potentially accelerate that shift away from seats and towards hybrid, if you will, on the commercial side?
spk01: We have some deals we already do on a platform basis. That's how we're testing the market. So actually, sales leadership has the capability to apply that new model as they see fit. In the meantime, we're working with a consulting firm to really package and price the correct way so we do it once, roll it out, and don't have to pull it back like my Sonos system updated me and I didn't like it. So what we have to do is to be very thoughtful because, look, by asset size and by solution type, not only do we have to... optimize pricing, we have to make sure there's expansion capabilities, we have to make sure it's competitive in the market, and we have to make sure it makes sense to the customer and how they view pricing in the future. And to bring all those elements together, I'm rather going to take the next two months to get this finalized and get it right. And then we will make it very clear on these calls with you all that how that will impact your modeling and how the company's future will look based upon that.
spk12: I will say, I think, to Pierre's note, we are working with a third party to help drive. And as you get into it, it's complex, right? It's much different than just changing a pricing skew on a price list. And so I think we're on track with that. I think there's good momentum internally to leverage on what we did, what we've done on mortgage and consumers we've previously talked about. And again, I think it also gives us an opportunity to look at the business a little bit differently in terms of bringing in light of the breadth and depth of the product, bringing different bundles together and pricing them together to really make buying Encino much easier and much more straightforward. And that's something that I think, you know, our customers will appreciate as well as our sales folks. So I think we're excited about it. But to Pierre's point, we're going to be very methodical about it, make sure we do it right across every T dot every I. And I think we're on track in terms of our internal plan to execute on that.
spk13: Very helpful. Thank you very much, Greg.
spk08: Thank you. Thank you. And as a reminder, to ask a question, please press star 1-1 on your telephone. Our next question comes from Chris Kennedy with William Blair. You may proceed.
spk11: Good afternoon. Thanks for taking the question. Just a quick one. Any way to think about free cash flow for the rest of the year? I know there's some seasonality here. Thank you.
spk12: Yeah. Thanks, Chris. You know, we don't guide to free cash flow. You know, we did note that Q1 is historically our strongest cash flow quarter. You know, I don't see us tracking any differently in terms of how we have historically in terms of, you know, from Q1 throughout the year to Q4. But yeah, otherwise really nothing to note. Again, obviously we have been increasing our cash and ultimately that's been allowing us to do things like make these tuck-in acquisitions that really can help drive growth and value. Great. Thanks for taking the question.
spk05: Thanks, Chris.
spk08: Thank you. I would now like to turn the call back over to Pierre Nade for any closing remarks.
spk01: Thank you, operator, and thank you all for attending today. We've always said that customers are at the heart of Encino's mission, so the opportunity to spend three days with customers and partners at Insight earlier this month fuels my excitement about the road ahead. We learn so much from our customers. They shape our product roadmap and drive our technology innovation. We are grateful for their trust in us and the opportunity to continue shaping the financial services industry. And as always, I appreciate the hard work and loyalty of the global Encino team. After another quarter of solid execution, I'm excited for your continued efforts as we work together to accelerate the digital transition of financial institutions around the world. Thank you all. Talk to you later.
spk08: Thank you. This concludes the conference. Thank you for your participation.
spk05: You may now disconnect.
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