Earnings Call Transcript
nCino, Inc. (NCNO)
Earnings Call Transcript - NCNO Q3 2024
Harrison Masters, Investor Relations
Good afternoon and welcome to nCino's third quarter fiscal 2024 earnings call. With me on today's call are Pierre Naude, nCino's Chairman and Chief Executive Officer; Gregory Orenstein, 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. 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. nCino disclaims any obligation to update or revise any forward-looking statements. Further, on today's call, we will also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. A reconciliation to comparable GAAP metrics can be found in today's earnings release, which is available on our website and as an exhibit to the Form 8-K furnished with the SEC just before this call as well as the earnings presentation on our Investor Relations website at investor.ncino.com. With that, I will now turn the call over to Pierre.
Pierre Naude, CEO
Thank you, Harrison, and thank you for joining us this afternoon to review our third quarter fiscal 2024 performance. We had another solid quarter despite the continued unsettled macroeconomic environment. We exceeded the high end of our revenue guidance with subscription revenues of $104.8 million, up 19% year-over-year, and total revenues of $121.9 million, up 16% year-over-year. Once again, we significantly increased profitability, posting a 17% non-GAAP operating income margin even as we continue to invest in the business, specifically in product innovation. Our positive view of the quarter reflects a number of significant product wins across the platform. In particular, we are very excited to announce signing our first consumer lending deal with an enterprise bank in the United States, an over $200 billion institution. Over the past several quarters, we have been highlighting the progress we have made maturing our consumer lending product, and we view landing this customer for consumer lending as another validation of that momentum as well as of our overall single platform product strategy. We also continued to strike in our U.S. mortgage business. Our financial results reflect double-digit U.S. mortgage revenue growth, even despite lower volumes of originations and an uptick in independent mortgage bank (IMB) churn, driven by generationally high mortgage rates. These results demonstrate the benefit of cross-selling into our installed base of banks and credit unions, the differentiation of our mortgage technology, and we believe the durability of our business model. A pivotal win for our U.S. mortgage business in the quarter came with our first cross-sell to a regional bank in the U.S. that has been using nCino for both consumer and commercial lending. Our market-leading mortgage technology further enhances our ability to grow wallet share in an account once a customer experiences the value of our technology. These wins are the result of having our products available on a single integrated platform, and we are excited to deliver an enhanced omnichannel experience for consumer lending in the spring, further leveraging the technology we acquired in the SimpleNexus transaction. As our first generally available point-of-sale journey beyond mortgage, this offering will empower our consumer lending customers to deliver the exceptional point-of-sale experience we offer for mortgage across a broad spectrum of consumer lending products. We expect this offering to further accelerate sales for both our consumer and mortgage lending solutions. As we continue to innovate and expand the capabilities of the platform, I'm also excited by the AI capabilities being introduced through banking adviser, which leverages our data expertise. Over the past four years, we have been working with our customers to create a large differentiated pool of commercial and consumer banking data, including mortgage data. Today, we are well positioned to provide valuable and actionable insights from data aggregated across our customer base and integrated into our single platform. Access to this data is a powerful enabler and our deep domain expertise is informing our AI strategy. The industry has taken notice of this expertise as evidenced by the over 1,200 people who registered for our initial AI webinar in September. When available early next year, banking adviser will help usher in the next wave of intelligent automation, delivered on a single platform for originating any loan product and opening any account type at critical decision points. Turning to our international business. In Q3, we added our largest customer to date in Japan by signing Yamaguchi Financial Group, which occupies a top spot in the sizable regional Japanese banking market, and saw an opportunity with nCino to improve the efficiency of their processes and the user experience they offer to their customers through digital transformation, beginning with their mortgage business. We are excited about the large opportunities we see in the Japanese market and are pleased to see our investments over the past few years there bearing fruit. Despite this list of Q3 accomplishments, the selling environment does remain challenged in certain parts of our business. Enterprise banks, in particular, continue to be slower in signing deals. And unlike the second quarter, we did see a few deals get pushed out of the third quarter as these customers further evaluate their budgets and the potential impact of an evolving interest rate environment on their business. Over the past few weeks, I have traveled to see customers and prospects across North America and Europe. I've come away from these conversations incredibly energized about our opportunity as their needs align so closely with the value proposition of nCino's single platform and product strategy. We built this company and continue to innovate our technology so the world's best financial institutions can more efficiently run their operations on a single platform. In this environment, risk reduction and cost savings are paramount, and nCino is proving efficiency and greater security while leveraging data to provide unique insights into our customers' businesses. As the macro environment settles down, the institutions leveraging nCino will be better positioned for market share gains, profitability, success, and longevity. Our sales pipeline, which remains healthy, reinforces we are on the right path, notwithstanding some lumpiness we have seen this year with enterprise sales opportunities. We are excited to close the year with a strong Q4, positioning nCino for further growth next year and beyond. Now let me turn the call over to Josh to provide additional details on some of the operational highlights of Q3.
Josh Glover, President, CRO
Thank you, Pierre. We are pleased with our third quarter results and the continued momentum we see in the business. On the sales front, we signed key strategic wins across market segments, geographies, and solutions. We added our largest customer to date for consumer lending in this last quarter, signing a $200 billion bank in the United States. This new customer will leverage nCino across all of their consumer lines of business with both in-branch and digital workflows to modernize their go-to-market approach. We're extremely proud of the work our product teams have done to enable a best-of-breed consumer lending solution for even the largest banks in the U.S. Also in the quarter, we signed an expansion agreement with an existing regional bank customer for mortgage point of sale, bringing mortgage point of sale, consumer and commercial lending all into a single platform for this over $35 billion bank. This is an exciting proof point for the scalability of our mortgage technology, having passed a rigorous selection process with one of our most sophisticated customers. We expect to deliver exceptional time to value with a quick go-live in the fourth quarter. Our thesis that a mortgage point-of-sale offering would resonate in our legacy bank customer base is proving out, with half of the eight new mortgage logos signed in the third quarter belonging to financial institutions. Our mortgage customer base is now 46% financial institutions on a logo basis versus 25% at the time of the acquisition of SimpleNexus. And our mortgage pipeline on a dollar basis is now comprised of 60% of financial institutions. As interest rate pressures continue to drive consolidation of the long tail of IMBs in the industry, we are working with existing customers to see them through this downturn, but we are aggressively cross-selling into the under-penetrated banking and credit union markets. We continue to see our competitive differentiation of mortgage proven out by the market with two additional competitive takeaways this quarter. We continue seeing success with multi-solution net new deals in the quarter, including a $6 billion bank that selected nCino for commercial lending, portfolio analytics, and auto spreading and a community bank that picked nCino for commercial and consumer lending as well as auto spreading. A more streamlined and efficient tech stack is resonating even in the current environment, as banks see vendor consolidation as a way to gain critical efficiencies across their operations. Our pipeline for solutions beyond commercial lending continues to develop, making up half of the total pipeline as of quarter end. Risk management is another key value proposition of our solutions that drove new business in the third quarter. We signed our largest portfolio analytics bank deal to date for commercial real estate stress testing, trend analysis, and concentrated risk reporting. We also signed our largest ever portfolio analytics credit union deal this quarter for CECL. Turning to international markets. As Pierre noted, in Japan, our team signed a record deal with Yamaguchi Financial Group, a $150 billion asset bank, making this our largest customer to date in Japan. This opportunity is for a mortgage use case by which prospective homebuyers can apply entirely online, 24 hours a day, replacing a traditional paper process. Jointly, we see a clear expansion path across both corporate and consumer lines of business to help YMFG realize a goal of originating all loan products from a single platform. We are pleased with the receptivity we're seeing in the Japanese market, a serviceable available market (SAM) opportunity, we size at $1.4 billion. This win represents another critical lighthouse account and is still relatively new and still under-penetrated for nCino. Lastly, we completed a seven-figure ACV expansion deal with an existing UKI customer that first signed in fiscal 2019. This opportunity was for corporate and institutional banking, small and medium enterprise banking, commercial pricing and profitability, ESG, and end-to-end mortgage origination. While embracing these newer offerings, this bank also extended their commitment with nCino for another five years. Our broad and diverse customer base continues to be an asset, particularly in a complex macro environment. Approximately 60% of our gross ACV bookings in the quarter came from existing customers. With 50% of platform customers now using more than one product and 25% year-over-year growth in NIC adoption by platform customers, I cannot overstate the strategic long-term value of our customer relationships. Looking to the fourth quarter, we remain confident in our ability to execute and are well-positioned with ample pipeline coverage for a seasonally high fourth-quarter sales performance.
Gregory Orenstein, CFO
Thank you, Josh, and thanks everyone for joining us this afternoon to review our third quarter fiscal '24 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 8-K furnished with the SEC just before this call. To echo Pierre and Josh, I am pleased with our third quarter financial results. Total revenues for the third quarter of fiscal '24 were $121.9 million, an increase of 16% year-over-year. Subscription revenues for the third quarter were $104.8 million, an increase of 19% year-over-year, representing 86% of total revenues. Professional services revenues were $17.2 million in the quarter, growing 1% year-over-year. Professional services revenue growth was impacted by pressure on bill rates even as utilization from a billable hours perspective improved year-over-year. As I noted during my Investor Day comments, we will continue to focus on leveraging our extensive system integrator ecosystem to provide professional services to our customers and prioritize subscription over professional services revenues. Non-U.S. revenues were $23.4 million or 19% of total revenues in the third quarter, up 48% year-over-year. Subscription revenue growth outside the United States outpaced respective total revenue growth with particular strength coming from our Australia and New Zealand operations. Non-GAAP gross profit for the third quarter of fiscal '24 was $81.1 million, an increase of 18% year-over-year. Non-GAAP gross margin was 67%, compared to 65% in the third quarter of fiscal '23. The gross margin improvement was due to efficiencies realized in our customer support organization while maintaining customer satisfaction ratings of 3.9 or about 98% with five times the respondents documented versus the year-ago quarter. Non-GAAP operating income for the third quarter of fiscal '24 was $20.4 million compared with $2.5 million in the third quarter of fiscal '23. Our non-GAAP operating margin for the third quarter was 17% compared to 2% in the third quarter of fiscal '23. This impressive bottom-line performance reflects continued operational discipline and leverage from our business model. Our non-GAAP results this quarter also include approximately $2.8 million of accrual reversals for tax equalization within sales and marketing and for certain employee benefits across the organization. Non-GAAP net income attributable to nCino for the third quarter of fiscal '24 was $16.2 million or $0.14 per diluted share compared to negative $1.4 million or negative $0.01 per basic and diluted share in the third quarter of fiscal '23. As I noted during our Investor Day, during the third quarter, we rebranded the SimpleNexus solution to nCino Mortgage, resulting in a change to the trade name useful life. As a result, we recorded accelerated amortization to fully amortize the remaining trade name intangible asset. The effect of this change in estimate for the third quarter was an increase in sales and marketing, amortization expense of $10.1 million or $0.09 per basic and diluted share. The impact of this accelerated amortization expense has been excluded from our non-GAAP results. We ended the quarter with cash and cash equivalents of $105.8 million, including restricted cash. Net cash provided by operating activities was $5.9 million compared to negative $4.1 million in the third quarter of fiscal '23. Capital expenditures were approximately $600,000 in the quarter, resulting in free cash flow of $5.3 million for the third quarter of fiscal '24. You will note incremental spend on the investments line of our balance sheet and statement of cash flows and related disclosures this quarter for a $2.5 million investment in Rich Data Co, an Australia-based leading AI decisioning platform that helps banks make high-quality lending decisions efficiently and safely. We announced a partnership and reseller arrangement with RDC in February of this year and are proud to cement our relationship with this investment to enable even tighter collaboration between our two organizations. Our remaining performance obligation, or RPO, was $917.1 million as of October 31, 2023, compared with $919.2 million as of October 31, 2022, with $627.6 million in the less than 24 months category up 4% from $603.9 million as of October 31, 2022. As you heard from Pierre and Josh, we saw great validation of our solutions across market segments, products, and geographies in the third quarter. Gross bookings in the third quarter were lower than in the second quarter, but we continue to expect gross bookings in the second half of the year to be better in the first half of the year as previously communicated. We did see elevated churn in the third quarter from IMBs in our U.S. mortgage business of approximately $5 million of annualized subscription revenues as some IMBs struggled with mortgage rates peaking in October to their highest level in over 20 years. This level of churn exceeded our internal churn forecast by about $2.5 million. Fortunately, despite the rate pressure, we are seeing the top-performing originators earn a positive production profit as reported in the latest MBA quarterly mortgage bankers performance report. The mortgage industry has come a long way towards rightsizing for current volumes, and with our U.S. mortgage business continuing to take market share and grow revenues despite the interest rate pressure and elevated churn, we believe this business is very well positioned for healthy top-line growth for years to come. Churn and down-sell for the rest of the business were in line with expectations in the third quarter, but in light of the elevated IMB churn, we are adjusting our churn rate expectation for the full year to about 9% of prior-year subscription revenues, up from 6%. Although the outlook for our fourth quarter revenues has been tempered by this heightened churn, we are increasing both the low and high end of our outlook for full-year subscription revenues guidance. Please note that this heightened churn rate of 9% also includes the impact of our relationship with one of the three customers that was acquired during the liquidity crisis, ending about nine months before the expiration of their contract which was scheduled to be in May of 2024. This event had a negative impact on deferred revenue of approximately $900,000. Positively, we expect to maintain the other two customers that were acquired and, in fact, have already expanded our relationship into one of the acquiring banks. Turning to guidance. For the fourth quarter, we expect total revenues of $123.5 million to $125.5 million, with subscription revenues of $105.5 million to $107.5 million. This guidance assumes year-over-year subscription revenue growth of 15% at the midpoint of our range. Non-GAAP operating income is expected to be approximately $15 million to $16 million and non-GAAP loss attributable to nCino per share to be between $0.11 to $0.13 for the fourth quarter. This is based upon a weighted average of approximately 115.5 million diluted shares outstanding. For the full fiscal year '24, we expect total revenues of $476.5 million to $478.5 million, with subscription revenues of $407.5 million to $409.5 million. This full year guidance assumes year-over-year subscription revenue growth of 18% at the midpoint of our range. We are again increasing the range of our full year non-GAAP operating income guidance to $57.5 million to $58.5 million. Non-GAAP net income attributable to nCino per share is expected to be between $0.40 to $0.42 based upon a weighted average of approximately 115 million diluted shares outstanding.
Operator, Operator
Our first question comes from Adam Hotchkiss of Goldman Sachs. Your line is open.
Adam Hotchkiss, Analyst
I guess to start, it would be great to get a little bit more color on how customers outside of the independent mortgage banks are responding to the evolving rate environment, in particular, some of the recent movement in rate expectations for next year. Just wondering if you're seeing any initial changes as to how decision-makers are thinking about product prioritization or budgets? And then your comment on incremental scrutiny at the enterprise level, whether that's relation in relation to Q4 or if that's something you think reflects early indications of '24 budgets as well?
Pierre Naude, CEO
Thank you for your question. We're observing that everyone in the market is getting ready to take more aggressive steps as soon as the rates stabilize. This is evident in our pipeline and in our discussions with banks. The cautious approach we’re seeing from buyers is largely due to the uncertainties surrounding the rate environment. Once stability is perceived, we expect banks will recognize the importance of advancing their transformation projects to remain competitive. In the short term, the market remains a bit uneven, but within the enterprise sector, we are starting to notice some stabilization as indicated by the retail deal. There are promising developments in our pipeline concerning movement in that market. However, final decision-making is progressing more slowly than we would prefer. Despite this cautiousness, our pipeline is robust, and we are optimistic about it.
Adam Hotchkiss, Analyst
That's great. Really helpful. And then, Greg, wondering if you could just comment a bit more on the leverage this quarter, it looked like it was both in sales and marketing and R&D in particular. Just wondering where you're seeing the lowest hanging fruit and what you're looking for in terms of investment discipline for '24?
Gregory Orenstein, CFO
Yes. Thanks, Adam. Again, as I noted, the team continues to execute well as an organization and really has embraced the shift from just pure growth in prior years to profitable growth. And so we have seen nice leverage across all of our operating expense lines. And we'll continue to focus on that. As we think about next year and again, consistently, we say, and we want to reinforce this, that we'll continue to prioritize growth. And as we see opportunities for growth, we're going to make sure our investments are aligned to capture those. Again, we still think it's in the early days of a very large market opportunity for us. We think we've got a unique leadership position, and we want to make sure that we continue to invest in that leadership position, again, across the entire platform. And again, Pierre referenced, and Josh referenced in their comments that consumer lending deal, again, another validation of our platform and ultimately, what our software can do for banks on a global basis.
Operator, Operator
Our next question comes from the line of Saket Kalia of Barclays. Your line is open.
Saket Kalia, Analyst
Okay. Great. Pierre, Josh, maybe this question is for you. First of all, congrats on the consumer lending enterprise win; $200 billion is certainly a very big bank. Maybe the question is, could you folks just maybe speak to who nCino is typically replacing in these consumer lending deals? And what do you think is sort of the catalyst for these banks to be considering a replacement at this juncture? Does that make sense?
Josh Glover, President, CRO
Sure, Saket. I can address that. Yes, that bank has experienced significant growth. When a bank expands like that and wants to serve the consumer segment effectively, it often reassesses its infrastructure to ensure it can continue to grow. A major focus for them has been shifting more towards digital channels. Working with outdated in-house systems makes it challenging to operate efficiently, especially when those legacy systems are rigid and unable to adapt to the evolving business needs. Adding new products or altering business rules becomes difficult, and when you layer on digital channels, those systems can’t keep pace with a bank of that magnitude. For that $200 billion bank, it became clear they needed to overhaul three or four systems. Through the nCino project, they will develop both in-branch and digital channels that will be significantly more efficient, allowing them to meet customer expectations in today's market. Efficiency and better consolidation are key motivators. They will be well-prepared to compete as the economy recovers following a swift project completion.
Pierre Naude, CEO
I would add, Saket. I think what you'll notice is below the top four banks, the deposit flow towards the big four was an issue through the liquidity crisis. And every bank we talk to has a new renewed focus on the consumer to drive deposits because your average deposit balance of a consumer is much lower. They don't move it for interest rate fluctuations. So what you'll find is there will be a focus on consumers in the future to have a stable and a much broader diversified deposit base going forward. And I think you'll see this across the whole banking sector that they have to reverse that trend of deposit flow to the big four.
Saket Kalia, Analyst
Yes, that's very interesting. Greg, for my follow-up question, I want to clarify that we don't manage the business based on RPO. However, since there are various factors influencing that metric, such as duration and mix, could you provide some insights on those elements? Additionally, could you discuss the sequential change in RPO we observed this quarter?
Gregory Orenstein, CFO
Yes, Saket, thank you for recognizing that we don't focus our business strategy on RPO. We value that understanding. There are various factors to consider, including duration, which you mentioned. The churn we noted also affects RPO. Pierre brought up the irregularities in enterprise contracts, especially those exceeding 24 months. Typically, contracts with larger clients last longer than the 24 months associated with RPO, which contributes to some of the fluctuations we've seen this year due to the macro environment. Additionally, as Josh mentioned, about 60% of our gross ACV bookings this quarter came from existing customers, primarily add-on business. We usually align this add-on business with existing agreements, which generally fall into the shorter duration category. Moreover, we've discussed how we're structuring our mortgage contracts to reflect anticipated growth as the market stabilizes and eventually expands again, which isn't captured in RPO but represents potential upside opportunities beyond that specific metric. Those are the key points I wanted to highlight.
Operator, Operator
Our next question comes from the line of Terry Tillman of Truist Securities. Your line is open.
Terry Tillman, Analyst
I have a question for Pierre or Josh regarding the retail or consumer lending side, which appears to be an important win for us. I'm curious if we can expect to see quick success with more large wins in the near future, especially since the fourth quarter typically sees stronger bookings. Do we need to get our current clients fully operational and established as reference customers before we can start achieving similar wins with other large enterprises in retail or consumer lending? I also have a follow-up question.
Josh Glover, President, CRO
Terry, Josh. Look, the goal is to go as quickly as we can to sign a $200 billion bank for our consumer lending solution. Obviously, if you have to go through a pretty detailed and long evaluation process. That's a fantastic proof point. So if you look at the other announcements we've put out even in this call, multiple community regional financial institutions picking us for both commercial, small business and consumer. That's a great proof point that we'll try to take to the market. And frankly, for a $200 billion bank to pull the trigger on a consumer lending deal in this environment, it shows a lot of conviction. It's a great validation point. So we're excited. So to answer your question directly, we're going to go as quickly as we can because ultimately, the scrutiny that we've stood up to shows that we can scale up.
Terry Tillman, Analyst
Got it. I have a follow-up question. You recently hosted an impressive Analyst Day with a lot of valuable content. One takeaway was that the ending ACV balance at the end of the second quarter is up 14% year-over-year. I understand there may be some variability with IMB churn, but do you feel like that's the minimum level, or could it be higher? Can you provide any insight into the potential risks for subscription revenue as we approach calendar 2024, and what would be considered the lowest point?
Gregory Orenstein, CFO
Yes. Terry, I think we will refrain from discussing next year for now. We have provided some insight into bookings this quarter compared to last, as well as our perspective on the second half of the year against the first half. At this point, I believe we should leave it at that. As we mentioned during the Investor Day, this is a specific data point at a specific time. We will likely revisit these points more on an annual basis rather than quarterly. However, I hope the information we shared regarding the second half of the year compared to the first and our strong pipeline coverage is useful for our thoughts on Q4 and finishing the year on a high note.
Terry Tillman, Analyst
Yes. But Greg, just one quick follow-up on that. 4Q, you signed business. Some of this can be shorter dated activation schedules though, correct? So some of the products, if you do have a strong finish, some of that could meaningfully show up in calendar '24. Is that accurate? At least in the second half?
Gregory Orenstein, CFO
That is accurate. Yes. And again, as we talked about at Investor Day, we're seeing with the mix of business with some of the pricing evolution that we've addressed, we're seeing a quicker turn from signing to revenue. It's upwards of 28%, 30% in the first half of the year and compare that to the prior year, I think it was around 16%. And so we expect that trend to continue, and so again, we'll be getting, as we go forward, more in-quarter or in-year revenue from deals that we sign in quarter and in year than we have in the past.
Operator, Operator
Our next question comes from the line of Bob Napoli of William Blair. Your line is open.
Adib Choudhury, Analyst
Adib Choudhury on for Bob. So first question, just in terms of the significant Japan, could you kind of talk about how critical system integrators were, if at all? Now and more broadly, are you seeing kind of peers using a similar SI strategy in some of your core international cloud banking markets?
Josh Glover, President, CRO
Absolutely. This is Josh. The system integrators are part of that play. They have local presidents to understand the culture. We're taking some of these institutions literally from paper straight into the cloud. So having the local team change management expertise and scalability of those SIs, particularly as we expand internationally, really helps. And we're pleased not just about the initial proof point, but also about the way these banks are thinking about the single platform where you have banks that are starting with mortgage, some are starting with commercial, but they're all doing it from the lens that they want to get the whole institution up on nCino.
Adib Choudhury, Analyst
Got it. And I guess one for Greg. Thinking about the long-term operating margin targets you guys laid out during the Investor Day, 35%, and that compares to the 12 or so implied from the current fiscal full-year guide. As we think about annual margin expansion cadence? Should that kind of be evenly attributed or more front and back-end loaded? And what's the visibility you kind of have around that expansion?
Gregory Orenstein, CFO
Yes. We'll hold off giving any guidance beyond this year. Again, as we look at the target, I set out a time frame of four to six years. And I think it all depends on the opportunities that we see ultimately the market. But again, we're going to err on the side of growth. And to the extent that that margin target is a little bit lower because our growth is higher as we march towards that rule of 50, we'd be very happy with that. So again, I think we'll update you as we move along in terms of the progress that we're making, but we continue to see opportunities for leverage across the organization. Again, you see in the progress that we've made on our margin lines as well as on our OpEx lines. And I said earlier, the team has done a great job; the organization has done a great job embracing the environment that we've been operating in.
Operator, Operator
Our next question comes from the line of Adam Bergere of Bank of America. Your line is open.
Adam Bergere, Analyst
Can you give some color on the deals that pushed? Is there any sort of commonality between those deals or thinking more in depth on them? Is there any way in which you could quantify how much that may have impacted Q3 results? And lastly, how are those deals tracking now that you're roughly a month into Q4?
Josh Glover, President, CRO
Absolutely, those are not deals that dropped out of the pipeline. Ultimately, sometimes they may have wanted to get another board look at that. Sometimes they may want to see how the year continued on. They are in this interest rate environment, continued to keep a keen eye on their credit quality. They're also thinking about their P&L as they deal with this margin compression. So we do not see a lack of conviction on the need for transformation. We do see more measured investment as they think about new lines of investment for the institution.
Pierre Naude, CEO
Yes. I think it's more a case of timing versus need. Also, we've not lost any of those deals to competitors. This is more a matter of let's revisit in the budget cycle for banks and as soon as those are solidified, we'll move forward. And we see that in our pipeline movements as well. So we're very optimistic that we're going to see some of those coming through.
Adam Bergere, Analyst
Got it. And as a quick follow-up, have you sort of embedded that new assumption of, I don't know, these are taking a little longer than expected into the Q4 guide?
Pierre Naude, CEO
Yes. Our Q4 guide is assuming that we understand now very well the churn expectations in the market, both on IMBs. So we've taken a conservative view, and we built that into the guidance that we provided.
Operator, Operator
Our next question comes from the line of Alex Sklar of Raymond James. Your line is open.
Alex Sklar, Analyst
Great Greg, outside of the $2 million accrual that you called out in sales and marketing this quarter. Was there anything else one-time impacting operating income this quarter? And then kind of unrelated to your answer about preferring growth, a couple of the earlier questions, can you just talk about what's being factored from a hiring or an investment perspective in the fourth quarter relative to third quarter driving kind of the sequential margin decline?
Gregory Orenstein, CFO
Yes. So from it was $2.8 million. That was really the one-time thing. The other thing I'd note is in the second quarter, we had our Insight, our annual user conference. And so that's a heavier spend. So as you look at it on a sequential basis, I would note that as well. When you look at fourth quarter, it's the guide that we provided ultimately taking into account, obviously, holiday seasonality that we sometimes see in the fourth quarter. So I think that's what is impacting the guide if you deduct the one-time that I noted from the total, and you look at the guide that we gave, I know there's a small little delta there, but that's really what it comes down to.
Alex Sklar, Analyst
Okay. Perfect. So no major incremental hiring kind of in the year-end above and bound kind of normal operating?
Gregory Orenstein, CFO
No. I think for us, it's business as usual. As we look into the fourth quarter, a big focus on obviously, closing business, as Josh noted, in echoing Pierre's comments, we see ample coverage from a sales pipeline perspective, and so we're just focused on execution between now and the end of the fiscal year.
Josh Glover, President, CRO
Yes. And the stat that we quoted was we see 25% year-over-year growth in NIC adoption on the platform. That brings us to 34% of platform customers who've adopted NIC to date. Also in the quarter, we had for portfolio analytics, one of our great NIC solutions, the biggest deal we've ever done with the bank and the biggest deal we've ever done with the credit union. So we're pleased with that momentum. Greg, do you want to speak about how that flows through revenue?
Gregory Orenstein, CFO
Yes. I mean, ultimately, again, as we talk about with our NIC solutions that turns quicker into revenue. And so we see that more quickly impacting our P&L, that's exciting as we look at the mix of business and again, the evolution of our pricing model.
Operator, Operator
Our next question comes from James Faucette of Morgan Stanley. Your line is open.
James Faucette, Analyst
Great. I want to dig in quickly. And I think, Pierre, in the past, you've alluded to some inertia in the sales cycle. Is that kind of what you're seeing right now? And is that consistent? Or is that what you're also talking about when you say that you've got customers that are kind of waiting for the interest rate environment to stabilize before kind of moving ahead and making decisions?
Pierre Naude, CEO
Yes. We've observed that some banks are experiencing a profitability decline of up to 40% year-over-year, as stated by public institutions. In such an environment, there is a demand for stability in the future. Currently, there's significant uncertainty regarding whether the Fed will raise rates again or start to cut them, which affects both the mindset and actual outcomes in the banking sector. People are cautiously optimistic but are waiting for a more stable environment to emerge. I don't believe they're necessarily waiting for rates to decrease. Generally, bankers expect some level of stabilization will occur at some point. Once that stabilization happens, they are prepared to make investments. There is still uncertainty at this stage; however, once that uncertainty diminishes, based on our discussions and pipeline data, banks will have to move forward. They recognize the need for a platform that supports IT simplification and modernization, which aligns with consumer demands. This is essential for deposit gathering, efficiency, and compliance. They understand this well, and we meet with them regularly. During my recent trip to Europe, one customer mentioned that the project is more challenging than anticipated, but they realize they have no other option, which I found encouraging. Thus, I feel very optimistic that we are strategically positioned. Our platform is maturing at an opportune time. The impressive non-commercial wins demonstrate that our architectural efforts will be fruitful.
James Faucette, Analyst
Got it. And then, Greg, I know you've addressed this in various ways, but I want to ensure we understand how the change in churn is affecting your previous assumptions. Has churn remained stable? How would that influence your fourth-quarter guidance? I'm trying to clarify the extent of churn's impact compared to other factors.
Gregory Orenstein, CFO
It was a big part. I mean, you saw we rolled some of our over-performance in Q3 into Q4 in terms of upping our guidance but ultimately not the whole thing. And so that certainly was an impact. And the engines what we really saw was just October. I mean, interest rates were specifically mortgage rates peaked and ultimately, just some of the IMBs, I think just said enough was enough. As we looked at the first month of this quarter, so far, things are more in line with what we expect. And obviously, this is something we've been tracking for the last year-plus. The team has done a really good job of tracking the churn. I do think it was somewhat just a unique set of circumstances in October with that spike that really increased the churn level from really what our expectations were.
Operator, Operator
Our next question comes from the line of Nick Altmann of Scotiabank. Your line is open.
Nick Altmann, Analyst
Awesome. It sounds like there's a lot of excitement around banking advisers. So I wanted to ask a couple of questions there. I guess the first one being, what is the initial customer feedback then from those who are beta testing it, is there any sort of update on the monetization strategy there? And then just as a follow-up, is the best way to think about the opportunity with banking adviser really around the installed base with nCino IQ? And should that really kind of foster more cross-sell activity into NIC? Or should we kind of think about those as mutually exclusive?
Josh Glover, President, CRO
This is Josh. We've been pleased but not surprised by the customer excitement about this. We've done, I think, a really good job of meeting our customers where they are. The problems they are really asking us to help them solve today is helping with efficiency and also helping with employee effectiveness and employee engagement. So if you think about the initial use cases where we'll have the ability for banking adviser to offer a knowledge base where a banker rather than navigating a 300-page PDF of a credit memo, they can have that at their fingertips where they can have intelligent credit memo narratives where rather than sitting and typing out the risk of doing a hotel loan in Florida, they can use generative AI to tell them that, look, we have seasonal risk because of tourism, we have hurricane risk, et cetera. So those are things that are going to make employees a lot more efficient and frankly, help banks, even though the labor market is becoming a little bit more employer-friendly, it will help them attract the kind of employees that they need to continue evolving their bank because the smartest kid graduating university today does not want to go sit and thumb through a 300-page credit memo or credit policy. So those are the kind of things that we've seen relative to monetization. Banking adviser is something that will contribute to nCino's growth. And I would expect to see NIC use cases continue to be monetized on a stand-alone basis, as you've heard from us with portfolio analytics with pricing and profitability. But we'll also use these tools to inject intelligence in every aspect of the application, which is a validation of the continued investment that we have and the ongoing growth that we get from our customers.
Nick Altmann, Analyst
Great. And then just a quick follow-up. You guys mentioned earlier, 60% of gross ACV bookings came from the installed base in 3Q. When you look at the Q4 pipeline, how does that kind of look in terms of net new versus existing just given it's a seasonally strong spending quarter for software, there's budget flush dynamics, et cetera?
Josh Glover, President, CRO
Yes. So we feel good about the pipe relative to our ability to deliver on the commitments that we've made for the fourth quarter. We're not also not being toned on the macro and realizing that the buying environment is tough. So we feel confident that we have ample coverage 60% in quarter from existing customers as we've seen when the market gets tough, our customers need us more, and we continue to focus on them. And that's one of the benefits of having such a fantastic customer base of happy customers that we partnered with for years. Composition has not changed relative to new deals or existing customers. As we said earlier, we're not seeing greenfield logos fall out of the pipe; we're just seeing a more thoughtful timeline for how they buy.
Operator, Operator
Our next question comes from the line of Alex Markgraff of KBCM. Your line is open.
Alex Markgraff, Analyst
I actually wanted to expand on the prior question, maybe ask it a bit differently. Just thinking about that mix of, say, gross ACV bookings on a more normalized basis or in a more normalized environment when you consider the pent-up demand, particularly in enterprise and some of the product expansions that are helping you lead with non-commercial products. Just curious, I mean, 60% for the last couple of quarters from existing, what is the good range to think about for that mix from, say, existing versus new on the other side of this kind of more challenging macro environment just considering the changes around product and such in the last couple of years?
Pierre Naude, CEO
Historically, we maintained an equal balance between cross-selling to existing customers and acquiring new ones, which is beneficial as it allows us to enhance our offerings and provide more value. This also grants us some pricing power due to ongoing innovation. In the past, we operated at a 50-50 ratio, but during the COVID pandemic, the unstable market led to an increase in cross-selling to our existing customers, pushing that percentage to around 60%. We anticipate that as market conditions normalize, this ratio will revert to approximately 50-50.
Gregory Orenstein, CFO
We did not. We provided the commentary around Q3 sales bookings being lower than Q2, but still confirming that we expect the second half of the year to be greater than the first half of the year from a gross bookings perspective. And just from an internal perspective, we did expect Q3 to be lower than Q2. So I'll note that just as we think about the year playing out.
Operator, Operator
Our next question comes from the line of Robert Trout of Macquarie Capital. Your line is open.
Robert Trout, Analyst
It's great to be on my first earnings call as a covering analyst with the team. I have two questions. The first is about the evolution of the pricing model. Greg, you mentioned in response to Terry's question that the early signs from the migration indicate a quicker path to revenue. However, I'm curious about how the current state of the financial services employment market, which is somewhat more favorable to employers, might affect job growth and stability in that market. Specifically, how does the new pricing model benefit or not benefit from changes in that market compared to the old pricing model?
Pierre Naude, CEO
Let me explain with a simple example from consumer banking. Five years ago, booking a flight involved calling the airline, making a reservation, and getting a paper ticket, which now seems outdated. Today, you simply use your phone to book a ticket and have your boarding passes in an app. This shift reflects a trust in the system that banking has yet to achieve, as it still relies extensively on in-branch visits, document submissions, and personal interaction. We believe that in the next five years, we can transform consumer banking into a fully digital, end-to-end experience that is very user-friendly and automated. This transition will shift the focus of banking jobs from personal consumer interactions to more back-office functions, with self-service options becoming prominent. Our strategy will involve offering a pricing model that is more oriented towards solutions and platforms, enabling banks to reduce costs significantly as they grow and reallocate their workforce. While back-office support will remain for consumers who need assistance, our pricing will reflect the value we provide, emphasizing a platform that facilitates a complete end-to-end experience. For small businesses, we anticipate a 40% automation and 60% banker involvement, while commercial transactions will lean towards more automation but still require full banker engagement. Overall, we see a transition to solution-based and platform-based pricing becoming standard in our industry.
Robert Trout, Analyst
Okay. That's very helpful. And just on the consumer side. I just wanted to ask sort of a broader question about sales strategy. You had this wonderful win. Congratulations on that during the quarter. And I think you alluded to the amount of time and energy that gets spent landing something like that. As consumer becomes and as international consumer also becomes a bigger portion of the pie, how do you think about perhaps changing your approach to your sales force, the way you train them, the way you resource and the way you evaluate them. Both in terms of who this prospect? What are the kind of the key metrics to evaluate them and how they're spending their time?
Josh Glover, President, CRO
Our focus as we continue to take the single platform in these institutions as we are covering these accounts with a core account executive who maintains that relationship. This is a C-suite sale to multiple stakeholders in the C-suite, and they expect us to have that core who drives the relationship. And we support them with a robust set of experts across our various solutions who can help them tell that story to those differentiated stakeholders within the institution. For example, you heard us speak about a $35 billion bank. They were already using us for commercial lending and consumer lending. This last quarter they purchase our mortgage solution. They're going to deliver a single platform that's going to put them ahead of their competition. That relationship was driven by a core account executive. But while driving in the consumer opportunity in the past, while driving in the mortgage opportunity this quarter, they had a specialist to help them. That's the best thing for our customers. For my CFO, he does get some operating leverage with time because in this market, where in the U.S., for example, banks are going through a period of consolidation. When I launch a new solution, I don't have to linearly grow my sales force, but I can thoughtfully support them with the specialists that they need to drive those other solutions in. So does that answer your question?
Pierre Naude, CEO
Yes, I can just add something to that, which is, remember, we sell to business owners, not necessarily to IT. IT is heavily involved. They assist us in integrations and project management, et cetera. But those business owners want to see business value. And what's put in seen or part since its inception was the fact that we trained our salespeople to understand return on investment, understand how businesses will actually look at this investment they have to make and what value that will bring. If you look at that Japanese case we talked about earlier, that's a mortgage use case, which is very exciting because that's a consumer use case first in a place like Japan. So across the board, our people are trained and equipped to do an ROI model and actually win the business based on a solid business case and then with the help of IT get it installed.
Operator, Operator
Our next question comes from the line of Saket Kalia of Barclays. Your line is open.
Saket Kalia, Analyst
Awesome. I'm sorry to lengthen the call here. But pricing has been mentioned a couple of times here on the call. And I think there was a question earlier just around pricing in the retail business. I guess I want to ask kind of a two-part question, right? So the first one is, how much of the mortgage business is now being priced based on volume versus seats, right? And I guess the second question is just to loop in the great retail win, is there anything that you can disclose just on how the pricing structure works for that deal? Was there a decent volume component to it? Was it mostly seat-based? Anything you could talk about on pricing here for mortgage and for that retail deal.
Pierre Naude, CEO
Saket, as you know, we have never aimed to be just a volume-based business. We've stated that from the beginning, which is why we appreciate SimpleNexus. We always incorporate a platform element into our offerings. Even during our seed-based pricing, there was a fixed component included as a minimum in the contract, which we have consistently adhered to. In the current soft mortgage market, we initially offered lower platform pricing to gain entry, considering that potential clients are hesitant to make large commitments. However, our pricing schedule encourages them to increase their minimum commitment once volumes rise, allowing them to benefit from a lower unit cost as their volume grows. So yes, we anticipate some volume growth when that market rebounds. There are also incentives in place; if they decide to commit to a higher minimum, they will receive a lower unit cost for that volume. This arrangement promotes beneficial behavior for both sides, as it secures a larger commitment from them while they enjoy a reduced unit price. That’s how we intend to gradually raise the minimums in our contracts once the market improves. Does that make sense?
Gregory Orenstein, CFO
Yes, Saket, I want to point out that the consumer lending deal included a platform pricing fee. This structure aligns with our evolving business strategy, which I mentioned during Investor Day, where we are focusing on consumer aspects and moving away from a seat-based approach, especially with the digital component. As Josh pointed out, we're integrating in-branch and digital services, emphasizing value for the institution rather than just providing seats. This approach has been effective, and as we discussed earlier, our customers and prospects feel comfortable entering into agreements with this structure. We believe this will also facilitate the sales cycle.
Operator, Operator
Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Pierre Naude for any closing remarks.
Pierre Naude, CEO
Thank you, operator, and thank you, everyone, for attending our call today, and thank you for your insightful questions. We are excited about the business. We've got a great pipeline with good coverage. We are considering all factors in the current market as we give you guidance for the future. And hopefully, you can see our confidence in our strategy as well as our customer relations and our customer set we get from our clients. So thank you very much until next time. Have a great day.
Operator, Operator
Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.