nCino, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes and other financial information included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended January 31, 2022 filed with the SEC on March 31, 2022 . The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K, particularly in the section titled “Risk Factors.” Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Our fiscal year ends on January 31 of each year and references in this Quarterly Report on Form 10-Q to a fiscal year mean the year in which that fiscal year ends. For example, references in this Quarterly Report on Form 10-Q to "fiscal 2023" refer to the fiscal year ended January 31, 2023. Overview nCino is a leading global provider of cloud-based software for financial institutions. We empower banks, credit unions, and independent mortgage banks with the technology they need to meet ever-changing client expectations and regulatory requirements, gain increased visibility into their operations and performance, replace legacy systems, and operate digitally and more competitively. Our solution, the nCino Bank Operating System, digitizes, automates, and streamlines inefficient and complex processes and workflow, and utilizes data analytics and artificial intelligence and machine learning ("AI/ML") to enable banks and credit unions to more effectively onboard new clients, make loans and manage the entire loan life cycle, open deposit and other accounts, and manage regulatory compliance. Additionally, SimpleNexus' digital homeownership platform, which we acquired on January 7, 2022 (the "Acquisition Date"), unites people, systems, and stages of the mortgage process into a seamless end-to-end journey. We serve financial institution customers of all sizes and complexities, including global financial institutions, enterprise banks, regional banks, community banks, credit unions, new market entrants, such as challenger banks, and, through SimpleNexus, independent mortgage banks. Our customers deploy and utilize our technology, which can be accessed anytime, anywhere, and from any internet-enabled device, for mission critical functions across their organizations. Built as a single, multi-tenant SaaS platform, the nCino Bank Operating System transforms the way banks and credit unions operate, go to market, and interact with their clients, while delivering measurable return on investment by enabling them to: • digitally serve their clients across commercial, small business, and retail lines of business, • improve financial results, • operate more efficiently, • manage risk and compliance more effectively, and • establish a data, audit, and business intelligence hub. We were founded in a bank with the goal of improving that institution’s operations and client service. Realizing the problems we were addressing were endemic to virtually all banks and credit unions, we were spun out as a separate company in late 2011 with the vision of providing a comprehensive solution to onboard clients, originate any type of loan, and open any type of account on a single cloud-based platform. We initially focused the nCino Bank Operating System on transforming commercial and small business lending for community and regional banks. We introduced this solution to enterprise banks in the United States in 2014, and then internationally in 2017, and have subsequently expanded across North America, Europe, and APAC. In fiscal 2020, we acquired nCino Portfolio Analytics, LLC (formerly Visible Equity) and FinSuite and combined the acquired technology with certain of our internally-developed technology to launch nCino IQ ("nIQ"). nIQ helps our customers improve operational and financial performance by using AI/ML to increase efficiency through automation and analytics to gain greater insights into their operations and client interactions. In January 2022, we acquired SimpleNexus, a leading cloud-based mobile-first homeownership software company in the United States. We offer our solution on a SaaS basis under multi-year contracts and recognize subscription revenues ratably over the term of the contract. Our customers may initially purchase the nCino Bank Operating System for client onboarding, loan 24 Table of Contents origination, and/or deposit account opening for a single line of business or geography. Once this initial solution is in production, we seek to deploy additional solutions and expand within and across additional lines of business or geographies. The expansion from our original focus on commercial and small business loan origination to retail loan origination, client onboarding, deposit account opening, and, most recently, analytics and AI/ML solutions, has enhanced our ability to increase adoption of the nCino Bank Operating System by our customers. We sell our solutions directly through our business development managers, account executives, field sales engineers, and customer success managers. Our sales efforts in the United States are organized around financial institutions based on size, whereas internationally, we focus our sales efforts by geography. As of October 31, 2022, we had 275 sales and sales support personnel in the United States, including SimpleNexus, and 75 sales and support personnel in offices outside the United States. To help customers go live with the nCino Bank Operating System, we offer professional services including configuration and implementation, training and advisory services. For larger financial institutions, we generally work with system integrators ("SIs") such as Accenture, Deloitte, PwC, and West Monroe Partners, for the delivery of professional services for the nCino Bank Operating System, while we have historically performed professional services for smaller financial institutions ourselves. We expect larger financial institutions to make up a greater proportion of our nCino Bank Operating System sales. As a result, we expect the mix of our total revenues to become more heavily weighted toward subscription revenues. On the Acquisition Date, we acquired SimpleNexus, a leading cloud-based mobile-first homeownership software company in the United States, for an aggregate purchase price of $933.6 million. As a result of the acquisition, SimpleNexus became a wholly owned subsidiary of nCino, Inc. Our consolidated results of operations for the three and nine months ended October 31, 2022 include the operating results of SimpleNexus from the Acquisition Date. See Note 7 "Business Combinations" to our consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q for additional information. Given it was prior to the Acquisition Date, no operating results for SimpleNexus are included in the comparative period for the three and nine months ended October 31, 2021. SimpleNexus offers a suite of products that enables loan officers, borrowers, real estate agents, settlement agents and others to easily engage in the homeownership process from any internet-enabled device. For the three months ended October 31, 2021 and 2022, our total revenues were $70.0 million and $105.3 million, respectively, representing a 50.3% increase. Our revenues for the three months ended October 31, 2022 include $16.9 million in revenues from SimpleNexus. For the three months ended October 31, 2021 and 2022, our subscription revenues were $57.1 million and $88.3 million, respectively, representing a 54.7% increase. Our subscription-based revenues for the three months ended October 31, 2022 include $15.4 million from SimpleNexus. Due to our investments in growth, we recorded net losses attributable to nCino, Inc. of $13.6 million and $23.6 million for the three months ended October 31, 2021 and 2022, respectively. For the nine months ended October 31, 2021 and 2022, our total revenues were $198.9 million and $299.1 million, respectively, representing a 50.4% increase. Our revenues for the nine months ended October 31, 2022 include $48.2 million in revenues from SimpleNexus. For the nine months ended October 31, 2021 and 2022, our subscription revenues were $162.1 million and $251.9 million, respectively, representing a 55.5% increase. Our subscription-based revenues for the nine months ended October 31, 2022 include $44.0 million from SimpleNexus. Due to our investments in growth, we recorded net losses attributable to nCino, Inc. of $42.3 million and $81.5 million for the nine months ended October 31, 2021 and 2022, respectively. Factors Affecting Our Operating Results Market Adoption of Our Solution . Our future growth depends on our ability to expand our reach to new financial institution customers and increase adoption with existing customers as they broaden their use of our solutions within and across lines of business. Our success in growing our customer base and expanding adoption of our solutions by existing customers requires a focused direct sales engagement and the ability to convince key decision makers at financial institutions to replace legacy third-party point solutions or internally developed software with our solutions. In addition, growing our customer base will require us to increasingly penetrate markets outside the United States, which markets accounted for 15.1% of total revenues for the three and nine months ended October 31, 2022. For new customers, our sales cycles are typically lengthy, generally ranging from six to nine months for smaller financial institutions to 12 to 18 months or more for larger financial institutions. Key to landing new customers is our ability to successfully take our existing customers live and help them achieve measurable returns on their investment, thereby turning them into referenceable accounts. If we are unable to successfully address the foregoing challenges, our ability to grow our business and achieve profitability will be adversely affected, which may in turn reduce the value of our common stock. 25 Table of Contents Mix of Subscription and Professional Services Revenues. The initial deployment of our solutions by our customers requires a period of implementation and configuration services that can generally range from as little as three months to over 18 months for global financial institutions. As a result, during the initial go-live period for a customer on the nCino Bank Operating System, professional services revenues make up a substantial portion of our revenues from that customer, whereas over time, revenues from established customers are more heavily weighted to subscriptions. While professional services revenues will fluctuate as a percentage of total revenues in the future and tend to be higher in periods of faster growth, over time we expect subscription revenues will make up an increasing proportion of our total revenues as our overall business grows. COVID-19 Effects on Demand for Our Solutions . To help our customers service demand for Paycheck Protection Program ("PPP") loans under the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, beginning in April 2020, we adapted our Small Business Administration loan solution to the requirements of the PPP and rapidly introduced it to the market. Using our PPP solution, since the inception of PPP funding, our financial institution customers processed hundreds of thousands of applications. In light of the extraordinary nature of this market demand, we offered our PPP solution on one- or two-year terms as well as on a multi-year basis co-terminus with existing contracts. Seats for our PPP solution were activated immediately, which caused subscription revenues from these seats to be recognized sooner than is typical with the phased seat activations usually offered to customers. We believe that the emergency purchases of our PPP solution, coupled with the disruptive effect of COVID-19 on the economy more generally, may have had the effect of moderating revenue growth rates in fiscal 2022. In addition, our revenue growth rates and our subscription revenue retention rates may be adversely affected upon the expiration of access and use rights to our PPP solution to the extent such rights are not re-purposed for other applications. Interest Rate Environment. We are currently operating in a rising interest rate environment as the United States Federal Reserve raises interest rates as a means to manage inflation. These rate increases have had an impact on the real estate market in the United States and specifically, the demand for mortgages and mortgage-related products and services, which has had a negative impact on our SimpleNexus business. We continue to monitor the impact the rise in interest rates and any future rise in interest rates may have on our business. Continued Investment in Innovation and Growth . We have made substantial investments in product development, sales and marketing, and strategic acquisitions since our inception to achieve a leadership position in our market and grow our revenues and customer base. We intend to continue to increase our investment in product development in the coming years to maintain and build on this advantage. We also intend to invest in sales and marketing both in the United States and internationally to further grow our business. To capitalize on the market opportunity we see ahead of us, we expect to continue to optimize our operating plans for revenue growth and profitability. Components of Results of Operations Revenues We derive our revenues from subscription and professional services and other revenues. Subscription Revenues . Our subscription revenues consist principally of fees from customers for accessing our solutions and maintenance and support services that we generally offer under non-cancellable multi-year contracts, which typically range from three to five years for the nCino Bank Operating System and one to three years for SimpleNexus. Specifically, we offer: • Client onboarding, loan origination, and deposit account opening applications targeted at a financial institution’s commercial, small business, and retail lines of business, for which we generally charge on a per seat basis. • nIQ for which we generally charge based on the asset size of the customer or on a usage basis. • Through SimpleNexus, digital homeownership platform uniting people, systems, and stages of the mortgage process into a seamless end-to-end journey for which we generally charge on a per seat basis. • Maintenance and support services as well as internal-use or “sandbox” development licenses, for which we generally charge as a percentage of the related subscription fees. 26 Table of Contents Our subscription revenues are generally recognized ratably over the term of the contract beginning upon activation. For new customers, we may activate a portion of seats at inception of the agreement, with the balance activated at contractually specified points in time thereafter, to pattern our invoicing after the customer’s expected rate of implementation and adoption. Where seats are activated in stages, we charge subscription fees from the date of activation through the anniversary of the initial activation date, and annually thereafter. Subscription fees associated with the nCino Bank Operating System are generally billed annually in advance while subscription fees for SimpleNexus are generally billed monthly in advance. Maintenance and support fees, as well as development licenses, are provided over the same periods as the related subscriptions, so fees are invoiced and revenues are recognized over the same periods. Subscription fees invoiced are recorded as deferred revenue pending recognition as revenues. In certain cases, we are authorized to resell access to Salesforce’s CRM solution along with the nCino Bank Operating System. When we resell such access, we charge a higher subscription price and remit a higher subscription fee to Salesforce for these subscriptions. Professional Services and Other Revenues . Professional services and other revenues consist of fees for implementation and configuration assistance, training, and advisory services. For enterprise and larger regional financial institutions, we generally work with SIs to provide the majority of implementation services for the nCino Bank Operating System, for which these SIs bill our customers directly. We have historically delivered professional services ourselves for community banks and smaller credit unions and SimpleNexus has historically provided professional services directly to its customers. Revenues for implementation, training, and advisory services are recognized on a proportional performance basis, based on labor hours incurred relative to total budgeted hours. To date, our losses on professional services contracts have not been material. During the initial go-live period for a customer on the nCino Bank Operating System, professional services revenues make up a substantial portion of our revenues from that customer, whereas over time, revenues from established customers are more heavily weighted to subscriptions. While professional services revenues will fluctuate as a percentage of total revenues in the future and tend to be higher in periods of faster growth, over time we expect to see subscription revenues make up an increasing proportion of our total revenues. Cost of Revenues and Gross Margin Cost of Subscription Revenues . Cost of subscription revenues consists of fees paid to Salesforce for access to the Salesforce Platform, including Salesforce’s hosting infrastructure and data center operations, along with certain integration fees paid to other third parties. When we resell access to Salesforce’s CRM solution, cost of subscription revenues also includes the subscription fees we remit to Salesforce for providing such access. We also incur costs associated with access to other platforms. In addition, cost of subscription revenues includes personnel-related costs associated with delivering maintenance and support services, including salaries, benefits and stock-based compensation expense, travel and related costs, amortization of acquired developed technology, and allocated overhead. Our subscription gross margin will vary from period to period as a function of the utilization of support personnel and the extent to which we recognize subscription revenues from the resale of Salesforce’s CRM solution. Cost of Professional Services and Other Revenues . Cost of professional services and other revenues consists primarily of personnel-related costs associated with delivery of these services, including salaries, benefits and stock-based compensation expense, travel and related costs, and allocated overhead. The cost of providing professional services is significantly higher as a percentage of the related revenues than for our subscription services due to direct labor costs. The cost of professional services revenues has increased in absolute dollars as we have added new customer subscriptions that require professional services and built-out our international professional services capabilities. Realized effective billing and utilization rates drive fluctuations in our professional services and other gross margin on a period-to-period basis. Operating Expenses Sales and Marketing. Sales and marketing expenses consist primarily of personnel costs of our sales and marketing employees, including salaries, sales commissions and incentives, benefits and stock-based compensation expense, travel and related costs. We capitalize incremental costs incurred to obtain contracts, primarily consisting of sales commissions, and subsequently amortize these costs over the expected period of benefit, which we have determined to be approximately four years. Sales and marketing expenses also include outside consulting fees, marketing programs, including lead generation, costs of our annual user conference, advertising, trade shows, other event expenses, amortization of intangible assets, and allocated overhead. We expect sales and marketing expenses will decrease as a percentage of revenues as we leverage the investments we have made to date. Research and Development. Research and development expenses consist primarily of salaries, benefits and stock-based compensation associated with our engineering, product and quality assurance personnel, as well as allocated overhead. 27 Table of Contents Research and development expenses also include the cost of third-party contractors. Research and development costs are expensed as incurred. We expect research and development costs to decrease as a percentage of revenues as we leverage the investments we have made to date. General and Administrative. General and administrative expenses consist primarily of salaries, benefits and stock-based compensation associated with our executive, finance, legal, human resources, information technology, compliance and other administrative personnel. General and administrative expenses also include accounting, auditing and legal professional services fees, travel and other corporate-related expenses, and allocated overhead, as well as acquisition-related expenses, which primarily consists of third-party expenses related to the acquisition of SimpleNexus, such as legal and other professional services fees. We expect general and administrative expenses will decrease as a percentage of revenues as we leverage the investments we have made to date. Non-Operating Income (Expense) Interest Income. Interest income consists primarily of interest earned on our cash and cash equivalents. Interest Expense. Interest expense consists primarily of interest related to our financing obligations along with interest expense on borrowings, commitment fees, and amortization of debt issuance costs associated with our secured revolving credit facility. Other Income (Expense), Net. Other income (expense), net consists primarily of foreign currency gains and losses, the majority of which is due to intercompany loans that are denominated in currencies other than the underlying functional currency of the applicable entity. Income Tax Provision. Income tax provision consists of federal and state income taxes in the United States and income taxes in foreign jurisdictions. 28 Table of Contents Results of Operations The results of operations presented below should be reviewed in conjunction with the financial statements and notes included elsewhere in this Quarterly Report on Form 10-Q. The following tables present our selected consolidated statements of operations data for three and nine months ended October 31, 2021 and 2022 in both dollars and as a percentage of total revenues, except as noted. Three Months Ended October 31, Nine Months Ended October 31, 2021 2022 2021 2022 ($ in thousands, except share and per share amounts) Revenues: Subscription revenues $ 57,085 $ 88,290 $ 162,052 $ 251,924 Professional services and other revenues 12,951 17,006 36,858 47,210 Total revenues 70,036 105,296 198,910 299,134 Cost of revenues: Cost of subscription revenues 15,753 26,844 46,007 78,499 Cost of professional services and other revenues 11,501 16,312 34,121 46,180 Total cost of revenues 27,254 43,156 80,128 124,679 Gross profit 42,782 62,140 118,782 174,455 Operating expenses: Sales and marketing 20,586 32,423 58,227 94,274 Research and development 19,956 29,471 55,990 88,287 General and administrative 14,964 18,690 45,931 62,575 Total operating expenses 55,506 80,584 160,148 245,136 Loss from operations (12,724) (18,444) (41,366) (70,681) Non-operating income (expense): Interest income 57 87 173 115 Interest expense (379) (580) (977) (1,849) Other income (expense), net (255) (2,911) (325) (5,498) Loss before income taxes (13,301) (21,848) (42,495) (77,913) Income tax provision 356 797 1,030 2,159 Net loss (13,657) (22,645) (43,525) (80,072) Net loss attributable to redeemable non-controlling interest (389) (257) (1,259) (908) Adjustment attributable to redeemable non-controlling interest 368 1,191 61 2,348 Net loss attributable to nCino, Inc. $ (13,636) $ (23,579) $ (42,327) $ (81,512) Net loss per share attributable to nCino, Inc.: Basic and diluted $ (0.14) $ (0.21) $ (0.44) $ (0.74) Weighted average number of common shares outstanding: Basic and diluted 96,431,082 110,897,811 95,510,413 110,434,171 29 Table of Contents The Company recognized stock-based compensation expense as follows: Three Months Ended October 31, Nine Months Ended October 31, ($ in thousands) 2021 2022 2021 2022 Cost of subscription revenues $ 179 $ 392 $ 721 $ 1,120 Cost of professional services and other revenues 1,209 1,778 3,881 5,564 Sales and marketing 1,685 3,326 5,415 10,144 Research and development 1,351 3,012 4,580 8,457 General and administrative 1,421 3,997 5,952 13,191 Total stock-based compensation expense $ 5,845 $ 12,505 $ 20,549 $ 38,476 The Company recognized amortization expense as follows: Three Months Ended October 31, Nine Months Ended October 31, ($ in thousands) 2021 2022 2021 2022 Cost of subscription revenues $ 388 $ 4,249 $ 1,177 $ 12,767 Cost of professional services and other revenues — 47 — 47 Sales and marketing 418 2,772 1,253 8,315 Total amortization expense $ 806 $ 7,068 $ 2,430 $ 21,129 Three Months Ended October 31, Nine Months Ended October 31, 2021 2022 2021 2022 Revenues: Subscription revenues 81.5 % 83.8 % 81.5 % 84.2 % Professional services and other revenues 18.5 16.2 18.5 15.8 Total revenues 100.0 100.0 100.0 100.0 Cost of revenues (percentage shown in comparison to related revenues): Cost of subscription revenues 27.6 30.4 28.4 31.2 Cost of professional services and other revenues 88.8 95.9 92.6 97.8 Total cost of revenues 38.9 41.0 40.3 41.7 Gross profit 61.1 59.0 59.7 58.3 Operating expenses: Sales and marketing 29.4 30.8 29.3 31.5 Research and development 28.5 28.0 28.1 29.5 General and administrative 21.4 17.7 23.1 20.9 Total operating expenses 79.3 76.5 80.5 81.9 Loss from operations (18.2) (17.5) (20.8) (23.6) Non-operating income (expense): Interest income 0.1 0.1 0.1 — Interest expense (0.5) (0.6) (0.5) (0.6) Other income (expense), net (0.4) (2.8) (0.2) (1.8) Loss before income taxes (19.0) (20.8) (21.4) (26.0) Income tax provision 0.5 0.8 0.5 0.7 Net loss (19.5) % (21.6) % (21.9) % (26.7) % 30 Table of Contents Comparison of the Three and Nine Months Ended October 31, 2021 and 2022 Revenues Three Months Ended October 31, Nine Months Ended October 31, ($ in thousands) 2021 2022 2021 2022 Revenues: Subscription revenues $ 57,085 81.5 % $ 88,290 83.8 % $ 162,052 81.5 % $ 251,924 84.2 % Professional services and other revenues 12,951 18.5 17,006 16.2 36,858 18.5 47,210 15.8 Total revenues $ 70,036 100.0 % $ 105,296 100.0 % $ 198,910 100.0 % $ 299,134 100.0 % Subscription Revenues Subscription revenues increased $31.2 million for the three months ended October 31, 2022 compared to the three months ended October 31, 2021, due to initial revenues from customers who did not contribute to subscription revenues during the prior period, including customers added as a result of our acquisition of SimpleNexus, and growth from existing customers within and across lines of business. Of the increase, 31.5% was attributable to increased revenues from existing customers as additional seats were activated in accordance with contractual terms and customers expanded their adoption of our solutions, 19.2% was attributable to initial revenues from customers who did not contribute to subscription revenues during the three months ended October 31, 2021, and 49.3% was attributable to revenues from SimpleNexus. Subscription revenues were 83.8% of total revenues for the three months ended October 31, 2022 compared to 81.5% of total revenues for the three months ended October 31, 2021, primarily due to growth in our installed base and SimpleNexus. Subscription revenues increased $89.9 million for the nine months ended October 31, 2022 compared to the nine months ended October 31, 2021, due to initial revenues from customers who did not contribute to subscription revenues during the prior period, including customers added as a result of our acquisition of SimpleNexus, and growth from existing customers within and across lines of business. Of the increase, 36.9% was attributable to increased revenues from existing customers as additional seats were activated in accordance with contractual terms and customers expanded their adoption of our solutions, 14.2% was attributable to initial revenues from customers who did not contribute to subscription revenues during the nine months ended October 31, 2021, and 48.9% was attributable to revenues from SimpleNexus. Subscription revenues were 84.2% of total revenues for the nine months ended October 31, 2022 compared to 81.5% of total revenues for the nine months ended October 31, 2021, primarily due to growth in our installed base and SimpleNexus. Professional Services and Other Revenues Professional services and other revenues increased $4.1 million for the three months ended October 31, 2022 compared to the three months ended October 31, 2021, primarily due to the addition of new customers as well as expanded adoption by existing customers within and across lines of business where implementation, configuration, and training services were required. 38.0% of the increase was attributable to revenues from SimpleNexus. Professional services and other revenues increased $10.4 million for the nine months ended October 31, 2022 compared to the nine months ended October 31, 2021, primarily due to the addition of new customers as well as expanded adoption by existing customers within and across lines of business where implementation, configuration, and training services were required. 41.2% of the increase was attributable to revenues from SimpleNexus. 31 Table of Contents Cost of Revenues and Gross Margin Three Months Ended October 31, Nine Months Ended October 31, ($ in thousands) 2021 2022 2021 2022 Cost of revenues (percentage shown in comparison to related revenues): Cost of subscription revenues $ 15,753 27.6 % $ 26,844 30.4 % $ 46,007 28.4 % $ 78,499 31.2 % Cost of professional services and other revenues 11,501 88.8 16,312 95.9 34,121 92.6 46,180 97.8 Total cost of revenues $ 27,254 38.9 $ 43,156 41.0 $ 80,128 40.3 $ 124,679 41.7 Gross profit $ 42,782 61.1 % $ 62,140 59.0 % $ 118,782 59.7 % $ 174,455 58.3 % Cost of Subscription Revenues Cost of subscription revenues increased $11.1 million for the three months ended October 31, 2022 compared to the three months ended October 31, 2021, generating a gross margin for subscription revenues of 69.6% compared to a gross margin of 72.4% for the three months ended October 31, 2021. The decrease in gross margin percentage is primarily due to an increase of $3.9 million in amortization expense for acquired developed technology related to the acquisition of SimpleNexus. Costs related to Salesforce user fees increased $3.1 million as we continued to add new customers and sell additional functionality to existing customers and other costs of subscription revenues increased $2.6 million due to costs associated with access to other platforms and data center costs. Personnel costs, including stock-based compensation expense, increased $1.3 million as we added new employees, including headcount from the acquisition of SimpleNexus. The increase in cost of subscription revenues also included an increase of $0.2 million in allocated overhead costs due to growth supporting our continued business expansion. We expect the cost of subscription revenues will continue to increase in absolute dollars as the number of users of the nCino Bank Operating System grows. Cost of subscription revenues increased $32.5 million for the nine months ended October 31, 2022 compared to the nine months ended October 31, 2021, generating a gross margin for subscription revenues of 68.8% compared to a gross margin of 71.6% for the nine months ended October 31, 2021. The decrease in gross margin percentage is primarily due to an increase of $11.6 million in amortization expense for acquired developed technology related to the acquisition of SimpleNexus. Costs related to Salesforce user fees increased $8.6 million as we continued to add new customers and sell additional functionality to existing customers and other costs of subscription revenues increased $7.9 million due to costs associated with access to other platforms and data center costs. Personnel costs, including stock-based compensation expense, increased $3.5 million as we added new employees, including headcount from the acquisition of SimpleNexus. The increase in cost of subscription revenues also included an increase of $0.6 million in allocated overhead costs due to growth supporting our continued business expansion. We expect the cost of subscription revenues will continue to increase in absolute dollars as the number of users of the nCino Bank Operating System grows. Cost of Professional Services and Other Revenues Cost of professional services and other revenues increased $4.8 million for the three months ended October 31, 2022 compared to the three months ended October 31, 2021, generating a gross margin for professional services and other revenues of 4.1% compared to a gross margin of 11.2% for the three months ended October 31, 2021. For the three months ended October 31, 2022, personnel costs, including stock-based compensation expense, increased $4.0 million for professional services compared to the three months ended October 31, 2021, due to increased headcount, including headcount from the acquisition of SimpleNexus. The increase in cost of professional services and other revenues also included an increase of $0.5 million in allocated overhead costs due to growth supporting our business, an increase of $0.3 million in travel-related costs, and a $0.1 million increase in reimbursable travel and related expenses for the professional service organization. The decrease in our professional services and other gross margin for the three months ended October 31, 2022 was primarily due to a decline in realized effective billing and utilization rates in our professional services teams. Cost of professional services and other revenues increased $12.1 million for the nine months ended October 31, 2022 compared to the nine months ended October 31, 2021, generating a gross margin for professional services and other revenues of 2.2% compared to a gross margin of 7.4% for the nine months ended October 31, 2021. For the nine months ended October 31, 2022, personnel costs, including stock-based compensation expense, increased $10.1 million for professional services compared to the nine months ended October 31, 2021, due to increased headcount, including headcount from the acquisition of SimpleNexus. The increase in cost of professional services and other revenues also included an increase of $0.9 32 Table of Contents million in allocated overhead costs due to growth supporting our business, an increase of $0.7 million in travel-related costs, and a $0.3 million increase in reimbursable travel and related expenses for the professional service organization. The decrease in our professional services and other gross margin for the nine months ended October 31, 2022 was primarily due to a decline in realized effective billing and utilization rates in our professional services teams. Operating Expenses Three Months Ended October 31, Nine Months Ended October 31, ($ in thousands) 2021 2022 2021 2022 Operating expenses: Sales and marketing $ 20,586 29.4 % $ 32,423 30.8 % $ 58,227 29.3 % $ 94,274 31.5 % Research and development 19,956 28.5 29,471 28.0 55,990 28.1 88,287 29.5 General and administrative 14,964 21.4 18,690 17.7 45,931 23.1 62,575 20.9 Total operating expenses 55,506 79.3 80,584 76.5 160,148 80.5 245,136 81.9 Loss from operations $ (12,724) (18.2) % $ (18,444) (17.5) % $ (41,366) (20.8) % $ (70,681) (23.6) % Sales and Marketing Sales and marketing expenses increased $11.8 million for the three months ended October 31, 2022 compared to the three months ended October 31, 2021, primarily due to an increase of $7.3 million in personnel costs, including stock-based compensation expense, resulting mainly from an increase in headcount on the sales and marketing teams, including headcount from the acquisition of SimpleNexus. Amortization expense for acquired customer relationships and trade name increased $2.4 million related to the acquisition of SimpleNexus. The increase in sales and marketing expenses also included an increase of $1.0 million in sales-related travel costs, an increase of $0.7 million in allocated overhead costs, and an increase of $0.3 million in marketing costs primarily attributable to in-person conferences. Sales and marketing expenses increased $36.0 million for the nine months ended October 31, 2022 compared to the nine months ended October 31, 2021, primarily due to an increase of $20.2 million in personnel costs, including stock-based compensation expense, resulting mainly from an increase in headcount on the sales and marketing teams, including headcount from the acquisition of SimpleNexus. This increase was partially offset by a decrease in expatriate tax equalization expenses compared to the nine months ended October 31, 2021. Amortization expense for acquired customer relationships and trade name increased $7.1 million related to the acquisition of SimpleNexus. The increase in sales and marketing expenses also included an increase of $3.6 million in sales-related travel costs, an increase of $3.1 million in marketing costs primarily attributable to in-person conferences, and an increase of $2.0 million in allocated overhead costs. Our sales and marketing headcount grew by 123 from October 31, 2021 to October 31, 2022. Our acquisition of SimpleNexus contributed to this increase in headcount. We expect sales and marketing expenses to decrease as a percentage of revenues as we leverage the investments we have made to date. Research and Development Research and development expenses increased $9.5 million for the three months ended October 31, 2022 compared to the three months ended October 31, 2021, primarily due to an increase of $9.5 million in personnel costs, including stock-based compensation expense, resulting mainly from an increase in headcount, including headcount from the acquisition of SimpleNexus. The increase in research and development expenses also included an increase of $0.8 million in allocated overhead costs due to growth supporting our continued business expansion and an increase of $0.3 million in travel-related costs, partially offset by a $1.1 million decrease in third-party professional fees primarily attributable to contract research and development spend. Research and development expenses increased $32.3 million for the nine months ended October 31, 2022 compared to the nine months ended October 31, 2021, primarily due to an increase of $31.3 million in personnel costs, including stock-based compensation expense, resulting mainly from a continued increase in headcount, including headcount from the acquisition of SimpleNexus. The increase in research and development expenses also included an increase of $2.8 million in allocated overhead costs due to growth supporting our continued business expansion and an increase of $0.9 million in travel-related costs, partially offset by a $2.7 million decrease in third-party professional fees primarily attributable to contract research and development spend. 33 Table of Contents Our research and development headcount grew by 182 from October 31, 2021 to October 31, 2022. Our acquisition of SimpleNexus contributed to this increase in headcount. We expect research and development expenses to decrease as a percentage of revenues as we leverage the investments we have made to date. General and Administrative General and administrative expenses increased $3.7 million for the three months ended October 31, 2022 compared to the three months ended October 31, 2021, primarily due to an increase of $4.5 million in personnel costs, including stock-based compensation expense, from additional headcount as we continued to scale our business, including headcount from the acquisition of SimpleNexus. The increase in general and administrative spend also included an increase of $0.3 million in allocated overhead and other general and administrative costs and an increase of $0.1 million in travel-related costs. Third party professional fees decreased $1.2 million for the three months ended October 31, 2022 compared to the three months ended October 31, 2021, mostly attributable to a decrease in third party professional fees and expenses related to the government antitrust investigation and related civil action disclosed in Note 14 "Commitments and Contingencies" of Part I, Item I of this Quarterly Report on Form 10-Q (the "Antitrust Matters") and acquisition costs, partially offset by an increase in fees and expenses related to other professional fees. General and administrative expenses increased $16.6 million for the nine months ended October 31, 2022 compared to the nine months ended October 31, 2021, primarily due to an increase of $15.9 million in personnel costs, including stock-based compensation expense, from additional headcount as we continued to scale our business, including headcount from the acquisition of SimpleNexus. The increase in general and administrative spend also included an increase of $2.0 million in allocated overhead and other general and administrative costs and an increase of $0.5 million in travel-related costs. Third party professional fees decreased $1.7 million for the nine months ended October 31, 2022 compared to the nine months ended October 31, 2021, mostly attributable to a decrease in third party professional fees and expenses related to the Antitrust Matters, partially offset by an increase in fees and expenses related to acquisition costs and other professional fees. Our general and administrative headcount grew by 47 from October 31, 2021 to October 31, 2022. Our acquisition of SimpleNexus contributed to this increase in headcount. We expect general and administrative expenses to decrease as a percentage of revenues as we leverage the investments we have made to date. Non-Operating Income (Expense) Three Months Ended October 31, Nine Months Ended October 31, ($ in thousands) 2021 2022 2021 2022 Interest income $ 57 0.1 % $ 87 0.1 % $ 173 0.1 % $ 115 — % Interest expense (379) (0.5) (580) (0.6) (977) (0.5) (1,849) (0.6) Other income (expense), net (255) (0.4) (2,911) (2.8) (325) (0.2) (5,498) (1.8) Interest expense increased $0.2 million for the three months ended October 31, 2022 compared to the three months ended October 31, 2021, primarily due to a larger balance on our financing obligations for leases for which we are considered the owners for accounting purposes. The increase of $2.7 million in other income (expense), net for the three months ended October 31, 2022 compared to the three months ended October 31, 2021 was primarily driven by intercompany loans that are denominated in currencies other than the underlying functional currency of the applicable entity. Interest expense increased $0.9 million for the nine months ended October 31, 2022 compared to the nine months ended October 31, 2021, primarily due to a larger balance on our financing obligations for leases for which we are considered the owners for accounting purposes, and also due to expenses associated with a credit agreement for a senior secured revolving credit facility of up to $50.0 million we entered into on February 11, 2022 (the "Credit Facility") that did not occur in the prior comparative year to date. The increase of $5.2 million in other income (expense), net for the nine months ended October 31, 2022 compared to the nine months ended October 31, 2021 was primarily driven by intercompany loans that are denominated in currencies other than the underlying functional currency of the applicable entity. 34 Table of Contents Income Tax Provision Three Months Ended October 31, Nine Months Ended October 31, ($ in thousands) 2021 2022 2021 2022 Income tax provision $ 356 0.5 % $ 797 0.8 % $ 1,030 0.5 % $ 2,159 0.7 % Income tax provision was $0.8 million for the three months ended October 31, 2022 compared to a provision of $0.4 million for the three months ended October 31, 2021, and resulted in an effective tax rate of (3.6)% and (2.7)%, respectively. Income tax provision was $2.2 million for the nine months ended October 31, 2022 compared to a provision of $1.0 million for the nine months ended October 31, 2021, and resulted in an effective tax rate of (2.8)% compared to (2.4)%, respectively. We continue to maintain a valuation allowance against our deferred tax assets in most jurisdictions, including the U.S. It is determined by management when a valuation allowance should be recorded, utilizing significant judgement and the use of estimates. Beginning with the nine months ended October 31, 2022, we have adopted, as required, Internal Revenue Code Section 174, as amended by the Tax Cuts and Jobs Act of 2017. For U.S. income tax purposes, the option to deduct research and development expenditures is no longer available and thus requires us to capitalize and amortize these expenditures over either a five- or fifteen-year period. This will result in the repartition of our deferred tax asset balances from net operating losses and tax credit carryforwards to non-tax attribute deferred tax balances. In addition, this could reduce our operating cash flows in future periods through cash remittances of U.S. federal and state income tax. Effects of COVID-19 COVID-19 began affecting our business in our first quarter of fiscal 2021. At present, we do not see COVID-19 affecting customers’ decision making, such as delaying purchase decisions or cancellations, nor are we seeing COVID-19 having a material impact on the decision making of the vendors and third-party service providers we rely on. To the extent COVID-19 has measurably affected our historical financial results, we have noted such effects in the discussion above. We are aware that there are effects of the COVID-19 pandemic in terms of efficiency, productivity, workforce retention and other matters that are not directly measurable. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments unknown and unpredictable at this time, including the ultimate duration, severity and spread of the pandemic, the effectiveness of COVID-19 vaccinations, the effects of the pandemic on financial institutions generally as well as on our customers, their clients and on our business partners in particular, restrictions on travel and other actions that may be taken by governmental authorities and other factors. For further information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Operating Results—COVID-19 Effects on Demand for Our Solutions” and “Risk Factors—Uncertain or weakened economic conditions, including as a result of COVID-19, may adversely affect our industry, business, and results of operations," included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022 filed with the SEC on March 31, 2022. Beginning in January 2023, nCino will implement an "in-person first" working environment at the Company's headquarters in Wilmington, N.C., in which we expect full-time employees within Wilmington to return to the office on a full-time basis. Non-GAAP Financial Measure In addition to providing financial measurements based on GAAP, we provide an additional financial metric that is not prepared in accordance with GAAP (non-GAAP). Management uses this non-GAAP financial measure, in addition to GAAP financial measures, to understand and compare operating results across accounting periods, for financial and operational decision making, for planning and forecasting purposes, and to evaluate our financial performance. We believe that this non-GAAP financial measure helps us to identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in the calculations of the non-GAAP financial measure. Accordingly, we believe that this financial measure reflects our ongoing business in a manner that allows for meaningful comparisons and analysis of trends in the business and provides useful information to investors and others in understanding and evaluating our operating results, and enhancing the overall understanding of our past performance and future 35 Table of Contents prospects. Although the calculation of non-GAAP financial measures may vary from company to company, our detailed presentation may facilitate analysis and comparison of our operating results by management and investors with other peer companies, many of which use a similar non-GAAP financial measure to supplement their GAAP results in their public disclosures. This non-GAAP financial measure is non-GAAP operating income (loss), as discussed below. Non-GAAP operating income (loss). Non-GAAP operating income (loss) is defined as loss from operations as reported in our unaudited condensed consolidated statements of operations excluding the impact of amortization of intangible assets, stock-based compensation expense, acquisition-related expenses, and expenses related to the Antitrust Matters. Non-GAAP operating income (loss) is widely used by securities analysts, investors, and other interested parties to evaluate the profitability of companies. Non-GAAP operating income (loss) eliminates potential differences in performance caused by variations in the extent to which intangible assets are identifiable (affecting relative amortization expense). We do not believe acquisition-related expenses and fees and expenses related to the Antitrust Matters are indicative of the Company's ongoing operating performance and hinder comparability with prior and future performance. This non-GAAP financial measure does not replace the presentation of our GAAP financial results and should only be used as a supplement to, not as a substitute for, our financial results presented in accordance with GAAP. There are limitations in the use of non-GAAP measures because they do not include all of the expenses that must be included under GAAP and because they involve the exercise of judgment concerning exclusions of items from the comparable non-GAAP financial measure. In addition, other companies may use other measures to evaluate their performance, or may calculate non-GAAP measures differently, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. The following table reconciles non-GAAP operating income (loss) to loss from operations, the most directly comparable financial measure, calculated and presented in accordance with GAAP (in thousands): Three Months Ended October 31, Nine Months Ended October 31, ($ in thousands) 2021 2022 2021 2022 GAAP loss from operations $ (12,724) $ (18,444) $ (41,366) $ (70,681) Adjustments Amortization of intangible assets 806 7,068 2,430 21,129 Stock-based compensation expense 5,845 12,505 20,549 38,476 Acquisition-related expenses 902 186 902 2,070 Fees and expenses related to the Antitrust Matters 2,021 1,225 8,168 5,093 Total adjustments 9,574 20,984 32,049 66,768 Non-GAAP operating income (loss) $ (3,150) $ 2,540 $ (9,317) $ (3,913) Liquidity and Capital Resources As of October 31, 2022, we had $106.5 million in cash and cash equivalents, and an accumulated deficit of $288.8 million. Our net losses have been driven by our investments in developing the nCino Bank Operating System, expanding our sales and marketing organization, and scaling our finance and administrative functions to support our rapid growth. We expect to continue to incur operating losses for the foreseeable future. To date, we have funded our capital needs through issuances of common stock and operating cash flows. Beginning in the three months ended April 30, 2022 and again during the three months ended October 31, 2022, we supplemented our liquidity with our revolving line of credit. In July 2020, we closed our IPO of 9,269,000 shares of common stock (including shares issued pursuant to the exercise in full of the underwriters' options to purchase additional shares) at a public offering price of $31.00 per share, resulting in aggregate net proceeds to us of $268.4 million after deducting underwriting discounts and commissions. We used a majority of the proceeds from our initial public offering in July 2020, which were in our cash and cash equivalents on the balance sheet, to consummate the acquisition of SimpleNexus in January 2022. We generally bill and collect from our customers annually in advance. Our billings are subject to seasonality, with billings in the first and fourth quarters of our fiscal year substantially higher than in the second and third quarters. Because we recognize revenues ratably, our deferred revenue balance mirrors the seasonality of our billings. In addition, our advanced billing and collection coupled with our recent growth has resulted in our cash used in operating activities generally being less than our net operating losses in recent periods. 36 Table of Contents On February 11, 2022, we entered into the Credit Facility of up to $50.0 million. We borrowed and repaid $20.0 million under the Credit Facility during the three months ended April 30, 2022 and borrowed $30.0 million during the three months ended October 31, 2022. As of October 31, 2022, the Company had $30.0 million outstanding and no letters of credit issued under the Credit Facility and was in compliance with all covenants. See Note 13 "Revolving Credit Facility" of Part I, Item I of this Quarterly Report on Form 10-Q for more information. We believe that current cash and cash equivalents as well as borrowings available under the Credit Facility will be sufficient to fund our operations and capital requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts to enhance the nCino Bank Operating System and introduce new applications, market acceptance of our solutions, the continued expansion of our sales and marketing activities, investments in office facilities and other capital expenditure requirements, and any potential future acquisitions. We expect capital expenditures will be appreciably higher in absolute dollars in fiscal 2023 for planned office build-outs compared to prior fiscal years to accommodate our growth, which we estimate to be approximately $4.3 million remaining to complete at October 31, 2022 for fiscal 2023. We may from time-to-time seek to raise additional capital to support our growth. Any equity financing we may undertake could be dilutive to our existing stockholders, and any debt financing we may undertake could require debt service and financial and operational covenants that could adversely affect our business. There is no assurance we would be able to obtain future financing on acceptable terms or at all. nCino K.K. In fiscal 2020, we established nCino K.K., a Japanese company in which we own a controlling interest, for purposes of facilitating our entry into the Japanese market. We have consolidated the results of operations and financial condition of nCino K.K. since its inception. Pursuant to an agreement with the holders of the non-controlling interest in nCino K.K., beginning in 2027 we may redeem the non-controlling interest, or be required to redeem such interest by the holders thereof, based on a prescribed formula derived from the relative revenues of nCino K.K. and the Company. The balance of the redeemable non-controlling interest is reported on our balance sheet below total liabilities but above stockholders’ equity at the greater of the initial carrying amount adjusted for the redeemable non-controlling interest’s share of earnings or losses and other comprehensive income or loss, or its estimated redemption value. As of January 31, 2022 and October 31, 2022, the redeemable non-controlling interest was $2.9 million and $4.1 million, respectively. As part of our joint venture obligations, we may be required to make an additional cash capital contribution of up to $5.0 million to nCino K.K. during the course of the current fiscal year. Cash Flows Summary Cash Flow information for the nine months ended October 31, 2021 and 2022 are set forth below: Nine Months Ended October 31, ($ in thousands) 2021 2022 Net cash provided by operating activities $ 1,823 $ 6,639 Net cash used in investing activities (3,640) (13,776) Net cash provided by financing activities 12,439 34,637 Net Cash Provided by Operating Activities The $6.6 million provided by operating activities in the nine months ended October 31, 2022 reflects our net loss of $80.1 million, offset by $79.5 million in non-cash charges and $7.2 million generated by changes in working capital accounts. Non-cash charges primarily consisted of stock-based compensation, depreciation and amortization, amortization of costs capitalized to obtain revenue contracts, foreign currency losses related to intercompany loans and transactions, and non-cash operating lease costs. Cash generated by working capital accounts was principally a function of a $32.5 million decrease in accounts receivable due to collections from customers. The cash generated by working capital accounts was partially offset by a $9.2 million decrease in accrued expenses and other current liabilities, payments of $8.0 million of capitalized costs to obtain revenue contracts, which consisted primarily of sales commissions, a $3.0 million decrease in operating lease liabilities, a $2.9 million decrease in deferred revenue, a $1.7 million decrease in accounts payable, and a $0.4 million increase in prepaid expenses and other assets. 37 Table of Contents The $1.8 million provided by operating activities in the nine months ended October 31, 2021 reflects our net loss of $43.5 million, offset by $33.3 million in non-cash charges and $12.0 million generated by changes in working capital accounts. Non-cash charges primarily consisted of stock-based compensation, depreciation and amortization, amortization of costs capitalized to obtain revenue contracts, and non-cash operating lease costs. Cash generated by working capital accounts was principally a function of a $21.6 million decrease in accounts receivable due to collections from customers and a $4.7 million increase in accounts payable. The cash generated by working capital accounts was partially offset by payments of $5.8 million of capitalized costs to obtain revenue contracts, which consisted primarily of sales commissions, a $3.2 million decrease in deferred revenue, a $2.0 million decrease in accrued expenses and other current liabilities, a $1.9 million decrease in operating lease liabilities, and a $1.4 million increase in prepaid expenses and other assets. Net Cash Used in Investing Activities The $13.8 million used in investing activities in the nine months ended October 31, 2022 was comprised of $13.9 million for the purchase of property and equipment and leasehold improvements to support the expansion of our business and $0.6 million for an asset acquisition completed in August 2022. The cash used in investing activities was partially offset by $0.7 million received for a net working capital adjustment from our SimpleNexus acquisition. We used $3.6 million in investing activities in the nine months ended October 31, 2021 for the purchase of property and equipment and leasehold improvements to support the expansion of our business. On November 1, 2022 we used $2.5 million for the purchase of preferred stock in Zest AI. See Note 17 "Subsequent Events" of Part I, Item I of this Quarterly Report on Form 10-Q for more information. Net Cash Provided by Financing Activities The $34.6 million provided by financing activities in the nine months ended October 31, 2022 was comprised principally of $50.0 million of proceeds from borrowings on the Credit Facility to expand our liquidity, $3.0 million of proceeds from the exercise of stock options, and $2.4 million of proceeds from stock issuances under the employee stock purchase plan. The cash provided by financing activities was partially reduced by payments of $20.0 million on the Credit Facility, principal payments of $0.5 million on financing obligations, and payments of debt issuance costs of $0.4 million. The $12.4 million provided by financing activities in the nine months ended October 31, 2021 was comprised principally of $12.6 million of proceeds from the exercise of stock options, partially reduced by principal payments of $0.2 million on the financing obligation. Contractual Obligations and Commitments Our estimated future obligations principally consist of leases related to our facilities, purchase obligations related primarily to licenses and hosting services, financing obligations for leases for which we are considered the owners for accounting purposes and the Credit Facility. See Note 12 "Leases," Note 13 "Revolving Credit Facility," Note 14 "Commitments and Contingencies," and Note 17 "Subsequent Events" of the notes to our unaudited condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q for more information. Critical Accounting Policies and Estimates Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be significant. There have been no material changes in our critical accounting policies or estimates as compared to those disclosed in the Annual Report on Form 10-K for the fiscal year ended January 31, 2022 filed with the SEC on March 31, 2022. 38 Table of Contents Recent Accounting Pronouncements See Note 2 "Summary of Significant Accounting Policies" of the notes to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted, if applicable.