nCino (NASDAQ:NCNO) Q3 Sales Beat Estimates, Next Quarter Growth Looks Optimistic

Full Report / December 01, 2021
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Maker of operating system for banks nCino (NASDAQ:NCNO) reported strong growth in the Q3 FY2022 earnings announcement, with revenue up 29.1% year on year to $70 million. Guidance for next quarter's revenue was $69 million at the midpoint, which is 1.03% above the analyst consensus. nCino made a GAAP loss of $13.6 million, down on its loss of $9.27 million, in the same quarter last year.

nCino (NCNO) Q3 FY2022 Highlights:

  • Revenue: $70 million vs analyst estimates of $66.6 million (5.12% beat)
  • EPS (non-GAAP): -$0.04 vs analyst estimates of -$0.06
  • Revenue guidance for Q4 2022 is $69 million at the midpoint, above analyst estimates of $68.2 million
  • Free cash flow was negative $21.4 million, down from positive free cash flow of $12.5 million in previous quarter
  • Gross Margin (GAAP): 61%, up from 58.4% same quarter last year

Founded in 2011 in North Carolina, nCino (NASDAQ:NCNO) makes cloud-based operating systems for banks and provides that software as a service.

Banks are complex to run, heavily regulated and often lag far behind the curve in adopting cloud technologies, instead relying on decades old on-premise software. nCino offers cloud-based software that promises to replace the functionalities of the banks legacy systems, making it easier and cheaper to operate the bank. The company built its software on top of the Salesforce platform and as a result has a very close partnership with Salesforce (CRM).

nCino works as a central system for banks and credit unions allowing them to onboard new customers by offering them loans or checking and savings accounts, all online and in compliance with regulatory requirements. The platform becomes the single central location where all the data about customers and decisions are stored, which improves effectiveness of banking operations and allows banks to offer more personalised services to their clients.

In the age of digital banking, being the only bank with a physical branch in town is not enough of a competitive advantage anymore. Regional and community banks and credit unions are facing increasing pressure to keep up with the offerings of the big banks, but they don’t have the resources or competency to develop the digital solutions in-house. That drives demand for software as a service platforms that allows the small banks to offer the digital services without having to run or maintain them.

Other players with solutions addressing nCino’s fintech niche include Oracle (NYSE:ORCL), Infosys (INFY), and Q2 Holdings (NYSE:QTWO).

Sales Growth

As you can see below, nCino's revenue growth has been very strong over the last year, growing from quarterly revenue of $54.2 million, to $70 million.

nCino Total Revenue

This quarter, nCino's quarterly revenue was once again up a very solid 29.1% year on year. But the growth did slow down a little compared to last quarter, as nCino increased revenue by $3.51 million in Q3, compared to $4.16 million revenue add in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 20.3% over the next twelve months, although estimates are likely to change post earnings.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. nCino's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 61% in Q3.

nCino Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.61 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

Key Takeaways from nCino's Q3 Results

We liked to see that nCino beat analysts’ revenue expectations pretty strongly this quarter. And we were also glad to see good revenue growth. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is flat on the results and currently trades at $59.1 per share.

Is Now The Time?

When considering nCino, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of nCino we will be cheering from the sidelines. Its revenue growth has been exceptional, though we don't expect it to maintain historical growth rates. Unfortunately, its gross margins show its business model is much less lucrative than the best software businesses, and its cash burn raises the question if it can sustainably maintain its growth.

Given its price to sales ratio based on the next twelve months is 18.5x, nCino is priced with expectations of a long-term growth, and there's no doubt it is a bit of a market darling, at least for some. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

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