nCino (NASDAQ:NCNO) Reports Bullish Q2, Next Quarter Sales Guidance Is Optimistic

Full Report / September 01, 2021
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Maker of operating system for banks nCino (NASDAQ:NCNO) reported Q2 FY2022 results topping analyst expectations, with revenue up 36.4% year on year to $66.5 million. nCino made a GAAP loss of $14.2 million, improving on its loss of $14.7 million, in the same quarter last year.

nCino (NCNO) Q2 FY2022 Highlights:

  • Revenue: $66.5 million vs analyst estimates of $63.7 million (4.39% beat)
  • EPS (non-GAAP): -$0.02 vs analyst estimates of -$0.06
  • Revenue guidance for Q3 2022 is $66.5 million at the midpoint, above analyst estimates of $65.2 million
  • The company lifted revenue guidance for the full year, from $259 million to $263.5 million at the midpoint, a 1.73% increase
  • Free cash flow of $12.5 million, up 78.9% from previous quarter
  • Gross Margin (GAAP): 60%, up from 57.8% previous quarter

Founded in 2011 in North Carolina, nCino 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 impressive over the last year, growing from quarterly revenue of $48.7 million, to $66.5 million.

nCino Total Revenue

And unsurprisingly, this was another great quarter for nCino with revenue up an absolutely stunning 36.4% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $4.16 million in Q2, compared to $5.76 million in Q1 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 18.6% over the next twelve months, although we would expect them to review their estimates once they get to read these results.


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, licences, technical support and other necessary running expenses was at 60% in Q2.

nCino Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.60 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 Q2 Results

With a market capitalization of $5.91 billion nCino is among smaller companies, but its more than $399.3 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.

We enjoyed seeing nCino’s improve their gross margin materially this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company is up 1.63% on the results and currently trades at $64.06 per share.

Is Now The Time?

nCino may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. 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. But while its efficient customer acquisition is better than many similar companies, unfortunately its gross margins show its business model is much less lucrative than the best software businesses.

Given its price to sales ratio based on the next twelve months is 21.2, 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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