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nCino (NASDAQ:NCNO) Beats Q2 Sales Targets, Provides Encouraging Quarterly Guidance


Full Report / September 20, 2022
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Maker of operating system for banks nCino (NASDAQ:NCNO) beat analyst expectations in Q2 FY2023 quarter, with revenue up 49.7% year on year to $99.6 million. Guidance for next quarter's revenue was $103.5 million at the midpoint, which is 1.62% above the analyst consensus. nCino made a GAAP loss of $27.2 million, down on its loss of $14.2 million, in the same quarter last year.

nCino (NCNO) Q2 FY2023 Highlights:

  • Revenue: $99.6 million vs analyst estimates of $97.5 million (2.17% beat)
  • EPS (non-GAAP): -$0.04 vs analyst estimates of -$0.08
  • Revenue guidance for Q3 2023 is $103.5 million at the midpoint, above analyst estimates of $101.8 million
  • The company reconfirmed revenue guidance for the full year, at $402.5 million at the midpoint
  • Free cash flow of $4.86 million, up from negative free cash flow of $3.44 million in previous quarter
  • Gross Margin (GAAP): 58.6%, down from 60% 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.

Consumers these days are accustomed to frictionless digital experiences from online shopping to ordering food or hailing a cab. Financial services firms are notoriously risk averse in adopting modern software, often lacking the resources or competency to develop the digital solutions in-house. That drives demand for software as a service platforms that allows banks and other finance institutions 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 $66.5 million, to $99.6 million.

nCino Total Revenue

And unsurprisingly, this was another great quarter for nCino with revenue up 49.7% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $5.41 million in Q2, compared to $19.2 million in Q1 2023. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates nCino is expecting revenue to grow 47.7% year on year to $103.5 million, improving on the 29.1% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 34.3% over the next twelve months.

Profitability

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 58.6% in Q2.

nCino Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.58 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.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. nCino's free cash flow came in at $4.86 million in Q2, down 61.3% year on year.

nCino Free Cash Flow

nCino has burned through $42.9 million in cash over the last twelve months, a negative 12.6% free cash flow margin. This low FCF margin is a result of nCino's need to still heavily invest in the business.

Key Takeaways from nCino's Q2 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on nCino’s balance sheet, but we note that with a market capitalization of $3.47 billion and more than $86.1 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by the exceptional revenue growth nCino delivered this quarter. And we were also glad to see the improvement in gross margin. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company currently trades at $35 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. Although nCino is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been impressive. But while its efficient customer acquisition is better than many similar companies, the downside is that 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.

nCino's price to sales ratio based on the next twelve months is 7.2x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that nCino doesn't trade at a completely unreasonable price point.

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