nCino (NASDAQ:NCNO) Beats Q2 Sales Targets But Quarterly Guidance Underwhelms

Full Report / August 29, 2023

Maker of operating system for banks nCino (NASDAQ:NCNO) reported results ahead of analysts' expectations in Q2 FY2024, with revenue up 17.7% year on year to $117.2 million. The company also expects next quarter's revenue to be around $120.5 million, slightly below analysts' estimates. nCino made a GAAP loss of $16.1 million, improving from its loss of $27.4 million in the same quarter last year.

nCino (NCNO) Q2 FY2024 Highlights:

  • Revenue: $117.2 million vs analyst estimates of $115 million (1.96% beat)
  • EPS (non-GAAP): $0.09 vs analyst estimates of $0.07 ($0.02 beat)
  • Revenue Guidance for Q3 2024 is $120.5 million at the midpoint, below analyst estimates of $121.4 million
  • The company very slightly raised its revenue guidance for the full year, it is $476.8 million at the midpoint (in line with expectations)
  • Free Cash Flow of $11.1 million, down 62.3% from the previous quarter
  • Gross Margin (GAAP): 59%, in line with the 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 very strong over the last two years, growing from $66.5 million in Q2 FY2022 to $117.2 million this quarter.

nCino Total Revenue

This quarter, nCino's quarterly revenue was once again up 17.7% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $3.56 million in Q2 compared to $4.49 million in Q1 2024. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.

Next quarter's guidance suggests that nCino is expecting revenue to grow 14.4% year on year to $120.5 million, slowing down from the 50.3% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 15.7% over the next 12 months before the earnings results announcement.


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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 59% in Q2.

nCino Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.59 left to spend on developing new products, sales and marketing, and general administrative overhead. nCino's gross margin is poor for a SaaS business and we'd like to see it start improving.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. nCino's free cash flow came in at $11.1 million in Q2, up 128% year on year.

nCino Free Cash Flow

nCino has generated $4.76 million in free cash flow over the last 12 months, or 0.58% of revenue. This FCF margin stems from its asset-lite business model and enables it to reinvest in its business without depending on the capital markets.

Key Takeaways from nCino's Q2 Results

Sporting a market capitalization of $3.25 billion, nCino is among smaller companies, but its more than $98 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.

It was encouraging to see nCino narrowly top analysts' revenue and adjusted EPS expectations this quarter. That really stood out as a positive in these results. On the other hand, its revenue and non-GAAP operating profit guidance for next quarter underwhelmed. Full year guidance was very slightly raised and roughly in line with expectations. Overall, this was a mixed quarter for nCino, but there were no major surprises. The company is down 1.56% on the results and currently trades at $29 per share.

Is Now The Time?

When considering an investment in nCino, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We cheer for everyone who's making the lives of others easier through technology but in case of nCino, we'll be cheering from the sidelines. Its revenue growth has been strong, 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.

Given its price to sales ratio based on the next 12 months is 6.4x, nCino is priced with expectations of a long-term growth, and there's no doubt it's 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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