NCNO - nCino Contends With Multiple Industry Headwinds In 2023

2023-04-17 17:31:45 ET

Summary

• nCino, Inc. provides modern software solutions for legacy banks looking to improve their customer-facing offerings.
• The firm has reduced its revenue growth outlook for the rest of the year and faces the twin challenges of the recent regional banking crisis and mortgage industry contraction.
• Given these challenges and the firm's ongoing substantial operating losses, I'm on Hold for nCino, Inc. in the near term.

A Quick Take On nCino

nCino, Inc. ( NCNO ) provides updated cloud software solutions to legacy financial institutions seeking to modernize their customer-facing offerings.

A few of its banking customers were involved in the recent bank failures.

Given the recent banking crisis and likelihood for more bank failures, a continued "higher for longer" interest rate environment harming independent mortgage FIs and the company's ongoing operating losses, my outlook for NCNO is Neutral [Hold].

nCino Overview

Wilmington, North Carolina-based nCino, Inc. was founded to develop cloud-based financial software to assist financial institutions in serving their customers in an efficient and modern manner.

Management is headed by president and Chief Executive Officer Mr. Pierre Naude, who has been with the firm since its founding and was previously Divisional President of S1 Corporation and Vice President and Managing Partner of Unisys.

nCino's partners include:

• Consulting Partners - Large and medium sized consultants

• Technology Partners - Financial technology providers.

The company's primary offerings include:

• Deposit account opening

• Commercial loan origination

• Retail loan origination

• Auto loan decisioning

• Document management

• SBA

• Collateral management

• Specialty lending and administration.

nCino's Market & Competition

According to a 2019 market research report by Gartner, the global market for financial institution IT spending was $63 billion in 2018, of which 29%, or about $18 billion, was for vertical-specific software.

Gartner also estimates that the demand for cloud-based delivery of software to financial institutions will grow at a CAGR of 17% from 2018 to 2023, reaching $29 billion in total value by the end of 2023.

Also, management commissioned a study by Grata that estimated the firm's serviceable market at more than $10 billion.

The breadth and depth of nCino's offerings may give it an advantage in a market where vendor bloat may be seen as a negative due to increasingly complex integration overhead.

nCino's Recent Financial Trends

• Total revenue by quarter has grown steadily, as shown in the chart below:

• Gross profit margin by quarter has varied within a narrow range:

• Selling, G&A expenses as a percentage of total revenue by quarter have been rising in recent quarters:

• Operating income by quarter has remained materially negative:

• Earnings per share (Diluted) have remained negative, although improved in recent quarters:

(All data in the above charts is GAAP.)

In the past 12 months, NCNO's stock price has fallen 37.5% vs. that of the iShares Expanded Tech-Software ETF's ( IGV ) drop of approximately 6%, as the chart indicates below:

The company experienced elevated churn from independent mortgage banks as the mortgage industry underwent severe contraction due to sharply rising interest rates.

For the balance sheet , the firm ended the quarter with $82.0 million in cash and equivalents and only $30.0 million in total debt.

Over the trailing twelve months, free cash used was $34.3 million, of which capital expenditures accounted for $18.9 million.

The company paid $50.2 million in stock-based compensation in the last four quarters, the highest trailing four-quarter result, so management has been ramping up the stock-based compensation, diluting equity shareholders in the process.

Valuation And Other Metrics For nCino

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

NCNO's most recent GAAP Rule of 40 calculation was 36.3% as of FQ4 2023's results, so the firm has performed reasonably well in this regard, per the table below:

(Source - Seeking Alpha.)

Future Prospects For nCino

In its last earnings call ( Source - Seeking Alpha ), covering FQ4 2023's results, management highlighted its diversified customer base, which it believes makes the firm more resilient to a potential downturn due to the recent bank crisis at a few of its customers.

While the firm sees continued interest from legacy banks in modernizing their customer-facing infrastructure, it is seeing longer sales cycles more recently as banks scrutinize their proposed technology outlays.

Looking ahead, for the full fiscal year 2024, management expects approximately $480 million in total revenue, which if achieved, would represent growth of approximately 17.6% year-over-year.

This would be significantly lower growth than the previous year's result and I'm not convinced the company will achieve even this lowered growth rate estimate.

Regarding valuation, the market is valuing NCNO at an EV/Sales multiple of around 6.9x.

The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.3x on March 30, 2023, as the chart shows here:

So, by comparison, NCNO is currently valued by the market at a premium to the broader Meritech Capital SaaS Index, at least as of March 30, 2023, although that multiple has dropped materially since the last quarter.

The primary risk to the company's outlook is a likely macroeconomic slowdown or recession, especially among small and regional banks, which may accelerate new customer discounting, produce slower sales cycles and reduce its revenue growth trajectory.

Given the recent banking crisis and likelihood for more bank failures, a continued "higher for longer" interest rate environment harming independent mortgage FIs and the company's ongoing operating losses, my outlook for nCino, Inc. is Neutral [Hold].

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