Summary
- nCino continues to grow nicely on the top line, including during the most recent quarter.
- While this is great, the company continues to struggle from a profitability perspective.
- Given current pricing, the company looks quite pricey.
Software is undeniably important in the present age. The functionality it can offer is wide-ranging and serves often to reduce costs and time. But not every company can use the same kind of software. Financial institutions, for instance, are different than, say, a manufacturer or automotive company. They have their own troubles that need to be solved. And one company that's dedicated to making the jobs of financial institutions easier is nCino ( NASDAQ: NCNO ). Over the past few years, the financial performance for the company on the top line has been very impressive. Growth for the enterprise continues into the present day. However, the bottom line of the business has been stressed to some degree, with profits and cash flows shrinking year over year. Although it is possible that the company could grow into its valuation, investors will have to take some risk and will need a lot of patience in order to wait that out. Some investors may view the opportunity as worth that wait, but for value investors, the opposite might be true.
A focus on financial institutions
The management team at nCino describes the company as a provider of cloud-based software for financial institutions. For the most part, the company works with banks, credit unions, and independent mortgage banks by providing them with various technologies aimed at making their tasks easier. The company's core solution, the nCino Bank Operating System, works by digitizing, automating, and streamlining inefficient and complex processes and workflow for its customers. It also uses data analytics and artificial intelligence/machine learning in its tasks. All of this is done with the end goal of enabling banks and credit unions to more effectively onboard new clients, make and manage loans, open deposits and other accounts, and manage regulatory compliance.
Although that is the company's core offering, it has recently expanded. In January of this year, the business acquired SimpleNexus, allowing it to offer a digital home ownership platform that unites people, systems, and stages of the mortgage process, all into a seamless end-to-end journey. Using the Nexus Engagement offering, the company can collaborate with borrowers and real estate partners all the way from the pre-application phase in order to provide relationship-building tools like payment calculators, integrated home search, instant chat, and more. Their Nexus Origination service is a mobile-first tool set that improves productivity and reduces cycle times by giving loan officers the ability to manage their own affairs. Nexus Closing, meanwhile, streamlines each financial institution's preferred closing workflow, including for traditional mortgage closings and for fully digital closings. The company even has an incentive compensation feature called CompenSafe that calculates associated compensation for all parties involved.
Over the past three years, the management team at nCino has done a really good job growing the company's top line. Revenue rose from $138.2 million in 2020 to $273.9 million in 2022. That growth has continued into the current fiscal year, with revenue in the first half of 2023 hitting $193.8 million. That translates to a year-over-year growth rate of 50.3% compared to the $128.9 million generated the same time last year. This increase was driven largely by a 55.9% rise in subscription revenues for the company, with that portion of sales climbing from $105 million to $163.6 million. A healthy 38.6% of the increase in revenue the company saw during this time came from existing customers as additional seats were activated in accordance with contractual terms and with customers expanding their adoption of the company's solutions. 12.7% of the rise, meanwhile, was driven by initial revenues from new customers. And the remaining 48.7% of the sales increase came from its aforementioned acquisition. For the second quarter alone, revenue came in at $99.6 million. That compares favorably to the $66.5 million generated the same time last year. It also translated to a revenue beat compared to what analysts anticipated of $2.1 million.
It's really great to see revenue continue to increase at a nice clip. However, the company has paid dearly for that growth. In 2020, the business generated a net loss of $27.6 million. By 2022, the loss had grown to $49.4 million. Other profitability metrics have been similarly negative. Operating cash flow over the past three years has ranged between a negative $19.2 million and a positive $9.2 million. If we adjust for changes in working capital, the range would have been from negative $25.7 million to negative $5.4 million. Meanwhile, EBITDA for the company also deteriorated, going from negative $23.6 million to negative $51.3 million over the past three years.
The picture so far for 2023 looks even worse, with a net loss in the first half of the year totaling $57.9 million. That dwarfs the $28.7 million loss achieved the same time last year. Some of that year-over-year weakening came from the second quarter as well, with a net loss of $27.2 million coming in worse than the $13.7 million loss generated the same time one year earlier. On a per share basis, the company generated a loss of $0.25, missing analysts' expectations by $0.03 per share. But if we were to look at the adjusted figures for the company, the loss would have been $0.04 per share, beating expectations by that same amount. As the chart above illustrates, this increase in bottom line pain was not confined to the company's net income only. Operating cash flow and EBITDA also worsened year over year. The only figure that did not was operating cash flow if we were to remove changes in working capital from the equation. For the first half of the year, that metric dropped from negative $6.7 million to negative $5.2 million, while for the second quarter alone, it went from negative $3.5 million to negative $0.1 million.
When it comes to the 2023 fiscal year as a whole, management expects revenue of between $401.5 million and 403.5 million. At the midpoint, that would translate to a year-over-year improvement of 47%. Adjusted earnings per share should be between negative $0.17 and negative $0.19. And no guidance was given when it came to other profitability metrics. Unfortunately, we can't really value a company like this. But what we can do is determine what kind of cash flows would be necessary in order for the firm to be fairly valued. In the chart below, you can see a hypothetical scenario where I looked at price to operating cash flow multiples and EV to EBITDA multiples of 10, 15, and 20. As you can see, the amount of cash flow the company would need to generate is significantly removed from what the company has achieved in its lifetime. The firm could very well get to the point of generating these cash flows. But based on the trajectory seen across earnings, adjusted operating cash flow, and EBITDA, that could take many years to achieve.
Takeaway
The data available right now suggests to me that nCino is a rapidly growing enterprise that will almost certainly continue to expand for the foreseeable future. The company provides a very important service to its customer base and the expansion in sales over that timeframe is proof that the service is worthwhile. However, the business continues to generate significant net losses and cash outflows. So much so that you can't really value the firm at this moment. But what we can say is that, while the company likely will grow into its valuation in time, that wait could be rather significant.
For further details see:
nCino Q2 2023 Earnings: Strong Growth Is Nice, But Work Is Needed On The Bottom Line