IPO Preview: nCino Rolls Out Plans For U.S. IPO

IPOStreet

nCino (NCNO) intends to raise $100 million in an IPO of its common stock, according to an S-1 registration statement.

The firm provides a suite of cloud-based software tools to banks and credit unions in the U.S.

NCNO is growing revenue quickly and making progress toward operating breakeven as it expands in a growing industry.

I’ll provide an update when we learn more about the IPO from management.

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

Management is led 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.

Below is a brief overview video of the firm's product offerings:

Source: nCino

nCino’s partners or major customers 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 has received at least $288 million from investors including Insight Partners, Salesforce (CRM), and Wellington Management.

The firm sells multi-year, non-cancellable subscription contracts on a direct sales basis.

NCino markets its offerings on what is called a 'land and expand' basis, where a sale is made for a limited set of software tools and the firm seeks to expand its sold offerings within the financial institution as it produces successful outcomes in the first implementations.

Sales & Marketing expenses as a percentage of total revenue have been dropping as revenues have increased.

The Sales & Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales & Marketing spend, has risent to 1.2x in the most recent reporting period.

The firm’s ACV-based retention rate by year is shown in the chart below:

ncinocontractretention

Source: Company registration statement

The most recent full year cohort, that of 2019, indicates an ACV-based net retention rate of 118%. Anything over 100% is considered good, since that shows negative net churn, at least based on the annual contract value to the firm.

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 results can be summarized as follows:

  • Sharply growing topline revenue
  • Increasing gross profit and gross margin
  • Operating losses but reduced negative operating margin
  • Increasing cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

ncinopl

Source: Company registration statement

As of January 31, 2020, nCino had $91.2 million in cash and $78.5 million in total liabilities.

nCino intends to raise $100 million in gross proceeds from an IPO of its common stock, although the final amount may differ.

Management says it will use the net proceeds from the IPO to ‘obtain additional capital to support further growth in our business. We intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital and capital expenditures such as additional office facilities.

Management’s presentation of the company roadshow is not yet available.

Listed bookrunners of the IPO are BofA Securities, Barclays, KeyBanc Capital Markets, SunTrust Robinson Humphrey, Piper Sandler, Raymond James, and Macquarie Capital..

Commentary

nCino is seeking public expansion capital as it seeks to continue its growth in a modernizing financial institution market.

The company’s financials indicate very strong and sustained topline revenue growth and reduced operating losses as NCNO appears to be making a move toward operating breakeven.

However, cash used in operations is increasing, leading me to wonder as to the degree of progress.

Sales & Marketing expenses as a percentage of total revenue is dropping as revenues have been increasing; its Sales & Marketing efficiency rate has risen, also a good sign.

The firm’s annual contract value retention rate was 118% in the most recent calendar year, a good result indicating its sales & marketing efforts are efficient and there is good product market fit.

The market opportunity for helping U.S. financial institutions modernize and digitize their operations and marketing is large and expected to grow considerably in the years ahead, so the firm has enviable industry prospects in its favor.

BofA Securities is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 36.8% since their IPO. This is a top-tier performance for all major underwriters during the period.

I’ll provide an update when we learn management’s pricing and valuation assumptions.

Expected IPO Pricing Date: To be announced.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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