IPO Launch: nCino Proposes Terms For $175 Million IPO

IPOStreet

nCino (NCNO) has filed to raise $175.4 million from the sale of its common stock in an IPO, according to an amended registration statement.

The company provides a variety of cloud-delivered software technologies to financial institutions seeking to modernize their onboarding, loan origination and account opening systems.

NCNO has produced a strong revenue growth rate, is making a path toward profitability, has low operational cash burn, high dollar-based net retention rate and strong industry prospects, and the IPO appears reasonably valued, although not cheap.

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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 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.

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 risen 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.

NCNO intends to sell 7.625 million shares of common stock at a midpoint price of $23.00 per share for gross proceeds of approximately $175.4 million, not including the sale of customary underwriter options.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $2.0 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 8.55%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds ‘for general corporate purposes, including working capital and capital expenditures such as additional office facilities.’

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

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

Commentary

nCino is seeking an IPO transaction to fund its overall expansion plans, of which management has provided little in the way of detail.

The firm’s financials indicate continued strong revenue growth, high gross margin that is typical of software companies and a significant turn toward operating breakeven, although the firm is still some distance away from that milestone.

Cash flow from operations is negative, but not unmanageably so.

Sales and marketing expenses as a percentage of total revenue have dropped as revenues have increased while its efficiency rate has increased, both positive operating signals.

NCNO’s dollar based net retention rate was 118% in the most recent period. A figure above 100% is considered good as it shows the firm is adding revenue from the same cohort which also indicates good service / market fit and a working ‘land and expand’ strategy.

The market opportunity for vertical IT software in the financial space is expected to grow markedly in the coming years, so the firm has strong industry dynamics 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 39.6% since their IPO. This is a top-tier performance for all major underwriters during the period.

Management is asking IPO investors to pay an Enterprise Value / Revenue multiple of 12.81x.

While not cheap, given the firm’s revenue growth rate, path toward profitability, low cash burn, high dollar-based net retention rate and strong industry prospects, the IPO appears reasonably valued.

My opinion on the IPO is a BUY at up to $23.00 per share.

Expected IPO Pricing Date: July 14, 2020.

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 in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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