nCino, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

nCino, Inc. is a cloud-based software provider focused on the financial services industry, offering solutions for streamlining operations, automating processes, and enhancing customer experiences.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: nCino provides cloud-based software solutions, primarily focusing on the financial services industry. Their offerings encompass banking, lending, and compliance tools. nCino’s strategy revolves around delivering a unified platform for financial institutions to manage their operations and provide a better experience for their customers.

Revenue Streams: nCino generates revenue through subscription and professional services. Subscription revenues are recurring and provide consistent income, while professional services are tied to implementation, training, and other similar requirements of client software integrations.

Subscription revenues consistently form the major portion of the company’s total revenue.

Industry Trends: The financial services industry is undergoing a rapid digital transformation, as customers increasingly expect digital-first experiences. There is a growing need for financial institutions to streamline their processes, improve efficiency, and maintain compliance. The ongoing shift to cloud solutions in banking, along with increased focus on data security and analytics, should provide favorable tailwinds to the company.
Margins: nCino has experienced high gross margins as it is a SaaS-based company. However, its operating margins are negative due to significant investments in sales, marketing, and research & development (R&D). Gross profits has been stable around 60% in recent times. While the company has not been profitable, its margins have been quite good in recent years. Operating expenses are primarily focused on sales and marketing as a percentage of revenue. In the near future management has clearly indicated their main priority is not profitability but growth, especially increasing the recurring subscriptions.
Competitive Landscape: nCino operates in a competitive market, with several competitors offering various solutions for different aspects of financial operations. Competitors range from larger tech companies to smaller niche software providers specializing in specific areas. However, no other company really offers the same integrated model as nCino.
What Makes nCino Different: nCino differentiates itself with an end-to-end platform that streamlines multiple areas of banking operations, including originations, customer relationship management, and document management. In addition, nCino’s specialized approach specifically for the financial services industry is a unique advantage, since the company has detailed knowledge of the financial sector. As a new trend of AI development becomes more prominent, nCino will incorporate AI driven tools in the near future as it enhances its platform, but it is not particularly differentiated on the AI front.

Recent Developments * There was a recent earning call where nCino management outlined the company’s Q4 fiscal year 2024 and the full 2024 year results. * Subscription revenues for fiscal year 2024 rose 17% to $406 million year-over-year. Management reported that while the environment is challenging, they are still able to achieve high revenue growth compared to their peers. * In the latest quarter, recurring subscription revenue accounted for 85% of total revenue. The professional services revenue accounted for the rest, indicating the strength of the subscription business. In recent years they have been increasing focus on recurring revenue compared to professional services. * They expect the subscription revenues to be between $451-$455 million and total revenue between $521-525 million in fiscal year 2025. * The company continues to invest significantly into research and development at 28% of revenue, showing the company’s commitment for continued innovation and improved product offerings. As management has indicated, their core focus is on growth and market share at the moment rather than immediate profits, which is expected given the stage of development that the company is in.

Financial Deep Dive nCino’s financials are characterized by a recurring revenue model, but currently a net-loss due to large investments in growth and technological innovation.

Income Statement: The company is showing excellent subscription revenue growth along with increased gross profits in recent years. The sales and marketing spend is about 70% of the revenue, however, this has reduced somewhat over time. R&D is consistently maintained above 25% of revenue, and is a very large expense for the company. It is apparent that the company is spending a lot on R&D and sales to create value and generate growth, but profitability is not a priority at this point. It’s important to note that their revenue is also impacted by foreign currency exchange rates.
Balance Sheet: They have a good liquidity position, with strong cash reserves and limited debt. As of the latest quarter, they have $102 million in cash and cash equivalents and about $23 million of debt, suggesting their low reliance on debt financing. They have seen continuous growth in assets and equity. The liability structure is mostly made of customer deposits. The shareholders equity continues to grow.
Cash Flow: The company has had consistent negative cash flows over the last few years, primarily due to the losses the company has incurred. However, the cash burn has been decreasing in recent years. The company expects to get cash flow positive in the near future by lowering operating costs while improving efficiency and revenue.

Moat Analysis: 3 / 5 nCino’s moat is mainly derived from a combination of factors, including:

Customer switching costs: The company’s platform is deeply embedded into the clients day to day operations, making it hard for customers to switch away without incurring substantial disruptions. If all of a company’s operation is tied to a particular system, the cost and time to switch is tremendous, and as the business scales and more aspects of the business are integrated into the software, the lock in grows stronger.
Intangible assets: While nCino’s brand is not highly recognized outside the banking sector, its specialization and focus on solutions specific to the financial sector have led to a good reputation in the sector, providing a degree of pricing power. The company benefits from its relationships with a number of financial institutions and with the Salesforce Ecosystem.
Network effects: The company benefits from the direct network effects due to its partnership with Salesforce (which increases the number of potential users). The more companies that start using the platform, the better this value proposition will become for all banks, making it harder for a competitor to come and establish themselves.

Although their moat is defensible, it is vulnerable to the following:

Competition: While it is clear that nCino is a leader in this field, the competition is not going to remain idle. Competitors might improve their solutions, and smaller and more efficient startups might try to attack certain parts of their market. New, more innovative entrants with better value propositions could chip away at the moat.
Tech Change: The rapid technological advancements in AI could render certain parts of the company’s value proposition irrelevant. The company needs to stay ahead in the game to always incorporate the latest technological advancements into their solution.
Dependency on Partnerships: As nCino relies on its partnership with Salesforce to operate its platform, any changes in that alliance could have adverse impacts on the company’s performance.

Risks and Resilience:

Risks:
- Dependence on Salesforce Ecosystem: The reliance on Salesforce’s platform can be a double-edged sword, limiting the company’s flexibility and making it susceptible to any adverse changes in that ecosystem.
- Sales Cycle Length and Customer Concentration: Due to its business model, nCino usually deals with big financial enterprises. This means it has less access to small customers and a long sales cycle before a deal is actually finalized. The financial strength of few large customers might be a significant risk if a company loses some of them.
- Unprofitability: The company has been consistently loss-making and depends on future growth to become profitable. If the growth cannot be maintained and operating costs aren’t reduced, the company might run into trouble.
- Rapid Technology Changes: The tech industry changes rapidly. It could mean that more innovative solutions that might come from others can change the competitive environment and also put pressure on the company’s revenue structure.
Resilience:
- Recurring Subscription Revenue: The high percentage of recurring revenue indicates that their business model is relatively resilient. Also, if the company maintains its customer lock-in, it may be very hard for competitors to take market share from the company.
- Strong Cash Position: The company’s healthy balance sheet and significant cash resources provide a buffer against short-term downturns.
- Strong Leadership: The company’s leadership team has a deep understanding of the sector and continues to drive product development.

Understandability: 3 / 5 nCino’s business is moderately easy to understand due to its focus on a specific industry niche and cloud-based software solutions. However, the complexity of the financial sector and the nuances of the company’s product platform can make it slightly difficult for the average investor to appreciate the entire business model.

Simple concept - Banking software for banking companies.
Business model easy to understand - recurring subscriptions.
Financials complicated due to non-profitable nature and large acquisitions.
Reliance on partner companies adds another layer of complexity

Balance Sheet Health: 4 / 5 nCino’s balance sheet is in good condition.

Strong cash position with low reliance on debt.
Shareholders equity is increasing
Asset growth.
Limited goodwill and intangible liabilities.

Summary nCino has strong underlying potential for long-term growth because of high switching costs and network effects from Salesforce relationship, but it requires very careful watch because of significant financial risk and limited profitability. For the moment this is still a speculative bet, but may prove to be an excellent long term investment.

In the next 1-2 years it is important to focus on metrics such as:

Increase in subscription numbers
Revenue growth rate
Operating expense management
Effect on AI adoption