nCino: Benchmarking the S1 Data

Recently nCino filed their initial S1 statement. Generally it takes companies ~1 month to start trading from the time the first S1 is filed with the SEC. Over the next couple weeks the company will file an amendment to the S1 with a price range. A S1 is a document companies file with the SEC in preparation for listing their shares on an exchange like the NYSE or NASDAQ. S1 documents are often hundreds of pages long, and include information on the company ranging from general overviews, up to date financials, risk factors to the business, cap table highlights and much more. The purpose of the detailed information is to help investors (both institutional and retail) make investment decisions (and to assure that they meet the regulatory requirements to list their shares publicly). There’s a lot of info to digest, so in the sections below I’ll try and pull out the relevant financial information and benchmark it against recent cloud IPOs (44 in total dating back to Workday’s offering in 2012), and come up with my own valuation target.

nCino Overview

From the S1 - “Cino is a leading global provider of cloud-based software for financial institutions. We empower banks and credit unions with the technology they need to meet ever-changing client expectations and regulatory requirements, gain increased visibility into their operations and performance, replace legacy systems, and operate digitally and more competitively. Our solution, the nCino Bank Operating System, digitizes, automates and streamlines inefficient and complex processes and workflow, and utilizes data analytics and artificial intelligence and machine learning (“AI/ML”) to enable financial institutions to more effectively onboard new clients, make loans and manage the entire loan life cycle, open deposit and other accounts and manage regulatory compliance. We serve financial institution customers of all sizes and complexities, including global financial institutions, enterprise banks, regional banks, community banks, credit unions and new market entrants, such as challenger banks. Our customers deploy and utilize our digital platform, which can be accessed anytime, anywhere and from any internet-enabled device, for mission critical functions across their organizations”

“The nCino Bank Operating System serves a large addressable market opportunity globally as financial institutions make significant investments in IT applications and infrastructure, with demand for cloud-based solutions in banking continuing to grow. According to Gartner, banking had the highest global enterprise IT spending of all industries with approximately $376 billion spent in 2018. Based on our internal analysis and experience, we estimate the current serviceable market for the nCino Bank Operating System to be greater than $10 billion.“

How nCinoMakes Money

nCino makes money both by selling subscriptions to the nCino Bank Operating System and services related to deployments. The initial deployment of the nCino Bank Operating System by their customers requires a period of implementation and configuration services that can range from as little as three months for community banks to over 18 months for global financial institutions. As a result, during the initial go-live period for a customer, professional services revenues make up a substantial portion of their revenues from that customer, whereas over time revenues from established customers are more heavily weighted to subscriptions. While professional services revenues will fluctuate as a percentage of total revenues in the future and tend to be higher in periods of faster growth, over time they expect to see subscription revenues make up an increasing proportion of their total revenues as their overall business grows.

Valuation

Predicting the valuation of pending IPOs is nearly impossible, but it adds to the fun to make predictions! If I’m completely off you can hold me accountable :) In the SaaS / Cloud world companies are always valued off a multiple of their revenue. Generally this is a projected revenue number, and for the purpose of this analysis I will be looking at the projections for 1 year forward revenue, or better known as NTM (next twelve months) projections. When I think about what a company will be worth I first like to look at how other similar public companies are valued. I call this set of companies the “comparable set,” or “comps” for short. To come up with the set of comps I’ll look for companies with similar growth trajectories, margin profiles, or ones who operate in the same vertical. For nCino I’ll look at high growth SaaS (any company with a NTM growth rate >30%), vertical software providers selling predominantly to financial services, and overall SaaS medians. I’ll then look at specific data from nCino (which you can see in the below sections) to make a determination around what type of premium / discount I think they’ll get relative to each of my comps buckets. Below are the median multiples today. Keep in mind we’re sitting at all time high multiples right now, and what nCino ultimately trades at will be relative to what the comps are trading at down the road. For the financial services vertical software bucket I’ve included Q2, Fiserv, FIS, Temenos, Black Knight, Jack Henry, Blackline, Guidewire and AppFolio.

High Growth SaaS: 25x

Overall SaaS Universe: 13x

Financial Services Vertical Software: 11x

Now comes the fun - zero’ing in on a multiple range. In my opinion nCino will not get the high growth SaaS multiple. While they are growing quickly, they’re right on the border of being considered “high growth” and one tier below that. Also, their gross margin profile of 55%, and lower subscription revenue as a percentage of overall revenue (76%) will push their multiple down from this elite bucket. That being said, I do think they’ll trade at a premium to the financial services vertical software providers and overall SaaS universe comps set. Their net retention and gross margin adjusted payback (see below!) are phenomenal / best in class, and these are two metrics I place a lot of emphasis on. While they are loosing money, their operating margin is not quite as negative as most cloud businesses. Their sales and marketing spend as a percentage of revenue is also below average (good thing). Finally, the market opportunity they’re going after is quite large - $10Bn is the number discussed in the S1 (and above), and they have plenty of room to grow into it. Taking all of this in, I think a multiple that isn’t out of the question is Twilio’s multiple of ~18x NTM revenue. Twilio similarly has gross margins in the 50’s and phenomenal net retention and payback. Twilio is growing faster with a slightly better operating margin so I don’t see nCino trading above Twilio. That being said, the market is starved for cloud offerings (ZoomInfo has been the only cloud IPO this year!) so nCino may benefit from increased demand. In the first chart below I’ve shown implied valuations based on the multiples of each comp set, then in the second chart I’ve zeroed in on where I think it will be valued when it starts trading (the highlighted region). For context, nCino grew 50% over the last 12 months. We don’t know the projected revenue figures, so I’ve given a range based on different growth rates

Where I think it will end up:

My current prediction (based on current SaaS multiples) is that nCino will be worth $3-$3.5Bn when it goes public and starts trading!

Benchmark Data

The data shown below is not current data, but data as of each companies IPO. As an example, in the first graph below the LTM revenue for Docusign represents the 4 quarters leading up to their IPO, not the most recent 4 quarters.

If you’d like to see how this compares to current operating metrics / valuations you cna check out my weekly newsletter here

Overall nCino has middle of the pack scale (revenue) and growth, below average gross margins, slightly better than average operating margin, and exceptional unit economics (net revenue retention and gross margin adjusted baypack)

Last Twelve Months (LTM) Revenue

Revenue Growth (YoY Growth of Most Recent Quarter)

Implied ARR (quarterly subscription revenue x 4 in most recent quarter)

ARR Growth (YoY Growth)

% Subscription Revenue

GAAP Gross Margin

Operating Margin

Net Revenue Retention

This metric is calculated by taking the annual recurring revenue of a cohort of customers from 1 year ago, and comparing it to the current annual recurring revenue of that same set of customers (even if you experienced churn and that group of customers now only has 9, or anything <10). 

Gross Margin Adjusted CAC Payback

(Previous Q S&M) / (Net New ARR x Gross Margin) x 12. This metric demonstrates how long it takes (in months) for a customer to pay back the cost at which it took to acquire them. In the chart below I’m taking the average of the 4 quarters leading up to IPO to remove any seasonality out outliers.

ACVs

This number represents the 1 year subscription value of a customer (ie the average subscription revenue each customer will pay in a 1 year time period). It’s calculated by taking the implied ARR (quarterly subscription rev x 4) and dividing by the total number of customers.

S&M % Rev

R&D % Rev

G&A % Rev