nCino Updated S1: $22 - $24 Price Range Implies $2.2B Valuation

A few weeks ago nCino filed their initial S1 with the SEC. They’ve since updated that filing to include an expected price range ($22 - $24). In a standard IPO process each company will now kick off their roadshow and spend roughly 10 days traveling the country (and sometimes the world) meeting with large institutional investors (mutual funds and hedge funds) to pitch them on why they should invest in their business at the IPO with a goal of trading on the open market by next Friday (7/17). One thing to keep in mind - most SaaS businesses end up raising the initial price range (>70% of SaaS companies to go public in the last 3 years have provided a revised, increased range at some point on their roadshow).

Let’s dive into the implications of the announced share price range. In the table below you can see implied valuations (post offering market cap) and revenue multiples at different share prices. At the end of this article I’ll explain what each column in the valuation matrix means in greater detail.

Commentary on Implied Multiples

As you can see from the data above, the midpoint of the range implies a forward revenue multiple of roughly 9.5x, assuming a forward growth rate of 35%. For context, nCino grew 50% over the last 12 months. It’s normal to see some decelerating revenue growth at this scale so I’d expect the forward growth to be <50%. We won’t know the exact forward revenue estimates until public research is available a few weeks after nCino starts trading. You can see from my charts below that the median SaaS forward revenue multiple is 13.5x and the median forward revenue multiple for high growth SaaS businesses is 24.2x. The median multiple for the financial services vertical software bucket of companies is 11.7x. So this 9.5x implied multiple comes in at a discount to both the median SaaS multiples and bucket of financial services vertical software companies.

nCino in Context of Other SaaS Businesses

Below I’ve created two different comp buckets for nCino:

1. High Growth SaaS: Datadog, Coupa, Zoom, Bill.com, Okta, Crowdstrike, Docusign, Atlassian, MongoDB and Twilio

2. Financial Services Vertical Software: AppFolio, BlackLine, Temenos, Guidewire, Q2, Black Knight, FIS, Jack Henry and Fiserv

NTM Multiples

It’s clear the company has priced the business to look more like the financial services vertical software bucket. I think this is the right call given the higher levels of professional services (and lower gross margins) of nCino.

LTM Rev

nCino is on the smaller end of public SaaS companies. With $153M of LTM revenue the only smaller SaaS companies are Agora, Bill.com and Sprout Social (Agora went public last week, and Bill.com went public ~6 months ago)

LTM Growth Rate

nCino is growing faster than all of the companies in the financial services vertical software bucket, but in line with high growth SaaS. The overall median LTM growth rate for the entire SaaS universe is 34%. I do think when all is said and done and the company starts trading it will trade with a higher multiple than any of the companies in the financial services vertical software bucket.

Gross Margin

Operating Margin

Valuation Matrix Detail

Column A - Share Price

Column A is simply the share price, and I’ve highlighted the expected price range the company has provided. Most (but not all) of the columns to the right are derived from the share price. I’ve provided a few share prices that are above the range so we can see how things like valuation are impacted with a different share prices.

Column B - Primary Shares Issued

Column B represents the new (primary) shares a company is issuing and selling as part of the IPO. These are shares that did not exist before the offering, and are dilutive to existing shareholders (ie they decrease the ownership of existing shareholders). Primary shares are offered as a way to raise money - the procedes from the sale of these new shares go straight to the companies balance sheet. It’s the same as any fundraising process (Series A, Series B, etc)

Column C - Secondary Shares Offered

As part of an IPO companies can also elect to allow existing shareholders to sell some of their shares. This is not as typical, and is generally a much smaller component of the total IPO size then the primary shares offered. Because no new shares are offered as part of secondary sales this is non-dilutive. The proceeds from secondary sales go directly to the bank accounts of the individuals selling, and the company receives no proceeds from them.

Column D - Primary Dollars Raised

This is simply the result of multiplying the share price by the number of primary shares issued (Column A x Column B), and represents the gross proceeds (proceeds before fees and transaction costs) that the company receives as part of their IPO.

Column E - Secondary Dollars Sold

This is simply the result of multiplying the share price by the number of secondary shares shares (Column A x Column C), and represents the aggregate proceeds that the selling shareholders receive as part of the IPO.

Column F - Total Offering Size

This is typically the headline value you’ll see in articles when reporters are talking about the total size of the IPO. It is calculated by adding the primary dollars raised to the secondary dollars sold (Column D + Column E). It represents the total amount of dollars institutional investors invested into the IPO

Column G - Post Offering Fully-Diluted Shares

This column represents the share count after the offering (and we use this later on to calculate the market cap, or valuation). It is calculated as:

Existing shares pre-offering + New Shares Issued + Dilutive Effect of Options

That last piece (dilutive effect of options) is what makes the share count “fully-diluted.” Without this we’d be looking at the “Basic Share Count.” The reason we do this is that it gives a more accurate picture of the valuation of the company. Once public, you can assume people with “in the money” (strike price is below current trading price) options will exercise them. An option is simply a “contract” that lets individuals buy stock at a pre-determined price. If that pre-determined price is below the current market price you’d buy (exercise) your option to accumulate shares (because it’s cheaper to do that then buy on the open market at the higher price). If the exercise price is above the current market price you wouldn’t buy (exercise) you’re option becasue you’d be better buying at the market price. So, if options are exercised the share count goes up, and we want to include these “shares” in our market cap calculation. In my analysis I’m using the treasury stock method to calculate exactly how many additional shares are created from options. If you’d like to read more about the specifics of the treasury stock method you find details here. At a high level it assumes that all in-the-money options will be exercised - meaning the individuals with the options will buy them at their exercise price. The company receives these proceeds and uses them to buy back existing shares on the market (at existing market prices). The difference between the number of options exercised and the number of shares bought back represents the net new shares added to the share count.

# Options - [# Options x (Exercise Price)] / Share Price

Column H - Post-Offering Market Cap

This is the probably the metric people care most about - the market cap! This represents the valuation that will be listed in almost every article headline. It is calculated by multiplying the share price by the fully-diluted share count (Column A x Column G)

Share Price x Fully-Diluted Share Count

Column I - Post-Offering Enterprise Value

Enterprise value is important to highlight because this is the metric we use when calculating valuation multiples (it is the numerator of multiples). In all of my articles you’ll hear me talk about “revenue multiples” quite frequently. This revenue multiple is really Enterprise Value / Revenue. For cloud and SaaS businesses that are generally not profitable, a revenue multiple is the most common (can’t assign a multiple to a negative figure like profit or FCF as it would imply a negative valuation!). Enterprise Value is calculated as:

Enterprise Value = Market Cap + Debt - Cash

We use enterprise value, and not market cap, for multiples because it gives a more appropriate true value of the business. Think about how an acquirer would value a business they want to buy. Not only would they be acquiring the shares, but they’d also be taking on the liability of the debt, and the benefit of the cash. We add that debt liability, and subtract the cash asset to get to the fair value of the company. To hit this point home - if you acquire a company for $1B, but that company has $900M of cash on the balance sheet (that you as the acquirer would get post acquisition), you are really only paying $100M, which would be the enterprise value.

Column J - Dilution

This column represents the incremental dilution the company takes on as a result of primary shares being sold in the offering. Typically this number is in-between 10%-15%. It is calculated by dividing the primary dollars raised by the eventual market cap (Column D / Column H)

Column K - LTM Revenue Multiple

The LTM revenue is the revenue the company generated over the last year (twelve months). The multiple is simply dividing the enterprise value (Column I) by this LTM revenue figure. Typically companies are valued off of forward revenue estimates, but since we don’t have the exact consensus forward estimates yet I’m also showing LTM

Column L - NTM Revenue Multiple

These three columns represent the implied NTM (next twelve months) revenue multiples at different projected growth rates. Since we don’t know what the exact consensus estimates are I’m showing a range of growth rates, and the multiples at each of these growth rates