2022 was tough on tech stocks, and the cloud-based banking technology company nCino (NCNO -0.91%) wasn't spared, with shares trading down more than 56% so far this year.
While the stock is down significantly, nCino's business continues to report strong quarterly results and show that its products are resonating with financial institutions -- both large and small -- that understand the need to digitally transform their operations.
Although nCino's clients are dealing with a worrying economic outlook that creates headwinds for the company, I still think it is well-positioned to succeed long term. Here's why.
nCino's products are still resonating
nCino developed core banking technology that financial institutions can use to automate their operations and speed up workflow, which drives efficiency through lower expenses and higher revenue. The company's solutions include automated spreading, which is software that can quickly pull certain information from an applicant's financial documents, speeding up the loan application of a borrower and removing a lot of manual labor in the process.
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It also sets up full loan origination systems for banks that allow them to oversee loans from start to finish, from onboarding to account opening to approval, and can be applied to both commercial and retail loans. In addition, nCino previously acquired the company SimpleNexus, a digital mortgage origination platform that is being used by at least 35 of the top 100 mortgage lenders. nCino also has lots of analytical tools banks can take advantage of to assist with pricing discovery and identify new opportunities for growth, as well as monitor credit trends.
Many banks, which have used old legacy technology for decades, are realizing that systems like nCino's are crucial if they are going to be nimble enough to serve modern-day customer needs.
During the company's most recent quarter, it announced a new deal with Bank of New Zealand, one of the country's largest banks, to use nCino's bank operating system. It also took its first German customer live and continued to get banks in the Asia-Pacific region up and running as well. nCino signs multiyear deals with customers and uses a land-and-expand model, meaning as customers increase their usage of its products they pay more.
Dealing with the headwinds
With many bank executives worried about a looming recession and normalizing credit costs from loan losses, they might be wary to make a big digital investment that will require not just money but also time and other resources to get employees up to speed and trained.
nCino CEO Pierre Naudé said on the company's most recent earnings call that "against the backdrop of macroeconomic and geopolitical uncertainty, we are seeing a more measured buying environment and increased executive scrutiny on purchasing decisions, particularly in Europe, which extend sales cycles and the time required to close deals."
Additionally, nCino's SimpleNexus business is facing headwinds because the mortgage market is struggling with higher interest and banks laying off mortgage bankers.
But in the third quarter of nCino's fiscal year 2023 (ended Oct. 31), the company still reported more than $105 million of revenue, including a record $88 million of subscription revenue. Remaining performance obligations, which represent contract revenue that has not yet been recognized, grew by 18% organically.
The company is not yet profitable and lost more than $80 million over the last three quarters, but that includes a lot more spending on research and development. nCino did, however, deliver an adjusted operating margin of 2% in the third quarter, which is much better than in prior years.
Finally, management guided for subscription revenue of as much as $91 million and total revenue of as much as $105 million for the fourth quarter of its fiscal year 2023, which ends Jan. 31. The guidance implies subscription revenue growth of 44% year over year and roughly 28% organic subscription growth.
Good product market fit
Like many other businesses, nCino could face some headwinds headed into next year as banks tighten their belts and get more conservative when it comes to new investments. But I think almost every bank would agree that having the right cloud-based technology in place to leverage data and better serve their customers is now a necessity.
Investors will naturally want to see nCino improve its bottom line, but I believe as its products and services continue to resonate with financial institutions globally, the company will eventually be able to scale to profitability.
