There's some discussion in this thread about the less-sexy corners of the market that are getting eaten by software. What I'm wondering about is whether these corners yield the incredible levels of profitability that we've seen in the past from the tech industry. In other words, with something like Facebook, once the basic product was operational, every additional million of users came with negligible acquisition costs. With something like SAP, every new customer requires a gargantuan integration effort.
So what I'm curious about is this: It might be true that there is a long tail of industries that remains to be eaten by software, but do we expect the software in those industries to be as scalable as it has been in "tech"?
While subscription revenues almost double every year since 2018. This is also highlighted in their risk factors.
What this indicates is that the deployment of such software still needs significant human touch.
Based on the services revenues and the sales expenses, I am hazarding a guess that nCino is a high touch businesses requiring significant sales professionals.
Which is why, it is key to understand customer retention in such businesses. From what I see, they have a 147% subscription revenue retention rate. That might be a proxy to customer retention but I'll try to get their actual customer retention numbers to be on the safer side.
Overall, yes this is no Facebook or Google. The risk section of S1 is very good and the founders are pretty candid about what the investors are up for.
1) The growing divergence between the subscription and PS revenues strongly imply that a "land & expand" model is prevelant (2018 1.9x, 2019 2.3x, 2020 2.95x) where they are able to push subscriptions up 21-28% post-deployment.
2) PS margins were 9%-10% in 2018 and 2019, and then dropped to 5.4% in 2020. Good to know that management continues to view PS as a sales enabler that pays for itself (i.e. break even or at least single-digit margin) executing their primary mission to drive high-margin subscriptions.
Valid points. Land and expand is a great moat to have. Couple of other interesting points
Their contracts are non-cancellable 3 to 5 year contracts. So retention is almost guaranteed and in banks, beyond 5 years no one bothers to change the status quo. So this is a significant factor when it comes to predicting future revenue potential and profit potential.
On the costs front, hey have to pay a part of the subscription revenue to Salesforce. However, this cost grows linearly in proportion to revenue. The ratio has remained same throughout 3:1 (almost)
I was dating someone who worked at nCino as a support engineer, they absolutely are keeping most of their customer base by just providing tech support help to the managers at the banks that have problems clicking shortcuts. It's not too unsimilar to a company like ESRI, except their product is built on Salesforce and not nearly as widely needed as Arc.
Also something to keep in mind is this is selling to large financial institutions, not small businesses. They have 290 customers, who each pay pay ~$480K/year on average in subscription revenue. nCino doesn't need millions of customers, so its sales and support model is built to attract and retain a relatively small number of customers. It's common with large enterprises to see a decent amount of professional services revenue because keeping your existing customers happy is paramount, since churn matters a lot more at these contract values and customer acquisition is a longer process that goes through procurement, bureaucratic red tape, longer implementation, etc.
So what I'm curious about is this: It might be true that there is a long tail of industries that remains to be eaten by software, but do we expect the software in those industries to be as scalable as it has been in "tech"?