Nuix Limited (NXL) Earnings Call Transcript & Summary

I'm joined on this call today by our CFO, Stephen Doyle, who will speak in a little while. I'm sure many of you have seen this morning's release to the ASX and the aim of this call is to provide the opportunity for some Q&A after our initial remarks. We have now closed out our third quarter and analyzed the impact on Nuix' fourth quarter and the full year forecast. As we have previously stated, we wanted to be as informative and transparent as possible with the market and our investors in a timely manner. Following our usual deep dive on the business and the outlook post the end of the quarter, we have determined that we should update the Nuix full year forecast to a range between $180 million and $185 million, down from the previous forecast of $193 million. Operating expenditures continued to be well controlled and are anticipated to offset the lower revenues anticipated for the full year, with EBITDA coming in above our prospectus forecast. I'll now provide some background to the reasons for this change. Firstly, as many of you are aware, we use a run model to describe our statutory revenue. Renewals, the basis of ARR, if you will, upsell additional capacity for existing customers and new being net new customers beginning their journey with Nuix. I'm pleased to reaffirm we are on target to achieve our renewals and continue to win new enterprise deals with blue-chip customers in all markets, and Stephen will provide some more colors and more detail on that later. During our first half results call, we noted the challenge to increase upsell significantly in our second half in order to reach our full year forecast at the time. Quarter 3 gave us some important insights in and around our upsell, particularly from conversations with many clients, including some of our largest, regarding their intentions to buy additional software, i.e., upsell and the timing of those decisions. Over the last few weeks, we've noted a couple of key trends. Firstly, the recovery in new case work, if you will, or matters and working through the COVID backlog that exists in law firms and in the court and within our advisory and service provider clients was not going to drive the increase in capacity upsell, if you will, again, previously forecast from our pipeline. But on the positive side, these conversations influenced our clients to assess more critically a shift to consumption models. Now consumption models talk to gigabytes processed through the Nuix Engine or software-as-a-service, which we use for our eDiscovery review product. So as to align their work, if you will, to more closely to license usage. This shifting informs the variance from our earlier forecast on upsell. However, the adoption of consumption models accrues future benefits over a simple pay-for-use model because Nuix consumption licenses require a client to a minimum commitment over the term and an annualized payment for any overages that they incur. So increasing consumption or software-as-a-service orders and revenue is, therefore, a positive for Nuix. In addition, I want to speak to multiyear deals, a key part of our business. As we outlined at the half 1 results briefing, multiyear deals as a percentage of revenue in half 1 were 23% of revenue, which was against an initial forecast in the prospectus of 15%. This is a strong indicator of clients' confidence and trust in Nuix and for clients' certainty in their ongoing license cost over this term. However, it does create lumpiness in Nuix' statutory revenue. This trend of strong multiyear deal flow continues, particularly in the corporate domain or corporate sector where several new clients that have signed year-to-date have included multiyear commitments across subscription, consumption and software-as-a-service. Well, we're sort of calling sort of a hybrid model where some of their data is behind the firewall, hosted, consumption and some of it's in a software-as-a-service model. As we previously discussed, a key pillar of our strategy is to offer customers choice in how they consume Nuix. This is a competitive advantage to us. Many of the new business deals were software-as-a-service consumption-based and indeed, creates a positive trend for Nuix. Overall, new customer revenue is up over the prior comparable period and average order size has grown significantly. Given the impact of month-to-month revenue with annual commitments on multiyear deals, it results also in changes to the ACV profile, which Stephen can talk to as well. I want to finish my talk on our comments by emphasizing how new customer growth is very strong. Our franchise of customer brands is second to none, and our confidence in the business, therefore, remains very strong indeed. In fact, the engineering and product teams will add some significant additional capacity this quarter to accelerate some exciting new developments as we move more of our solutions, including the Nuix Engine to a cloud infrastructure. We also have a very active pipeline of M&A to bring new technology and use cases to our customers, and we look forward to talking to you more about that in the future. I now hand over to Stephen to provide further detail on our forecast, and at the end of his comments, we'll open up for some time for questions. Thank you.

Thanks, Rod, and good morning to everyone. Thanks for joining us. Let's just jump off the springboard into some prepared financial remarks. And as Rod said, we'll cover those off pretty quickly before we go to open Q&A. As you know, our business operates on a run model as Rod spoke to, renewals, upsell and new. Year-to-date renewal rates are high. They're in the high 90s, and we are forecasting attaining the prospectus forecast for renewals. Year-to-date new business revenue was on track. It's at $19.3 million versus the $29 million prospectus forecast, and we are forecasting attaining the prospectus forecast for new. We will not attain the upsell prospectus forecast, as Rod just discussed. This is the reason for the statutory revenue decrease of $8.5 million to $13.5 million, and the ACV decrease of $22 million to $29 million. What's the reason for not attaining upsell prospectus forecast? Quite simply, the migration of customers to consumption and SaaS is happening faster than expected. When customers migrate off all you can eat fixed-price contracts, there can be a natural downsell first. This is followed by recalibration period where usage increases and then upsell follows, which is now under the new contract, accordingly paid for. Why are customers migrating faster than expected? Customers see Nuix as a logical choice as they embark on their cloud journey at their own pace, they penetrate new markets that they may not otherwise been in or support it, and they seek to align their investment to Nuix to match their consumptions' consumption patterns and/or they adopt our Discover product for reviewing and analyzing customer data. So what are the consequences to revenue, ACV and EBITDA? Well, having less upsell from our customer base impacts both stat rev and ACV but in different manners. It's worth mentioning again, when customers migrate off all you can eat fixed-price contracts there can be natural downsell first. For stat rev, the downsell has been offset, as Rod mentioned, by continued strong multiyear deals in our year-to-date results. However, for ACV, the consequences are most pronounced since the data consumption run rate uptick has not yet come to fruition. And as you know, the last month's run rate x12, is used to calculate ACV. That is why you see an $8.5 million to $13.5 million reforecast for stat and a more material $22 million to $31 million reforecast for ACV. In summary, the stat rev range is $180 million to $185 million, down from $193.5 million and the reforecasted ACV range is $168 million to $177 million, down from $199 million. On a positive note, EBITDA pro forma forecasted range has been revised up from $63.6 million to a range of $64.6 million to $65.6 million. Some concluding remarks for consideration. The migration of our customers to consumption and coming off fixed-price contracts is a positive trend. However, it requires some courage and patience because of the short-term headwinds that are created to revenue. Whilst we've not yet seen the uptick, we are confident as customers progress on the consumption in cloud journey at their own pace, we will see upsell return to well-established historical run rates. Zoey, would you please open the floor for questions, please?

[Operator Instructions] Your first question comes from Josh Clark with QVG Capital.

Just hoping to understand your EBITDA guidance a little bit better. So could you just give us the expected level of capitalized expense? And maybe along a similar vein, just the amount of EBITDA that you'd expect to convert to free cash for the year, please?

Okay. Josh, thanks for the question. So our capitalization rate is on track to prospectus forecast. If not, it may have come down a little bit because of a bit of a mix between headcount costs and other costs. But it's more or less in line with that as a percentage. And in terms of cash flow, we're holding our prospectus cash position of $67 million. No change to that on the basis of the reforecast presented today.

Your next question comes from Stewart Oldfield with Field Research.

Just the announced merger of Consilio and Xact overnight. Is it more likely that Nuix is going to be participating in M&A activity going forward?

Thanks, Stewart. Yes, we did see the announcement of that change of ownership. Now it's important to characterize that, that organization is a service provider, not a software company per se. And there has been ongoing consolidation across the service provider community over the last few years including, as they said in their statement that they participated that as well. For us, most of the -- in fact, in most cases, those companies that consolidate are, in fact, Nuix service provider support partners. And we, in fact, have nearly 60 of them across our full range of customers. And we would expect and we've had conversations with them that our relationship continues and grows as they make forward moves. Our M&A activity, as we've said in the prospectus, is focused on: firstly, being able to add technology where it makes a a better decision to buy versus build or partner that enhances our offering in our current markets and also to participate, sometimes there may be opportunities to acquire customer activity where our legacy technology could be replaced with Nuix. And to a lesser extent, I think that we would, in the near term, be participating in roll-ups of that. And our stated position is that we are a software company, first and foremost, and it's not on our agenda today to participate in acquiring services-based businesses.

Got it. And were you presently surprised by the valuation put on Relativity by the recent private equity investment?

Well, I wasn't surprised. We had done our own numbers based on -- but I'm not sure that has much relevance. It's just -- it's good to see that people continue to see that these legal technology that supports the legal, corporate, government and service provider community is highly valued as is ours and others, right?

Got it. And final question is just in relation to today's announcement has there been any scale back by the number of usage of Nuix technology by KPMG?

No. In fact, discussions with KPMG which obviously, to a large extent of confidential, is consistent with the general trend is that new use cases are coming to offer them and us opportunity in the market.

Thank you. There are no further questions at this time. I'll now hand back to Mr. Vawdrey for closing remarks. Sorry, pardon me. I do have another questioner with [ Prasad Padkar with Parapost AM ].

Hey, Prasad, you've got the floor.

Sorry, I was on mute, apologies. I just wanted to get some historical context on the profile for when a customer migrates from fixed-price all you can eat to a consumption-based model that downsell and a reset lower and the growth profile from that point on, how does that work out? How has that worked out historically?

Generally speaking, it's specific to the customer and the arrangement they have. In the case of -- there was a significant change in the last quarter from a customer moving across away from an all you can eat to pay as you use, I suppose, in the different forms of flexible license we offer, whether they move to subscription or modules, whether they move to consumption or whether they move to software-as-a-service. We tend to work with each client individually on minimizing any potential downsell by doing very careful analysis with them on their usage. And in fact, it almost works in the opposite way in terms of the data. The data tends to show that the client has used a lot of more Nuix than they would be if they started their journey with us as a traditional module customer. So I guess their temptation is to say we want to stay on all you can eat because we're eating more than what we're paying for. Now the reality is we've made it clear over the last couple of years that all of those sort of foundation customers that enjoyed that should move to -- move off those licenses, and that's been a really successful trend. If the mix of license changes to your specific question, and they were an all-you-can-eat customer that was using our module licenses and they move to a consumption or SaaS model it -- the downsell could -- is more actually likely to be a shift in when the revenue is recognized because if they move to a large component of SaaS, it will be recognized over the life of the journey. Sorry about the complexity of that, but it is quite -- there's quite a few dimensions to that question.

Your next question comes from Michael Evans with Quest Asset Partners.

Rod and Stephen, I have just got a question about if we look at, there's a number of listed U.S. providers in this general search discovery software provision, And some seem to be growing very strongly and others are not. And I put you obviously, you've announced today that your revenue will be up 3%. Should we draw conclusions that there's a product differentiation, Elastic reporting 35%, 40% growth in the last year. Is it a product differentiation? Is it a capacity issue? Are there reasons why we're seeing such differentiated growth rates?

I obviously can't comment on other companies, specifically that as we haven't mentioned. But as a general trend, we're a mature player in the eDiscovery sector of the market that we operate in. And there are -- and we've been in that business for a long time now. And we've had really good growth throughout that period. Most of our growth profile in recent times has changed as a result of some of the changes we've made as we moved to SaaS and consumption and move away from traditional term licenses. But the other part of that question goes to the fact that there are some emerging vendors some typically start up small vendors that obviously, if we're talking about growth percentages are probably having higher growth because they're in start-up mode. And they're usually around the Software-as-a-Service model. And as we've outlined, we've invested significantly to be able to participate in that emerging market of software-as-a-service and consumption. So obviously, those areas are growing faster than in terms of new license type. The other thing is that we're not a single market-focused organization in eDiscovery with our focus on regulatory environments, forensics and of course, the emerging and really big opportunity with governance, risk and compliance represents for us going forward, a very significant growth opportunity.

Your next question comes from [ Gerard Paul with ACP Asset Management ].

Stephen, this one's for you. I think I missed, I sort of came in a little bit late to your question about the ACV profile change. And if you could just correct me if I misheard what you were saying, but the way you defined ACV with the last months run rate x12, I'm hoping you can just clarify that for me, because I thought it was a little bit more complicated than that.

Yes, it is. So...

Yes. And then if you could just just run through the change to ACV profile again, just because I didn't get it, sorry.

Yes. Okay. Yes, there's some -- so the proceeding part to that conversation around how you calculate ACV is for the consumption or the data under management, which is the run rate that is then prevailing in that particular month at which point the ACV is calculated. And given in the context was around upsell. And so upsell doesn't always come until the capacity commitment has been surpassed when they come off the annual contracts. So there's some downsell that occurs initially. The uptick then comes in the upsell. And if that is occurring at a slower rate than we had anticipated, therefore, the kicker effect that you get from that last month's run rate of data under management and data usage is not taken to ACV. So that was the context there about times in that last month run rate for that element of consumption in our business.

Yes. So it's specific to consumption only, not the rest of it?

Yes. Yes. Well, the other -- as you know, there's -- this is something, yes, we can talk to more later. And then your other question, does that help if I may answer the second part of your question?

Yes. Well, if you -- we can run through a bit later, but I was just a bit concerned there that I was miscalculating ACV, it could have been a lot more simple than it is. But thank you for clarifying. Yes.

Your next question comes from [ Mason Thomas with Opal ].

Yes. Just quickly, the -- you mentioned that the shift to consumption comes with it comes with an initial downsell. Was the downsell unusual in its quantum this time in -- over the last month or so?

I'll let Stephen answer that specifically. I just think it doesn't -- I'll just add to the first part is that it doesn't always mean a downsell. I mean sometimes the rollover from modules to consumption is an increase. But I think, Stephen, you want to maybe want to answer it specifically to the recent activity.

Yes, exactly, Rod, thanks for that. Look, it depends on how it's priced and packaged by a particular customer. We hold the annual value, but there is sometimes a drop off depending on how it's priced and packaged for that particular customer, that cohort of customers. We have seen encouraging signs where customers are coming up, but not all of them are coming up and others are just doing it at their own pace. I think the other part is that when we look at seasonality of our upsell, it traditionally happens in Q4. And we really just want to see more evidence coming through from our customers that they're on that same trajectory as some of the early adopters are before we really want to commit to the stronger upsell rate coming an uptick coming back to fruition.

And I think just to add to Stephen's comment, just 1 little thing is that there is a real downsell and then there's a theoretical downsell, theoretical downsell happens when you move from modules to SaaS software as a service, where it's recognized over a different period and that creates a downsell in this year. But if it was at the year is over different months, it would have a different impact. So it's the shift to being able to recognize revenue all upfront versus being able to recognize it on a time-based model. Next question.

Right. Okay. So sorry. So just on the -- given that you do generate a significant portion of your revenue in the fourth quarter, are you confident that today's earnings update will -- is sufficiently conservative to take into account potential risks in Q4, if you don't meet -- if if activity levels don't meet your expectations?

Yes.

Thank you. There are no further questions at this time. I will now hand back to Mr. Vawdrey for closing remarks.

Thank you, everyone, for joining us on the call. If you want to reach out through our Investor Relations on any follow-up questions, we'll be more than happy to engage, and thank you for your time this morning.