Nuix Limited (NXL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nuix Limited Full Year 2020 Results Presentation. [Operator Instructions] I would now like to introduce -- hand the conference over to Mr. Jonathan Rubinsztein, Group CEO. Please go ahead.

Good morning, everyone, and thanks for joining us today. My name is Jonathan Rubinsztein, and I'm the CEO of Nuix. I'm joined today by our COO and Chief Financial Officer, Chad Barton. Today, we'll be discussing Nuix's full year 202 results, as well as outlining in more detail some of the strategy refresh work that's been occurring behind the scenes for the last 8 months since I joined. Chad will cover the details of the full year results, and I'll talk through current and future strategic initiatives after. Nuix is a leader in investigative analytics and intelligence at scale. Our engine takes vast amounts of data, whether it be on structured, semi-structured or structured data, and helps users analyze and interpret that data. Nuix is evolving as we execute on our plan to return to growth. There are several key elements to our plan but ensured we are deepening our customer relationships as we move towards a greater sense of customer centricity, investing in taking our products to cloud-based platform solutions, driving simplicity, scalability and standard digitization across processes and systems and laying the foundation to the financial performance with clear accountability and expectations, and reigniting our people's purpose and passion to be a force for good. This last point is important. Nuix software has been used to solve some of the most challenging problems facing society. In this way, Nuix has the ability to be a real force for good in a modern society with societal challenges and data intersect in a myriad of ways. And it's this sense of purpose, which really drive so many of our talented people and our passionate customers, an opportunity to make a meaningful difference to some of the most complex problems of our times. Before I hand over to Chad, I thought I'd quickly touch on the key themes that we'll be talking through today. Chad will talk through the financial results but ensure the results are in line with the recent update on market, with ACV down slightly and revenue and EBITDA lower. We've leaned forward into revenue-generating investments in keeping with our strategy with an uplift in spend on both R&D and sales. These investments have been funded through our operational cash flow. As flagged at the recent update, we have a cash balance of $46.8 million. I've been clear about the needs of our growth focus and our strategic initiatives at Nuix. The team has been working exceptionally hard behind the scenes over the last year. And today, I'm pleased to be able to share an update on our early progress. We've made good headway on key Horizon 1 initiatives and work is already underway on Horizon 2 and 3 initiatives. We're putting the right people into the right roles and our sales process is being restructured with a stronger focus on the customer. These initiatives are all about driving profitable growth, and in line with this theme, there has been an increased focus right across the organization on key metrics such as ACV and NDR which I'll talk about further later on. I'll now hand over to Chad to talk through the FY '22 results.

Thanks, Jonathan, and good morning, everyone. In July, we updated the market with guidance for key metrics such as ACV, statutory revenue and EBITDA. Today's results are in line with those guidance ranges, with EBITDA coming in slightly above where we were expecting. As many of the participants on the call will be aware, Nuix's specialty revenue can display marked variability due to the accounting treatment of multiyear deals. ACV removed its variability by recognizing the revenue evenly over the contract period rather than upfront. As far in July, ACV is down slightly in an overall sense, with lower new business largely offset by net upsells to existing customers. Statutory revenue is lower on PCP, driven by lower multiyear deals and lower new sales. The cash performance of the business has been solid, with the company's underlying cash flow positive in the second half before nonoperational legal costs and Topos costs, ending the period with a cash balance of $46.8 million. The trend towards consumption licenses continued during the year, with 40% growth in consumption ACV. As part of that, our Discover SaaS product showed particularly strong growth at 38% over the year. On Slide 7, we see our regular dashboard of key financial metrics. ACV fell by 2.3% in the year to $162 million, in line with the July update. Statutory revenue fell further by 13.5% to $152.3 million, also in line with the July update. The lower statutory revenue, along with our high spend impacted EBITDA, which fell to $12.1 million, slightly above the range we expected in the July update. A few other numbers to highlight here. Gross margin is still high at 87.9%. Customer churn has risen to 5.4%, but overall remains low, and net dollar retention or NDR is up to 96.8%. I want to highlight that we continue to disclose the results of both the functional and constant currency basis. While the currency movements have mostly had limited impact on outcomes in this result, we wanted to continue with this disclosure for completeness. On Slide 8, ACV. As we mentioned, total ACV fell 2.3% to $162 million. Importantly, subscription ACV continues to rise up 1.1% on PCP. As I mentioned, subscription ACV is the measure of our recurring revenue, akin to ARR and represented here by the blue bars on the chart. We saw a drop in other ACV, which includes perpetual licenses and services. This is as expected and in line with the strategy. We are continuously moving away from perpetual licenses, which drove the fall in other ACV last year. Slide 9 provides an update on ACV by license type and helps illustrate the mix shift occurring across our client base. The growth in consumption licenses continues, now contributing 18% of ACV, up from 12% a year ago. We felt previously that several large customers have shifted from module style licenses to consumption licenses, which contributes to the growth in consumption ACV. When customers shift to consumption licenses, we've particularly seen a short down-sell, but then we've had longer-term leverage to data volumes into the medium and long term. We've also been successfully selling annual consumption licenses, and we've had very good growth in our Discover SaaS product, which I'll come to shortly. While services ACV has been relatively constant, we see this as future growth opportunity, and Jonathan will have more to say on this topic shortly. Now looking at Slide 10. This slide illustrates the growth in consumption ACV that I've mentioned. Overall consumption ACV is up 40.6% in the year, remembering that consumption ACV is a subset of subscription ACV. Non-SaaS consumption growth here in the purple has been driven by the continued customer demand for a shift to consumption licenses. In the blue bar, you can see the growth in SaaS consumption, which is our Discover SaaS product. SaaS consumption is up over 38%, driven by strong demand for Discover SaaS from law firms. Now looking at the regional performance on Slide 11. You can see here that North America makes up a little over half our ACV and fell by 1.8% last year. There are a lot of moving parts inside the North America outcome. We saw growth in corporate and law firms, with good demand for Discover SaaS. That growth was partly offset by a down-sell associated with the large advisory customer shifting to consumption. EMEA had a weaker overall result year-on-year, down 7.4%. ACV was impacted by an advisory customer shifting to consumption and another customer being acquired. We had mixed success in new strategic markets with a range of wins and losses. Generally, new business and upsell was weaker than expected. This was only partly offset by new customer wins in corporate and government. APAC was our strongest region, up 3.9%. We saw very good growth in government with 3 new key count wins and upsell with another key customer. The team also achieved solid upsell to key customers in law firms and corporate. Turning now to Slide 12. I mentioned earlier that the statutory revenue can be variable due to the impact of multiyear deals between periods. As I flagged, statutory revenue fell 13.5%, driven by lower multiyear sales and lower new sales. New business fell 32% in the year to $18.7 million. Multiyear deals represented 40.3% of statutory revenue falling by $11.9 million compared to last year. Subscription revenue amounted to 93% of revenue, mirroring the trend seen in ACV. There's more detailed statutory revenue, revenue recognition and customers in the Appendix. We've been clear in update over the last year that we're leaning forward into our R&D program. On Slide 13, you can see the quantification of that investment. R&D spend lifted to $58.3 million, up 30% from last year and representing 38% of revenue. We lifted headcount by 15% in our R&D team and made very important progress on key projects, such as further development of our integrated SaaS platform, NLP integration and FedRAMP high development. Jonathan will touch on some of these in a moment. As we flagged at the half, the markets of talent across the sector and the broader economy for that matter is still tight. Even with that backdrop, we've been able to increase our R&D footprint meaningfully, which will continue to drive progress on our key initiatives and help to drive revenue growth in future periods. On Slide 14, you can see the income statement. Statutory revenue was lower as I've discussed while costs are associated with R&D and sales were higher during the period. Our G&A costs were also higher, driven by nonoperational legal costs of $13.8 million for the year, incremental headcount and insurance costs. These factors led to EBITDA falling to $12.1 million for the period, slightly above the expected range of July. To explain these movements in EBITDA, I'll turn your attention to Slide 15. In the waterfall, you can see revenue is lower, driven by lower multiyear deals and lower new sales in particular. As I mentioned earlier, we had higher costs associated with each sales, R&D and G&A. Underlying EBITDA, being EBITDA before nonoperational legal costs and Topos running costs amounted to $29.2 million, above the $25 million to $27 million range we predicted in the July update. Nonoperational legal costs amounted to $13.8 million and Topos running costs of further $3.3 million. These 2 items are reported separately for clarity to get our reported EBITDA. Looking at the cash flow on Slide 16. You can see here the cash costs of the increased R&D reflected here in software development costs have been funded from operational cash flow. Underlying cash flow before legal and Topos cost was positive for the second half and we record a small fall over the full year to $2.5 million in underlying free cash flow. Just briefly turning to the balance sheet. Nuix finished the year with $46.8 million in cash. Unbilled receivables have fallen on the previous year, primarily due to the lower value of multiyear deals. Intangibles includes the impact of the Topos acquisition. I'll now hand back to Jonathan.

Now on to our strategic refresh. Back at the first half, I noted that our path to growth is via a greater focus on customer centricity, ensuring the growth and value of our product and service offerings align with our customer requirements. We need to focus our talented people and great technology on solving our customers' highest-value problems. We have achieved this through continuous and rigorous prioritization while also delivering our proposition with simplicity in both the way our customers engage with us and freeing up our people to perform at their best. Our strategic refresh is about putting the mechanisms in place to drive that customer centricity and growth. We are focused on 3 horizons of change that underpin our strategic refresh. Horizon 1 is the immediate and near-term focus, building on our strengths, improving competitiveness, commercial performance and customer relationships. These near-term initiatives help to not only provide important momentum to restart growth but provide a solid foundation for Nuix's medium- and long-term growth strategies. This longer-term growth is reflected in Horizons 2 and 3. Horizon 2 incorporates work to build up our integrated set platform whilst Horizon 3 incorporates new and repeatable ways to use our technologies. Importantly, work on all 3 horizons is underway now. Some of the key strategic goals that we intend to drive with this strategic refresh. We are looking to involve Nuix into an organization with simple structures and processes with clear accountabilities. We need to make sure that Nuix is a great place for our people to work, and we need to continue to build the trust of our investors through transparency and delivery. Central to our mission is to evolve Nuix's customer focus and return to growth. Horizon 1 is the most immediate of the 3 horizons and later foundation for both near- and long-term growth. On this slide, you can see some of the key initiatives that have been implemented over the last half. Firstly, our new price book was launched effective 1 July. As an organization, Nuix has not realized any meaningful price increases for several years. This move provides a greater alignment between pricing and the value add from the Nuix offering. This new pricing structure helps to close that gap whilst also standardizing and simplifying the way we price and package. Recent innovations from the R&D such as automation helped to strengthen our offering. New contracts will be subject to new price mechanisms and existing customer contracts come up for renewal, these will also be negotiated under this new structure. As part of this process, it's important that we demonstrate to our customers the value that can be accessed from the Nuix offering as part of the pricing proposition. As you can imagine, this initiative has important implications for metrics such as ACV and NDR. Sales enablement optimization is a very important Horizon 1 initiative. As we move towards the next level of product maturity, we'll look to standardize the buyer experience across regions and ensure that our sales team can consistently demonstrate the benefit and value our customers can derive from our offering. This is one of the more comprehensive Horizon 1 initiatives, and we're only in the early stages of implementation here. The global sales process program has been established and a tenet account management model has been implemented to more closely align customer service with the level required by each customer tier. We've said before that we have some of the best customers in the world, and a critical part of driving growth will be about how we interact with this group of existing customers. As an organization, we've implemented an improved renewal process with a strong focus on renewal metrics and processes to drive a stronger ACV outcome. As customers renew, there is now a much stronger focus on driving value to our customers to better align with the group's objectives. Additionally, we're upgrading our service offerings to our customers with dedicated pre- and post-sell resources and focus, we're looking to create a more of a listing customer offering of products, services and support. This helps to make sure that customers can optimize their Nuix experience and provide incremental revenue opportunities for our organization. Nuix Advantage has been launched to provide regular support to customers, including health checks and account management. Providing a more comprehensive support offering to our customers is an important part of our customer-centric focus, also providing benefits to Nuix through retention and upsell. Our core structure for strategy, and we've been busy making sure that we have the appropriate structural elements in place to support our strategic initiatives. I mentioned recently that we had undertaken an organizational restructure. This incorporates some significant changes at the leadership level to foster greater clarity and accountability by function, with a renewed focus on customer centricity. We've reorganized our sales teams to drive stronger sales outcome and efficiencies, and our technology function has been streamlined under a new CIO to drive commonality of purpose and project prioritization. It's really important that we have the right leadership team in place to drive our strategy forward, and I've been thrilled with the caliber of individuals we've been able to attract to Nuix to join us on our journey. Firstly, Jee Moon joins us as our CMO, our Chief Marketing Officer, a new role that has been elevated to the leadership team, helping our organization accelerate sales and deepen customer relationships. Mike Smith joined last month as Executive Vice President, Americas to drive renewed growth across Nuix North America customer base. Alexis Rouch has joined us as the CIO, a role that I mentioned a moment ago, with ownership of the technology platform under a common leadership voice with a focus on commercial outcomes. And Chad Barton's role has been expanded from Chief Financial Officer to including COO, with expanded responsibility for teams, including IT, legal and risk. Jee, Mike, Alexis and Chad, in his expanded role join Jonathan Rees, Oliver Harvey and Melissa Pascoe on the leadership team to drive strategic commonality of purpose right across the organization. We are expanding the depth of talent to our extended leadership team. On performance and reward alignment, we've realigned the performance incentives and KPIs across the organization, with a particular focus on Horizon 1 objectives for the sales team centered on ACV uplift. This new format is effected from the start of the financial year and make sure we have much better alignment between individual performance measures and the goals of the organization. So as you can see, we've been hard at work inside Nuix making sure that the foundations for growth are being set. The element I just outlined are just a fraction of our Horizon 1 plans. Slide 24 gives a visual representation of how far progressed we are across a range of Horizon 1 initiatives. Our new price, for instance, is mostly implemented and in place for new orders and renewals, driving incremental benefits across ACV and NDR. The basis of our sales optimization plan is now in place, and as this blueprint is rolled out across the sales team globally will provide huge benefits in terms of improved win rates, high customer retention and sales force efficiencies. We are currently standardizing the sale process, refreshing training on sales engagement and system utilization, sharing learnings and key strategies across the globe and removing low-value activities on orders fulfillment to free up time for our salespeople. On renewals, we are now much more stringent in terms of the structure around the renewal process with a heavy focus on ACV and NDR outcomes and long checks to make sure that the pricing is appropriate. There's more process on the product and service mix being offered to customers and making sure that they are migrating to the latest version of where appropriate and if not, that the appropriate extended support model is offered. And our upgraded service and support offerings will have significant benefits in terms of customer satisfaction and that customer retention as well as providing incremental revenue opportunities. As mentioned, we've launched Nuix Advantage as our product usage optimization support offering. We will also look to extend the support for our legacy version. We will have a suite of service packages focused on implementation that are more customer-centric and can be easily bundled with our product offering. On enablers, we've made very important progress on our new organization structure, as I've outlined and also on realigning the way people are incentivized to more closely match the goals of our organization. These initiatives will continue to evolve as required, and the benefits will begin to flow through from this financial year. And one further critical enabler that I only briefly touched on in the previous section is the build-out of the marketing function from a low level. As I mentioned, the role of the Chief Marketing Officer has been elevated as the leadership team, and Jee Moon has joined us in that role to drive our marketing initiatives. This is a critical element of our strategy. Rebuilding our marketing capability globally will not only drive new lead generation in terms of strengthening our deal pipeline, but also frees up sales people to focus on selling. So while we've already achieved a lot in terms of Horizon 1 initiatives in the last half, you can see that we're only at the beginning of the journey. But all of the things we have achieved so far and those that are still coming through will help us provide the momentum we need to drive near-term growth and provides a solid underpinning for growth in the medium to longer-term growth across our Horizon 2 and 3 plays. Which brings us to Slide 25, detailing how the horizons are put together strategically. You can see on this slide in the yellow, the key Horizon 1 initiatives and timetables, including expected benefits. Looking into Horizon 2, we are already building out our SaaS infrastructure and will increasingly integrate Nuix technology into a unified investigations platform. This unified platform will extend the hybrid deployment options available to customers. Releasing our integrated natural language processing capability will also enable customers to work smarter, opening new use case areas and giving customers an early opportunity to take advantage of the Nuix infrastructure. Just glancing at business enablers, licensed modernization is a Horizon 2 enabler, which will simplify our licensing system to enable a use case proposition that is in line with customer design outcomes. It will increase our agility to deploy regardless of the environment, so on-premise, hybrid or SaaS and increased security of software IP to address any potential revenue linkage. This program of work has commenced and is expected to be rolled out during FY '24. Our central growth program in our corporate services function will focus on process optimization across finance, legal and risk management capabilities, giving Nuix a headroom to grow with a more optimized business partnering approach. Over Horizon 3, our team is already working on new high-value repeatable use case solutions. Example of such potential use cases include information governance and privacy, data incident response and sophisticated fraud solutions. Before finishing up, I just wanted to touch on some of the important technology highlights achieved by the team in progressing our Horizon 2 and 3 plans. We've been very clear about our leaning forward into our investment cycle to deliver on key projects, such as our integrated SaaS platform, which is a critical element of our medium-term growth path. During the half, the team made significant progress in terms of development and testing of the platform using Automation, Engine and Investigate in the combined setting. Load testing conducted by the team indicated the best ever performance results from the new engine. The new platform is being built with the highest security practices and will provide Nuix customers with flexibility across public cloud SaaS, all marketplace with unlimited scalability and high performance. Natural language processing is an exciting and critical part of our growth path. The acquisition of Topos, the market-leading power of Nuix technology with Topos' cutting-edge machine learning capability. During the half, the team deployed a stand-alone NLP SaaS platform for internal testing and a series of customer proof of concepts. Work is being done right now to finalize the engineering work to integrate Nuix Workstation with NLP SaaS to enable customers to take data from their workstation environments and stream through NLP to various use cases. We closed the completion on this work and very excited to have been planning a launch of NLP Workstation integration for the fourth quarter of the calendar year with continuing development of additional feature capabilities in the path. On Slide 28, just turning to some key messages I want to leave with you. Behind the scenes at Nuix, we are taking important and certain steps around Horizon 1 initiatives, in particular, to put the foundation in place for growth. We've made significant progress on a range of initiatives, which are already beginning to have an impact. We're putting the right people in the right roles to make sure that Nuix is fit for growth. Our customer and partner relationships remain strong. Our engine remains unparalleled and is central to our platform at the core of a growth trajectory. And lastly, our strategy is clear and we're acting on it. We are hard at work executing on that strategy and execution will be urgent and focused. Nuix is a remarkable organization making a meaningful difference in the world. I'm excited and internally optimistic about our future. And as an organization, the Nuix team is mobilizing to enact the challenges required to drive growth. I'll now hand back to the operator for Q&A.

[Operator Instructions] It appears there are no questions at this time. I'd now like to hand it over to Mr. Rubinsztein for closing remarks.

Thank you, and thank you for your time today. The headline is I'm confident and optimistic about showing stronger results next year. We have a clear strategy. We have focused an urgent commitment to execution, and we are well positioned for sustainable growth. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.