Nuix Limited (NXL) Earnings Call Transcript & Summary

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 Chief Operating Officer and Chief Financial Officer, Chad Barton. If we move to Slide 2, the agenda. Today, we will be discussing Nuix' results for the half year ending 31 December 2022, along with an update on the important strategic work that we've been undertaking. I'll make some opening comments before handing over to Chad to talk through the financial results in further detail. Following that, I'll provide some commentary on our strategic initiatives and make some concluding remarks. If we move to Slide 4. Before I get to the results, just some brief comments on us. We've been driving a business transformation at Nuix underpinned by cultural transformation. We are passionate people at Nuix who are driven by pipes of being a force for good by helping our customers find truth in their data. We have harnessed the passion to redefine our new values to which we want to be held accountable and are working hard to create a culture that is true to our values and our purpose. We are actively and intentionally working on aspects of our culture to foster greater belonging, engagement and meaning to create a culture of innovation and excellence. We are signaling the change also in our new branding, which represents a great Australian tech brand. The new branding will be carried through our marketing, our website and our products and the new energy that is possible within the business is now visible through our visual identity. Turning to Slide 5. To the H1 financial results, there are some key messages that I'd like to emphasize today. Firstly, critical measures like ACV and NDR net dollar retention are showing good momentum, and our customer churn remains low. All 3 of these metrics have actually improved further since our recent update at the AGM in November. On statutory measures, revenue, EBITDA and net profit after tax are all up. The strategic initiatives that we have been working on are progressing at a rapid pace and are beginning to yield tangible benefits. Our critical Horizon 2 project, the Nuix unified platform is approaching launch, which will be a real game changer. And we've commenced with the productization of our capabilities with the launch of the New Data Privacy solution, the first of our Horizon 3 initiatives. Turning now to our key financial metrics for the half on Slide 6. ACV at the end of the half came in at $170.2 million, in line with the expected range we provided last month. This outcome is up 3.4% on the same time last year. Importantly, we've made some good gains just in the last 6 months, in particular, with the ACV result up 5% from the outcome at 30 June and slightly higher than the ACV we highlighted at the time of the AGM. Our statutory revenue rose by 4.3% on the previous corresponding period, driven by a stronger trading performance in December and currency tailwinds as indicated in the January trading update. We have previously flagged that our nonoperational legal costs were significantly lower during the half compared to the PCP. This impact, along with revenue growth and general cost containment meant statutory EBITDA was up 51.6% to $20.9 million. 2 key new numbers for the half to highlight today are customer churn and net dollar retention or. Customer churn for the half remains low at 4.8% compared to 4.1% in the previous period. Importantly, our churn numbers have improved since the full year results and the AGM update where the metrics were 5.4% and 5.5%, respectively. Similarly, our MDR outcome, an indicator of how much we're selling to our existing customer base rose to 103.1% for the half. Not only is this metric up from PCB, but also higher than both the financial year results and the AGM update. I want to pull for a moment to reflect on MDR and churn. Progress in these 2 metrics are reported. It means we are selling more to our existing customer base, and we're also losing true customers to churn. It is a useful reminder of the loyalty and stickiness of our customer base. And remember, this has occurred during a period of where we have begun implementing aspects of our new price book, which we'll have more to say about a little later on. Chad will also talk shortly about some of the interesting characteristics of our customer base. Lastly, we finished the half with over $37 million in cash with no debt. I'll now hand over to Chad to talk through the financial results in a bit more detail.

Thanks, Jonathan. Good morning, everyone. Last month, we updated the market with our guidance through our key financial metrics for the half. Today's results are in line with those guidance ranges, and there are some interesting trends worth highlighting. As Jonathan has pointed out, ACV and NDR are both higher and churn remains low. Subscription ACV continues to grow strongly. Consumption ACV is also growing strongly, including Discover SaaS. Statutory revenue is higher despite moderation of multiyear deals. Our R&D spend remained elevated in line with strategy, but generally costs have been well contained. Underlying EBITDA has shown good lift with statutory EBITDA and NPAT client. In line with our stated aim, we were underlying free cash flow neutral for the half and our customer base is diversified and speaking. So let me take you through these results in a little bit more detail. Starting with ACV. Total ACV is up 3.4% on PCP compared to the ACV at the end of FY '22, we're up 5%. Subscription ACV is up 7% on PCP, represented by the darker blue bars on the chart. Subscription ACV is important because it's a measure of recurring proportion of our ACV akin to ARR. ACV growth is primarily driven by stronger net upsells to our existing customer base in keeping with our near-term strategy. You can also see this illustrated through our growth in our NDR metrics. Other ACV, which includes perpetual licenses and services is lower, in line with our strategic shift away from selling perpetual licenses. I won't talk to here, but Slide 10 shows further evolution of our ABB by license time. Slide 11 illustrates growth in our consumption ACV. Overall consumption ACV growth is up 11.6% on PCP. Keeping in mind that consumption ACV is a subset of subscription ACV. We continue to experience strong demand from law firms for our Discover SaaS product, which rose 14.2% on PCP. -- non-SaaS consumption here, the light blue line continues to be driven by the trend for a small number of large customers shifting to consumption-based licenses. Although the pace that this shift has slowed compared to prior periods, with many of our large advisory customers already having made this transition. Slide 12 shows ACV by region. North America, which makes up a little over half our ACV rose on PCP on the strength of corporate and law firms. We saw good upsell to existing customers and discovered SAS uplift as well as a currency tailwind. We previously announced that Mike Smith had joined as Head of Americas and his new leadership team is now in place. EMEA saw good growth, up 5% on PCP, with important new business wins in corporate and government along with upselling advisories and government. Asia Pacific was down marginally on PCP. Warren Burger has joined the team played in the half to lead the region. The APAC result was characterized by growth from Australian government sector, offset by some weakness in Asia and some customer consolidation. Turning now to statutory revenue. As we've noted previously, our statutory revenue can be variable due to the impact of multiyear deals between periods. Statutory revenue rose by 4.3% on PCP for $87.6 million for the half. Subscription revenue accounted for 93% of total revenue. New business was 18.3% lower on PCP with our near-term strategic focus on our existing customer base during the period. The proportion of multiyear deals in the half was 29% from a high level of 48% in the PCP. This moderation in multiyear deals is in line with our expectations. Despite the fall in the proportion of multiyear deals, average new order value actually rose by 12.9% to $210,000. Turning to R&D. You can see during the half we have maintained our strong commitment to research and development with a total spend up 3% on PCP. During the half, we made important progress on our key R&D projects, including the achievement of the FedRAMP Ready status, a critical milestone for our R&D journey. We also made important progress on initiatives to drive our pipeline, including those around our NLP integration, our unified platform and the data privacy solution. It's important to note here that our R&D spend is almost entirely covered by our operational cash flow, even at these higher levels of R&D spend. This is a conscious decision to lean forward into our key projects to drive future growth. On Slide 15, you can see our income statement. Underlying EBITDA rose 8.5% on PCP, driven by both revenue growth and general cost containment. We experienced an increase in cost of goods sold due to a lift in reseller volumes and a step-up in our hosting cost and capacity. I've mentioned the R&D spend that overall costs have been well contained partly as a result of our Fit for Growth program. As already flagged, nonoperational legal costs were significantly lower than the PCP. It's worth noting that we expect a step-up in our cost base in the second half compared to the first half. Marketing costs, in particular, will be significantly higher, partly due to the Accelerate program, which Jonathan will talk about shortly. Separately, although we secured important legal victory, it's likely that our nonoperational legal costs will remain elevated into the second half as we focus our tension on the other legal matters. Slide 16 highlights some of those things graphically, showing a walk from last year's statutory EBITDA to this year's outcome, including underlying EBITDA. Turning to Slide 17 and free cash flow. We've been clear in our commentary that we aim to be underlying cash flow neutral. That is cash flow, excluding costs associated with the Top of acquisition and nonoperational legal costs. As you can see in the chart, we're essentially cash flow neutral for underlying cash flow during the half and matching from the same period last year. The cash cost of our elevated levels of R&D reflected here in software development costs have been funded by operational cash flow. It's worth lagging at this point a payment made after the end of the period associated with Topo acquisition in the amount of USD 6.25 million. You can find this information further in the appendix. Lastly, I'd like to make some comments about the nature of Nuix's customer base. Advisers remain our largest industry group, although we have seen good growth in government, in particular, over the last 6 months. New customer base remains highly diversified with no individual customer contributing more than 3% of ACV. Highlighting the degree stickiness in the customer base, more than 40% of our customers have actually been with us for more than 10 years. And of course, our customer churn remains low. And lastly, as a reminder of the truly global nature of our customer base, around 85% of our ACV sourced from customers outside Australia. The diverse nature of our customer base is important and provides us with a degree stability across our ACV base and means that any individual contract is not by itself overly material. I'll now hand back to Jonathan.

Thanks, Chad. Now if we move to Slide 20, our multi-horizon strategy. We've talked before about the 3 horizons of change that underpin Nuix's strategic refresh. Horizon 1 is the near-term focus, providing important momentum to restart growth and providing a solid foundation for our medium- and long-term growth strategies. Horizon 2 incorporates work to build out our unified platform, and I'll have lot to say on that shortly and our other 3 incorporates high-value repeatable use cases. If we move to Slide 21, which is our horizon 1 key initiatives. At the last result, we outlined critical Horizon 1 initiatives, and I'm pleased to provide a further update today. Our new price book was launched on 1 July, as we previously highlighted. This approach isn't simply about raising prices by addressing what we saw as a fundamental disconnect in certain areas between pricing and value. It's important to remember that price increases also occur as contracts are renewed with customers not on a single date across the customer base. So the impact of price rises take time to work its way through the customer base as contracts come up for renewal. We have also currently finalizing, price book simplification for the U.S. government sector, which is the last major part of this initiative. As we've said all along, it's important for us to demonstrate value for our clients along with any price increases. And we've made sure our customers have access to a more streamlined, broader offering that incorporates R&D innovation to help demonstrate that value. On sales enablement optimization, really great gains have been made in relation to standardizing our sales processes. This has been an intensive process, differentiating our account tiering, utilizing hunters and farmers concept more effectively pivoting our sales metrics towards ACV, standardizing our pitch decks and other materials and broadly shifting from design to execution. Our renewals process continues to be refined with a much greater focus now on critical metrics like ACV, NDR and churn. The global approvals process is now much more standardized and structured. We've also got much greater clarity regarding accountability around curing quality renewals. You can see the benefits of these initiatives, in particular, flowing through into our ACV, NDR, and churn metrics that we've highlighted today. The next steps from here involves continuing to drive NDR uplift through upsell and cross-sell. On service offerings, we remain committed to offering a more holistic customer offering of product, services and support so that customers can get the most out of their new investments. This is a longer-dated initiative, which is going to take further time to implement, but the earlier work carries promising and the potential benefits to our customers, partners at Newark are large. We are revamping new advantage offering to make it more meaningful and appropriate for our customer base. This is a cultural change for our customers, and it's a longer-term project that has great potential for us. If we move to Slide 22, we've said right from the start of the strategic refresh that we need to have the right structural elements in place to support our strategic initiatives. -- significant and ongoing changes occurred during the half around our leadership, culture and value propositions. Last year, we rolled out new organizational structure, including a new leadership structure, the reorganization of the sales teams and streamlining of the technology function. In the past half, we've made important parts into critical leadership roles with Jason Wilson appointed as our Chief Product Officer, to own and drive our product road map. In addition, Warren Brugger joined as EVP of APAC and Global Alliances responsible for driving our sales efforts in Asia Pacific as well as taking ownership of our critical alliances and channel partner relationships globally. We continue to invest in our capabilities across engineering, corporate services and product development. Importantly, our cultural refresh program, implementing new branding and company values to help define the type of company we are and want to be. And we made important progress in building greater clarity around employee propositions, particularly in engineering, focusing on role clarity, articulation on career pathways and fostering a greater center of collaboration. There are a couple of other enablers, which are absolutely critical projects that are also worth flagging. You might have heard us talk about our license monetization project previously. This is a critical and transformational project targeting a simplified licensing framework built on our solution and data consumption with time lines linked to our new unified platform, which I'll come to shortly. Our R&D operational strategy has further evolved meaning greater efficiency in our technology development and delivery as well as an increased focus on project prioritization. And lastly, our Fit-for-Growth program has made terrific strides in terms of embedding operational efficiency discipline into the organization, giving us greater flexibility to pursue future investment requirements. If we move to Slide 23, the heat map, you might remember this schematic from our full year results, and I wanted to revisit it today to put a bit more of a framework around the progress that we've achieved in the last half. As I flagged, our new price book is almost fully implemented, driving incremental benefits across ACV and NDR. Sales optimization is one of the areas where we made really good gains in the half, arming our salespeople with the skills and materials to drive improved win rates, higher customer retention and sales force efficiencies. I mentioned that our renewals process is now much more focused around ACV and NDR outcomes with better checks on addressing the price versus value proposition. Service and support offerings as I mentioned, will take time but will have material impacts over the medium term, helping our customers use our products more effectively. On enablers, our recent hires into critical leadership positions give us a fantastic structure and the right individuals to drive growth. We will continue to refine the structure of the margins, but the near-term goal here is almost complete. We piloted the way our people are incentivized to more closely match our goals of our organization. The next steps here are involved further defining accountability and embedding our new company values into our culture. And lastly, we've made some great gas in building out our marketing function, which is critical for lead generation and our deal pipeline, and I have more to say about this shortly. If we move to Slide 24, this details how the initiatives from each of the 3 horizons fit together strategically showing timing and expected benefits. As you can see, first half 23 was all systems curve for everything all at once. It was a remarkably business and fruitful time for our projects across Horizon 1, 2 and 3. In the current half, more finalization work will occur in Horizon 1 foundations, while our Horizon 2 and 3 projects will continue with their current momentum. If you move to Slide 25, this is a nice lead into some comments around horizon 2. I'm super excited to announce that our new unified platform is on track to be related to customers in first half '24. That is the second half of this challenge. The new unified platform is a step change in the way our customers use our products. vastly, optimizing workflows and getting users from requests to results far faster, smarter and easier. This is partly achieved by augmenting Nuix' engine-based products with our natural language processing AI capabilities and by automating the most manual repetitive tasks so that data flows more easily through the NEX platform. Customers will be able to work smarter, yielding significant productivity benefits, better control of tech stack costs and utilizing their own team experiences to work across new and diverse business lines. On launch, the unified platform becomes a foundation for solving challenges like data privacy, early case assessment through our legal processing and fraud. We'll have more to say about the Unified platform closer to rollout, but in short, we're super excited watch this space. If you move to Slide 26 data privacy, I majored a prove CEO a moment ago when talking about the Unified platform. Data privacy is the first horizon 3 initiative that is building high-value repeatable use case solutions available to our customers. This is a great example of harnessing the power of the Nuix engine in managing the impact of expanding data regulation. The offering of our customers to make privacy data, identify risks, meet retrievable obligations, defensively elite relevant data and optimize processing. Future product type offerings are in our development pipeline, and these will be underpinned by the capabilities of the Unified platform. We look forward to updating you on these further initiatives in due course. If you move to Slide 27, which is our Accelerate 23 million -- right from the start of our strategic refresh, we've set a greater focus on customer centricity is critical. We're increasing our engagement with customers through events like user groups. And further to that, we're very excited to showcase all of these innovations and more to our customers and our partners and a series of landmark customer events taking place in Sydney, London and Washington, D.C. over March in April. The events are named Nuix Accelerate and are positioned as an essential destination for global professionals who protect their organizations and communities by finding truth in complex data. These events are opportunity to excite our customers with the change and highlight some of the incredible and important work that our customers conduct aided by our technology. And there are also an opportunity for us to connect with our customers in person, building relationships that build business in the long term. Separate to the results today, New has also released an ASX announcement regarding a change of Chairman from Jeff Bleich to Rob Mactier. I want to take a moment to express my sincere thanks to Jess for his tireless efforts as Chairman. Our role is executed with integrity and the up commitment. I know I speak for the entire Board when I say we look forward to continuing to work with Jeff in his capacity as Deputy Chair. In closing today, I'd like to leave you with the following key points: one, our strategic initiatives are working. We are seeing the green shoots of momentum that we wanted to see in our critical metrics like ACD, NDR and churn. As we progress fee further on these initiatives and indeed finalize some of them, we expect these initiatives to provide further momentum and growth. Two, our pipeline at unicycle, -- the launch of the new Nuix Unified platform will be a step change in terms of our customers' experience and also for us as an organization. We have already seen and started our productization pathway with data privacy and with more solutions to follow. Three, the new Nuix is emerging, and it's emerging now. Our strategy is clear and we are acting on it. We are not distracted by erroneous chatter. We have had significant wins recently, and our team is motivated and getting on with the task at hand, making a meaningful difference in the world. We're excited about the future and ready to drive new ex forwards. I'll now hand back to the operator for Q&A.

[Operator Instructions] We are showing -- currently showing no questions at this time. I'd like to hand the conference over to Mr. Rubinsztein for closing remarks.

Thank you very much for your time today. We look forward to meeting with investors in the coming days and weeks. Thank you.