Nuix Limited (NXL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nuix Limited FY '23 Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Jonathan Rubinsztein, Chief Executive Officer. Please go ahead.

Good morning, and thank you for joining us today for Nuix's financial year '23 results. I'm Jonathan Rubinsztein, Nuix's CEO, and I'm joined by our Chief Operating Officer and Chief Financial Officer, Chad Barton. I'll make some opening comments, including an overall snapshot of the FY '23 results before handing over to Chad to talk through the financial results in more detail. Following that, I'll provide an update on our strategic initiatives, including the launch of Nuix Neo and our related solutions. Lastly, I'll make some comments in relation to our strategic objectives for financial year '24. Jumping to Slide 4, who is Nuix. Just a quick reminder of who we are. Nuix is a leading provider of investigative analytics and intelligence software that empowers our customers to be a forceful good by finding truth in the digital world. We have over 20 years of experience in the field with the ability to process more than 1,000 file types. Our talented team of more than 400 people around the world, service roughly 1,000 customers out of 11 locations. We work with more than 100 partners around the world, broadening the reach of our offering. Moving to Slide 5. Nuix's Engine is unparalleled in helping customers make sense of massive amounts of structured and unstructured data. We make it searchable and actionable at speed and scale with forensic accuracy. Our customers are allowing us to help with challenges as diverse as criminal investigations, data privacy, e-discovery, regulatory compliance and insider threats. Turning to Slide 6, the full year results. There are some key messages that I'd like to emphasize today. Firstly, as we outlined in our July update to the market, we experienced strong growth in ACV, Statutory Revenue and EBITDA over FY '23, which we will explore further today. We have driven a significant lift in net dollar retention, an indication of how much we sell to existing customers, and importantly, our customer churn has remained stable. Underlying cash flow for the year was positive, in excess of our stated aim of being underlying cash flow neutral. These outcomes are partly as a result of the Horizon 1 initiatives we've been pursuing over the course of the year. These Horizon 1 initiatives are now at or near completion. Our critical Horizon 2 and 3 projects are underway with Nuix Neo and the first associated solution, Data Privacy, launched last month. And lastly, we have set some strategic targets for FY '24, which we are pleased to share with the market today. Moving on to Slide 7. As mentioned, we've achieved some pleasing results for FY '23. ACV at the end of the year came in at $185.5 million, to the upper end of the range we provided last month. This outcome is a pleasing 14.5% increase on the same time last year. Statutory Revenue rose by 19.8% on the PCP, driven by a particularly strong trading performance in June. This increase in stat revenue was achieved despite a moderation of multiyear deals compared to last year. We previously flagged that our nonoperational legal costs were lower this year compared to last year. This impact, combined with the stronger revenue growth and general cost containment contributed to statutory EBITDA rising almost 190% to $34.9 million. 2 key new numbers today to highlight are customer churn and net dollar retention. Customer churn remained stable at 5.3% for the full year compared to 5.4% this time last year. Our NDR outcome at 109.2% is a marked improvement from this time 12 months ago. As we've mentioned previously, NDR is important because it provides an indicator of how much we're selling to our existing customer base. A key element of our strategy during FY '23 was to focus on our existing customer base, and you can see the results of that focus in today's NDR number, along with generally stable churn. We'll have more to say about our customer base a little later on, but these 2 indicators are a great reminder of the strength of Nuix's customer relationships. Lastly, we finished the year with $29.6 million in cash, with no debt, as we flagged last month. I'll now hand over to Chad to talk through the financial results in more detail.

Thanks, Jonathan. Good morning, everyone. Looking at Slide 9. In FY '23, ACV rose to $185.5 million, up 14.5% on the prior year and up 10.8% in constant currency. ACV growth was underpinned by stronger net upsell to existing customers, driven by the strategic initiatives implemented during FY '23, including the organizational restructure, improved renewal processes, new price book and our sales enablement uplift program. ACV growth was also driven by new business, with ACV from new logos rising to $6.5 million in FY '23, up from $5.4 million in the prior year, which equates to an average new ACV of $96,000 compared to $82,000 in the PCP. Subscription ACV represented the darker blue bars on the chart. It rose 14.4%. Subscription ACV is an important indicator of recurring proportion of our ACV. Akin to ARR, subscription ACV represents 92% of total ACV. Other ACV, which is not included in subscription ACV, also rose because of stronger sales of perpetual licenses to U.S. government customers. Turning to Slide 10. Overall consumption ACV is up 17.7% on PCP or 14.9% in constant currency. Consumption ACV has been driven by stronger growth in Discover SaaS, which is up 35.5%, driven by usage across our law firms and advisory customers. Non SaaS consumption fell slightly on the prior period, but we expect to see further growth in consumption ACV as we roll out Nuix Neo. Looking at the regional performance on Slide 11. It's very pleasing to see all regions reported double-digit ACV growth. North America, which makes up a little over half our ACV, rose 15% on PCP, driven by strong upsell to existing U.S. customers. The region also saw solid new business sales to corporates and increased SaaS usage from law firms. EMEA ACV rose 12.2% with growth in U.K. and German government customers, driven by the conversion of several perpetual licenses to annual subscription licenses. The EMEA region saw new business growth through EU law firms and U.K. corporates. Asia Pacific rose 16.4% because of strong upsell Australian government agencies. New business [ strength ] came via good wins in Asia and strong uplift in SaaS usage for Australian law firms and advisories. Slide 12 shows our statutory revenue. As we have highlighted previously, Nuix's statutory revenue can be variable due to the accounting treatment of multiyear deals. Revenue rose by 19.8% on the prior year, up 15.8% in constant currency. What's particularly pleasing about this stat revenue result is the strong uplift that occurred, despite the moderation in multiyear deals from 40% in the prior year to 30% this year. A falling multiyear deal experience is a headwind in statutory revenue framework, and importantly, this year's the outcome was achieved despite that headwind. Subscription revenue, the generally recurring component of our revenue stream was 94% of total revenue. Average new order value fell slowly, as you would expect, if you sign a [ lower ] proportion of multiyear deals. Turning now to Slide 13. As you can see, we have maintained our commitment to research and development over the course of the year with our total investment up slightly to $60 million. It's worth noting that the R&D spend was up in AUD, but down 2.6% in constant currency, a reflection of our R&D presence in the U.S. FY '23 was an important year for the development of Nuix Neo and related solutions, which is reflected in our overall spend. You'll notice a higher expense portion of our overall spend in FY '23. That is an outcome of the nature of the work leading into the commercialization of Nuix Neo as it's an expense item that has a resulting impact on our statutory EBITDA, as you would expect. Given our revenue rose during the year, the overall R&D as a proportion of revenue fell to 33% from 38% in the year earlier. R&D spend for the year has been entirely funded from underlying cash flow, even at these higher levels of overall investment. On Slide 14, we show the income statement. Underlying EBITDA rose 59% or 51% in constant currency on both revenue growth and general cost containment. As flagged at the half, we experienced an increase in cost of goods sold due to a higher proportion of deals contracted through partners. And as anticipated at the first half results, we saw a significant uptick in cost in the second half related to the marketing function, particularly in relation to the global XLR8 conferences we held during the half. This investment is important in driving new lead generation and overall growth. General and administration costs were lower on general cost containment through our Fit for Growth program. And as flagged in our July update to the market, whilst nonoperational legal costs were higher in the second half compared to the first half, for the full year, they were significantly lower than PCP at just under $8 million compared to close to $14 million in the prior period. Compared with PCP, our net losses reduced by 75% in the year. Slide 15 shows the EBITDA walk for FY '23. This graphically shows our operating leverage achieved in the business over the course of the year, with revenue growth outpacing cost growth. Nuix's underlying EBITDA margin rose to 25.5% from 19.2% in the prior year. Including a much better experience around nonoperational legal costs, the statutory EBITDA margin jumped significantly to 19.1%, more than doubling from the prior year. And then you can see, adding back the nonoperational legal costs and top loss costs, how we get to an underlying EBITDA of $46.4 million. Turning to Slide 16 and our free cash flow for the year. We've been clear in our commentary that our aim was to be underlying cash flow neutral for the year. That is cash flow neutral, excluding costs associated with the Topos acquisition and nonoperational legal costs. Given the particular strength we saw that came through in the second half, we've been able to exceed this target with a positive underlying free cash flow of $9.1 million compared to a $2.5 million cash outflow in the prior year. The elevated levels of R&D that I mentioned earlier have been funded from underlying free cash flow. Note the larger cash outflow associated with Topos compared to the first half, this is due to the milestone payment made in January, which was USD 6.25 million or AUD 9 million. Slide 17 gives an update on our 2 acquisitions since IPO, most recently Rampiva in July 2023 and Topos Labs, which was announced and completed in September 2021. This is provided to assist the investment community in understanding cash flows and equity commitments associated with these 2 acquisitions. Firstly, in terms of our recent acquisition of Rampiva, note the initial payment of USD 2 million cash and USD 2 million in shares was paid in July this year, that is in FY '24. There is the potential for a further USD 3 million in shares payable upon meeting ACV growth and cost management milestones in the 3 years post-acquisition. Rampiva team and technology will be embedded into Nuix operations in the coming months with Rampiva software immediately available to Nuix customers. Separately on Topos, recall that this acquisition of natural language processing technology, which has become the cornerstone of our Nuix Neo AI capability. As I noted earlier, we made a milestone payment of $6.25 million cash in January 2023 on the achievement of the first group of progress markers, including functionality and integration. Current milestone progress suggests a likely final cash payment of USD 5.5 million to be made in either late FY '24 or early FY '25, mostly dependent on sales outcomes. But the team and the technology are fully integrated into the Nuix stack and into our Nuix teams. Lastly, on Slide 18. As I did in the first half, I'd like to make some comments about the nature of the Nuix customer base. Nuix's customer base remains highly diversified with a generally long tenure. Around 85% of ACV is generated outside of Australia, with no individual customer representing more than 4% of our ACV. Our customer relationships are strong, with just under 40% of our customer ACV having been with us for more than 10 years. And as Jonathan mentioned earlier, our net dollar retention from existing customers has improved from 96.8% in FY '22 to 109.2% in FY '23. I'll now hand back to Jonathan.

Thanks, Chad. Now moving to Slide 20. The strategic refresh agenda that we articulated 18 months ago was built upon a greater focus on customer centricity and structured around 3 horizons of growth. I'm pleased to report that very significant progress has been made on projects across all 3 horizons. As a quick reminder, Horizon 1 was a near-term focus, providing momentum to restart growth and to provide a solid foundation for our medium and long-term growth strategies. We made a strategic decision to focus heavily on renewals and our installed base customer over the course of the year, and you can see the results of that focus in our metrics today. Horizon 2 was focused on building out our unified platform, which has culminated in the development and recent launch of Nuix Neo as a commercial go-to-market and technology pivot for platform solutions. And Horizon 3 incorporates higher-value repeatable use cases and new ways to use our technologies. This is captured through the Nuix Neo solution road map, beginning with our data privacy solution, which was launched in July this year. Moving to Slide 21. Our Horizon 1 initiatives that enable us were implemented to drive near-term business momentum and provide a solid foundation for growth. We have achieved our near-term goals in relation to the new price book, improved [ the ] Neo process, organizational restructure and the build-out of our marketing function. These areas now enter into a continuous improvement operating cycle, or BAU. In addition, we will shortly complete our work on sales enablement optimization and performance and reward alignment. We are investing in our service offerings, which provide an opportunity to embed and refine upgraded service offerings as part of a standardized process and will be an important part of our Nuix Neo rollout. Moving to Slide 22. The next 2 slides provide more specifics around these Horizon 1 initiatives and enablers. We launched our new price book during the year. And as we said during the half, this was about addressing what we saw as the [ fundamental ] disconnect in certain areas between pricing and value, remembering these price book increases take time to work their way through the customer base as contracts come up for renewal. Now that we have our price book in order, this provides a foundation and structure for our pricing mechanisms moving forward. On sales enablement optimization, we are very close to completing our near-term goals. We are utilizing the hunter and farmer concept more effectively, standardizing our pitch decks and marketing materials, and we've pivoted our [ sales ] metrics towards ACV. The final elements here involve leveraging our new operating model for pipeline expansion and some further elements of standardizing our sales approach. Our renewal process has undergone significant changes over the financial year, leading to very positive financial outcomes and metrics like NDR. The renewals process is now much more focused on ACV, NDR and churn with a greater degree of clarity and accountability. On service offerings, we've had a great opportunity to offer a more holistic customer offering, incorporating product, services and support. We've decided to take the time here to make sure we get this initiative right through an internal reorganization and new hires, along with the refinement of the overall strategic plan. A big part of this strategic plan involves offering Nuix advantage support alongside Nuix Neo. So in some senses, this objective is merging with our Horizon 2 and 3 plans. Moving to Slide 23. Having the right structural elements in place to support our strategic initiatives is obviously critical. We have now completed our organizational restructure. Performance and reward alignment is close to completion. We are now including the final incorporation of growth metrics and embedding our core corporate values to drive further performance. The build-out of our marketing function is complete, and we've hosted very successful XLR8 conferences in the last half in Sydney, London and Washington D.C., enabling us to reconnect with our customer base and showcase our product and innovation. The licensed modernization project is making great progress. This is really a critical project, simplifying and modernizing our licensing framework built around solution and data velocity in conjunction with our Nuix Neo offerings. The engineering team has continued to refine its project prioritization, while the Fit for Growth program has further embedded operational efficiency discipline, yielding tangible cost optimization and a pivot of spend towards areas of growth. Lastly, I'm very pleased with the cultural transformation that's underway, incorporating our new corporate values, promoting greater transparency and more frequent employee engagement and feedback cycles. An enormous amount of work has taken place over the last year to deliver on these Horizon 1 initiatives, the outcomes of which are evident in today's results. Importantly, these initiatives now provide us with the foundation for further growth. Moving to Slide 24. We said when we launched the strategic refresh that we wanted to focus more closely on customer centricity. The key Horizon 2 project was the development and launch of a unified platform, which culminated last month in the launch of Nuix Neo. Nuix Neo is an AI-enriched single platform that helps our customers identify, process and understand complex data faster, easier and smarter. Faster because customers can do more in less time, users have access to on-demand scalability with the platform yielding significant efficiency benefits; easier because Nuix Neo consists of an end-to-end web-based automated template-driven platform; and smarter because Nuix Neo leverages our proprietary AI to risk assess and prioritize the most relevant information for human review. Moving to Slide 25. Nuix Neo resets commercial relationships by accelerating customers' productivity, deployment flexibility and AI innovation in a fully integrated platform. It puts our world-leading processing capability at the heart of an integrated solution-focused platform. Using a browser-based collaborative interface, Nuix Neo represents a step change in user experience, incorporating end-to-end automation, investigative analytics and AI-enabled workflows. The consumption-based model allows on-demand scalability with deployment on-premise or in a customer cloud. Moving to Slide 26. It's really important to distinguish Nuix's proprietary AI from the more general purpose AI that many people might be familiar with. Nuix Neo proprietary AI offers customers a responsible, transparent and a secure way of utilizing AI innovation to reveal unprecedented insights into data sets. There are 3 key principles in the way Nuix Neo utilizes AI capabilities, namely, explainability, accessibility and specificity. Firstly, explainability. To achieve and sustain confidence in AI's output, the black box must be opened to provide users with clear line of sight to the training data used to build the models, any biases that might exist and easy to understand reasons behind the AI's outputs. AI should be used to inform and accelerate human decision-making, not replace it, by delivering definitive yes or no answers. Nuix's AI points human decision makers to the places they are most likely to find the undeniable facts that will inform their actions. There is transparency around the training data set used to build the AI model and every process step is recorded, repeatable, explainable and [ defensible ]. Secondly, accessibility. The transformative power of any technology lies in how usable and customizable it can become. Until recently, AI had been the preserve of a smaller number of highly skilled machine learning experts, software programmers and data scientists. To maximize the value from AI investment, there is an opportunity and obligation to empower nontechnical individuals with access to AI capabilities in an intuitive, easy-to-use way. Nuix Neo's interface is designed to enable domain experts to build, optimize and validate highly accurate language AI models quickly with a simple point on kick interface without a single line of code. This helps to democratize the power of AI, allowing a broader range of humans to directly engage with AI and its associated benefits. Thirdly, specificity. Generalist models can be difficult to explain and be less transparent in terms of processes, also making them less repeatable. The key is to enable users to try the process by imparting their knowledge and expertise into the model they create, centered on a wide range of targeted use cases. The result is dramatically improved accuracy and greater credibility in domain-specific outcomes. Before we leave this page, a quick comment on data security. Many of Nuix's customers need to process vast amounts of highly sensitive information. Generalized public cloud AI simply isn't appropriate for these use cases. This is one of the reasons why their ability to deploy Nuix AI technology in a secure way behind the customer high [ role ] is so critical. Nuix is one of very few organizations that can offer an AI-enabled end-to-end data investigations platform that customers can deploy behind their firewall and customize using their data sets. Our customers leverage AI innovation in an environment where they can control and tune it with the immediate relevant existing data sets that they are already accountable for. Moving to Slide 27. Nuix Neo becomes a foundation for specific use case solutions. The Horizon 3 objects that we previously articulated. These use cases provide an easy-to-use, templatized, repeatable approach to specific customer needs. The first use case solution, Data Privacy, was launched in July 2023 to Early Adopters. This will be followed later this financial year with investigations and legal processing solutions, all underpinned by Nuix Neo AI-enriched capabilities. Moving to Slide 28. Nuix's Data Privacy solution provides users with forensic depth and defensibility to analyze sensitive data and protect businesses and customers. Use cases include fiber breach notification, data protection, personally identifiable information and regulatory compliance. As mentioned, this solution is available to Early Adopters now. We are currently in discussions with a number of organizations around the globe as part of our Early Adopters rollout. We'll update the market on the progress of our rollout in due course. Moving to Slide 29. I've mentioned Early Adopters quite a bit over the last few slides. FY '24 will be characterized by partnering with a small number of Early Adopter customers and partners as various solutions are released. These customers will receive what I like to call white glass service. We will partner with them to achieve accelerated ROI and maintain an open dialogue around their early experiences and incremental ways to improve our offering. This is aligned with our customer-centric design philosophy. Nuix Advantage subscriptions will be part of the Nuix Neo offering, delivering rightsized customer support packages in addition to the various solutions. We will work with customers and partners on managed commercial pathways migrating to Nuix Neo via the multiple use case specific solutions. Customers not part of the Early Adopter group will have a Nuix Neo pathway plan to provide a road map for them to achieve the benefits of Nuix Neo take up. Moving to Slide 30. Here, you can see a graphical representation of what I just described. Solution releases to Early Adopters started Data Privacy and will also include investigations and legal processing later on this financial year. All of these use case solutions are underpinned by the Nuix Neo framework and technology. Customers not in the Early Adopter group will have a pathway to migrate it to Nuix Neo solutions, with adoption across the customer base accelerating into FY '25 and beyond. Importantly, these customers will continue to benefit from their existing technology in the meantime. Nuix Neo and associated solutions are the culmination of an enormous amount of work by the Nuix team over the last year. We are proud of what we've created and excited about rolling it out to our customer base. Nuix Neo and use case solutions are a material step change in our customer offering, and we'll be providing a key foundation for growth in coming years. Moving to Slide 32. We're super excited about what we've achieved to date and what we're looking to achieve in this financial year FY '24. At a high level, we've set ourselves the following strategic targets for FY '24. Firstly, we're targeting around 10% ACV and stat revenue growth in constant currency. With around 85% of our revenue from outside Australia, foreign exchange can, and does have an impact on our reported results, which is why we provide a great deal of transparency around our constant currency outcome. With the progress we have made in implementing more robust business practices, along with the rollout of Nuix Neo, we look forward to delivering further growth in FY '24. In addition, we were clear that FY '23 was a year about further reengaging with our existing customer base and getting our NDR moving. We've achieved momentum in this area, and now we are ready to broaden the sales focus in FY '24 to more comprehensively incorporate new customers and drive new business. As we saw in FY '23, we expect to see further operating leverage in the business in FY '24 with revenue growth continuing to exceed our operating cost growth. And lastly, we expect our underlying cash flow, that is cash flow before nonoperational legal costs and top off costs, to again be positive for the full year FY '24. This will likely be more evident in the second half than the first half, given the timing of certain cash flows over the year. In closing, we're very pleased with the progress we've made over FY '23. But of course, there's still much to do. I want to thank the team for their hard work in delivering these results. The rollout of Nuix Neo, along with a range of other initiatives that we've outlined today, will provide the foundation for growth in FY '24 and into the years following. I'll now hand over to the operator for Q&A. Thank you.

[Operator Instructions] Our first question is from Hazmy Hazin with Foster Stockbroking.

Just a couple of questions from me. I think just among the 3 regions that you're operating in North America, Asia Pacific and EMEA, may I know which among this region that poses a significant potential going forward, in your view? And will you be focusing any particular region for growth in this coming FY '24?

Good question. Look, I think all 3 regions -- again, we're really excited about the growth that all 3 regions have attained. And I think there are different market dynamics in different regions. But in summary, there is a lot of growth for all 3 regions separately. In the U.S., we're seeing some very good growth in U.S. government and also in U.S. corporate. In Europe, a lot of the big government organizations. We've also seen a lot of growth in our Discover SaaS business. And in APAC, we've seen good growth in our legal business, in government, and also Japan we're seeing some regional growth. So separately, Japan and in the U.S. region, Canada are 2 areas that we are looking at exploring from a geographic growth perspective.

Also just maybe if you can give a bit more detail in terms of -- you mentioned the moderation of the multiyear deal. Yes, just want to know a little bit more about that and also if there's -- if you can share any pushback from the customers in terms of renewing with your company as well?

Yes. So certainly, multiyear deals continues to be roughly about 30% of our SaaS revenue. It has been as high as [ 40% ] in the last couple of financial years. But actually, if you look over a longer period of time, it's pretty consistently been tracking on average about 30% over a longer period of time. So nothing there in particular. No pushback from customers necessarily on that perspective. Probably what you're seeing is -- a little bit more so is we have changed our commission plan for our sales teams to be focusing on ACV, in particular, so annualized contract value. And you're seeing that probably a bit more of a focus in the numbers and why multiyear deals have gone from 40% to 30% from 1 year to the next. I think the other thing just to point out as well within that, even with that drop in multiyear deals, you're seeing that revenue has grown nearly 20%. So we've offset that drop in multiyear deals. So it really shows the quality that the Statutory Revenue growth is actually quite high this year with a 20% growth, including offsetting a 10% reduction in multiyear deals.

And also in terms of -- you mentioned on Nuix Neo. Do you have any kind of expectation or guidance in terms of earnings contribution coming from this new product for FY '24?

We are super excited about Nuix Neo, specifically because it does shift the way we sell and what we sell to our customers. And I think the value that Neo drives is going to be significant. However, we're also very clear that we are taking a very customer-centric view of how we deliver Neo. And so we have an Early Adopter program, which means that we really think -- and again, we're rolling that out right now for our data privacy solution, which we launched in July. And so, we are making sure that we're rolling it out properly that we get customer feedback and embed that within the way we roll it out and within our product. And so, we expect to see some growth in our Data Privacy solution, really moving into H2 this financial year. And I think we'll update the market more at the end -- at the half.

Just a last question from me in terms of the nonoperational legal costs. What kind of expectation of guidance going into FY '24 -- are you going to be higher or lower?

Look at the moment, my expectations is, it will probably pretty similar to FY '23 into FY '24. We do have a 4-week trial coming up later this year on the [indiscernible] [ Section ]. So obviously, a 4-week trial, it will be quite expensive, and there's a lot of investment going into that at this point in time. So best I think, to think is a similar level to FY '23.

[Operator Instructions] There are no further questions at this time. I will now hand the call back to Mr. Rubinsztein for closing remarks.

Thanks, everyone, for taking the time today and look forward to catching up with some of you over the next couple of weeks.

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