Nuix Limited (NXL) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Nuix Limited First Half '24 Results Presentation. I would now like to hand the conference over to Jonathan Rubinsztein, Chief Executive Officer. Please go ahead.

Good morning and thank you for joining us today for Nuix's first half '24 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 open this morning's call with the key messages and metrics of this result before handing over to Chad to talk through the financial results in more detail. Following that, I'll provide an update on our 4 strategic growth initiatives, the Nuix Neo platform and related use case solutions. Lastly, I'll make some comments in relation to the outlook and our strategic objectives for the full year. If we move to Slide 3. As I've shared before, we've been on a journey of transformation at Nuix, investing in the best of what we do and innovating and improving where we needed to do better. Just to give you some context behind these results. Some of the changes that we've implemented included new people, including a new leadership team, new products, Nuix Neo, which I'll say more about later, new sales process and a new way of engaging our customers, new licensing models, new support and services and new brands, all of which have strengthened the business and are showing in the financial results. If we move to Slide 4, who is Nuix. Firstly, a quick reminder of who we are. Some listeners might be familiar with this slide. Nuix is a leading provider of investigative analytics and intelligent software that empower customers to be a force for good by finding truth in the digital world. We have over 20 years of experience with the ability to process more than 1,000 file types. Our talented team of more than 400 people around the world, service around 1,000 customers. And to further broaden the reach of our offerings, we work with about 100 partners around the world. Moving on to Slide 5. Nuix's powerful proprietary engine underpins the offering, helping customers make sense of massive amounts of structured and unstructured data. We make sustained and searchable and actionable at speed and scale with forensic accuracy. Our customers rely on us to help with challenges as diverse as criminal investigations, data privacy, e-discovery, regulatory compliance and insider threats. Moving to Slide 6. Turning to the half-year results, there are some key messages that I'd like to highlight today. Firstly, as we outlined in our updated the market last month, we are continuing to drive growth in ACV, stat revenue and underlying EBITDA. We had a very expensive trial during the half that meant our legal fees were elevated, impacting our statutory EBITDA for the half. We have had a further improvement in NDR with customer upsell more than offsetting an uptick in customer churn. Underlying cash flow for the half was positive, in line with our strategic objective to be underlying cash flow positive for the full year. First half '24 was a particularly important time for the next stage of our strategic evolution with the successful launch of our unified platform, Nuix Neo, along with the first use case solutions to our early adopters. And lastly, we take the opportunity to reiterate the FY '24 strategic objectives that we shared with the market at the full year results in August, targeting 10% ACV and stat revenue growth in constant currency, the successful rollout of Nuix Neo and associated solutions to early adopters, broadened sales focus to further drive new business, revenue growth to exceed operating cost growth and finally, underlying cash flow positive for the full year. Turning to Slide 7, our financial metrics dashboard. ACV at the end of the half came in at $199.6 million, slightly above the upper end of the range we provided last month. This outcome is a pleasing 17.3% higher than the same time last year. Stat revenue rose by 12.3% on the PCP. This increase in statutory revenue was achieved despite a moderation of multiyear deals compared to last year. Both ACV and revenue growth have been driven primarily by increased sales to Nuix's broad existing customer base. Growth in the top line, combined with the continued focus on the cost base meant that we were able to grow underlying EBITDA by 12.8% to $28.4 million. This is in compete with our strategic objectives for the full year to grow our revenue faster than operating costs. We [ planned ] in January that nonoperational legal costs were particularly elevated due to the asset trial, which occurred during the half. And that [ has laid on our ] statutory EBITDA, which is down 17.6%. Our net dollar retention or NDR has risen to 110.1% from 103.1% a year ago while customer churn has ticked up a little higher to 5.7% compared to 4.8% a year ago and 5.3% at the full-year results. As I mentioned earlier, continued upsell to our customer base more than offset the small increase in churn during the half. Lastly, we finished the year with $24 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.

Thank you, Jonathan, and good morning, everyone. Turning to Slide 9 and drilling down a bit further on the strong ACV growth. In first half '24, ACV rose to $199.6 million, up 17.3% on the prior year and up 7.6% in the 6-month period since the full year results. ACV growth has been driven by a number of factors. Pleasingly, Nuix Neo sales contributed around 1/5 of the growth from the standing start this financial year. Upsell to existing customers of our component products contributed the largest driver of growth at 40% with sales to new customers and price increases, both contributing about 1/5 of the growth each. Other ACV, which includes perpetual licenses and services [indiscernible] on services into key government and corporate customers. Turning to the regional performance on Slide 10. It's great to again see all regions reporting double-digit ACV growth with key government customer wins across each region. North America, which makes up more than half our ACV rose 18.7% on PCP. The region also saw quality business sales to corporate and achieved a key new government win for the Nuix Neo product. EMEA ACV rose 13.5% as a result of strong upsell achieved in key advisory and government accounts. The EMEA region also achieved new business wins in government. Asia Pacific rose 18.8% with strong upsell in the key government accounts, including significant Neo Investigate migration. Once again, Asia Pacific achieved a strong uplift in SaaS usage driven by Australian law firms. Speaking of SaaS, on Slide 11, we can see the continued strength in the Nuix discovered SaaS product, up over 33% on PCP. While SaaS continues to grow strongly, it does apply some variability depending on the usage patterns. With this in mind, we have commenced the project to migrate pay-as-you-go accounts to minimum commit contracts to drive a more predictable ACV growth in the future. Slide 12 shows our statutory revenue. For the half revenue rose by 12.3% or 9.3% in constant currency. Importantly, this statutory revenue increase has been achieved despite multiyear deals falling to 24% from 29% in the PCP. A falling multiyear deal experience is a headwind in statutory revenue framework. And importantly, this year's outcome was achieved despite this headwind. The falling multiyear deal experience is a combination of several factors, including increasing appetite from customers for annual deals, combined with a focus by us on more appropriate pricing in out-years for multiyear deals. Subscription revenue, a generally recurring component of our revenue stream, represented 95% of total revenue. Sales [ to new ] customers came in at $4.6 million, lower than PCP with the average order value from new customers also lower. Accordingly, the revenue growth achieved during the half was primarily from new -- extensive existing customer base, including sales of Nuix Neo. Slide 15 highlights Nuix's R&D spend for the half. As you can see our R&D spend fell 10% compared to the PCP. This outcome is due to a range of initiatives, along with increasing refocused spend on particular areas of revenue-generating capacity. The total R&D spend as a proportion of revenue fell to 27%, which is demand fall from 34% a year ago and 33% at the full year results. This low proportion has been accelerated by higher revenue and a lower R&D spend in the period. We do have further investment to do in R&D and in a general sense, we expect R&D to land a couple of percentage points higher as a proportion of revenue in the near term. You'll also notice a higher expense amount in the first half and that was an outcome of the nature of the work leading into the commercialization of new Nuix Neo solution. And it's an expense item that has resulted in -- on our statutory EBITDA. Once again, R&D spend for the half has been entirely funded by underlying cash flow. On FedRAMP, our U.S. team has been particularly active over the last 12 months and its overall level of business has meant that the FedRAMP-ready status that we advised to the market in late 2022 has lapsed. Our intention is to continue with this investment, regain the ready status, especially given we have previously met the requirements of various controls and formalize the partnership with a government agency in due course. On Slide 14, you can see the income statement. Underlying EBITDA is up 12.8% on PCP or up 9.7% in constant currency, driven by revenue growth and a continued focus on costs. Now that we've previously excluded Topos operating costs from underlying EBITDA prior to full integration and revenue generation of that business, we have now included those Topos costs in the underlying EBITDA measure. You can see the Topos adjustment about halfway down the table. Naturally, without these extra costs, the underlying EBITDA increase would have been even more pronounced. The cost of goods sold decline, as you can see on the table, was achieved through lower hosting fees following an optimization plan. And accordingly, the gross margin was [ lifted through ] 89%. Sales and distribution costs are higher than the PCP on the incorporation of Topos of head count and a few other items. It's worth noting that we're cycling a low number in the PCP and its outcome for the first half '24 at around 34% of revenue is in line with our expectations and also in line with the historical proportion of revenue. I've already spoken about R&D. With the Topos headcount inclusion there is a little change in R&D expense line. G&A costs are running about the same as we would expect them to be around 18% of revenue, in line with the FY '23 outcome. As a proportion of revenue, this has been trending down over time. As flagging [indiscernible] updates to the market, nonoperational legal fees were particularly elevated during the half, primarily related to the ASIC Federal Court hearing, which occurred during the period. These costs amounted to $11.2 million compared to $2.4 million in the PCP and compared to approximately $10 million we estimated in the January update. We expect nonoperational legal costs to be significantly lower in the second half of the current financial year. Naturally, the high level of nonoperational legal costs through the period has weighed on our statutory profit with EBITDA down 11.8% to $17.2 million and net loss after tax of $4.8 million for the half. Slide 15 shows the underlying EBITDA walk for the first half '24. This graph shows the operating leverage achieved in the business in the half, with revenue growth outpacing cost growth, even including the Topos adjustments. We remain committed to realizing further operating leverage in the business as evidenced by our full-year strategic objective of growing revenue faster than our operating costs. Slide 16 has our underlying free cash flow for the year. One of our strategic objectives for the full year is to achieve positive underlying cash flow for the full year. And you can see from this slide that the first half outcome has put us in good position to achieve this. In the first half, we achieved an underlying free cash flow positive outcome of $6.6 million compared to a $0.5 million cash outflow in the PCP. [ MP ] referenced the 12 months prior to that figure was a cash outflow of $5.7 million. We continue to make strong gains in the way cash is generated and utilized in the business. You [ note hear ] the items that sit outside of underlying cash flow, [indiscernible] cash acquisition payment made in July as well as the cash payments associated with nonoperational legal expense. On Slide 17, as we have done previously, I'd like to make some quick comments about the quality of Nuix's customer base. Nuix's customer base remains highly diversified with a generally long tenure. As we've highlighted before, around 85% of ACV is generated outside of Australia with no individual customer representing more than 4% of ACV. Our customer relationships are strong, with just under 40% of our customers having been with us for more than 10 years. And as Jonathan mentioned earlier, our net dollar retention from existing customers has improved further from 103% in the PCP to 110% this half, indicating that we continue to provide and create value for our customer base. Before I hand back to Jonathan, I'd like to make some comments about a really important development in relation to our capital base, which we announced today. I'm pleased to announce that Nuix has signed a $30 million revolving credit facility agreement with a global bank. The facility has a maturity of 3 years and is for general corporate purposes of the company other than costs associated with litigation, arbitration or administrative proceedings. While we have no current need for the debt facility, as we have been funding our business out of cash flow, having this sort of flexibility around our capital base really broadens our growth options in the context of our build, buy or partner approach to growing the business. It represents a significant further strengthening of our capital base and gives us more ammunition to pursue our growth strategy. You can find more information about the facility in a separate release we've made to the ASX this morning. I'll now hand back to Jonathan.

Thanks, Chad. Software companies are only as strong as their products and we are fortunate to have the most powerful processing engines of its kind. What we have done in new Nuix Neo is to synchronize all our technology around our patented Nuix engine to make the process of data collection, processing, enrichment, analysis and review faster, easier and smarter. All of this has been enriched with our proprietary AI in MLP that makes the process of understanding the data more intelligent and more incisive. Customers told us that whilst they loved our products, there was a friction between them and we smoothed that out to make the process of understanding data and taking actions on it at [ fast and easy time ]. We have also systematized the most common use cases for our software and created end-to-end solutions. Insights that we've gathered from our customers have been poured into our capability, investigations and soon to be launched legal solutions. So they are powered with common workflows, [ true ] AI language models that are specific to the challenges, meaning that solutions are turnkey and reduce time to answers. The acquisition of Rampiva last year means that the automation and orchestration of enterprise data is taking up a level again, all these in less than 12 months from inception. I'm pleased today to revisit the product road map that we outlined at the full year results and provide a progress update. In line with plan previously articulated early in the half, the first of these product solutions, Data Privacy was launched. The Data Privacy solution provides customers 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, PII, and regulatory compliance. Later in the half, the second use case Investigations was launched. The Investigations solutions allow our users to apply an array of collaborative AI techniques to quickly make connections between digital evidence and human behavior in a single platform. Use cases include fraud and economic crime, counterterrorism, serious and organized crime, regulatory investigations, public inquiries and employee misconduct. Both of these solutions were delivered in line with the planned timetable. Development is progressing on the third Nuix Neo use case solution planned for FY '24, namely Legal Processing, which is expected to be launched in the second half of this financial year to early adopters. Moving to the Nuix Neo early adopter program slide. We've been clear from the start that during FY '24, we would partner with a small number of early adopters in the launch of our Nuix Neo rollout, and I'm pleased to provide an update on that rollout today. By December, Nuix started working with early adopter customers with an average Neo ACV of more than $500,000 per customer being a 2 to 3x multiple of the previous typical non-Neo deal signed. This early adopter group comprises of 7 existing customers who have either upgraded their existing packages or migrated completely to Nuix Neo and 1 brand new customer out of North America. While it is still early days in terms of solutions rollout, we are very pleased with the incremental growth that Nuix Neo is providing, already contributing more than $4 million of ACV since its inception this half. In line with our strategy, all Nuix Neo customer packages include Nuix Advantage subscriptions, offering right-sized customer support in addition to the purchased solutions. And lastly, during the half Nuix engaged select customers in relation to Nuix Neo Pathway, collaborating with these customers to create a plan to transition to Nuix Neo solutions on a timetable that fits their organizational requirements. Now looking at the Nuix Neo roadmap. Looking forward, we are excited about the next steps for Nuix Neo. In the first half, we delivered on our timetable and core objectives. Looking to the second half, we expect further momentum in our data privacy and newly launched investigation solutions. We will launch our new Legal Processing solution and engage in further discussions with select customers in relation to the Neo Pathway. We will also further consider the FY '25 landscape, including further solution releases and more widespread adoption of solutions beyond the early adopter group. I'm incredibly proud of what has been created here. In first half '24, we took the first steps in launching a new offering to our customer base that has already yielded early financial results and will become the cornerstone of our growth strategy moving forward. Now moving to the outlook slide. During the first half '24, we delivered on what we set out to do, and I'm pleased to visit and reiterate the strategic targets we set for the full year. For the full year, we're targeting around 10% ACV and stat revenue growth in constant currency. At the halfway mark, we remain confident in delivering on this objective. We did have a very strong end to the second half of last financial year. So we will continue to drive further growth into the current half to maintain our momentum. We have delivered on the first part of Nuix Neo rollout and associated solutions and will continue this into the next half with the launch of Legal Processing. We will continue to couple the power of our AI and our engines and build on our differentiation in the market. Sales of our new Nuix Neo platform, while still in the early adopter phase, have been encouraging, and we are working with the sales team to make sure that they have the required tools to be able to articulate the sales and value proposition clearly and compellingly. We expect to see further operating leverage in the business in the second half, and we will remain on track for revenue growth to exceed our operating cost growth. And lastly, you saw that our underlying cash flow for the half represented a significant uplift from PCP, coming in with a solid positive underlying cash flow performance for the half. This sets us up well to achieve our objective of being underlying cash flow positive for the full year. In closing, I'm very pleased to share today the progress we've made over the first half '24, including further momentum in our financial metrics and the progress we've made on Nuix Neo. I'm pleased with the performance from all regions but the strength in our Americas business is particularly noteworthy given it represents more than 1/2 of our business. As ever, there remains more to do, but I remain excited and optimistic about our trajectory. I want to thank the Nuix team for really delivering during the half. Along with the financial momentum we have created in the business, the strategic foundation that we have set will provide the basis for growth into the medium and longer term. I'll now hand back to the operator for Q&A.

[Operator Instructions] The first question today comes from Jules Cooper from Shaw and Partners.

Jonathan, look, really strong results, particularly for Nuix Neo, particularly as you really only had essentially one product available in the period. I guess, could you perhaps comment on some of the feedback that you might be getting from those early adopters around the products and how they sort of fit with their requirements and whether that's giving you any more confidence around what the demand profile might look like once it sort of is generally available?

Thanks, Jules. Yes, great question. At the moment, we are very happy with the Neo rollout. As you know, we're in an early adopter phase. But also reminding the reality is that we only released the first version of Neo, which was our data privacy solution in July. And then more recently, end of December, we released our forensic investigation solution. So we're happy with kind of the early adopter program. In terms of our customer product market fit, look the reality is that we can even see the product market fit in terms of the sale process. So the one new customer that we did sell to, it was a tender process where there was an incumbent. And again, in a very open tender process in a large government organization we won a data privacy solution. So we're, at the moment, again, early days, but we think that, again, the fit seems pretty good. The other scenario out of the 8, we had 1 large advisory that bought a breach response tool. They went to market that actually selected a breach response tool, and we came quite late to the selection process and again won that in an open kind of tender situation. So again, I think we're going well. It is early stage, and we are feeling positive around where we sit.

That's excellent. Thank you for those insights. I guess if I just follow up on 2 more. So the second, on the legal costs, slightly higher than the January update provided. I guess, is that just sort of timing related? And if possible, are you able to sort of provide a perspective on what you think significantly lower might look like in the second half?

Thanks, Jules. Yes. So, yes, it's a little bit higher than what we said, which was in very early January. I think 12th of January, we gave the trading update. We did have a couple more late invoices come through from counsel, unfortunately, which is why it is a bit higher than where we sat on the 12th of January. Costs for the second half, really, it does depend on timing of judgments with the asset case and also case management hearings on class action but expect to be well below where we were in the first half. And we think at the moment, the best estimate circa somewhere between $4 million to $5 million in the second half.

Okay. That's appreciated. And then I guess lastly, the debt facility, you've made the comment that you don't need that facility today. But I guess, just the strategic thinking around what this added flexibility might open up for the business and just kind of what motivated the securing of this facility.

Yes. So thanks on that one, Jules, as well. So yes, as you saw in the first half, underlying free cash flow, we generated $6.6 million in the first half. So you can see operationally, we are very strong in cash generated in the first half. And some of the reason why we went -- our cash reduced in the first half was on the payment of the acquisition for Rampiva, the first tranche of payment for Rampiva. So you can see the facility we've established is to give us some more flexibility. We've been very clear over the years about a build by or partner strategy we have to developing our products. And so this facility enables us to think and have some more firepower to use debt and consider using debt and equity in terms of potential M&A moving forward. Not that we're saying that we have anything on our plate right now. We're always kind of scanning the market when things come up, but there's nothing on our plate right now, but this does give us that flexibility moving forward.

The next question comes from John Marrin from CLSA.

Nice work, and congrats on getting all that legal stuff in the rearview mirror. I just have a couple of questions. And on that slight rise in customer churn, can you just talk a little bit about what you're seeing in terms of the reasons for that churn?

Sure. Thanks. Thanks for that. Look, when we look at churn, I guess what we do is we absolutely look at churn in tandem with our NDR. And so at the moment, churn is within the range that we're comfortable with. It's on the slightly higher side of the range. However, again, looking at it in tandem with NDR, I think the reality is that we've seen our NDR move quite significantly, and we're pretty happy with the NDR. And again, the reality is that there can be some churn, which is actually -- so first of all, there is a chunk of churn, which is actually not customer churn, but often a project ending. And so a great example might be diesel gate where the project ends and they need less software than Nuix software. And then specifically some of the churn, although some of the churn has been higher in North America, we've also got a bunch of net new -- or new contracts within our existing customers, we can more than offset that churn. And again, that is part of our strategy, which is really to be very specific. There are segments potentially of a market that are fairly expensive to service. And so we're just being very specific around which segments we focus on. But again, the net is we are -- it's within our range and certainly not outside any kind of key barriers, and we are very happy with our NDR, which is tracking in the right direction.

Okay. And in terms of your sales force efficiency and optimization, obviously, you've got a ton of work. Just curious if you could speak to what else is left to do on that front? And is there any extra muscle that you have to build as you push harder into the enterprise customer base, perhaps with investigations or with legal?

Yes, I think that's a great question. And I think -- so absolutely. I think we're comfortable with where we're at, but certainly, we're not comfortable that this is certainly not the endpoint. In particular, and you've hit the nail on the head, there is a fairly significant shift in capability from selling components to selling an enterprise sale platform. And so -- and in fact, right now, today, we have a bunch of our sales organization going through our internal sales training, which is -- we're using a challenger sales methodological approach. And so that really is an uplift in our sales capability. I think we've still got a fair way to go. We're certainly not where we want to be from a long-term perspective. But certainly, in terms of the growth that we've made, I think we're pretty comfortable with the growth that we've made in the kind of capability over the last year to 1.5 years.

Okay. And one final one for me. I think on R&D spending, obviously, good to see some efficiency and operating leverage there. Can you just address the plan maybe on a longer basis on that R&D spend going forward and as a percentage of sales, perhaps or -- and then also on the mix between capitalized and expensed as we model it several years out?

Yes. Thanks, John. I'll take that one for you. So yes, R&D spend as a percentage of revenue came in at 27% for the half. That is lower than where we've kind of guided the market to over the last year. Our expectation is and somewhat dependent, obviously, on revenue growth as well, but somewhere around 29% to 30%. We see as a long-term kind of in -- medium to long-term investment rate as a percentage of revenue for R&D spend. So that is our expectation. So what you hear from that is we expect it to be up a bit higher in the second half as well from that. In terms of the capitalization rate, again, it's a factor of the work that the team is doing every particular half within that. So, this half was down, was pretty consistent as a percentage to last half within it as a percentage of what was capitalized within the team. And it does just, John, depend on the products, as I said. My expectation is that, that will probably continue to trend down a little bit over the next few years as a percentage of revenue. You've seen in the last couple of years, that's trended down. I think we're over 72% at one stage, down around 66%, 67%. My guess is it will probably be somewhere between 60% and 66% over the medium term where the capitalization rate should be.

Okay. That was very helpful. Well, congrats guys on a good report, and I appreciate it.

Thanks, John.

[Operator Instructions] At this time, we're showing no further questions. I'll hand the conference back to Jonathan for closing remarks.

Well, I'd like to thank everyone for making the time to listen to our results. We are pleased with the momentum in the business. And certainly, it's been a positive start in the Neo journey. Look forward to seeing some of you face to face in a not-too-distant future. Thanks very much for your time.

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