Nuix Limited (NXL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nuix Limited FY '24 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 full year results. I'm Jonathan Rubinsztein, Nuix's CEO, and I'm joined today by our Chief Operating Officer and Chief Financial Officer, Chad Barton. Running quickly through our agenda for today's call, I'll make some opening comments around key messages and metrics before handing over to Chad to talk through financial results in more detail. Following that, I'll spend some time talking about Nuix's Neo development and the outlook. Before I begin and share the results, I would like to reflect on the year just closed. FY '24 marked a significant step forward for the transformation at Nuix. In the 12 months, we launched the Nuix Neo platform and the 3 solutions that run off the platform, data privacy, investigations and most recently, the legal solution. I've been pleased with the reaction to Nuix Neo from both our existing customers and new customers, as well as our partner network. Customers of the Neo are amongst our largest and most prestigious national departments of trade and foreign affairs, national [ nuclear ] agencies, leading transport organizations and global [indiscernible]. Nuix's represents a massive jump in innovation, which gives us a strong foundation for further technological advances, many of which are in development, as I speak. This in turn sets the business up for sustained growth into the future. Moving to Slide 4. Nuix is evolving rapidly, so I wanted to pause briefly to articulate our positioning and our foundation for growth. Nuix creates intelligent software. Our platform approach is centered around world-leading data processing engine increasingly amplified with our AI technology and simplified with enterprise automation. We built powerful platform offerings through Nuix's Neo focused specifically on data privacy, forensic investigation and legal processing and review. Our business is truly global, with 85% of our ACV generated outside Australia. With more than 400 staff around the world, we service a simple, high-quality customer base, 75% of them have been with us for more than 5 years. This depth and breadth of both offering and footprint means we're well placed to drive future growth. Moving to Slide 5, I'm very pleased to deliver these results today, which are indicative of the further financial momentum that has been achieved in the business over the last year. At a high level, there are some key messages from this result that I would like to highlight. Firstly, we delivered on top line growth, producing ACV and revenue outcomes in excess of the strategic objectives we set ourselves at the start of the year. We've been very successful in the launch of Nuix Neo solutions, and as we'll come to, we've delivered further very strong growth in Neo ACV in the second half. We've diversified our sources of growth between new and existing customers, and new and existing products. We've delivered operational leverage with strong growth in underlying and stat EBITDA, both in line with the guidance we provided to the ASX in June, and that has also translated into a strong cash flow performance, which we'll come to in a moment. Moving to Slide 6, turning to our financial metrics dashboard. I'd like to highlight some key metrics. ACV at the end of the year came in at $211.5 million, a rise of 14% from last year. Statutory revenue rose a pleasing 20.9% on the prior year to $220.6 million. I mentioned the operational leverage we delivered this year, and you can see the extent of that here, with underlying EBITDA up 38.7% to $64.4 million and statutory EBITDA up 60.2% to $55.9 million. We've continued to drive further momentum in net dollar retention, which rose a further 3.7 percentage points to 112.9% over the year. And as I mentioned, the strong cash performance meant that our cash position by the end of the period rose significantly, up 28% to $38 million, providing our balance sheet with strength and optionality. Moving on to Slide 7, I'd like to take a moment to link these outcomes back to the strategic objectives we set at this part of the year. We said we were targeting about 10% ACV growth and stat revenue growth in constant currency. We've exceeded that objective in ACV and by quite a significant margin in stat revenue. We said we wanted to achieve a successful roll out of Nuix Neo and associated solutions to Early Adopters, and we've done that with the launch of Nuix Neo platform, including data privacy, investigations and legal solutions, and a big jump in Nuix Neo ACV in the second half to $12.1 million, which has tripled from the level 6 months ago. We wanted to broaden our sales focus to further drive new business, as we'll come to, we've seen good growth in component sales through new customers and new offerings with particular strength in Rampiva and Advantage, and our core strong Nuix Neo sales to both new and existing customers has been a significant boost to growth. We wanted to achieve operational leverage in the business by growing revenue faster than operating costs, and that's evident in the strong EBITDA numbers I mentioned one-minute ago. And lastly, we wanted to be underlying cash flow positive for the full year. We delivered underlying cash flow of $24.7 million, up 171% on prior year. And not only that, we were overall cash flow positive to the tune of $11.9 million, up from negative $12.9 million last year. These were ambitious by the achievable targets that we set ourselves 12 months ago. I'm very pleased today to outline how we've not only met the strategic objectives we set, but in several cases, exceeded them very significantly. I will now hand over to Chad to talk through the financial results in more detail.

Thanks, Jonathan, and good morning, everyone. As Jonathan mentioned, over the financial year, we exceeded our target to deliver 10% ACV growth in constant currency. ACV for the full year came in at $211.5 million, up 14% on PCP and 12% in constant currency. Subscription ACV, which is the generally recurring component of our ACV, represented 95% of ACV, up from 92% in the prior year, especially pleasing and align with our strategy is the uplift in NDR again this year. This highlights the opportunity to drive growth in Nuix's customer base. Slide 10 is a new slide we have incorporated into the pack of this result to provide further color on the nature of the ACV step up. We can see here that our traditional component style offering is still an important contributor to growth. In addition to this, even in these early stages of evolution, you can see that Nuix Neo is already an important driver of growth, representing 45% of ACV growth in FY '24. Jonathan will talk more about Nuix Neo shortly. Discover SaaS is a smaller subset of our overall ACV, but continues to record good growth, up 17% on prior year. The other ACV is down on lower perpetual license sales compared to prior year. Turning now to Slide 11, here, we highlight the progress we've made in driving NDR uplift, while containing customer churn. NDR reflects the lift in ACV achieved from Nuix's existing customer base over a 12-month period. What's been particularly pleasing is the significant progress that is being made in driving net dollar retention uplift while keeping customer churn contained. There are further levers we can pull to drive more NDR growth, including consumption volume uplifts and further sales of growth products like Rampiva and Advantage. The more we can move the NDR dial, the more uplift we'll continue to see in our overall ACV growth. On Slide 12, as we've done previously, we highlight the regional ACV performances. In line with the trends highlighted in the first half, our North American business continues to deliver very strong ACV growth with a 19% uplift over the full year. Given that North America represents more than half of our ACV, this growth in our biggest region is a key driver of the overall success of the group. The North American team continues to have good success in upselling to existing customers, particularly in the corporate and U.S. government domains, and we're especially active in terms of selling Neo, achieving more than half of all the Neo ACV for the year. EMEA growth on PCP was slower at 6.4%. This growth incorporates upsell to advisory and government domains and some important Neo wins. It's worth noting that Neo is in the investigations heavy market, so with further momentum in Neo investigations, we should see further growth in this region. Asia Pacific produced solid growth of 11.8% for the year with strong upsell to government and law firms and good momentum in Neo sales with some pleasing results in the Australian government sector in particular. On Slide 13, we turn to Nuix's revenue for the year, which rose 20.9% to $220.6 million, up 18% in constant currency. This outcome was a long way ahead of our strategic objective to grow revenue at about 10% in constant currency. Subscription revenue is generally recurring component of our revenue represented 95% of revenue, up from 94% a year ago. The multiyear deal proportion at 31% was in line with prior year. It's particularly pleasing revenue outcome, given how much change there have been in the business over the last 12 months and provides further validation of the team's strategic initiatives. Turning now to R&D, total R&D spend fell 11.7% during the year, in line with the decline we saw in the first half. As we mentioned previously, we implemented a range of efficiency measures at the start of the financial year, which had an impact on overall R&D spend. The total R&D investment, as a proportion of revenue fell to 24%. This is a combination of a lower amount of R&D investment and higher revenue. As we said at the half, we do have further investments to do in R&D. It's our expectation that R&D spend will rise in FY '25, both in absolute terms, and as a proportion of revenue, as we invest further in growth initiatives. One of our strategic objectives for FY '24 was to grow revenue faster than operating costs. To the extent, which we achieved this is outlined in Slide 15 in both underlying and statutory EBITDA. Underlying EBITDA, which excludes the impact of non-operational legal costs, rose by 39% over the year, driven by strong revenue growth I just flagged, along with cost discipline across the business. Statutory EBITDA, which includes the non-operational legal costs, rose by 60%. Once again, the earnings growth that has been achieved coinciding with the enormous amount of strategic change in business provides further validation of the strategic initiatives have been implemented and executed over the last few years. As we've shown previously, Slide 16 displays the underlying EBITDA war for FY '24 and its component drivers. This demonstrates the operating leverage that has been achieved over the full year, which accelerated into the second half. Stepping through the P&L, we've already noted the underlying EBITDA is up 38.7% or up 34.2% in constant currency. As we flagged at the half, Topos operating costs were previously excluded from underlying EBITDA prior to full integration. From FY '24, Topos costs are now included in underlying EBITDA. You can see the Topos adjustment about halfway down the table. Of course, without these extra costs, the underlying EBITDA increase would have been even more pronounced. Cost of goods sold are slightly lower on the mix shift in channel versus direct with a small fall in channel sales, but a large increase in direct sales on PCP. In keeping with the trend of the first half, sales and distribution expenses were higher on incorporation of Topos head count, along with the investment in key roles in growth-related expenses. If S&D spend, as a proportion of revenue at 33% is in line with the prior year. I've spoken already about R&D, you can see here some of the benefits of the efficiency gains impacting the P&L here. G&A costs ticked up quite remarkably in the second half. Part of this uptick is attributable to an ATO review around historical R&D treatments and then recognition of an R&D tax asset. Higher equity compensation costs are also incorporated here. Net non-operational legal fees of $8.5 million were a little higher than last year, meaning this year, we did receive insurance recoveries. Lastly, we can see the group swung to a net profit of $5 million for the full year from a loss of $5.6 million last year. Turning to Slide 18, we wanted to share this information on cash EBITDA because this is the way we tend to think about our profitability performance internally. This measure of cash EBITDA incorporates a full R&D spend into our underlying EBITDA metrics, not just the expense component. You can see how this cash EBITDA measure has tracked over time and the associated cash EBITDA margin. In the last year, we have more than quadrupled cash EBITDA, lifting the associated margin from 3.6% to 13.6%. We have ambitions to grow cash EBITDA margin further over time, although it's worth noting that the increase in R&D spend into FY '25 that we don't expect to see a significant lift in this margin in the coming years. Nonetheless, cash EBITDA level will continue to provide a useful guide, as to the profitability of the business, incorporating total R&D spend to more closely follow the cash generation experience of the group. Speaking of cash generation, if we turn to Slide 19 now, we are really pleased to highlight a very strong cash generation for the group over FY '24. We've set ourselves a strategic objective to be underlying cash flow positive for the year. You can see here that we have exceeded this objective with underlying cash flow coming in at a positive $24.7 million compared to $9.1 million in the prior year. More than that, and when incorporating payments associated with our acquisitions of Topos and Rampiva and payments for non-operational legal costs, our overall cash flow came in at a positive $11.9 million compared to a loss of $12.9 million last year. Slide 20 shows the turnaround in underlying and total free cash flow that has been achieved over the last 2 years. To achieve these strong cash flow outcomes for both measures reflects not only strong top line growth, but also cost discipline and operational efficiencies that we have achieved. In wrapping up the financials for the year, it's fair to say we're very pleased with the performance delivered by the team in FY '24. Robust top line growth has been achieved, along with operational leverage that has driven a significant increase in profitability and cash flow metrics. The financial performance over FY '24 puts the company in a real position of strength heading into FY '25 and beyond. I'll now hand back to Jonathan.

Thanks, Chad. Turning to Slide 22. Just 12 months ago, we flagged the launch of our new unified platform Nuix Neo. Nuix Neo synchronizes our technology around our patented Neo expansion to make the process of data collection, processing, enrichment, analysis and review faster, easier and smarter. Slide 23, the Nuix Neo platform facilitates a streamlined approach to common use cases for our software, utilizing tuned AI models specific to each challenge. Further, the platform enables our customers to harness the power of our proprietary AI technology, making the process of understanding data more intelligent and in sizes. And the acquisition of Rampiva last year has made an additional element of automation and orchestration capability, meaning even greater efficiency benefits for our customers. Turning to Slide 24, I'm pleased today to revisit the product road map that we first outlined a year ago and provide an update. At the half, we updated the market with the launch of our data privacy and investigation solutions, which have had good success with the early adopter group in the second half. In June of this year, we launched our Neo legal solution in line with the timetable previously articulated. Commercial conversations are now underway with customers in relation to the legal solution. To complete this ambitious product road map in the 12 months is a real credit to our talented R&D team and complete the 3 core use case solutions that will be important drivers of Nuix's growth into FY '25 and beyond. Moving to Slide 25 we can see the momentum in Nuix Neo picked up in the second half. From a standing start just 12 months ago, the Nuix Neo early adopter group expanded from 8 customers in the first half to 23 by the end of the second half. Nuix Neo ACV has tripled from the level of the first half to finish the full year at just over $12 million. This level of ACV represents sales across data privacy and investigations across both new and existing customers. A significant driver of this growth in the second half has been the take-up of new incremental Neo solutions by customers, who already had existing Nuix products. This is the important element to our growth strategy being able to go back to our existing customers with new offerings in addition to the ones they already have from us. Nuix Neo sales are good generators of ACV and revenue growth for Nuix, with the average Nuix Neo sale 2x to 3x the size of non-Neo sale. That differential represents both the significant benefits that the Neo platform can provide to customers, as well as a conscious pivot in the organization to target larger enterprise customers, who can benefit from the full capability of our offering. Slide 26, a critical element to the Nuix Neo journey is the transition from a traditional component offering to a unified platform. What we have built so far is innovative and as you've seen, our customers are responding. But importantly, it is just the beginning. We will continue to invest in FY '25 and beyond to drive further innovation and accordingly, further value for our customers, where FY '24 was about building out the unified platform and delivering on our 3 core use case solutions, FY '25 is now about investing further to continue to drive more value out of what we have created so far. There's an enormous opportunity in front of us, as we further commercialize and build on the Neo platform and these 3 use case solutions. As Chad said, our R&D levels were lower in FY '24 on some efficiency benefits even, as we worked hard to deliver on our Neo objectives. Heading into FY '25, R&D levels will rise, as we invest further into Neo offering. We will broaden and deepen the capabilities of the Neo platform and the core use case solutions to drive Nuix Neo adoption across a wider customer base. At a very high level, an overarching theme of our R&D investment will be broadening the capabilities and sub-use cases of the 3 core use case solutions that we created in the past years. This means that each of the use cases will have further areas of application and increasing sophistication, broadening their appeal and usefulness. We'll have more to say about this in time, but we have some really interesting further work to undertake in FY '25 on building out our deep learning capabilities for AI technology, an area, which has potential to be transformational for our offering. As our technology continues to evolve, we will harness the further potential of AI, as a cornerstone of our approach to innovation. You see we have some of the best minds in the business to guide us on that pathway and further support for non-English-speaking markets will help us to grow our presence in those markets. The technology advances we are making in AI will be instrumental in achieving this. This further investment on top of our existing technology will serve to make our offering even more valuable [ and compare it ] to our customer base. Turning to Slide 28, at the start of last year, we set ourselves ambitious targets, and over the last 12 months, the team has already delivered, meeting or exceeding all targets in some cases significantly. Our ambition heading into FY '25 is just as pronounced as we continue to drive growth in line with our strategy. We're excited about our R&D investment program and the commercialization program for the coming year. As many investors will be aware, we view ACV, as our core top line metric, given it provides an annual run rate of our contract value. We are targeting about 15% ACV growth over FY '25. Given Nuix Neo is a core part of our strategic growth path, we will naturally continue to focus on its strategic roll out. Our statutory revenue can be variable based on the multiyear deal experience. That said, as was the case in the year just passed for FY '25, we expect to grow revenue faster than our operating costs, even with the lift in R&D investments that we spoke good about today. And lastly, as was the case in last year, in FY '25, we are aiming to be underlying cash flow positive for the full year, that is cash flow positive before non-operational legal costs. In closing, I want to pay credits to the Nuix team for a remarkable year of delivery across both our R&D advancements and our financial metrics. As I've said before, there is always more to do, but the innovative foundation we've created, and we'll continue to build on means that we're still just at the beginning of a really exciting journey. I'll now hand back to the operator for Q&A. Thank you.

Your first question today comes from Andrew Johnston from MST Access.

Cracking result, particularly love that really strong cash flow. A couple of questions. So the first is -- just looking at Nuix Neo and the 2x to 3x higher average ACV from those products. Just wondering whether you can unpack a little bit where that's coming from. I mean, obviously, you did mention you're selling to larger customers. Is it the volume-based selling -- billing that's driving it? Is it AI -- how much -- how important is the AI part of the Nuix Neo products? And then finally, Jonathan, you used the word usableness and part of the strategy with Nuix Neo, as I understand, was to increase that usableness. I would have thought that should give you access to a wider range of smaller customers? And are you seeing -- to what extent are you seeing that in there as well?

Thanks, Andrew. So first of all, the size of the deals are correlated firstly, because we have a platform that we are selling, the platform itself incorporates more components than the component sale would have, the actual technology and software component of the platform is larger. So that's the first -- the reality of the platform sale. However, the fact that we're solving more strategic issues and providing a full end-to-end solution in this platform means that -- and by the way, the platform as we said, does include our AI. It does include our horizontal workflow, which was Rampiva, but separately, the value that we're selling to our customers is significantly higher, as a platform of sale. So that by its nature, as a result of more software and the solution itself solving a larger problem for our customers results in a larger sale, which, as I said, is 2x to 3x larger the average component sale. And so, I think that kind of makes sense. Your second question, which was -- and I've actually forgotten what your second question was. Can you repeat that?

Yes. Sure. Just looking at the -- sorry, just looking at the fact that Neo was to -- one of the issues with Neo is that it's more usable. And I would have thought that should have given you -- that should give you access to smaller clients, who in the past may not have had the -- not have had the internal capability to necessarily develop the product for their own use. To what extent are you seeing that in the sales?

Yes. I mean, I think what Neo actually does is that it's more focused on the larger enterprise customers. And I think that the [ fit ] of Neo, which includes AI and the full solution, actually, it is more aligned to our larger customers. However, the usability that you're describing does mean that we are in future in terms of some of the future use cases, we do have the ability to solve repeatedly some of our customers use cases in a smaller customer base. And I think that you'll see us push into some of the sub use cases, and also in some other ways we deploy Neo to be much more kind of consumer friendly to the smaller customers.

Okay. That's great. And on overheads, maybe, Chad, this is a question for you. So if we think about and you talked about R&D and where that's going. But if we think about sales and marketing and G&A costs, should we think of those remaining fairly constant, as a percentage of ACV? Or should we be expecting those to decline in a reasonable rate over the next few years, again, as a percentage of ACV.

So Andrew, as we -- as you pointed out, I'll probably start with G&A. First of all, you can see this year, there's been a large uptick in G&A this year. We've historically been running around 18% to 19% of revenue for G&A costs. The big driver of G&A being increase this year is we have major decision following the review that's going on with the tax office to write-off historical R&D claim dating back to '26 [Technical Difficulty] '29. So it's around $3 million of tax asset that we've written-off this year, and there's a fair amount of legal costs that attaches to that tax claim as well. So roughly, it's around $5.5 million to $6 million in G&A. That's one-off. And we don't expect to repeat or certainly don't expect to repeat that in [ the size ] next year. So again, what that says is G&A should be around that 8%, 19% of revenue moving forward in the next financial year. S&D, again, that's tracked at 33%. That's been very consistent with last year, as well as a percentage of revenue. Again, expectations this year looking forward into FY '25, our expectation is it should stay around that same level. And probably the only other comment that I'll make, but you didn't ask about R&D, but I'll answer it anyway, which is R&D, as a percentage of revenue came down to 24%. We've always said traditionally, it should be around 29%, plus or minus depending on growth within the business. It's obviously significantly less than that this year given the efficiency initiatives that we've driven. FY '25, I don't see it necessarily going back up to 29%, but also don't think it will be at 24% or probably somewhere in the middle of that range, I think, for FY '25, as we look to invest further in our platforms moving forward.

Okay. That's great, Chad. And just to clarify, you talk about those percentages. Is that a percent -- do you see that as a percentage of ACV or because that's better reflecting -- obviously better reflecting cash? Or do you see that as a percentage of revenue?

When we talk about it, we just -- because we have over the years, we've continually spoke about it as a percentage of revenue. But what you see is over most of the years, revenue and ACV has been pretty aligned. It really depends on the deal experience that can pick up the revenue line a little bit higher than ACV, but they're pretty close to each other again.

[Operator Instructions] Your next question comes from Hazmy Hazin from Foster Stockbroking.

Jonathan and Chad, congrats on the results. Just a couple of questions from me. On Neo's ACV contribution, I think in terms of FY '25, it was about 6%, but in terms of ACV growth, it's about 45%. Do you have any target expectation going to FY '25 in terms of that contribution from Neo?

Yes. So in terms of Neo contribution, our expectation [Technical Difficulty], so we are giving an outlook on the growth. But at the moment, typically, our expectations are continued strong growth. But again, very early stages, and we are still very excited with the current growth that we're getting.

Right. And I think looking at your presentation, I think FY '25 will still be your focus on the early sort of adopter group. So in terms of going forward at which one you'll start to probably roll out to the mass sort of like group -- wider group for this product?

Yes. So Hazmy, we just released our legal processing Neo solutions weeks ago, and so, we will have an early adopter program for those new customers, and that's roughly 6 months to 8 months of duration. So yes, we're kind of at the tail end of the early adopter solution -- roll out to our customer base. But I do think that by the -- certainly by the end of this FY '25, we will be well and truly into kind of growth outside of the early adopter base.

And then also, I think another good thing is your cash level are healthy this financial year. I think operations continue to be well funded. So in terms of your debt facility of about $30 million, when do you expect to tap into this fund and for any specific purpose?

Thanks, Hazmy. So yes, we've got the debt facility in place. As we've articulated over the years, we've got a very clear build, buy or partner strategy across the group. And so, if we believe there's opportunities for us to accelerate our growth even more, we could either partner or we could buy, right? And so, the facility is there and is available for us for the use of that. And that's really what we've kind of have that facility half year for at the moment. But there is nothing imminent in terms of any M&A that we're looking at right now. But that's primarily the use of the facility.

Also, just in terms of the legal expenses in terms of what you're expecting in terms of amount this FY '25? And also, if you have any update on the court cases so far?

So no update on the court cases. So we're still waiting for the judge's decision on the ASIC trial, and we continue in the discovery phase of the legal process for the class action. So that is ongoing. For next year, our assumptions at this point in time for non-operational legal costs is about the same, as this year's number. And that might be timing between the halves is going to be a bit difficult because as we obviously spend the money with our lawyers, we wait insurance recoveries to come through, and that might not match each other [Technical Difficulty] each half. So you might find a little bit of lag in receiving some cash offsets in the first half. But yes, the number has been pretty consistent with this [ year early ].

Right. That's good. And just the last one. I think given the strong growth in North America; will the company be focusing more resources on like sort of growing the market further as compared to other regions? Or the focus will still be the same across the market?

Look Hazmy, I think there are different market opportunities in the different regions, and we'll absolutely be focused on all 3 regions. We think they've got different opportunities in different stages, but we're very excited about opportunities in APAC and EMEA also. But the U.S. being the biggest market and also the most mature and sophisticated market does have its own significant set of opportunities that we're pursuing.

Thank you. [Operator Instructions] As there are no further questions at this time, I'll now hand back to Mr. Rubinsztein for any closing remarks.

I'd like to thank you all for making the time today to listen to this presentation and look forward to catching up with some of you in further detailed meetings today and next week. Thank you.

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