Nuix (ASX:NXL) has tripled in 12 months! But is more growth to come?

Nuix (ASX:NXL) is set to close 2024 roughly triple what it opened the year at, although off highs seen in early November.

This company has been one of the most controversial companies on the ASX since it listed. It is still down from its IPO price, but is several times higher than its all time lows 17 months ago and has clearly turned a corner. But what is next?

Who is Nuix?

Nuix is a data technology company. It developed an algorithm that enables unstructured data to be made searchable and provides the structure for more elaborate analysis. The algorithm was first developed as a use case for an Australian government agency, but has expanded into a broader forensics service called Nuix Engine, used by more than 1,000 customers in 78 countries.

The company’s self-proclaimed vision was to “find the truth from any data in the world” and it boasted of being used in high-profile cases such as the Panama Papers and the Royal Commission into Banking and Financial Services.

The Panama Papers totalled 320,166 text documents, 1.1m images, 2.15m PDF files, 3m database excerpts and 4.8m emails. If you were to print this all out with 2,000 characters per page, the final document would be 650m pages long. But with Nuix, you can easily obtain the most crucial insights.

 

Nuix’s first rise and fall

Nuix was listed on the ASX in late 2020 at $5.31 per share and enjoyed a spectacular run to $11.86. Shares fell as low as 50c in light of everything that transpired in the following 18 months. 

The drop all started with Nuix’s 1HY21 results in late February 2021, where it reported $85.3m in revenue, which was just 44% of its full year forecast of $193.5m. The company said things would improve, arguing its contract completions were weighted to the second half of the financial year and that H1 was hit by reduced US government spending because of the presidential election and the subsequent transition period.

But in autumn 2021, Nuix downgraded its guidance twice in less than six weeks, blaming the later timing of the closure of upsell opportunities and the shift of clients from modules to SaaS subscriptions. Although this was good for the company in the long run, it would hit short term revenues and Annualised Contract Value (ACV).

Neither downgrade was excessive, but the mere fact there were multiple cuts led to concerns about the governance of the company and lack of visibility. This was particularly the case with the second downgrade, coming days after a Fairfax investigation into Nuix’s culture and governance.

By the end 0f 2021, CEO Rod Vawdrey, CFO Stephen Doyle and co-founder Anthony Castagna were gone, and the company was slugged by four separate cases launched by shareholders and ASIC investigations. The shareholder cases included three separate class actions and one lawsuit filed by former boss Eddie Sheehy over whether or not options he once held still existed. 

 

2022 saw more of the same

With a new CEO in Jonathan Rubinsztein, Nuix shareholders hoped that 2022 would be better. Unfortunately this was not the case. The company spent a lot of time and expenses dealing with legal cases ($13.8m in legal costs in the 12 months to 30 June 2022). At the same time, revenue and customer growth slowed down, further spooking shareholders.

You have to bear in mind that, unlike many other tech stocks, Nuix’s software can take weeks to months to be implemented, particularly across large organisations. This is why it uses ACV as a key financial metric.

The Tech Wreck of 2022, increased R&D expenditure, increased churn (to 5.4%) and speculation of a takeover bid by US software company Reveal ,that ultimately came to nothing, did not help either. According to the AFR, Reveal wanted to just buy Nuix’s assets while leaving all liabilities with the company and its investors. Who would accept a deal like that?

 

A better 18 months

After starting 2023 at 65c, shares jumped as high as $1.55 on February 9 after Eddie Sheehy’s case was thrown out. This case was obviously the company’s biggest legal headache (but not the only one) and the biggest impediment to a takeover.

A few weeks earlier, in mid-January, the company reported that ACV could be 3.5-5.6% higher in 1HY23. This was of course assuming a legal victory against Sheehy. But in the last week, shares have trended lower after reports of client defections (both potential and those that had already occurred). The most notable of would-be ship jumper was ASIC. Investors are forgetting that it will be difficult for long-standing clients to jump ship and still retain access to any case files managed by Nuix.

Nuix’s next catalyst was it FY23 results when it revealed a return to growth. It made $182.5m in revenue, up 20% and $34.9m in EBITDA, up 189.2%. Its customer churn was 5.3%, down from 5.4% a year earlier, and it had $29.6m in net cash. The company hoped the launch of its Nuix neo platform will position it well to take advantage of the AI boom, which really got underway in CY23. Nuix Neo contextualises the data, and language models tuned to a customer’s use case to isolate what is needed.

Nuix’s 1HY24 results weren’t received well because it made a first half loss of $4.8m. The company’s clients were prioritising annual contracts rather than multi-year deals, and it was still facing legal costs ($11.5m for the period).

However, shares have performed well over the following months. In May, the company told investors the second half was positive and they were to expect 10% higher revenues and 35% higher EBITDA. Come August, these results were ultimately in the official FY24 results.

 

 

There’s likely share price upside if Nuix can continue to grow

For FY25 Nuix has promised:

• ~15% ACV growth in constant currency,
• Revenue growth to exceed cost growth, and
• Underlying Cash Flow positive for the full year.

At an Investor Day in November, the company reiterated the target, but warned investors it would be weighted to the second half of the year as the company’s sales were not linear. This was enough to stop the upward momentum, and a $10.8m contract extension with ASIC was received neutrally by the market.

But all things considered, 2024 has been a good year. So where to next?

Analysts aren’t so optimistic with a mean target price of just $6.92. For FY25, they expect $249m revenue and $68.7m EBITDA – up 19% and 22% respectively. Then in FY26, $290.4m revenue and $89.8m EBITDA – up 6% and 30%. These place the company at multiples of 29.3x EV/EBITDA and 106x P/E – neck and neck with WiseTech (ASX:WTC) for comparison’s sake.

Given the high multiples, and the fact we expect the share price to continue be volatile in the short term, means we would not buy the company right now. But  in the longer term, there is potential for the company to grow strongly, if it can stand out in the AI market.

 

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