Nuix Limited (NXL) Earnings Call Transcript

Thank you for standing by, and welcome to the Nuix Limited FY '25 Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Jonathan Rubinsztein, Chief Executive Officer. Please go ahead.

Welcome, everyone, and thank you for joining us for Nuix's Full Year 2025 Results Presentation. I'm Jonathan Rubinsztein, Nuix's CEO, and with me today is our Chief Financial Officer, Peter McClelland. I'll begin today with an overview of our key achievements and performance metrics. Peter will then provide a more detailed analysis of our financial results. And following that, I'll discuss our strategic progress, in particular, around Nuix Neo, and outlook before taking questions. Moving to Slide 4. Firstly, just some quick comments about Nuix. Nuix is a leading provider of AI-powered investigative analytics and intelligence software that helps organizations find meaning in their digital data. We develop advanced data analysis solutions for e-discovery, legal processing, regulatory compliance, data governance and forensic investigations. Moving to Slide 5. Let me highlight our key achievements for the year. We've grown our annualized contract value by 8% this fiscal year, which shows solid momentum despite some challenges. I'm particularly proud of the exceptional growth in Nuix Neo, where ACV grew by 132% as customers embrace our AI-enriched platform. Our focus on operational efficiency has paid off with our cash EBITDA increasing by nearly 25%. We've maintained positive cash flow throughout the year. And finally, we've successfully delivered on our product road map commitments, while completing our technology team restructure. These achievements position us well for continued growth. Moving to Slide 6. Annualized contract value, or ACV, finished at $228.4 million, up 8% on the prior year. This growth was primarily driven by the strong performance of Nuix Neo, which we'll discuss in more detail shortly. Revenue came in at $221.5 million, up 0.4% on prior year. The relatively flat outcome was particularly impacted by a lower incidence of multiyear deals in the period. Net dollar retention was 107.4%, down 5.5 percentage points on the prior year, impacted by lower net upsell and higher churn. Cash EBITDA, which is a key profitability metric considered by management, showed strong growth, up 24.5% to $37.2 million. This growth was particularly driven by continued cost discipline. Statutory EBITDA was $47.6 million, down 14.8% on the prior year, primarily impacted again by the lower multiyear deal incidents I mentioned, as well as a significantly higher expense proportion of R&D investment, which we'll come to shortly. Finally, we maintained a strong balance sheet with net cash of $40 million, up 5.1% on prior year, providing us with good flexibility to execute on our strategic priorities. I'd now like to invite Peter to discuss the financial results in more detail.

Thank you, Jonathan, and good morning, everybody. As Jonathan mentioned, ACV finished the year at $228.4 million, representing a growth of 8% on the prior year. Particularly noteworthy is the further growth in the recurring component of ACV, subscription ACV, which is up 10.1% and now represents 97% of our total ACV value. We had a particularly busy end of the half, including some contracts shifting from FY '25 into FY '26 due to the lengthening of the procurement cycle as we've discussed previously. Looking at the drivers of ACV growth. In line with our strategy, Nuix Neo was the key contributor, increasing by $15.9 million or 132% year-on-year to reach $28.1 million. Jonathan will have more to say about the Nuix Neo a little later on. Component ACV remained flat on the year with limited net upsell, some churn and migration to Nuix Neo solutions. Discover SaaS was also a good contributor to growth with cognitive AI capabilities introduced late in the half. Lastly, in line with recent trends, other ACV was down with lower perpetual license sales, as well as lower one-off services, as we focus on the sale of Neo solutions. Net dollar retention of 107.4% shows we're achieving growth with existing customers, albeit at a lower rate than the prior year. This decline reflects overall levels of net upsell and a lift in churn. Customer churn increased to 7.1% during the year. We churned some individual contracts due to end of projects, competitors and budget constraints, which contributed to this outcome, while a higher number of lower-value customers also churned as the group's focus shifted towards higher-value contracts. Jonathan will talk further on this strategy a little later on, including some of the recent initiatives we put in place to address churn. Turning to our regional ACV. Growth rates across all 3 regions were relatively consistent over the full year with a broad spread of transaction types across all regions and particular success in selling Nuix Neo. Looking at the revenue performance for FY '25, revenue came in at $221.5 million, up 0.4% on the prior year. As many listeners would know, Nuix's statutory revenue can display a greater degree of variability than ACV due to the impact of multiyear deals. The relatively flat performance in FY '25 was particularly impacted by the cycling of a larger multiyear deal in the prior period, a key driver of the decline in the multiyear deal proportion compared to last year. Multiyear deals represented 27% of revenue, down from 31% in the prior year. In FY '26, we don't expect further significant declines in proportion of multiyear deals. Total research and development spend increased by 3.5% to almost $55 million for the year. What's particularly notable is a significant shift in the mix between capitalized and expense components compared to last year. The capitalized component of R&D dropped to 41% of the total R&D spend, lower than 65% we saw in the prior period. This lift in the expense proportion of R&D investment reflects the expansion of Nuix Neo capabilities. As you would expect, this significant increase in expense component of R&D impacts on our statutory EBITDA but not our cash EBITDA. Management remains focused on the right outcomes for the overall R&D investment rather than the accounting treatment as such, which is why cash EBITDA is the key profitability focus for management. Importantly, research and development continues to be funded from the underlying cash flow, demonstrating the sustainability of our investment in product development. Cash EBITDA for FY '25 rose 24.5% to $37.2 million. As I've mentioned, this is a key profitability metric for us as it incorporates the full research and development investment spend, including the capitalized component, while excluding nonoperational legal costs and restructuring costs. The cash EBITDA margin expanded to 16.8%, up from 13.6% in the prior year, reflecting both our cost discipline and the lower variable pay associated with incentive programs during the period. I do want to flag that from FY '26 on, we will be referring to this metric as adjusted management EBITDA rather than cash EBITDA, though there will be no change to the calculation methodology, just a name change so that it more accurately reflects the characteristics of this metric. This metric will remain our core measure of underlying profitability. Let me walk you through the relationship between our different EBITDA measures for FY '25. As we've noted, revenue was relatively flat year-on-year, impacted by the fall in multiyear deals, while cash EBITDA showed strong growth, driven by general cost discipline and lower variable pay. However, net nonoperational legal costs were higher than the prior period, and we also incurred one-off restructuring costs related to the technology team organizational restructure during the year. These factors, along with the higher expense component of R&D, combined to impact our statutory EBITDA, which came in lower than the prior period. This demonstrates why we focus on cash EBITDA as our core measure of underlying profitability as it provides a clearer view on our operational performance. I won't spend too much time on the income statement, which is displayed here. We've already spoken about revenue and noted the fall in sales and distribution costs, which were lower despite increased headcount, particularly due to the lower variable pay associated with incentive programs, given the lower ACV outcome. Here, you can also see the impact of the shift of expense versus capitalized components of R&D. Turning to the cash flow. We delivered a positive underlying cash flow of $20.1 million compared to $24.7 million in the prior year. Closure of a number of deals late in the half did impact on cash flows with cash collection of these deals falling into Q1 FY '26. After accounting for nonoperational legal payments and the tech restructure, overall free cash flow remained positive at $4 million. We finished the year with a strong cash position of $40 million, and our $30 million debt facility remains undrawn other than the $1.3 million, which is currently utilized for bank guarantees. I will now hand back to Jonathan for comments on Nuix Neo, strategy and the outlook.

Thanks, Peter. Now, moving to Slide 19. When we launched Nuix Neo 2 years ago, the intention was to sell larger, more comprehensive solution-based offerings. While we are still in the relatively early stages of Nuix Neo rollout, the contribution to the business has already been very significant. Moving to Slide 20. The market response to Nuix Neo has been strong. Neo ACV grew to $28.1 million by the end of the financial year, representing growth of 132% compared to FY '24. We've expanded our Neo customer base significantly, growing from 23 customers at the end of FY '24 to 75 customers by the end of FY '25. This growth has been driven in particular by new Neo sales to existing customers, Neo sales to new customers and Nuix Advantage support sales. We've seen significant wins across financial organizations, law enforcement, advisories and regulators. And as Peter noted earlier, we've seen good Neo wins across all 3 regions. Importantly, when existing customers migrate from component solutions to Nuix Neo, we typically see a 30% to 50% uplift in value. For new Nuix Neo sales rather than migrations, the typical sale is 2x to 3x the size of a non-Neo sale, once again, a reflection of our strategy to focus on larger deal sizes. We are very pleased with the take-up of Nuix Neo and have further innovations planned for this year to help drive further growth. As was the case in FY '25, we expect Nuix Neo to be the core driver of growth again in FY '26. Moving to Slide 21. A key part of our strategy has been targeting larger contracts, making sure that the value that can be added by our software can be more appropriately captured, and we're seeing clear progress in this area. Since FY '22, our average customer ACV has increased by 89%, while the new customer average ACV is up 117%. Deals over $500,000 ACV have grown by 74% in the same period. We are actively pivoting towards higher-value customer relationships. We've noted that these more complex transactions have meant a lengthening of the sales cycle. A key learning from our customer discussions was that some organizations wanted a more staged pathway to full AI-enabled Nuix Neo. In response, we developed Nuix Neo Foundation. Foundation reduces the friction points by allowing customers to begin their Neo journey with core elements of Nuix Neo capabilities. Although only launched late in the financial year, Foundation has already proved successful, contributing significantly to our Nuix Neo growth by making the platform more accessible to a broader range of customers who previously found this pool transaction challenging from a cost, technology or compliance perspective. We had a very busy period at the end of the half with some contract closures landing in FY '25 and some falling into FY '26. As an example, 2 significant deals closed just after the end of the period that will impact FY '26, an advisory deal of around $500,000 ACV and a very substantial regulator deal in the order of $2 million to $4 million in ACV. The regulator opportunity is with the German tax authority and is particularly exciting. This is a kind of deal that can potentially act as a starburst opportunity for other similar deals in the region. These large deals are very tangible indicators of the shift in our focus in line with our strategy. Separately, I just want to touch for a moment on the higher churn we've seen at this result. For a long time, Nuix has had a long tail of smaller customers. Some of these smaller customers won't have a requirement or budget for a Nuix Neo style offering, and some of these customers have churned. These smaller customers do, of course, have a cost to serve, and that's something we have considered quite carefully. Our strategy in relation to maintaining our offering to our smaller customers incorporates the version 10 component rollout, as well as Nuix Advantage support, which has an important role in both customer sat and retention. Some of these smaller customers will also be in a position to take up Nuix Neo Foundation. In short, our strategy remains on track, and we are executing to plan. We are listening to our customers, and as shown by Foundation, for instance, responding as appropriate. Moving to Slide 22. In FY '25, we delivered several key product releases that demonstrate our innovation momentum. We launched version 10 for our component customers, while making substantial progress with Nuix Neo Discover SaaS, incorporating new cognitive AI features. We introduced the Semantic Search functionality we highlighted at last year's Accelerate Conference and launched both Nuix Neo Foundation in response to market feedback and also Nuix Neo Local, providing a far more rapid deployment capability for our customers. These developments were built on time and in line with our strategy. Further, they showcase our continued commitment to executing our product road map, while meeting evolving customer needs. Moving to Slide 23. I also want to highlight that we've now completed the realignment of our technology teams, consolidating our development hubs globally to improve efficiency and enhance customer support. This restructure has been completed on time and within our cost expectations. Turning now to outlook on Slide 25. Looking ahead, our core focus areas for FY '26 are: one, to continue to deliver on business transformation strategy, in particular, a key focus on higher-value contracts and extending out our platform; secondly, from a product perspective, further to develop our Nuix Neo capabilities within that platform. Number two, continued ACV growth, driven by Nuix Neo. Three, a key focus on revenue to exceed operating cost growth, and this focus is obviously on operating leverage. And finally, number four, underlying cash flow positive for the year. We won't be providing numeric guidance at this time, although naturally, we will update the market if it is appropriate. Before we move to questions, let me take a moment to reflect on FY '25. While our top line growth was more modest than we initially targeted, there are several indicators that reinforce our confidence in Nuix's future. The strong growth in Nuix Neo, up 132% this year, demonstrates the market's appetite for our offering. Our cash EBITDA expansion shows our ability to drive operational efficiency, while continuing to invest in innovation. The successful delivery of our technology road map, combined with our completed tech organization restructure, positions us well for FY '26. With a strong balance sheet, positive cash flow and loyal customer base, we have built solid foundations for sustainable growth. While there is more work to do, I'm proud of what the team has achieved this year and confident in our strategy to create long-term value for our stakeholders. With that, I'll now hand back to the operator for Q&A. Thank you.

[Operator Instructions] And our first question today comes from Sinclair Currie with MA Moelis Australia.

[Technical Difficulty] and the NDR and churn in a little more detail. Should we think about the increase in churn as having a linear impact on the decrease in NDR? Or was there more of that reduction in NDR related to the lower price average sale of Neo Foundations relative to the full Neo solution, if that makes sense?

Sinclair, that's a good question. The churn very much is a component and one of the key drivers -- sorry, component of NDR, one of the key drivers of the reduction. I mean, it is pleasing that the 107.4% is showing that we're still getting growth with those clients. But the churn during the period was very much driven by the lower value end of our client base. It's probably the only real trend that's been coming through that churn number, which was higher than what we anticipated, but then not unexpected, given the focus on the higher-value customers. So there is a direct relationship between the 2. As Jonathan sort of mentioned, some of the things we are focused on to address churn and just understanding where those clients are that are particularly wanting to stay on component is the release of version 10 for component to sort of keep that product current and add some additional features within there. But also then, the introduction of Foundation also helps NDR with a number of our clients as well who are wanting to progress beyond the component product but not ready to go into full Neo right at this point in time. So all those actions have been put in place to address the churn and continue to maintain/improve our NDR ratios.

Okay. And just in terms of the increase in number of clients on Neo, I think you're up at 76 from memory in the presentation. I'm presuming that sort of uplift from the second half, a lot of that is weighted towards that sort of 2-tier strategy you're now adopting with Neo.

I think we've seen growth in both areas. We're certainly very happy with new logos that are coming. We're also very happy with the migration of existing clients into full Neo. And we've certainly seen existing clients also moving into Foundation. So overall, the strategy that's been put in place for the business is certainly the right strategy, and we're seeing customer uplifts across all those areas.

And our next question today comes from Andrew Johnston at MST Access.

Good to see such a strong cash result, given the top line was probably a little softer than certainly where you had expected earlier this year. If we can just go to the top line for a minute, I wonder if you can talk about sort of general drivers for why the top line was softer, both -- I suppose both in ACV and revenue or the [ difference ] between those 2 you've explained. But just wonder where there's any sort of trends coming through in that. And then secondly, I wonder if you can talk about the transition rate of existing customers to Neo and whether that's sort of in line with what you're expecting and what you're seeing there.

Thanks, Andrew. So the top line is directly correlated really to the percentage of multiyear deals. And we had a key focus on ACV. So in terms of both how we rewarded our sales organization, the key focus has been to drive the annualized health, if you want, of the business. However, we are below the average over the last 4 years. So we do expect the multiyear deal [indiscernible] go up. And certainly, that will impact the stat revenue and then flow down to stat EBITDA. I think in terms of the underlying growth, we are definitely seeing selling new Neo both to existing and new customers. And the Foundation -- Neo Foundation really has made -- there are 2 friction points that we found where both the smaller customers and often government and regulator -- smaller regulators find that consumption is a friction point and also having clarity of exactly what the cost is and predictability [ has meant that ] we drove Foundation solution, which actually had very good uptake in kind of the second half of the year, moving from existing customers to Foundation.

I might just add one bit of [indiscernible] around cash flows as well, and thank you for picking up where the cash performance was and the fact we're maintaining quite a strong cash balance at year-end. The cash -- the underlying cash flows from operations, actually, I'm quite pleased with as well. We did have -- I mean, you'll see in the balance sheet, receivables is higher at year-end. As I mentioned, we had quite a busy end of the half, and a lot of those transactions were closed, actually resulted in the invoices being invoiced and acknowledged as a receivable but not yet collected, which we're expecting to fall into Q1. So actually, the underlying cash flows of the business remains very strong.

Okay. If I can just follow up on 2 things. You mentioned the Foundation product, and apologies if I missed that during the presentation. It's not based on consumption billing issue, and perhaps if there's some other key elements of Foundation that you're finding helping people transition across?

You dropped out a little bit, but I think your question is, what are the kind of the key elements of Foundation? The key elements of Foundation are, first of all, it's not a full AI-enabled capability. So it's more based on tech search. It's the full end-to-end platform, including our automation layer. And we do have some flexibility around not in the Foundation element, not having full consumption. And so, those are kind of the main elements, which means that the predictability of spend, which in some areas, in particular, text-based search is clearer and easier. And so, the 2 friction points were predictability of spend and also potentially a lower price point for those customers that don't want full AI capabilities within their platform.

Okay. Great. And if I can just follow up, Peter, on your comment about what the -- about things getting pushed into FY '26. Can you talk about your order book for larger deals and what that looks like compared to, say, 6 months ago?

Yes. So, as Jonathan mentioned, there are a couple of larger transactions that did fall into or fall out of FY '25 into FY '26. There is the German tax authority, which is one of the largest -- actually is the largest transaction that Nuix has undertaken. And the flow-on benefit of that is a potential starburst across both the German tax authorities and within the region. So, that is quite a large transaction. There was also another transaction for a legal provider that will fall into the start of this year. So generally, we're quite happy about the pipeline and where that's sort of sitting. As I said, we didn't have a very busy end of the half, but we are seeing great momentum around the Neo product and conversations to those target customer groups, both in terms of value and size, but also some of the segments that are key for us moving forward.

And our next question comes from Wei Sim with Jefferies.

Jonathan, can you hear me?

Yes, loud and clear.

So my first question is just in terms of the 2 deals that landed in FY '26. So just to be clear, this is all new incremental ACV? Or is there any kind of like renewal component associated to those 2?

It's all new, correct.

Okay. Great. And for that one with the regulator, so that range that you've given of $2 million to $4 million, it's a pretty wide range. Why is the range so large for that?

Part of the larger opportunities relate to the delivery of the actual solution. So again, we will see that, in particular, the larger new platform opportunities require a longer and more complex implementation. This one, we've kicked off the implementation. Again, we've been conservative around the range. But I mean, I think we will be within the range. But I think, again, the reality is, it's signed and we are delivering that deal, but it does have a broader, more complex delivery aspect to it.

Right. And so, for these ones, if we just kind of like look into FY '27, given that there is like some implementation involved with them, how should we think about, I guess, what the subscription revenues from these could look like 12 months down the track into FY '27?

Well, funny enough, in terms of this one, in particular, this one is a perpetual license. The German tax authority only buys perpetual. And we've had a strategy to move against perpetual. However, if we bid for deals and the only option is perpetual, however, what happens is the recurring maintenance falls into our subscription ACV. And so, what you'll find is a larger ACV, which is perpetual, and then the recurring comes through as sub ACV. I think more importantly is, it is the biggest new deal that we've won since I've been at Nuix. And I think also, again, it was an open tender, and we're quite excited about the opportunity, not only in the German tax authority area, but just generally from a regulator perspective, we're seeing strong growth. And our growth is strong partly -- just we think we have the right product fit, which is from investigations to prosecution. So our investigation solution, plus our legal solution, we think bodes very well for the regulator market, which is very strong at the moment.

Perfect. Okay. And just in terms of like some of those stats, again, on Slide 21, talking about average customer ACV, new customer ACV and the deal size, I'm wondering if you might be able to provide any color as to perhaps what those numbers look like maybe over the last 12 months instead of from FY '22, just to understand, I guess, the momentum in the strategy execution.

Yes. Look, I think it's a continuation of the trend. What we can see is that winning a big one can shift the averages even with the current cohort. And what we have also seen is that the adoption in EMEA this year has been some of the smaller customer base in the platform. And so, we've seen a slight drop. But on the whole, our expectation is, again, that we are seeing a materially bigger sales from component into platform, and we expect that trend to continue.