News: NXL Nuix Says Annualised Contract Value At End Of October Was A$169.5 Million, page-16

It is hard to see why investors were at all excited after Nuix’s trading update at last Friday’s AGM. Let’s analyse each of CEO, Jonathan Rubinsztein’s comments in turn: -

While it’s very early days of Nuix 2.0, there is preliminary evidence of improvement – or green shoots - in our results for the four months to October.

Annualised Contract Value (ACV) at the end of October was $169.5 million, up 4.6% from June of this year. While this does incorporate a currency tailwind, the constant currency growth is also showing encouraging signs.

This is misleading to say the least. Firstly, the ACV increase without currency tailwinds was a meagre 2.2% (hardly anything to get excited). Investors will also recall that in July Nuix reportedly pushed through a price increase in the order of 25-30% to customers. I’ve assumed conservatively that price increases averaged out at 20% across the whole customer base and that a quarter of Nuix’s customers renewed in the 4-month period covering the trading update. This would imply that ~5% of the ACV increase was due to price increases. Excluding the impact of price increases and currency, Nuix’s ACV would have fallen by almost 3% compared the prior year

Even if these assumptions are not 100% accurate you get the picture. Far from evidencing a turnaround (or green shoots) of growth, Nuix’s revenue continues to bleed. You can be certain that customers who have been whacked with 20%+ price increases will be looking for alternative solutions.

Net dollar retention (NDR), another important indicator of success with our existing customer base, rose to 101.9%, compared to 96.8% in June, and 99.2% in constant currency.

Our customer relationships remain strong, with Churn at 5.5%, which is slightly higher than the outcome of 5.4% at the full year result, however this is more than offset by the increase in upsell.

Stripping out the effect of price increases and currency will also have seen NDR continue to track around the 94-95% level. In its Prospectus, Nuix achieved NDR of 106.9% in FY20 and was forecasting NDR 112.8% for FY21, a far cry from Friday’s update.

An NDR of less than 100% is the clearest sign that customers are either churning or reducing their spend with Nuix. It is unlikely that Nuix will be able to push through another price increase of the magnitude of July’s without customers accelerating their efforts to shift providers.

It's also worth noting that the churn rate quoted here only applies to recurring (subscription or consumption) revenue. The churn rate does not apply to revenue from contracts that are less than 12 month, or which are project based which prior to the IPO accounted for 12% of total revenue (FY20). It is likely these customers have gone elsewhere and that has also contributed to Nuix’s revenue decline.

We are also seeing encouraging signs of net new customers, which is contributing to the lift in ACV.

Rubinsztein does not provide any detail to support this statement but given the average new order value was around $240K (as per page 12 of the FY21 full year results presentation), net new customers are not likely to have been a material contributor to the ACV increase.

It’s particularly pleasing to see these critical measures tracking positively at this early stage of our refresh.

The elephant in the room which Rubinsztein seems to have ignored is the shocking statutory trading result. Statutory revenue was down almost 8% on the prior corresponding period last year and more than 10% on a constant currency basis. Given revenue recognition policies, very little impact of the price increases in July would have benefited the statutory result.

If not for the July price increases, Nuix’s statutory revenue will likely fall from $152.3M in FY23 to ~$140M this financial year. Nuix will only be able to hold its revenue flat this year due to THE 25-30% JULY PRICE INCREASE.

Nuix’s cash cost base in FY2022 was approximately $182.6 million comprising:

• $121.8M in operating expenses (including $13.8M in non-operational legal costs)
• $42.4M in capitalised R&D costs; and
• $18.4M in COGS

With the ASIC, class action and Sheehy litigations ramping up, it’s unlikely the $2M+ a month in legal costs Nuix is incurring will abate anytime soon.

This means that without reducing headcount and employee costs, Nuix would be expected to generate an underlying cash loss this year in the order of $30M (being revenue of ~$152M less cash costs of $183M).

How does that compare with the trading update? Well, Nuix’s statutory EBITDA for the 4-month period was $3.4M. Deducing capitalised R&D costs of ~$14M for the same period (I’ve taken 1/3 of FY22 capitalised R&D costs of $42.7M as per the FY22 investor presentation), leaves us with an underlying cash loss of $10-11M for the 4-month period. Annualised this supports a full year cash loss of $30M as per my earlier statement.

With only $40.5M in the bank, Nuix’s bank balance will haemorrhage to $10-15M by the end of the financial year unless it takes remedial action to address its cost base. Soon enough, Nuix won’t even have the cash available to pay any redundancies let alone any fines, penalties or settlements should it be unsuccessful in any of the cases on the legal front.

This represents less than a year of available cash at the current burn rate. At this stage, it is difficult to see Nuix directors or its auditor, KPMG, being able to sign off on Nuix a “going concern”. This would have dramatic consequences for the company.

Investors who piled back into the stock on Friday to see the share price rocket up 21% are celebrating a false dawn. If ever there was a dead cat bounce, then this was it. Watch the share price track towards 10-20 cents when investors realise what is really happening below the covers.

Friday’s trading update is probably yet another case for ASIC to investigate whether Nuix continues to breach continuous disclosure rules.

Nuix continues to lurch from disaster to disaster, often of its own making.

Do you own research.