Nuix soars following encouraging trading update

After experiencing a miserable year on the back of the tough love dished out to tech-stocks, a court case against directors, a compensation claim by a former CEO, and a rejected takeover bid, shareholders in embattled Nuix (ASX: NXL) saw the stock up 16% at noon after the software group posted a strong trading update.

Within a trading update that accompanied today’s AGM, managed flagged signs of green shoots in results for the four months to October.

Annualised contract value (ACV) at the end of October (excl-currency tailwinds) was up 4.6% to $169.5m since the end of June, due in part to encouraging signs of net new customers.

What also impressed the market today was the company’s churn - a measure of net customer retention – which at 5.5% was slightly higher than 5.4% at the full year.

Other highlights within today’s update

• Net dollar retention - an important indicator of success with the existing customer base – was up 101.9%, compared to 96.8% in June, and 99.2% in constant currency.

• Cash balance of $40.5m.

• No debt as at the end of October.

Early days

While it’s early days within the company’s planned transformation - dubbed Nuix 2.0 – management notes positive signs of the changes being driven.

Management also notes due to the accounting standards required by significant advisory customer, recently re-signed on a multi-year contract - leading to some revenue lumpiness – statutory revenue and earnings (EBITDA) are both down on this time last year.

“… we are looking for new ways to innovate and enhance our end-to-end investigative platform, anchored by our superior data processing capability,” the company said.

“We are tightening our service model to better understand customer needs pre-sales, get them up and productive on day one and ensuring access to post-sales services as add-ons.”

What else has happened

Management has denied ASIC allegations that two aspects of the company’s market disclosure - between 18 January 2021 to 21 April 2021 - contravened provisions of the Corporations Act and ASIC Act, which has resulted in civil proceedings in the federal court.

Specifically, ASIC claims that Nuix’s disclosure of its ACV and statutory revenue performance as against forecasts was deficient.

“… we all strenuously deny the allegations made against the director respondents and intend to defend the proceedings,” the company noted.

In response to the past FY22 result, which fell short of stakeholders' expectations the company has also:

• Made significant changes to the senior leadership team.

• Changed the composition of the board.

• Implemented critical strategic initiatives.

• Examined performance to find gaps in execution and areas for improvement.

What happened at the full year FY22

Lower revenue combined with an increase in costs led to a lower earnings (EBITDA) outcome for the full year.

The FY22 result included:

• Annualised Contract Value $162.0m, down -2.3% on FY21

• Statutory Revenue $152.3m, down -13.5% on FY21

• Earnings (EBITDA) $12.1m, down -82.0% on FY21

• NPAT ($22.8m), down -190.4% on FY21

What brokers think

Nuix is down -76% over 12 months but has been trending higher since early November.

Consensus is Strong Sell.

Based on Morningstar’s fair value of $1.57 the stock appears to be undervalued.

Following a review of Nuix's FY22 results, Morgan Stanley lowered its rating to Equal-weight from Overweight and reduced its price target to $0.90 (22/08/22).

While Morgan Stanley acknowledges that a turnaround has begun, the broker reminds investors that execution risk is high.

The Nuix share price was on a tear this morning.