Date : 28/01/2021

Nuix Limited

ASX :

NXL

Market Cap : $3.5 Billion

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52 Week Range : $7.27 - $11.85

Share Price : $10.53

The recent IPO has been taken in very well. The firm is profitable and has an excellent customer base. They are positioned for growth and we issue a progressive "Buy" recommendation for long-term investors.

Company Analysis

Nuix Limited (ASX: NXL) is a Sydney based technology company that listed on the ASX in December 2020. Coming in at a market cap of $1.7 billion back then, it became the most valuable tech stock IPO of the year. The stock soared 50% on the day of the float and shares closed over $8 a share.

Nuix provides intelligence software and investigative analytics by analysing large volumes of data in the back end. They have very wide use case scenarios such as: criminal investigations, financial crimes, litigation, data protection/governance/compliance, employee & insider investigations, etc. To sum it up, they are becoming a need to have software to manage risks in corporations, governments, law enforcement, law firms, etc. They already have over a thousand customers coming in from 79 countries. Few notable clients include – Amazon, Barclays, Samsung, CommBank, etc. They have played a significant role in the investigation of the Panama Papers and also the Royal Banking Commission debacle of 2018, among other criminal investigations. It is also believed that Nuix works with some of the largest intelligence agencies in the world and they have participated in investigations surrounding terrorist activities, corporate scandals, and organised crime.


Most of Nuix’s revenues are generated in the Americas. Followed by EMEA and then the APAC. Just 20% of its overall revenues are generated in Australia. The above chart shows the segmented revenues for FY2020 in millions. For a technology company, this is rather a very common theme as the US and Europe are larger and more developed technology markets than the APAC region. In the growth phase, the reliance on Americas is important just due to the potential for revenues that it brings. Nuix added 102 new customers in FY2020. The table shows that America has been the fastest growing market for Nuix. However, the recent 2020 growth rates show that the firm is gaining traction in EMEA and APAC regions as well – because this business is turning out to be a mainstream requirement for corporations and government.

Company Updates

Nuix share price has been on an upward trajectory in 2021. Volume spikes can be seen from the above picture as well. After dipping over 5% today, NXL has returned 27% in the past month and has almost doubled since its IPO.


Source: Tradingview.com

UK based Forensic Analytics Ltd are the market leaders when it comes to digital forensic analytics. They work with law enforcement in the UK and just last week, they announced a commercial and technology alliance with Nuix. This shows that Nuix is gaining a lot of traction and market share in the EMEA region.

Industry Analysis

The market for investigative analytics and intelligence software includes the markets for eDiscovery software, digital forensics software, GRC software and endpoint security software:

The eDiscovery software market generated approximately US$3.0 billion of revenue in 2019 and is expected to grow at a CAGR between 2019 and 2024 of approximately 3.6% to reach approximately US$3.6 billion by 2024.

The digital forensics software market generated approximately US$1.0 billion of revenue in 2019 and is expected to grow at a CAGR between 2019 and 2025 of approximately 11.5% to reach approximately US$1.9 billion by 2025.

The GRC software market generated approximately US$10.5 billion of revenue in 2019 and is expected to grow at a CAGR between 2019 and 2024 of approximately 4.2% to reach approximately US$12.8 billion by 2024.

The endpoint security software market was estimated to generate approximately US$12.8 billion of revenue in 2019 and to grow at a CAGR between 2019 and 2024 of approximately 4.9% to reach approximately US$16.2 billion by 2024.

Data suggests that over 90% of legal cases now require a digital footprint. With the shift towards a digital economy, the use of eDiscovery software will only increase. Organisations are looking for ways to mitigate the risks they are facing when it comes to data, and with data being the gold mine of the future, Nuix and other such players have developed products that are a necessity rather than a want.

  • Managing data
  • Complying with legal and regulatory obligations
  • Risk mitigation from data breaches
  • Exploitation of data

These are all areas that Nuix’s products help their customers. Thus, the total addressable market in terms of number of potential customers is very large. Any business that is digital will ultimately have a need to protect and safeguard themselves from exploitation.

Investment Thesis

Although Nuix just listed on the ASX, it has been around for more than two decades. They have a high-performing and efficient business model, and they are cash flow positive. Nuix reported revenues of $175 million as of FY2020 – a growth of 25% over FY2019. Their gross margins are a steady 88% – indicating incredible efficiency for an enterprise software business.

EBITDA grew by 67% at the end of FY2019 and at the end of FY2020, EBITDA grew by 78% to $62 million. Currently, Nuix operates with a high EBITDA margin of 35%. The key takeaway here is that it is becoming easier for Nuix to acquire new customers and keep hold of them for sustainable revenues.

Profits are already soaring for Nuix. The Net Profit After Tax increased by a whopping 217% in FY2020 due to the substantial decrease in working capital requirements. The NPAT for the year for $23 million.

R&D investments have continuously increased – suggesting that the firm continues to improve its products. Software Development costs also have a similar trend – with the firm spending $42 million in FY2020 – a growth of 12%. After all expenses, Nuix had a cash balance of $38 million, again, an increase from FY2019 – by 41%. On their balance sheet, Nuix has over $100 million in Current Assets and also $100 million in Current Liabilities. While this may look like a red flag, on further examination, deferred revenue of $47.8 million has been recognised as a short-term liability – temporarily inflating their short-term liabilities. Deferred revenues are essentially customers who have already paid in advance for the services that are yet to be rendered. On the whole, Nuix’s short-and-long-term financial health is a position of strength.

As of FY2020, Nuix reported having $48 million of debt on its balance sheet. However, with the firm going public in December, the secured funds have been used to pay-off the debt and Nuix is thus, debt free and completely capitalised by equity as of 2021.

Nuix is expected to generate $193.5 million revenue, $63.6 million EBITDA during FY2020. However, our estimates suggest that Nuix will surprise the market with a performance higher than the above expectation. The EBITDA margins they are operating with currently have risen due to the operational efficiency that the firm has displayed. While consistent revenue growth may be volatile during the pandemic, the efficiency should remain the same even in a bearish scenario.


Source: Nuix

A net dollar retention of over 100% for the past 3 years shows that Nuix is generating more money from its existing customers than they did in the previous year. A healthy metric and a cornerstone when it comes to measuring SaaS businesses. Churn rates are also low. However, the pandemic looks to have had a slight impact when it comes to a few customers leaving.

The diversity in Nuix’s customers and industry verticals de-risks the firm when it comes to considering the effects that the pandemic has had on its customers. We expect the revenues to grow at a CAGR of 22% over the next 5 years as it becomes a dominant technology player on the ASX. The geopolitical tensions between the developed world and China rises a lot of question surrounding security and data protection. This looks likely to be a play that would benefit Nuix.

Nuix comes in at a market cap of over $3 billion as of this report. This puts the stock in contention for entry into a lot of indices. The positive here is that once a stock is instilled into a major index, a lot of ETFs and funds would be buying the stock and potentially leading to higher prices.

Relative Valuation

The table above compares the Enterprise Value/EBITDA multiple of the ASX tech firms. It is similarly priced to Technology One and Nextdc on a trailing multiple basis.

Recommendation

Nuix has a highly efficient operating model and very good financials. They have some of the biggest firms in the world as their customers and their revenues are forecasted to grow at over 20% for next 5 years post FY2021. Given the recent IPO, the stock may be subject to speculative pricing and thus volatility in the short-term. However, in the long-term, it looks to be a very good stock fundamentally. We recommend long-term investors to “Watch” closely for a buying opportunity as there will be degrees of  share price volatility.

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