Investors stampede into Nuix following mega-IPO

Rod Vawdrey is the CEO of the freshly listed Nuix, which is an investigative analytics and data intelligence company which has just completed the largest float of the year – a $1.8 billion dollar listing. We’re interviewing Rod on Nuix’s third day of trading and they’re off to an absolute flyer, currently trading at $9.40 which is 77 per cent above their offer price of $5.31 and means they’ve got a market cap of nearly $3 billion dollars. What Nuix does is produce a software platform that quickly analyses and searches through unstructured data which is pretty much highly complex data and extracts the useful or what they describe as the 'true data'.

The way Rod describes it, Nuix is often called into an organisation or a government agency once their defences have been breached and help them understand what went wrong. The software has a range of applications including digital investigation, cybersecurity and governance to name a few, and its customers are very broad internationally as they work with government agencies and also big-name companies such as Amazon, Thomson Reuters and the big four accounting firms. These types of data and cybersecurity stocks have been a hit with the market this year and are particularly relevant given Australia’s deteriorating relationship with China, so I asked what relevance that has to the future of Nuix too.

They’ve also got a lingering legal case being brought against the company by its former CEO, Edward Sheehy, relating to share options with Sheehy claiming he is owed around $118 million dollars in stock related to a share split Nuix did in 2017. Vawdrey is confident shareholders have nothing to worry about but the case is definitely something that the market will be keeping an eye on as it unfolds, so I ask him about that too. Nuix has raised $953 million dollars in the IPO with the funds being used to further expand internationally and put more funds into marketing and software.

Here’s Rod Vawdrey, the CEO of Nuix.

Table of contents:
Nuix software
Company history
International expansion
Recurring revenue & customer retention
Australia/China relations
Patents
Competition
Financial performance
Cash position
Share price performance

Rod, as I understand it, Nuix’s software revolves around quickly searching through, analysing and extracting data. It’s obviously more complicated than that, but could you explain in simple terms what it is that Nuix does?

Yeah, I think you’re pretty close to it. We certainly start with data and we really work in the area of unstructured data – now, what is unstructured data? It’s really any type of data that doesn’t conform to a logical model. If you were looking at files from an Oracle or an SAP, they’re logical data files. If you’re looking at emails and social media data and Twitter feeds and communications messaging like WhatsApp and so forth, all the file types are quite complicated, but also the data sizes are very varied in size, so you can have an email that may be just a kilobyte or one megabyte, or you could have one that’s almost several gigabytes because it has attachments to it and so on.

What Nuix does – and with the patents that we hold that go back to the early part of the 2000s, is our ability to take more than 1,000 of these messy, lumpy, difficult to deal with, unstructured data types and then turn them into the zeros and ones, if you will, through a patent called ‘Binary Extract’, which means breaking down the file format to zeros and ones, and putting an index on it so you could effectively ask any question you want of that data, which allows you to link all of these disparate data types and combine them with semi-structured data and logical structured data to be able to have a normalised dataset that you can do a lot of investigatory work or ask lots of questions of it to understand what that data is all about and the relationships between that data.

Rod, with this unstructured data, in your prospectus it details that there’s been a proliferation of this sort of data over the last decade and more and more companies are going to have to start dealing with this. How have you seen that play out?

Well the ‘data sphere’, as it’s often called, is growing at about a CAGR of about 26 per cent per year. Let’s take, say, 2024, there’s expected to be somewhere close to 150 zettabytes of data in our data sphere world, which in terms of magnitude you would be talking in terms of a zettabyte being a billion petabytes and a petabyte being a billion gigabytes, so when you’re talking 150 zettabytes it’s a lot of data.

What’s more interesting from the point of view of this discussion, is that 90 per cent of that data will be unstructured and that’s easy to sort of get your head around when you think of the proliferation of things like Facebook and Twitter and WhatsApp and all these communication platforms as well as corporate data, government data – all your data that sits in Government around health and taxation and regulatory compliance and so on. The data sphere’s exploding and the ability to be able to deal with that in a normalised fashion is extremely powerful.

What are you seeing happen, as you were just saying, in terms of the growth in data volumes as well, do you think COVID actually has had a significant impact given society’s mass shift online in this proliferation of unstructured data?

Pretty much everything we do in life now involves data in some form or another and certainly, the COVID pandemic created lots more data. I read an article recently where there was over 55,000 research papers being written just on COVID. If you multiply that out by the amount of words, that’s a proliferation of data. Think about all the Government work that’s being done on subsidising incomes and all the JobKeeper programs and so on, there’s data everywhere. But I think we need to think about it in a much even greater sense, is that it affects everything we do and therefore, even with the increase of COVID, it’s still a small part of a massive data sphere that is growing exponentially every year.

Just more specifically on your software, the application of it is across a really broad range of industries now. Nuix was conceptualised in the early 2000s for an Australian Government agency. Was it the plan back then to make this software widely available and applicable to a whole broad range of industries?

Yes, it was. When you have normalised data, you can start to think about all the possible use cases for it. We brought to life a couple of use cases which sort of formed the basis of our early growth, which was around investigation work or investigatory work, and it comes in two forms, often called ‘e-discovery’ which is like discovering information within datasets in litigation and those sorts of areas and then in forensics areas which is understanding data in the context of creating evidence which might be for criminal or civil cases. But also it can be applied in response to data breaches, in response to all sorts of cyber attacks and so on.

But that early case study that you talked about was actually related to looking inside emails to understand what was inside those email attachments. The specific example was, it was a government agency to see if you could apply the Nuix software to all of their emails to see if there were any inappropriate photographs within emails. The power of our software, actually with a feature called ‘Skin Tone Analysis’ allows you to look at the skin tone of a picture of a person within a photograph obviously within an attachment, within an email, which could be zipped up in a zip file, as they say, and contained in a cloud container. If you have a photograph that’s being looked at by the Nuix software, if you will, and it’s got lots of skin tone, it’s probably an inappropriate photograph. That was the sort of genesis of the notion, if you could collect all types of data like this, whether it be what’s in images, looking for things like images of anything that might look like a weapon, or if you could take data that’s in script that has inappropriate words in it and so forth, you could start to build up a profile which in a sense becomes evidentiary.

What was unique about the way we did it, is if you remember the days when people used to carry big three-ring binders of evidence into a courtroom, we moved that whole world to the digital world so that they could carry that evidence in on a thumb-drive, if you will, or a USB. And the most important attribute of that is that the courts don’t dispute it because it retains forensic accuracy and chain of custody. If we’ve consumed all your emails and then we’ve turned it into evidence and someone in the courtroom says, “Yeah, but what happened to the original emails? You might have changed them.” We can prove that we can reconstruct those emails back to their original form, so it’s very good for use for creating non-disputable evidence.

Could you give us some history about Nuix in terms of, obviously it’s an Australian made company, but how you’ve been able to expand out across multiple continents and then as you were just speaking about, apply the software to different industries?

Well, it was really fortunate that we started in the government sector and then very quickly we started to become useful for organisations that we typically call the big advisory firms, these the KPMGs, the Deloittes, the EYs and so on. These organisations are often called into corporations or they’re called into governments or they do work in the area of audit, they do work in terms of corporate investigations. They needed software to be able to help them do that more efficiently. When we first demonstrated Nuix to the big advisory firms, they were quite amazed at how powerful it was being able to unscramble all that data and help them with heir corporate regulatory investigations, help them with their forensic work they were doing for corporations and e-discovery, which is building up evidence that was used in corporate fraud and so on.

And so they took our software as customers and as they expanded around the world, their businesses, Nuix went with them. For example, today some of those advisories have us in 30-plus countries running in their data centres, helping their investigators do work. We’ve essentially entered new countries through the advisories. The other thing that happened, is very early in our genesis we started doing business with regulators like the Australian Securities Investment Commission, the tax and revenue organisations and so on, and other regulators around the world tend to follow each other. They look at what are the best software that’s being used and that helped the spread into government agencies around the world and the regulators.

And of course, if the regulators are using our software, the people they’re doing work with like the Banking Royal Commission here in Australia when they’re looking at the banks, the banks want to have the same software so they can look at the same data the regulator is to make sure they’re doing the most efficient way of responding to the regulator. We grow into new countries through the advisories, through law enforcement and through regulators, and then very quickly we build out into the law firms and the corporations and other agencies.

Just in terms of monetising those customers, as your prospectus reported, as of June 30 you had over 1,000 customers. As you said, many of them are those major companies, so I presume the relationship you have with these customers are long-term, you’re benefitting from this recurring revenue and high retention rate of your software?

Yes, most of our customers, in fact, more than 70 per cent of them, have been with us more than five years and many even 10 years now, and it is very sticky software as well, as they say. Once you’ve built – we call them Nuix cases, once you’ve built a Nuix case by using our software, you want to use that maybe for a particular regulatory compliance investigation, but you also keep that case because you don’t know in years to come that you might have to go back to that data. You don’t want to have to reprocess it all again, because that creates work and you don’t want to move it into another product because that would lose its chain of custody. Essentially, a simple way of looking at it, is the more work you do, the more Nuix you need, so we have this natural growing relationship with existing clients.

What’s your churn rate with customers? I think you mentioned it before, how often are these customers sticking with you beyond the first year they sign on?

Churn rates are in the low – I think they’re about 4.7 per cent at the moment and the only real churn we have relates to organisations that maybe consolidate. One company’s got a lot of Nuix, another company’s got Nuix and for a period of time when they consolidate, they’ve got some additional capacity. Then, as more work grows, they become growing customers as well. You have a few customers around the world that, in this world of COVID, there’s a lot of companies going into liquidation and disappearing, a few of those are our customers. But essentially, we think of churn as a very, very low single digits and we have north of 100 per cent customer retention.

And so it’s not something that takes up a lot of our focus because we know that customers need our software and they need to grow with more as they go through their life. Yes, we have a thousand-plus customers today that are active customers growing and we try to add somewhere between 15 and 20 per cent of our revenue in net new customers every year, which then become great renewing customers and growing customers.

One of the key applications for Nuix software seems to be in that cybersecurity space, which has been, especially on the ASX, a very hot topic in markets and we’ve had Australia’s deteriorating relationship with China and the cyber attacks earlier in the year. How have you seen that relationship between Australia and China affect interest in Nuix and have you seen increased demand for your software as a result or do you think that’s something that could play out over the next couple of years?

I think there’s a couple of parts to your question – one, is we often get put into the category of the word, ‘cyber’, and it’s really I suppose very simple terms, two sides to the cyber equation. There’s organisations out there, software companies and others, that are trying to protect organisations from some sort of cyber attack or cyber breach, and there are some very powerful companies that do that in what we call, protecting the perimeter. What Nuix tends to do, is Nuix usually gets called in after someone’s got around that perimeter, if you like, over the fence or around the fence, and we come in and get to understand with the client, what happened, how did this breach take place? What sort of vulnerabilities existed and so on?

We tend to come in after and do – sometimes we call it the autopsy, because the organisation’s been frozen through ransomware attack and so on. That’s an ongoing huge part of our business. What’s new about that is that we can now do real-time investigations, which means it allows organisations to test their corporate data hygiene or their vulnerability by using Nuix to check the strength of their security environment as to whether or not it’s penetrable. All of that applies not just across certain nation states like China, but other organisations around the world and other nation states that want to disrupt the lifestyle of people.

That hasn’t changed, that’s a big opportunity for us and it’s a growing opportunity. In terms of our relationship with China, those advisories I talked about earlier and those big service providers, they often have offices in China and other countries and they’re using our software to do our work. We’re very cautious about not selling our software to Government agencies that are in countries that we don’t think are appropriate, and we have an ethics committee that looks at that, plus we always respond to advice from DFAT here in Australia or the Department of Commerce, for instance, in the US. So, we’re very careful about where we sell our software. But it’s important to note in that that we don’t have customer data in Nuix or customer information. We provide the software, if you will, for others to do the work, the investigation and so on, so it’s not people trying to get into Nuix to get hold of customers though because we don’t maintain that in Nuix, that’s the customers.

You briefly touched on it earlier and I think a big part of the success you guys have seen so far seems to be the patents that you’ve acquired on your software. Could you explain which patents you have and their expiry?

We have a number of patents. I think the three major ones that really go to the heart of what we talked about is the binary extract, which is the one that translates these complex file types into normalised data. We have what we call a massively parallel processing architecture, which means that you could scale your Nuix environment vertically and horizontally, which means if you have huge, huge datasets and hundreds and hundreds of users, you can multiple instances of Nuix and orchestrate those across very, very large environments and be able to share work in a very efficient way through this parallel processing.

We also have some fault-tolerant processing capability within that which allows us to – if for instance you’re processing a whole a bunch of data and you find something you’ve never seen before, what we do is we partition that off into a different bucket while we continue working and then we go back and deal with that separately. Those are the major patents and they go through into – some of those have got 20 years left on them and some a little less, 15 years and so on. And we have a bunch of other patents related to the workflows and things that we do in and around how the users interact with our processing engine.

Are there many other companies operating in that specific area that you were talking about before in terms of going into a company after there’s been a potential breach and then helping them through this process of understanding how it happened? What’s the competition like in that space?

There are lots of companies that do things around investigatory work and there’s two sort of worlds we live in. We live in a world of machine data and these are things that are created like when computers give off alerts, when networks give off alerts and say, “Something’s happened.” That’s what we call machine level alerts. Then there’s human generated data that I talked about before like emails and messaging and communication. These two worlds are converging to some extent. When an alert goes off in your network and it looks like there’s been a breach or something, an alert comes up, they’ll start to investigate that from that perspective. Then they’ll say, now, how did that alert go off and what human behaviour, what behaviours – was it somebody printing something at an odd hour in the middle of the night? That’s a very unusual behaviour – so that’s a human behaviour getting married together with the machine data.

There’s a lot of specialist organisations in different elements of this holistic investigatory world. We like to differentiate ourselves, if you will, with the fact that we have this generalisable platform that can be applied across so many different environments and we really compete with, I suppose you’d call them ‘point solution vendors’ that are quite good at what they do in narrower segments of the overall industry. You’ll find companies that are very good at dealing with documents and spreadsheets and so forth in an e-discovery world, and then you’ll find other companies that are very good dealing with forensic artefacts like data that comes off mobile phones and so on, then you’ve got others that deal with, as I said, machine alerts and so on.

What’s unique about Nuix, we think, and it’s been proven out with feedback from our customers, is we deal with all manner of data, so we don’t focus on a particular subset, we’re able to be a more generalisable platform. Really, it’s hard putting a tag on anybody else that actually does it as broadly as we do.

Could you explain in terms of – you’re obviously selling these as software licences to customers – what’s the model you’re using, is it a cost per user model or does it change depending on the company?

You can consume Nuix many different ways, that’s one of the powers of our flexibility. If you’re an agency of government that doesn’t want your data to leave the premises, we can have on-premises licences in very secure environments. If you’re an agency that doesn’t want to have your own infrastructure, your own hardware, if you will, you can deploy that on a Government cloud environment. In a hosted situation, you can use AWS or Azure, these public cloud environments to host it. You can consume Nuix by users or you can consume it by the amount of gigabytes you want to put through the engine. We have a multiplicity of flexible licences and the newest licence type that we have which applies to some of our products and eventually will apply to pretty much all of them, is what we call a software as a service, traditionally called SaaS world, where you consume it based on data under management.

By offering all this flexibility, you can have hybrid installations where a Government agency or a corporation could have an on-premise licence based on the amount of gigabytes they’re processing and their user applications – we call them user experiences, they could be done on a user basis and be through a SaaS implementation, because they’re not all behind the firewall, if you will, they’re out in user land. Flexible deployment, on-premise, hosted in the cloud, SaaS, gives our customers the best chance of being able to meet their requirements from a customer workflow point of view.

In terms of translating that into revenue, you reported $175.9 million revenue for financial year ’20 and forecast $193.5 million for the next financial year, so how much of this are you expecting to come as a result of that? I think you mentioned before, you’re kind of going at that 15-20 per cent rate of signing new customers on.

Yeah, I think like all organisations, we’re being quite cautiously optimistic about how this whole COVID situation comes out and turns out to be getting back to normality. I think our forecast is appropriately balanced that way. For instance, normally we would target maybe 15 to 20 per cent of new clients. I think we had 12 per cent in the number for this forecast for the prospectus. Normally, we forecast quite a lot of customers that sign upfront for our software and pay their licences three years in advance, so we sort of backed off on the multi-year licences and had more annual licences.

We’ve taken a position that there is a little bit of uncertainty out there, but I have to sort of counter that in a sense by saying we had a good financial year, last year, which involved three or four months of COVID situation and we’ve just finished back in the end of September, our first quarter, and so far if I take the first quarter’s numbers and play them out over a year given it’s a traditionally softer quarter after the financial year, we’re quite confident of the prospectus forecast being able to be achieved and we’ve been a little bit more conservative on net new clients given people getting back into work and so on. We’re in pretty good shape, I think, to have a great year.

You’ve got your pro forma net profit after tax for 2021 financial year at $20 million dollars, but in a statutory sense, it’s a $7.7 million dollar loss. That $27 million dollars differential, is that solely due to accounting for the costs of the IPO?

There is a lot of IPO costs in the numbers, yes, and again I think our predictions in terms of the forecasts for EBITDA and EBIT, we feel pretty confident. We built into there some discretionary spending in the G&A area that we will pace according to how we’re tracking on our EBIT and so far, again, year to date that looks really positive and we’ll be able to make some additional investments and some additional salespeople and kick off a couple of the R&D projects and still meet our prospectus forecast.

Are you expecting for the 2022 financial year, back in that profit that you are forecasting in that sense to be around the $20 million dollar mark or more?

I think we’ll get into that later. What’s in the prospectus is what we believe we can do and we’ll see how this year plays out before we start making any more prognostications about further profits in outer years.

Could we discuss your cash position then? The IPO, you’ve raised $953 million dollars. What sort of cash position does that leave you in now going forward?

I don’t have the numbers directly in front of me so I’d have to come back to you on that. We’re in a fortunate position, Nuix, that because more than 75 per cent of our customers still pay upfront for their licences in what we call term or multi-year licences, we’ve always had strong cash flow and if you go back from 2008 through to 2020 numbers that you see in the prospectus in going forward, we’ve always been cash flow positive and profitable throughout that period and I expect that to continue.

So, you’re not seeing the need to raise more cash in the near future?

No, we’re very fortunate, we also have a facility if we need to draw on it with the Commonwealth Bank, so I would expect that we have adequate cash to get us through the next financial year and beyond.

You briefly touched on it in terms of what the funds from the IPO are going to be used for, is that solely to be a push for that marketing and new customer acquisition?

Of course, listing on the stock exchange has a number of benefits, it increases ownership, it allows us to take long-term investors in the business, take some money off the table. As you’ve seen with what’s happening, our major investors decided to sell down and still remain a significant investor in the business. So there’s those issues, then, of course, you have capital available to do a number of things and we will definitely be looking at some new markets. We’re looking at some expansion in Europe, beyond Germany, the Nordic and UK, now into France and Italy and Spain. We’re looking at continuing to add new countries in Asia. We’re currently in a lot of countries there in terms of Korea and India and of course, South East Asia.

But there are other countries and other segments and we also go to market by industry segment, so we’ll ramp up the number of industries that we’ll go after. All of that comes from investing in our partners, we have a very strong partner network and adding more enterprises software salespeople in different jurisdictions. We have a chance to really turbo-charge the front-end of the business and we have some aspirations to accelerate some of the R&D, particularly in the innovation around the SaaS world for some of our products. We want to bring all our products to a SaaS model over time. There is also the opportunity for us to participate in some selective M&A, bolt-on technologies that give us new use cases, and we’re really interested in putting a big push into this Government risk and compliance space which we think has privacy, you heard of the GDPR legislations and responding to privacy and so on, so there’s a number of use cases that we’ll invest in as well over the next year or two.

There’s also the case lingering that was brought forward by former CEO, Edward Sheehy, regarding the options dispute. This has come up in the last few weeks when the IPO’s been probably front of mind. But is this something that shareholders should be concerned about?

Well, it’s disclosed fully in the prospectus and Nuix maintains a very strong confidence in our ability to defend our position on that, and that’s all I can really comment on at this stage, it’s within the legal framework. I think we’ve been very forthright in putting that forward. One might think the timing suggests that it might be more opportunistic than anything else.

I wanted to also just discuss your share price which, it’s your third day of trading today and the share price is now $9.40, so it’s about 77 per cent above your offer price. What do you think – was there an issue with the offer price being too low or are you shocked by the amount of interest from the market over the last few days?

I think we’re pleasantly surprised by that and I think we always knew that we had a company that had technology in a very hot space, as you used the term earlier, in terms of being able to deal with compliance and risk and cyber breach and so on, and I think we priced it with our advisers, Morgan Stanley and Macquarie Bank, at where we thought was the right place. Of course, it’s great that people are able to take opportunity to the upside. But I’m not focused on the share price, to be honest, I’m focused on being able to use the funds and the capability to move the business forward in the right way. I’ve always said that I felt that it’d be great if Nuix had a right of its own existence, it didn’t get acquired by a big strategical PE firm and being able to maintain our brand and our presence…

Because we do this work for the world which really resonates well with our employees, this whole social-good corporate activity where we’re solving some of the world’s most difficult problems. I think the market is responding to our mission, finding truth in a digital world, the fact that we are in a hot space, I suppose, in terms of our adjacencies like the cyber breach area, and we’ll wait and see how that plays out over a longer period.

We’ll leave it there, Rod, thanks very much for your time.

Thank you very much, all the best.

That was Rod Vawdrey, the CEO of Nuix.