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NXL - Nuix Limited

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Nuix is a leading provider of investigative analytics and intelligence software, with the vision of “finding truth in a digital world”.

Nuix was first conceptualised in the early 2000s, with the development in Australia of an algorithm to make unstructured data searchable and was first commercialised for a specific use case with an Australian government agency. Since then, Nuix has grown to provide its software to over 1,000 customers across 78 countries. It remains headquartered in Australia today, despite over 80% of Nuix's Total Revenue in FY20 being generated from markets in North America and EMEA.

The Nuix platform is underpinned by over 15 years of research and development, with over A$200 million of total research and development costs incurred by Nuix since 2008 (including both capitalised and expensed research and development spend), resulting in the creation of one of the world’s leading technologies for processing data at scale. Over the last five years in particular, Nuix has made significant investments in talent, process improvement, sales and marketing, acquisition integration and technology, and improving customer experience, while continuing to enhance the functionality of its platform.

Nuix generates revenue through a number of different software licensing models, predominantly through the sale of subscription licences. In FY20, the Company achieved:
  • A$175.9 million Total Revenue, an increase of 25.9% on the previous financial year (FY19: A$139.6 million);
  • subscription revenue equivalent to 88.7% of Total Revenue, an increase from 87.4% in FY19 and 80.8% in FY18; and
  • a gross profit margin of 88.2% (FY19: 88.8%) and an EBITDA margin of 31.5% (FY19: 20.8%), on a pro forma basis.
It is anticipated that NXL will list on the ASX during December 2020.

 

Dona Ferentes

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As the NXL float is coming off the Macquarie production line, there is a bunch of market chatter associated with it.

Nuix is slated to come to market with a $1.8 billion market capitalisation. The company, which has grown to be one of the largest private Australian software companies despite a cofounder being sent to prison before being acquitted for tax fraud, has created software which helps organisations identify patterns and trends from different types and formats of data, including unstructured data, which is generated by things such as social media, text documents and PDF files. This type of data does not fit neatly into a database table and is more challenging to interpret. These data insights are generally applied to fields such as cyber security, risk and compliance, and fraud investigations.
Nuix is raising $975.3 million; of this, $875.3 million will go to existing investors selling down, while $100 million will be injected into Nuix. Macquarie, which owns more than 66 per cent of the business, will reduce its stake by more than half to 30 per cent.

In the year to June 30, Nuix recorded $175.9 million in revenue, up 25.9 per cent on the previous year. For the 2021 financial year, the business forecast $193.5 million of revenue, implying a growth rate of 10 per cent. The company has also forecast $63.6 million in earnings before interest, tax, depreciation and amortisation, on a pro forma basis.

Of company revenue, 80 per cent is generated offshore from North America, Europe, the Middle East and Africa. The bulk (70 per cent) of its annual contract value is generated by customers which have been using Nuix since 2016, or earlier, and the business has a churn rate of only 4.7 per cent.

In its prospectus the company pinpointed possible cyber security breaches and any churn in its existing customers as its biggest risks.
 

Dona Ferentes

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NXL is hitting the boards today at 12:30pm. IPO price of $5.31 sees it as a $1.8billion company.

Existing shareholders of Nuix have sold down $875 million worth of stock at the IPO price, and the company has raised another $100 million of new capital for the business to invest in growing into new verticals.
 

Dona Ferentes

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here's the joke:
Nuix is well-priced at $5.31 say fund managers. They point to the long-term prospects of the investigative analytics and intelligence software company, but aren't willing to hazard a guess as to how the stock will run on day one or over the first few months of trading.
My sources say all the argy bargy is because the big end of town couldn't get enough in their allocations, so the 'negatives' were all a game to get access to more . We'll soon find out, the pre-opens are consistently high, now $9ish.

15 mins to find out.
 
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Looks like your sources were right @Dona Ferentes as the IPO day price seems supported at quite a premium ($8 ish with 2.77M bid side vs 440K sell side). Nearly $81M in trading volume.

How to value this?
 
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AFR has the market cap on close at ~$3b and the projected revenue for next FY is ~$200m...

Price/Sales of 15.

The game of paying crazy multiples for tech stocks continues.

I'll just leave this old quote from Scott McNealy (CEO of Sun Microsystems) in 2002 here, after the dot com bubble had burst:


...two years ago we were selling at 10 times revenues when we were at $64. At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don't need any transparency. You don't need any footnotes. What were you thinking?
 
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Love that quote InvestoBoy, thanks for sharing!

I saw this IPO advertised on ASX website yesterday and had a little look into it. It is a quality business with +30% EBITDA margins and subscription business with renewing customers - most of whom are the big end of town (big 4 and the like) in their eDiscovery business.

I don't like the incentives/alignment post-listing, with all management selling down almost all their stakes, and the possibility that the former CEO - with whom NXL is litigating - could be owed 6% of equity which significantly dilutes current holders (as disclosed in the small print in the prospectus)! Market clearly discounting this risk and instead excited to be part of a quality growth company with good-looking runway in the global exuberance that is SaaS businesses. Could be interesting to see how this looks after 1-2 years when some of the risks have played out.
 

Dona Ferentes

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. It is a quality business with +30% EBITDA margins and subscription business with renewing customers - most of whom are the big end of town (big 4 and the like) in their eDiscovery business.
It has more than 1000 customers in industries such as financial services, oil and gas and government. The $100 million raised through the IPO ($875.3 million went to existing investors selling down) will help it push into new verticals, including into the regulatory space, from traditional regulators into civil agencies, attorney generals and the military side.

with all management selling down almost all their stakes ...
Macquarie Group's remaining 30 per cent stake swelled from a $508 million valuation to more than $762 million on Friday. Held 63%, banked $566million selling a bit over HALF

Ms Schwartz and her husband Alan's growth capital firm Armitage Associates stake jumped from about $48 million to more than $71 million. These gains are in addition to $48 million cheque pocketed from reducing their stakes in the IPO. i.e. sold HALF
Could be interesting to see how this looks after 1-2 years when some of the risks have played out
. It's not pets.com.... In 20 years time, it would be far more lucrative having NXL at A$8 than buying Alphabet, Google's parent, at US$1823 a share.

"Nuix started with a very simple idea: to make emails searchable. Conventional thinking at the time was encapsulated in "Isn't that what Google does?" That typified conventional wisdom. We are now well beyond that ambition and can successfully claim that we can make any digital data searchable and in near real time ...and at a speed and scale that is unmatched by anyone on the planet." Nuix co-founder Tony Castagna

... people I have spoken to that actually use Nuix rhapsodise about its search capabilities .... "It gives me what I want, rather than what Google wants."

The other aspect of Nuix is that it came out of intelligence communities, early days in Canberra. Less talked about, the Nuix business model precludes the sale of its data analytics software to Chinese controlled companies and Chinese government agencies. Some of the largest customers for Nuix software are Western intelligence agencies who spend much of their time thinking about China's latest strategic move.

Nuix software engine can allow prosecutors from police organisations or intelligence officers from spook organisations to find the truth in the data. Digital forensics teams in law enforcement and intelligence agencies use the Nuix software to collaborate and share intelligence as well as to prosecute the fight against criminals terrorists and other bad actors. It is believed the software has been used to collect, preserve, analyse and store evidence of crimes and atrocities by Islamic State. The software can ingest large quantities of structured and unstructured data at high speed and review it quickly

It is an industry-leading platform, which has six patents that don't expire until between 2031 and 2035. The Nuix algorithm to make unstructured data searchable was first patented in 2013. The company has since registered a further six core patents in the US as well as 100 other patents of its unique IP. (again, similar to pets.com)
 

galumay

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I'll just leave this old quote from Scott McNealy...

Yep, its a great quote and is a simple reminder of the continuing absolute disconnect between price and value in the tech sector of the current bubble market. No one remotely capable of analysing the financials of a business would pay the price that NXL is trading at, its a great business and has ongoing potential for growth, but paying too high a price for even the best business in the world is not good investing.

Regardless its entirely possible NXL will be $20 by the end of December given the current state of equity markets and the tech sector!

Coincidentally I just finished ready Tweedy Browne's Letter to Shareholders, if you dont mind a bit of serious reading its got some great content about the current state of large Tech prices around the world. https://www.tweedy.com/resources/li...l Report and Shareholder Letter Sept 2020.pdf
 
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Regardless its entirely possible NXL will be $20 by the end of December given the current state of equity markets and the tech sector!

Yeah.

If valuations were any limit on price then we would never see overvaluation (or undervaluation!).

The way I like to think about it is, like VIX which is the markets implied volatility for the next 21 days, short-hand valuation ratios are a way to gauge "market implied growth" (in EPS or revenue per share).

Market implied growth for growth stocks (mostly tech, but the same phenomenon is there for other growthy sectors and names) is so high!

MacroCharts on Twitter recently posted this chart from Ned Davis Research

as a possible explanation for this premium implied growth. Scarcity of revenue growth.
 

Dona Ferentes

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I suspect there might be a few punters watching rather nervously?

Since IPO, 5 minute chart:
1607565843333.png
 
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I suspect there might be a few punters watching rather nervously?

And others waiting to enter, I'm sure. It's a stock that allows exposure into a sector with few options.

How does one value it, I'm not so sure.

i found this comment amusing. Mostly since it's a "Reasons to buy Nuix" article composed by the Seller;

Macquarie's analysts, spearheaded by Mitchell Sonogan and keen to point out that they were not part of the Macquarie unit that owns about a 65 per cent stake in Nuix, presented a list of nine reasons to buy shares in the company.

The reasons included:

#1 High quality software business with a track record of growth

#2 The Nuix Engine is a key competitive advantage

#3 Scalable business with high incremental margins

#4 Attractive unit economics and growth outlook

#5 Leveraged to large and growing addressable markets

#6 Multiple opportunities for business growth and expansion

#7 High quality customer base, diversified by customer and geography

#8 Strong customer value proposition


#9 Impact of Covid-19 and potential opportunities
 

galumay

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That certainly looks like a holder's list of reasons to buy!

None of that matters if it's overpriced, none of that matters if its significantly underpriced!
 
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I chose NXL because they’ve got some big time customers and should continue to acquire new ones.. unique sector as cyber security related businesses are only getting more in demand
 

Dona Ferentes

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once things have settled down, the buyers seem to taking up more.

(was interested to see, among the LICs, only MIR took up some at IPO, while the bigger players AFI and MLT didn't)

1611187931924.png
 
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