Should you buy, hold or sell Nuix Limited shares?

In recent years, Nuix Limited (NXL: ASX) has had issues ventilated in the press that the company and management has systematically worked through.

Although these issues were important to be addressed, it meant that the company had to focus on things other than specifically going after the market opportunity.

The company's latest results clearly demonstrate that it has managed to get past these issues, and has started to demonstrate its execution against the opportunity set.

It has demonstrated its ability to upsell to existing customers and attract new ones, a capability that was previously obscured by the accounting complexities of multi-year deals and the transition to consumption based pricing.

Recent earnings releases have drawn the attention of a lot of investors, and the share price has reacted accordingly.

While we are still constructive on the opportunity for Nuix, the current share price fully values what the company has delivered to date into the future.

Further upside to the share price will come if the company can demonstrate firstly, an improvement to its net revenue retention (NRR) by selling more to existing customers and secondly, their ability to win new customers in a range of different use cases.

What is Nuix's strategy and outlook?

Nuix is one of a handful of high-quality technology companies from Australia with a truly global opportunity set.

Nuix's core product is its processing engine.

The engine extracts, processes and enriches unstructured data that is used in a number of different use cases which have developed in response to a number of regulatory requirements and or critical business risks (like security, fraud detection, military applications, and human trafficking).

Through demonstrated product market fit, and a refined enterprise sales strategy, Nuix can expand further into its current markets, and enter into new ones; primarily direct to corporates who are facing increasing regulatory burdens which require them to be proactive instead of reactive.

This increased penetration is expected to be driven by a modest number of new customers each year, but mostly via upselling existing customers to use more Nuix over time.

The upsell is driven primarily through the shift to consumption based contracts, and an explosion in the amount of data that is processed through its engine each year.

The key uncertainties are firstly, the speed at which the company can transition contracts to a consumption based model.

Secondly, what is the incremental uplift in pricing that occurs when this happens.

Finally, how many use cases can effectively be productised and sold to customers, that will enable them to keep their momentum.

What do Nuix returns look like?

If you have been an investor in Nuix from the initial public offering (IPO), like us, you have had to be patient.

Essentially, up until the 2023 financial year results, the focus by the market has been on a number of existential issues, as opposed to the product opportunity that lies ahead for it.

There were largely two groups of issues the company had to grapple with.

Firstly, a disagreement between the company and a former CEO on the award and exercisability of options.

Secondly, as the company began its transition away from multi-year contracts towards more consumption based ones, there were requisite impacts on the disclosures, particularly their Annual Contract Value (ACV) disclosures.

The 2023 financial year was a positive one for the company, having finalised the majority of the legal cases outstanding.

The case against the former CEO was won, both on the original application and on appeal.

The disclosure issues were dismissed with the exception of one which the company expects to be finalised shortly.

There was a positive share price movement on the back of the announcements but it took the first half of 2024 and 2024 financial year results to be reported for investors to really focus on the underlying fundamentals.

The big outstanding question for investors was whether or not the company could actually win new customers, and sell more products to their existing customers, as evidenced by their net revenue retention.

Their two latest sets of results demonstrate its ability to upsell to existing customers and attract new ones, a capability that was previously obscured by the accounting complexities of multi-year deals and the transition to consumption based pricing.

A big part of being able to do this was a re-engineering of their go-to-market (GTM) sales motion.

This included re-organising and incentivising their sales teams and simplifying their product offerings and price decks.

Over the past year, the company has increased their net revenue retention (NRR) from 95% to 113% which is a pretty material swing.

The company has also added new customers and started selling their new product, Nuix NEO, an end-to-end platform that handles data privacy, investigation and legal processing.

The market seems to have recognised this and, in my opinion, seems to have gotten a little head of itself now, taking the share price from AUD 1.85 in January to AUD 6.25 at time of writing.

Is Nuix a buy, hold or sell?

While recent earnings updates have positively affected the share price, they haven't significantly altered our forecasts.

Management has worked hard on ensuring that they focus on the right things and their strategy has paid off.

The company was able to increase upsell, whilst reducing churn, improving net revenue retention.

From here the company needs to demonstrate a consistent ability to win new customers and sell more to existing customers, to justify the valuation that the market is putting the company on.

We are looking forward to the next set of results to further refine our expectations for Nuix's future performance. Hold.

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