The Nuix Ltd (ASX: NXL) share price is on watch after disclosing revised FY21 forecasts. Let’s unpack this and understand what this means for the Nuix share price.
NXL share price
Nuix forecasts lower revenue but higher EBITDA
As explained in my previous article, revenue was down for HY21 mainly due to customers transitioning from on-premise software licencing to consumption-based licencing.
As a result, Nuix has provided guidance on revenue of $180 million to $185 million. This is lower than the forecast in the IPO prospectus of $193.5 million.
However, earnings before interest, tax, depreciation and amortisation (EBITDA explained) is expected to be between $64.6 million to $66.6 million. This is higher than Nuix’s initial forecast of $63.6 million.
The company notes some of its customers have reduced add-on or upsell requirements for existing licenses. Think of these as additional services.
Nuix advises this is due to a slower than expected recovery in legal case backlog. Interestingly, this reflects the results of the research conducted by Ernst & Young (EY) on business sentiment towards litigation.
EY used YouGov to survey more than 100 FTSE 350 and private companies in the UK and almost two-thirds (63%) had adopted a conciliatory approach to business disputes since the pandemic.
Nuix continues to acquire customers
Nuix acquired more customer for the nine months ended 31 March 2021 compared to the prior corresponding period (PCP).
Also, the total order value and average order value from these new customers were significantly higher than the PCP.
It appears over the last few months, customers have continued to enter into longer contracts. Nuix listed some large organisations that have executed 2 to 5-year commitments.
My thoughts on Nuix
Mr Market tends to punish companies that fail to meet expectations. Should this eventuate, the Nuix share price may descend to more attractive levels.
Why do I think it would be more attractive if the share price drops?
Well, I think there are two key positives from this revised guidance.
Firstly, Nuix is expected to record a higher EBITDA as a result of reduced employees and lower travel costs. So, I believe this is a strong indicator of the quality of Nuix’s product because it still managed to acquire more customers with fewer employees and little to no physical sales exposure.
Secondly, although business sentiment towards commercial litigation has dropped due to uncertain economic conditions, I think this will recover over the long term.
The consumption of Nuix is mainly driven by the usage of data, which is a growing industry with long tailwinds. This aligns strongly with the Rask Investment Philosophy.
Investors should also be mindful of the stall in revenue growth and its current valuation, which is still quite high in my opinion.
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