When a big shareholder sells/floats a company, it is important to ascertain whether the company was divested at a fair valuation for incoming investors. This is especially the case here where Macquarie sold off almost $600m during the IPO.

When faced with this dynamic, it is important to examine how directors act in the months and years after the IPO. Their buying and selling behaviour will give us critical insight into the health of the business and whether they foresee future value accretive events.

For Nuix, several directors have purchased significant parcels of stock over multiple trades. This is a very strong vote of confidence by several directors on the prospects of the company going forward, and this was backed up by the latest set of financial results. Let's examine these trades now:

Jeffrey Bleich

Sue Thomas

Robert Mactier

Jonathan Rubinsztein

Alan Cameron

As we can see, since Nuix began trading on the ASX, there has been ~$1.33m of additional stock purchases by directors. This excludes any “free” performance rights vested. This is no small quantum and shows that they are putting their money where their mouth is. As outside investors, this is a strong signal that these directors believe that the share price is attractive and that future business performance is likely to benefit the equity value.

Transparency helps investors gain an understanding how the business is going. This often occurs after a company has outlined a set of goals, and faithfully reports on their progress.

Nuix hasn't been listed for a particularly long time and has experienced periods of business volatility. As such, seeing how they plan to stabilise the business and then invest in growth is key.

What is important to note, however, is that measures of success or failure needs to be quantifiable and assessable definitively. When examining Nuix, we must note that not all strategies are goals. For instance, in the 1H22 Financial Results presentation (link), the company defined Three Horizons of Change. Although this is an important disclosure and shows proactive management, there is no easy way to quantify any of the horizons and assess accountability.

However, fast forward to the FY22 results presentation (link), the company included a informative breakdown on the progress of these initiatives and their expected run time.

This is a really great level of detail, especially given the uncertain growth trajectory of most tech companies. Later, in the 1H FY23 results presentation (link), the company again provided complete detail on the progress of each horizon activity.

Each horizon was also broken down to show progress since the prior quarter which makes it incredibly easy for investors to digest. This also shows a great degree of transparency from management.

Heading into FY23 (link), the company provided a further update on the progress of initiatives. For instance:

Although not all of the horizon 1 goals, such as sales enablement optimisation, have been achieved, it is important to note that the company has been upfront about its progress and hasn't simply ignored it. This is crucial because the achievement of goals is just as significant as their failures or delays, especially for investors. At this point, it appears that Horizon 2 goals have been incorporated into the Nuix Neo line, which represents their new solution-based unified platform.

Overall, the company has established a high standard for outlining goals and transparently reporting progress to shareholders over an extended period.

Although Nuix is a fairly mature company with revenue approaching $200m in FY23, the company is still heavily investing in “growth” activities that is expected to deliver additional financial value in the future.

As we see across mining and biotech companies, assessing how effectively those growth costs are consumed is very important to get a sense of the company's efficiency. What we want to avoid is a company that requires very expensive administrative costs to facilitate that growth, which means that shareholder funds are not fully being directed at growth.

For Nuix, we can focus on two key measures to ascertain its growth investment efficiency. The first measure, like some of the biotech examples we looked at in the past few weeks, focuses on R&D investment and expenditure indexed against general and administrative costs. Although not a perfect measure, there is usually a strong correlation between these two. Let's have a look at this for Nuix over the past few years.

In some of the previous Rare Triple analysis, the ratio is often above 2, yet it is worth noting that the benchmark for post-revenue companies, larger sized companies is much smaller. This is because these companies require larger head office teams and less investment in R&D due to business maturity. As such, this reduces the ratio in relative terms compared to a small, pre-revenue companies.

We can see from Nuix's figures that the company is rapidly improving it's growth efficiency ratio, with R&D investment and expenditure increasing despite smaller G&A costs. This tells us that their expenditure in growth has not led additional, company wide overheads.

Another area we should note is the proportion of R&D that is capitalised. The capitalisation of R&D implies that the investment has probable future value, useable or sellable, amongst other qualifying criteria under accounting rules. This compares to R&D with uncertain future value that must be expensed. Therefore, examining the proportion of capitalised and expensed R&D can tell us the likelihood of the growth investment paying off financially in the future. Let's examine this for Nuix:

Overall, we can see that a high proportion of R&D fulfils the requirements to be capitalised and therefore likely to generate future economic benefit to shareholders.

My concluding thoughts

Nuix has definitely had a turbulent time on the ASX. The business has shown many areas of strength, with key financial metrics all indicating strong growth over the last 24 months despite a material slowdown in the broader tech space. In addition, the improvements across the company's product lines and offerings to customers are reflected in the steady customer retention rate, high net dollar retention, and high gross margin. With these factors in mind, it is unsurprising to see additional stock purchases by management.

Therefore, we see Nuix as a rare Triple Threat.