If Nuix runs out is cash (sic) (& it’s still just an if) it’s going to be a time bomb for clients like ASIC, ATO, FBI, CIA, DoD, NCA as they risk losing critical data

 ~Neil Chenoweth

ASIC ready to dump Nuix

Neil ChenowethSenior writer

Updated Feb 13, 2023 

Corporate regulator ASIC is expected to dump Nuix when it chooses its software partner late next month, as concerns rise over the troubled tech stock’s cash burn and a wave of client defections.

While Nuix still hopes to win the 10-year tender to provide digital forensics and eDiscovery platforms, insiders close to the process said ASIC was keen to distance itself from the company as investigations continue, and that other government departments including the Tax Office and the ACCC were likely to follow ASIC’s lead.

Nuix is burning through cash but CEO Jonathan Rubinsztein told shareholders in November latest results were “green shoots”. Jessica Hromas

Former Nuix executives expressed concern over cash levels despite a rocketing share price after a January trading update and last week’s court victory over former CEO Eddie Sheehy,which has seen Nuix’s share price jump from 70 cents to $1.52.

Nuix is under intense pressure to retain clients, with law firms Minter Ellison and Ashurst and advisory firms KordaMentha and Grant Thornton Australia all switching to competitors.

At least 14 Nuix corporate clients in Australia are now trialling eDiscovery systems provided by a major US competitor, Reveal-Brainspace, whose marketing team is run by former Nuix staff. The trials are a potential preliminary step in switching away from Nuix while hedging their exposure to the troubled tech stock.

Nuix recently farewelled 15 senior staff including head of strategic alliances Chris Pogue, head of legal sales Matthew Geaghan and chief product officer Daniel Pidutti.

Nuix’s cash reserves have dropped from about $100 million when it floated in 2020, to $46.9 million in June 2022 and $40.5 million last October.

If Nuix continues to burn close to $2 million a month, insiders say that by mid-2024 it risks running short of working capital.

Awkward position

Nuix told The Australian Financial Review that its customer relationships remained strong and the company was comfortable with its balance sheet.

A spokeswoman pointed to Nuix’s November AGM when it said customer churn was 5.5 per cent, while net dollar retention rate (a measure of how much revenue is received from existing clients) was 101.9 per cent.

Nuix said it would update these figures when it released its December half results on February 20.

ASIC’s chief operating officer, Warren Day, told Senator Deborah O’Neill in a Senate committee in December that the regulator was looking at who else could provide services to replace Nuix, after paying $5 million to extend its Nuix contract for two years last April with a further one-year option to extend.

ASIC is in the awkward position of using Nuix software to run its case against the company and five of its directors for publishing allegedly misleading or deceptive statements in 2021. The trial is set down to begin November 20.

Complicating any decision by ASIC on whether to stay with Nuix is the knowledge that on top of Nuix’s looming cash shortage, losing either the ASIC action or the pending class action could potentially push Nuix into administration.

“Do you have a response plan for your continuing relationship if Nuix actually come out on the wrong side in this court outcome?” Senator O’Neill asked on December 5.

“The nature of that, I assume, will be the same as for all the other law enforcement agencies around the country,” Mr Day said. “I’ll have to consider those things when that occurs.”

ASIC has 17 years of investigations, court documents and evidence control and unstructured data held in massive Nuix files, which are owned by the Nuix application and can only be opened with a Nuix licence. Without the licence ASIC will lose not only access to the case file, but to case notes and links to any file exports. This can make it difficult to prove chain of custody.

It is difficult to switch software providers. The Financial Conduct Authority in the UK switched after eight years with Nuix and the process took two years, laboriously transferring files to a new system.

FBI and CIA

If Nuix goes into administration, customers are free to terminate their contracts. However, contracts seen by The Australian Financial Review state that on termination customers must remove all their data from the Nuix service within 10 days, after which Nuix will delete the files and “all customer data will be unrecoverable within 90 days”.

This is unthinkable for most of Nuix’s client list, which includes the Australian Federal Police, Border Protection, DFAT, the ABC, Attorney General’s Department, Infrastructure and Defence.

Overseas, Nuix clients include the FBI, the CIA, the US Department of Defence, the Securities Exchange Commission in the US and the National Crime Authority in the UK.

Clients could continue to use Nuix products until licences expire. But products that include third-party software would require programmers familiar with the millions of lines of Nuix coding to physically renew the licence.

While the prospect of a collapse remains distant at present, Nuix is a timebomb if it fails, which has to be part of the risk assessment for its clients.

Since March 2017 ASIC has had an escrow agreement with Nuix. It allows ASIC to have access to the Nuix source code stored with Assurex Escrow if Nuix is in administration, and to use a third party to maintain the data.

Insiders say a number of Nuix clients have since sought similar escrow agreements, but even with the source code programmers typically take 18 months to two years to become familiar with it. And almost all of those planners live in Sydney.

Nuix infuriated customers last May by lifting its prices close to 25 per cent, at a time when many clients had exhausted their annual budget. After intense pushback Nuix deferred the price rises for many legal firms who threatened to walk.

The higher prices only came into effect when licenses were renewed, which would produce an 8 per cent revenue rise this year.

At the annual meeting in November chairman Jeffrey Bleich and CEO Jonathan Rubinsztein both described the latest results as showing “green shoots”, yet last month’s update indicated that despite the price rise, annualised contract value only rose between 1.5 and 4 per cent in the December half.

In the update Nuix said there had been “a continuation of the trend of revenue growth from existing customers, while revenue from new customers is lower than the prior corresponding period”.

Neil Chenoweth is an investigative reporter for The Australian Financial Review. He is based in Sydney and has won multiple Walkley Awards. Connect with Neil on Twitter. Email Neil at nchenoweth@afr.com.au