‘Slow the bleeding’: Documents reveal internal Nuix concerns weeks after Macquarie-led IPO

Nuix executives were questioning the quality of the forensic data software company’s core products and calling for more resources to “slow the bleeding” just weeks after its sensational sharemarket listing led by Macquarie Group last December.

Internal documents obtained in a joint investigation by The Sydney Morning Herald, The Age and the Financial Review detail fresh concerns about Nuix’s business from January, including problems with key products and concerns it was losing ground to competitors.

Macquarie shares fell amid revelations about Nuix, the tech company it invested in and floated last December.
Macquarie shares fell amid revelations about Nuix, the tech company it invested in and floated last December. Credit:Tim Wimborne

Nuix floated on the ASX last December at $5.31, in a deal led by its major shareholder, investment bank Macquarie Group. On Monday, the stock sank by almost 10 per cent to close at a record low on of $3.14. Macquarie shares also declined 4.9 per cent to $150.59.

The decline came after the joint investigation revealed problems with Nuix’s governance and questions over the quality of its financial accounts before its float.

In January, when Nuix shares had surged to $11.86, a company internal review warned that its product portfolio was losing ground to competitors.

In mid-2020 a similar review flagged red lights for two of Nuix’s core products. The January review showed red lights for six key products and concluded that even if Nuix boosted resources it would take between 18 months and two years to “turn the situation around”.

“We immediately need 8 people to slow the bleeding” and another 43 people to “turn” the situation, the review said.

“An additional investment of 49 resources will allow Nuix to significantly improve our turnaround time and our ability to deliver innovation that will create sustainable differentiation in our key offerings.”

Advertisement

As at June 30 Nuix had 483 staff, of which 151 were in engineering and 49 were product, internal documents reveal.

The review rated key products including the Nuix Engine and Nuix Workstation “red” status as a “lack of engineering capacity prohibits our ability to capture additional market share.”

The internal review raises questions about whether Nuix’s core technology is up to the task of executing the growth strategy laid out in the prospectus.

In the year to June 2020 – six months out from the float – internal documents reveal furious cost-cutting saw an exit of key personnel. Staff churn hit 35 per cent, with almost 30 per cent leaving engineering and savage cost-cutting in the key product area.

This would wreak havoc on the quality of the business, but allow Nuix to keep costs down. Or as one trader would later say “dress the pig in the gown and sell it like it’s a princess.”

‘Can’t innovate’

A day after Nuix announced an earnings downgrade on April 21, Nuix executives told a meeting of engineers that the company had spent $6.8 million less on R&D than it had budgeted. While this would have helped Nuix’s reported profits, the company was now changing course with plans to hire 50 new staff.

One former senior Nuix executive, who asked for anonymity, described Nuix as the next AMP in waiting. “Like AMP, it can’t innovate and the culture is so bad it is hard to recruit,” he said.

Nuix spent the first half of 2020 in dispute with its auditor, PwC, over its treatment of R&D claims worth tens of millions of dollars.

Documents obtained under an FOI request show that Nuix auditor PwC told ASIC, which had queried the reason Nuix’s 2019 accounts were delayed, that “FY19 audit has experienced delays due to research and development issues on the company’s end.”

A due diligence report prepared for the sale process, dubbed Project Truth, dated September 20 outlined PwC’s concerns over what could be up to $42 million in R&D costs over-claimed.

In September 2016 Nuix had applied for an R&D advance from AusIndustry over three years for a research project known as Endpoint on the basis that 55 per cent of “total actual and reasonably anticipated expenditure” would be in Australia.

It turned out only 9 per cent of the expenditure was in Australia, with 91 per cent spent in the US.

PwC noted management’s explanation for this but said if the ATO investigated and made an adverse finding, “in addition to paying back the R&D benefit, the Commissioner may impose penalties of up to 80 per cent as well as shortfall and general interest charges”.

Nuix regarded its position as defensible and before signoff, forwarded its tax returns to Macquarie Group, its then 76 per cent owner, for review.

In its 2020 accounts Nuix management wrote confidently “it is probable that . . . the Australian Taxation Office will accept the tax treatment for the Endpoint project”.

Nuix did not directly answer questions put to it by the joint investigation. In a statement it said, “Nuix has in place robust processes to measure forward indicators of performance in order to ensure that it keeps the market fully informed and has done so on a timely and regular basis.”

Business Briefing

Start the day with major stories, exclusive coverage and expert opinion from our leading business journalists delivered to your inbox. Sign up here.

Most Viewed in Business

Source: Thanks smh.com