Nayax Ltd.

Good day and welcome to the NAACP LTD Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Mary Sable. CEO of MSIR. Please go ahead.

Thank you, operator, and everyone for joining us today on this call. With me on the line today are Yair Nechmad, NIAC's co-founder and chief executive officer, and Sagit Manor, chief financial officer. Following management prepared commentary, we will open the call for the question and answer session. All forward-looking statements on our call today are based on assumptions and and therefore subject to risks and uncertainties that may cause actual results to differ materially from those projected. We have no obligation to update these statements except as required by law. You can read about these risks and uncertainties in our earnings press release issued earlier today and our regulatory filings. Our commentary today will include an earnings presentation. If you still do not have it, please view it via NIAC's IR website. All key performance indicators are intended to evaluate our business and properly measure factors in the macroeconomic environment to guide and support our decision-making. These key performance indicators may be calculated in a manner different from the industry standards. And finally, please note that all figures in today's call will be reported in U.S. dollars unless stated otherwise. On that note, I'd like to turn the call over to CEO Yair Nechmad. Yair, the floor is yours.

Thank you, Miri, and to everyone for joining us on the ninth third quarter conference call. I'd like to begin by sharing a quick overview of who we are and what we've accomplished year to date. NICE is the leader of a global commerce enablement and payment platform for unattended retail. Unattended retail covers a diverse range of verticals from vending machines, safe checkout counters, digital kiosks, and even charging stations. All devices connected to these verticals provide retailers with a sophisticated platform and payment system that generates valuable insight, allowing them to monitor and optimize their operations. As of September 30, 2021, we have grown our business to 10 offices around the world with 35 distributors. We have over 510 employees, of which more than 25% work in R&D departments to fuel our innovative technology and keep disrupting the market. Over 27,000 customers rely on our platform, clocking in on over 460,000 devices in more than 15 countries. which generates approximately a $1 billion transaction so far this year. Moving to slide six, you can see how NAACS empowers retailers to accelerate their trajectory. Our focus concentrates on growing customers' demand by encouraging their success. The growth in transactions derives from our full-stop solution that rewards customers' loyalty and transforms consumers' data into meaningful and actionable insights. Transaction value in Q3 grew an astonishing 84% compared to the same period last year, totaling $407 million. The number of transactions during the quarter also grew an impressive 73% compared to Q3 of 2020, reaching 280 million transactions. With certain markets recovering from complications due to the Delta variant, we see an increase in transaction volume across the payment industry. Combined with ongoing trends of digitalization and adopting forms of unattended commerce, we will continue to see an increase in the value and volume of transactions through our platform. Moving to slide 7, we can see how uniquely positioned we are to capture market shares. We offer an end-to-end solution, 360-degree platform for all the retailers' needs. Actually, one of the pillars of our success is the ownership of the entire value chain. From front-end to back-end, everything is between, and everything between, we rely on our own technology. This means we are flexible, fast, and efficient. For example, our proprietary connected POSs, Technology allows us to be flexible when we initiate installing our platform in existing as well as new devices. Our customer service relies only on our offering, so we take full oversight and control of our services. If you can see on the slide on the right-hand side, on the top right-hand side, the hardware itself is dealing with the friction and the way that onboarding customers with the hardware. On the bottom line of the yellow triangle, you can see what we're doing in terms of payment and how we're dealing with the payment on a global level and a local level, also integrating two local card schemes, employee cards and alternative payments. On the left hand, you can see how the data is reaching out to the decision maker in the organization, whether it is the route driver, or the technician or the CEO or CFO of the organization, owning the organization or managing the organization. On the top left side, you can see the mobile app. These are four pillars that generate the one-stop solution and enabling us to help the customer to grow the business. Moving to slide eight, our product portfolio and our marketing initiative to strengthen our customer base remain a top priority this past quarter. These continue to be powerful growth drivers and an instrumental factor to establishing a high net retention rate. Turning each customer into a long-term partner allows us to be directly involved with their growth, resulting in larger volume and transaction size. Our recurring revenue consists of SaaS and payment processing continue to be the main revenue growth drivers. The nine months ended September 30, 2021 versus the same period in 2020 show a 56% increase in total revenue to $31 million this quarter. This is a testament to our global leading position in the unattended industry. Despite these challenging times due to the pandemic and its economic effect, our wide global presence and the multiple verticals that we operate in support of strong growth. Moving to slide nine, on the customer engagement, we are pleased to report another quarter of strong growth with over 27,000 connected customers, including 3,000 additional customers this quarter. We value our partnership with our customers and made a strategic decision to keep our product price intact and not tested on the increased costs due to the global supply chain challenges. A strong commitment to our customer growth and more importantly, in this context, maintaining the pricing of our POS devices are the essence of establishing a loyalty and continue to help drive our customer growth. As of Q3 2021, we have over 461,000 connected devices, 29,000 increase over Q2 of 2021. We are expanding our footprint in the market while establishing ourselves in key areas of the world that are still poised for growth as they transition to cashless solutions. Looking at slide 10, we can see that our mission-critical service comes across in our overall results. Our churn rate is very low at only 2.7%, showing a greater dissection from our platforms. Customer concentration and global coverage remain highly diverse, ensuring a platform that is scalable and applicable among all potential markets and merchants. We believe the U.S. is still transitioning into 4G and EMV type payments, which are a strong indicator of further future reliance on our platform. Part of our expansion strategy involves connecting our devices to new verticals, diversifying our customer base, and expanding our regional coverage even further. You can see some of our significant wins this quarter. Just as an example, NYX US awarded a substantial global US military ERP over the incumbent cashless payment provider and shipped the devices for multiple bases installed in five different continents during Q3. Another T1 customer's example is IWG Regus, where we won a global RFP for sole supply payment solution provided for coffee services in Europe. In UK, Nike UK become preferred supplier for Labata coffee and Arma catering. With that, I will now pass the call to our Chief Financial Officer, Sagit Manohar.

Thank you, Yair, and thanks to everyone for joining us here today. I'd like to start with some highlights from the third quarter. As you can see in slide 13, NIACS follows a robust business model driven by powerful revenue streams with built-in elements to maintain a high rate of recurring revenue. The three main revenue streams come from POS devices and monthly SaaS subscription and processing fees. The point-of-sale revenues for the device itself are a one-time fee when the device is shipped. The devices we sell are enablers for growing the number of installations and in turn create recurring revenues from subscription and processing. The revenue yielded by sales of POS devices tends to be sensitive to cyclicality. The monthly subscription fee per connection allows for access to our telemetry and management platform. This includes the management suite, connectivity, telemetry, and support services. Payment services are determined by the percentage charged from the total transaction value per month. So recurring revenue from SaaS and processing represents the core value our customers derive from our platform and the value add they see from cost savings on one end and increasing sales at the other end. With every incremental device that we sell and connect, we establish long-term relationships that help fuel highly profitable recurring revenue streams. Moving to slide 14. NICE again delivers solid Q3 results showing a significant growth in customer demand in our connected and managed devices and in our recurring revenue from SaaS and processing. In slide 15, we are reporting an impressive growth in connected and managed devices reflecting a continuing and increasing demand. As mentioned by Aeir, The total number of managed and connected devices for Q3 was 461,000, a 38% increase compared to the same previous last year. These figures will consistently increase as we sell more POS devices and capture larger market share. Another indication of the growing demand is the significant increase in transaction dollar value. This is another catalyst driving an increase of our recurring revenue and providing healthy growth margins, which reached 40% this quarter. Moving to slide 16, I'd like to highlight a significant increase in recurring revenue, which is an important growth indicator for us. Our recurring revenues consisted of staff and payment processing. Based on the tailing 12 months, we've seen the recurring revenue increase by 65%. Regarding the gross margin, this quarter we reported 40% gross margin. Cost of goods sold grew due to a global shortage in components. Our efforts to overcome these challenges due to the global component crisis include streamlining certain processes and expanding the component supplier's pool of long lead items. We also focus on obtaining components by sourcing the components at various costs since our POS devices lead to new customer acquisition and expand activity with existing customers, resulting in the company's growth. As previously mentioned, we made a strategic decision to maintain NYAX product selling prices, supported by our strong balance sheet, to emphasize our commitment to our customers and their growth, which will invigorate our long-term expansion plan. Lastly, adjusted EBITDA was negative $1.6 million. However, excluding a bonus for non-sales employees that was introduced this quarter for the first time and product cost increase, on a like-for-like basis, the adjusted EBITDA improved to a positive half a million dollars. It's worth mentioning that since the outbreak of COVID-19, The company has been working to address issues related to the crisis and its possible consequences. To reduce the effects of the crisis, the company supports, among other initiatives, business development programs and marketing activities. NIAS continues to evaluate and promote business opportunities in the Israeli and international markets. The total number of connected devices has been a strong indicator that these programs are being properly applied on a global level. Quarter over quarter, we've maintained a strong and consistent growth rate in all of our KPIs. We've also supported the launch of an e-shop of online marketing and sales activities to better engage with customers, reduce friction of onboarding, and increase transactions through the NIAC site. With that, I'd like to return the call back to Yair.

Thank you, Sagit. To summarize, with the growing demand among our customers for cashless transactions, as well as their need for an end-to-end solution and our ability to successfully provide exactly such a solution, our execution this quarter and year-to-date is clearly shown. We will continue to focus on our customers' long-term journey as our first priority. I would like to transfer the call to the operators so that, again, I can take your questions. Operators.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2.

And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Paul Craft with Jefferies.

Please go ahead.

Hi. Thanks for taking my questions. I just have two questions on my end. I guess, you know, right now, you know, the supply shortage or I guess the component shortage, you know, looks to be temporary and, you know, eventually will sort itself out. I guess the question here is, if we do see this starting to go into the next couple of quarters, what are some of the actions you can take to further mitigate, I guess, gross margin compression? I appreciate you don't want to raise prices for now, but is that part of the agenda? Maybe if the shortage continues and then Secondly, when I look at your cash flow statement, I mean, we've seen, you know, the outflows linked to inventories increase quite substantially. You know, is this mainly just due to the component costs being higher, so you're having to kind of recognize a higher value on your cash flow statement, or I guess your balance sheet, or is there an element of trying to maybe build up inventory to maybe get ahead of, you know, additional or incremental shortages that you see coming up?

So I'll take the first question and Sagit will take the second part of it. The first question is an excellent question from my perspective because I don't see it so short. I believe the shortage of all the supply chain issues are not just the supply chain. There is also some kind of... I'm looking at the suppliers themselves. They're taking the chance now to raise the pricing, prices of the companies. So I see this... next three, four quarters, to be realistic, will continue. And how we're going to mitigate this, we initiative, we calculate exactly what is the pricing that we're selling, what are the rebates that we already had in place for some of the customers. And we have some kind of, we're going to initiate some kind of financial engineering that will take some kind of a win-win for all of us, for the customers, for ourselves, and for for the consumers based on ability of helping the customers to reduce their burden on the cash flow, setting up a solution that will bring them into a position that it's easier to work with the NIACs, but at the end result on the total cost of ownership to five years, seven years, whatever the number is, we can see a better margin from NIAC's perspective. So we'll share the pain in a smart way with our customers, And we're not imposing this on them, but it will be very tempting to get into this kind of solution that we intend to do in the next quarters.

And hi, Paul. Regarding your question about the inventory, it's actually a combination of the two that you've mentioned. So it's both the inventory cost that is higher, as well as preparing yourself, especially with non-lead items, to be prepared for the next five to six quarters.

Okay, that's really clear. Thank you.

Again, if you have a question, please press star, then 1. Our next question will come from Dominic Gabriel with Oppenheimer. Please go ahead.

Great. Thank you so much for taking my questions. You know, if you just talk, maybe stay on the supply chain just briefly. Can you talk about how many units you typically would have expected in a given year and how the supply chain impacts the number, that number, either on a percentage of total units. For instance, maybe they're 20%. It could create a 20% bottleneck in units sold, or maybe just on a number of units sold, just how you think about the near-term impact to the sales and how that kind of works in and back over time as you get the components. And I have a follow-up. Thank you.

So thank you, Dominic. Hi, it's Yair. I will take the first part and maybe Sagit will jump in to add some more remarks. In terms of what we decided strategically is really taking the supply chain aside and not touching in terms of selling the volume that we want to reach out. I tell you honestly, if I had more units, I can sell more because the market has a very strong tailwind towards NIAX, and we have more opportunities that we can sell. In terms of our, what you call, targets, we are meeting and exceeding our targets. So I don't see an issue over here. I see maybe... potentially, you know, I can't really calculate this, but if I would have more units, I can sell more. That's for sure. It will not hurt what we call, what we expected. We will overcome our expectation, our internal expectation. We overcome them. So for this perspective, I'm, you know, I can say that I wish I would know the future and I will put myself into like two years of orders with the suppliers. But this was a risk that we couldn't take during the COVID year. I hope that this answer in terms of volume, because volume we're not really hit, but potentially I can sell more.

Okay, great, great, great. And then maybe we can just, Gary, maybe we can walk through or you can take us through a tour around the globe as far as your progress in geographic expansion, because you've made some progress this quarter there. And what you're seeing for demand as you exited the third quarter and headed into the fourth quarter across various geographic regions, that'd be really great. Thanks so much.

Thank you for the question, Dominic. I think the idea is less of a geographic, because the geographic is not changing too much, although Australia was locked down in Q3, but this is like, again, the pandemic. So in terms of the geographic, it's not too much. I think the main point now for NIAC is that we're seeing a lot of requests and RFPs coming from T1 customers, T1 and T2 customers, that a class now starting to move, and they are what I'm calling the gorilla of the market, and they are the ones that really find NIAX as the best fit for them. The platform that we are serving them now is being revealed more and more to these customers, and now these customers are really, in terms of all level of M-level and C-level, understand what does it mean a cashless solution. It's not just a box or in terms of just accepting the cashless. It's a total 360-degree solution which this T1 customer needs. And the T1 customer, as I'm saying, is not just purely unattended. It's a combination of a retailer that has a self-service internally, and he has a toilet outside or EV charger outside of the parking. And these kind of T1 customers are now approaching NIAPS. And that's the thing that I think signalizing in terms of what is the future that NARCS can deal with. And we have the capacity to deal with because of the infrastructure in terms of the human resource behind it and all the divisions and department behind this.

Actually, maybe I can sneak in one more if that's okay. You know, you mentioned, I kind of just thought of this, you mentioned the end-to-end you know, capabilities that you have across the supply chain for getting, you know, the partnerships you have. How does that perhaps help you weather the storm for components versus someone who doesn't have the kind of tentacles you have throughout your entire end-to-end process for getting units going to selling them? Thanks.

It's absolutely right that since we know exactly what's going on and we know the full component issues we are controlling and we can be at least at the front seat of achieving and reaching out to the company. Because if I was in a different position just buying the payment or the POS, I'm hearing that not just Verifone and Ingenico has a shortage of the POS. And if you'll be under their wings and you are just, I don't know, number 20 in the customers, you will not be prioritizing anything. We are really seeing and talking to TI, to ST, to all these first-tier component suppliers. So we are the one that's really sitting on the front seat and reaching out to the components. And that's how we are really reaching out to the ability that we are secure, although in some cases we have to pay a little bit more, and that's what's helping our growth margin. But for sure, we have a big, big advantage that we are owning the full value chain in terms of the supply chain.

Great. Thanks so much. This concludes our question and answer session.

I would like to turn the conference back over to Yair Nekhmad for any closing remarks. Please go ahead, sir.

So with that, I would like to really thank the last thing is to thank our employees that's really carrying the heavy lifting of all this execution of this to the market. And thank you all for participating in this call and looking forward to see you in the next call. Thank you very much. The conference is now concluded.

Thank you for attending today's presentation you may now disconnect.