Nayax Ltd.

Hello everyone and welcome to NIAC's second quarter earnings conference call. At this time, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Ms. Virginia Stewart-Gibson. Please go ahead.

Thank you, operator, and everyone for joining us today on this call. With me on the call today are Yair Nekmad, NIAC's co-founder and chief executive officer, and Sangeet Manoor, chief financial officer. Following management's prepared remarks, we will open the call for the question and answer session. Our press release and supplementary investor presentations are available on our investor relations website at ir.niacs.com. As a reminder, during this call, we will be making forward-looking statements. All forward-looking statements on our call today are based on assumptions 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 filing. In addition, today's call will include a discussion of non-IFRS measures. These measures should be considered as a supplement to and not as a substitute for IFRS financial measures. Reconciliations to the nearest IFRS measure can be found in our earnings press release issued earlier today. 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 standard. And finally, Please note that all figures in today's call will be reported in U.S. dollars unless stated otherwise. Yair will start the call with a view of the business and then provide operational and strategic highlights. Sagit will go through the details of financial results for the quarter. If not, I would like to turn the call over to NIAC's CEO, Yair Nikmad. Yair?

Thank you, Virginia, and thank you to everyone for joining us on our Q2 Earnings Conference call. First, I'd like to point out our second quarter results and how we demonstrate the continuing resilience of both our team and business model and the ability to deliver another quarter of strong revenue growth and operating results, even with the backdrop of global macro uncertainty from inflation concerns, rising interest rates, worries and fears of border recession. In the face of continuing volatility in financial markets and changing economic and political landscape, the NIACS team has remained focused on what we can control and staying committed to executing against our growth strategies. Elevating our value proposition to our global diverse customer base and strengthening our competitive position as the preferred technology provider in the global unattended commerce market. While we do not have a crystal ball to predict economic outcome, we know for a fact, as we listen to our customers, that the demand environment for technology and a comprehensive solution remains robust, with no evidence of changing sentiments. I also want to underscore and remind everyone that our comprehensive proprietary platform addresses the entire unattended commerce value chain, including a global payment infrastructure a commerce software suite, a consumer engagement platform, and integrated post devices. This ownership of the entire value chain puts Knives in durable and unique position and continue to be a key pillar of our success that allow us to endure through various market cycles for good and challenging macro environments. In Q2, revenue grew over 30% year-over-year, driven again by another record level of recurring revenue at This excellent recurring revenue growth trend delivered an increase of 47% over the same period last year, accounting for 61% of total revenue compared to 55% of total revenue in Q2 2021. Our customer loyalty, as measured by net retention rate, remained high at 132% for the quarter. reflecting the high satisfaction and confidence our diverse customers place on NIAX's end-to-end platform and solutions. These metrics are key indicators that our business remains healthy and NIAX's solution is the preferred method of paying which continues to be strongly in favor of digital over cash. Based on the secular trend that continues to provide NIAX with strong tailwinds, the world of payment continues to evolve with noticeable shift towards cashless and digitalized payments. We see the digitalized payment shift from the rise of contactless with many new payment technologies such as digital wallets coming into the market. These changes are due to both advances in secure payment technology and consumer demand for safer and more personalized payment methods. Cash flow society is truly becoming global, and the world will continue to move towards a cash flow society. This payment shift continues to be a major contributor to our near-term growth trend and will also be an important part of our long-term growth aspiration. In Q2, demand for our platform and solution remained strong as we added an additional 42,000 devices, bringing the total number of our devices to almost 600,000. and we processed 360 million transactions, an increase of 70% over the previous quarter. Consisted with past quarters, the strong growth was a combination of continued new customer additions and increased transaction process volume as we expand our footprint across the world. Our strong track record of winning clients was further evidenced in Q2 with the addition of 4,000 new customers spending multiple markets and verticals, ending the quarter with an install base of almost 38,000 customers, an increase of 58% over the prior year quarter. Let me also emphasize here the impressive growth that we continue to see in our SMB category, which account for about 74% of our install base and remains a key focus of mine. This customer category remains healthy from both a sales pipeline and backlog perspective. I would also add that our customer base is today more diverse than ever before and is another reason that our business model and financial performance continue to be resilient despite the macro uncertainty. While SMB is a larger percentage of our customer base, we are rapidly adding or expanding our reach with large enterprise customers such as Compass School, one of the world's largest contract food service companies. I will provide more detail on this later in my remarks. We are also diverse across geographies. NICE already has a global presence in key regions that can be seen in our revenue mix. For Q2 2022, 40% of our revenue was derived from Europe, 39% from North America, 11% from the rest of the world, and 10% from Australia. The U.S. market continues to be bright and offers great expansion opportunities. An example of our key wins in this market is our expansion with Compass Group. Compass Group is the world's largest contract food service company and an existing customer is its U.S. subsidiary, which manages approximately 200,000 unattended point-of-sale devices. In July, we announced our expanded relationship with Compass Group beyond the existing 50,000 post devices that NIAX managed for a longer contractual period, choosing NIAX as their preferred technology provider. Our focus of expanding into new markets and extending our reach globally has always been part of NIAX's growth plan that we have previously outlined and will remain an ongoing strategic focus. while establishing our presence in markets that are still poised for growth, such as Japan and New Zealand, as they transition to cashless and accept more digital payments. I would now like to provide an update about the ongoing global supply chain challenges. As we've continued to communicate on our earning calls, the global company shortage is still ongoing and remains a challenge. Despite the challenges, we were able to report revenue growth in the second quarter from our post devices of 14% compared to the same quarter last year and a sequential increase of 33%. This growth was driven by our ability to close orders from our previous backlog while efficiently managing the shortage to meet our mass manufacturing schedule. We still expect this dynamic to continue for the rest of the year. However, we will continue to carefully manage the situation to supply the growing backlog of orders for our products and focus on what we can control and implement necessary action as the situation evolves. Let me now provide an update on two of our strategic initiatives. First, an update on the acquisition of OTI. We successfully closed the OTI acquisition in June, and I'm delighted to welcome the OTI team It is worth repeating that this acquisition supports our long-term growth plan to gain market share in strategic growth markets and accelerate our growth drivers in attractive regions such as Japan. Additionally, I am pleased with how the integration is proceeding and the collaborative approach by the team. The page will provide some additional color later on the call about how we view the financial contribution of OTI as part of NAICS going forward. Second, an update on our U.S. listing progress. As previously disclosed, we continue to take steps to list our ordinary share on the U.S. exchange in addition to the taste. The timing and completion of our U.S. listing remain at our discretion and is still subject to factor such as the completion of the SEC registration process. As a result, we cannot provide any certainty when this process will be completed and if at all. To wrap up, we had a strong second quarter and first half of the year. While global macro concerns continue to dominate the headlines, Max has been able to execute and deliver consistent results because of our number of factors, including a global and expanding customer base, execution on the strategies that we continue to outline, and support our customers with excellent service and product enhancement. As we look ahead, we remain confident in our ability to execute against our mid-term and long-term growth aspirations. With that, I will now turn the call over to Sagit. Sagit?

Thank you, Eir, and good morning, good evening, everyone. Q2 was another excellent quarter in terms of execution and growth, and our outlook for the business remains strong. Let me start with an overview of the revenue performance in Q2. Total revenue for the quarter was $41.2 million, an increase of 33% from Q2 2021, and 21% compared to last quarter. Recurring revenue which is comprised of our SAS subscription and payment processing fees, grew approximately 47% over Q2 2021 to reach a new high of $25 million in revenues and accounting for 61% of our total revenue in line with our expectations. The current revenue on an annualized basis, or ARR, reached $100 million, another great milestone in the company's history. I want to reiterate that we expect this revenue source to continue to drive the majority of growth going forward as we consistently grow our customer base. As a reminder for those new to NIAC's revenue model, our three main revenue pillars are derived from point of sales or POS devices, monthly SAS subscription, and payment processing fees. The POS revenue for the device itself has a one-time fee recognized when the device is shipped. The devices we sell are the enablers, the engine for growing the number of our managed and connected devices, and in turn, create recurring revenue from SAS and payment processing. The revenue generated by sales of POS devices tends to be sensitive to cyclicality. The monthly subscription for connection allows for access to the telemetry and software management platform. This includes the management suite, connectivity, telemetry, and support services. Payment processing services are determined by the percent charged from the total transaction value per month. So recurring revenue from SaaS and payment processing represent the core value our customers derive from our platform and the value add they see from increasing sales on the one hand and cost savings on the other hand. With every incremental device that we sell and connect, we establish long-term relationships that help fuel highly profitable recurring revenue streams. Now let me turn to the financial highlights for Q2. Starting with our global and diverse customer base, we again reported strong customer growth of 58% over the prior year quarter, as we extended our customer base to 38,000 at the end of the quarter. With the large market opportunity ahead of us that remains under-penetrated, customer expansion remains one of our key growth drivers and is an indicator for our successful execution in expanding internationally and entering key growth markets for cashless payment solutions. Turning to the growth of our devices, managing connected devices showed healthy year-over-year growth of 38%, ending the quarter with almost 600,000 devices. Another key highlight in Q2 2022 was the significant increase in transaction dollar value which almost doubled to $600 million compared to the $344 million in Q2 2021. This metric remains a key contributor to recurring revenue and recurring revenue growth margin, which was 51% in Q2, mostly reflecting higher payment processing than SAS revenue. This financial performance proves that even in an evolving macro environment, NIAC's business model can deliver a combination of growth and increasing scale. Turning to gross margins. Q2 gross margins were 34% compared to 38% in Q1 2022, tracking in line with the direction we had communicated on our last earnings call. Our gross margin was impacted mainly due to the mix of higher hardware revenue, which has lower gross margins. Additionally, as previously communicated, how the gross margins are temporarily impacted by the ongoing disruption caused by the global component shortage. Moving to adjusted EBITDA for Q2. Adjusted EBITDA was negative $3.2 million and as planned. This reflects the higher cost of goods sold resulting from the ongoing global component shortage, as well as the increase in operating expenses from investment in talent acquisition, customer-based expansion, and product innovation. All of these investments support our strategic growth as we become a much larger company. Looking at the like-for-like comparison to Q2 2021, adjusted EBITDA, excluding product cost increase due to the global component shortages, and excluding a bonus plan for non-sales employees that was introduced in Q3 2021 for the first time, the adjusted EBITDA on a like-for-like basis improved to a positive $1.3 million. Let me now discuss the impact of the macroeconomic environment as it pertains to the strengthening of the U.S. dollar in the second quarter. First, on revenue, we did not see any material impact from the exchange rate fluctuation. However, as it relates to operating expenses, we did see a favorable impact from the foreign currency's exchange rate conversion of approximately $1 million compared to Q1 2022. With the closing of the OTI acquisition in June, we added approximately 80 employees to the NIACS team ending the second quarter with more than 700 employees worldwide. As we discussed last quarter and is still true in the second quarter, 2022 is the year of disciplined investment to drive future growth and support the scale we anticipate in the business. We run the company for the long run, and our investment strategy is guided by this principle. As NAICS continues to show strong growth and increased market share, we need to reinvest in the business to extend our market leadership and capture the growth opportunities we see ahead. Since its inception, NAICS has always focused on driving efficiency with the investment we are making. We have stayed disciplined when allocating our investment resources to build the necessary infrastructure to support the growth today, as well as the growing scale we expect in the future as we become the company of choice that we aspire to build. These strong results further reinforce our conviction and plan, as we previously stated, to achieve profitability as we enter 2024, if not before, while we continue to take advantage of the significant market opportunities in front of us. Lastly, we ended Q2 with cash and cash equivalents, and short-term deposits of approximately $48 million. As a reminder, our use of cash is part of our capital allocation strategy to reinvest in the business. The cash in the quarter was mainly used for ongoing operations as well as actively purchasing component inventory to secure prompt delivery and increase inventory level to supply the growing backlog orders of our customers. As I mentioned earlier, we successfully closed the OTI acquisition in June. We consolidated OTI's balance sheet with NIACS as of June 30th, and the assets and liabilities are not material to NIACS. With the closing of the acquisition during the month of June, we do not expect a meaningful revenue contribution for the full year 2022. We expect to consolidate the OTI operations in the second half of 2022 and provide the contribution as we head to fiscal year 2023. Moving to our outlook. Based on our strong second quarter and first half results, our higher recurring revenue, and continued business momentum, we are reaffirming our mid-term annual revenue of $220 million and our growth rate of 35%. This does not yet consider OTI contribution to the overall outlook. We continue to expect that customer growth, increased market penetration, and continued expansion of our platform will serve as the main growth drivers. As for the long-term outlook, gross margin in the long-term is expected to reach 50% by providing leasing options for IoT POS and by growing the recurring revenue. Our long-term adjusted EBITDA margin guidance is set around 30%. In the near term, we expect to continue seeing margin pressure compared to pre-COVID levels related to the sale of TOS devices as the global component shortages continues to play out. In closing, we deliver another quarter of strong results reflecting the healthy demand for our products and the strength of our global and diverse customer base. We are aware of the macro uncertainties we read about each day, and we're closely monitoring the ongoing development. As we look ahead, we remain confident in our long-term strategy and growth outlook and our ability to stay laser-focused on executing our growth aspirations. I would now like to turn the call to the operator so that we can take your questions. Operator?

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. Once again, to join the question queue, please press star then 1 now. Our first question comes from Dominic Gabrielle of Oppenheimer & Co. Please go ahead.

Hey, great. Hope everybody's doing well. I just wanted to talk through the gross margin trajectory, gross profit margin trajectory of the software and payments business. And then also, if you could talk about you know, where we are today on the adjusted EBITDA margin, you know, focus and how we should think about the eventual path to the 30% long-term target. Thanks so much.

Hey, Dominic. Thank you for being here and for your questions. So, gross margin, on the gross margin-wise, especially on the recurring revenue, as you've asked, for the SaaS and processing fee, we actually see them very stable. As you know, processing from gross margin is in the 30%, 32%, and SaaS is around 78% to 80%. So that stays the same. And usually the difference when you see in the recurring revenue gross margin is based on the mix between the two. The more processing we have, and this quarter was very strong on processing, the lower gross margin we will see on the recurring revenue base. So that's also from trajectory. We don't see any changes to those numbers. On the adjusted EBITDA, we actually stayed stable if you compare that to Q1 and as we planned for Q2. And as we continue to plan for the rest of 2022, which as we've talked many times before, this is the year of investment. This is the year where we invest in talent acquisition and automation and infrastructure to really create the right infrastructure for the growth that we would like the company to achieve in the next years to come.

Thanks so much. Sure.

Once again, if you have a question, please press star then 1. To join the question queue, please press star then 1 now.

This concludes the question and answer session. I would like to turn the conference back over to Mr. Nekhmad for any closing remarks.

Thank you very much everyone for joining us on the call.

I want to thank the NIAX team for their incredible dedication and consistent execution in delivering on our strategic priority and advancing our vision of simplifying commerce and payment for our customers while driving growth, optimizing their operation and enhancing customer engagement.

Thank you for the question and thank you again for your interest in NIAX.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.