Nayax Ltd. (NYAX) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Nayax Fourth Quarter and Full Year 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Miri Segal, CEO of MS IR. Please go ahead.

Thank you, operator, and everyone, for joining us today on this call. With me on the call today are Yair Nechmad, Nayax's Co-Founder and Chief Executive Officer; and Sagit Manor, 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 presentation are available on our Investor Relations website at ir.nayax.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 filings. In addition, today's call will include a discussion of non-IFRS measures. These measures should be considered as a supplement to and not a substitute for IFRS financial measures. Reconciliation 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 strategic and operational highlights. Then Sagit will go through the financial results for the quarter. With that, I would like to turn the call over to Nayax CEO, Yair Nechmad. Yair, please go ahead.

Thank you, Miri, and thank you to everyone for joining us on our conference call. As you can see from our earnings press release, we had a great fourth quarter to summarize an excellent year with other base strength across the business demonstrate with a continued focus on our strategic investment and execution has yielded another quarter of strong financial results. Let me begin my remarks with our fourth quarter highlights. Total revenue for the quarter was $34.4 million, an increase of 40% from Q4 2020 and an increase of 11% compared to Q3. Recurring revenue [indiscernible] SaaS subscriptions and daily processing fees grew approximately 56% over Q4 2020 to reach $21 million in revenue and accounted for 66% of our total revenue compared to 51% in Q4 2020. Our customer growth of 58% year-over-year was significant as we added 11,000 new customers in full year 2021, resulting in pretesting of 795 million transactions for the year, only doubled the transaction processed in 2020. In Q4 2021, 247 million transactions were processed through our management connected devices, resulting in a growth of 84% compared to Q4 2020. Overall, our fourth quarter results reflect continued strong demand for our end-to-end commerce payment solution, along with focused execution by the entire large team in advancing our key growth strategies. The strong momentum we are seeing in the business gives confidence in updating our midterm outlook and reiterating our long-term outlook. Sagit will discuss this in more detail later in the [ call ]. Q4 kept off a remarkable view of the format, and I would like to highlight our key accomplishments and milestone in 2021, we position us well to continue the execution of strategic initiatives and capitalize on our multiple growth levers that we see ahead of us. The completion of our initial public offering was an important milestone in the company's history strengthened our leadership position [indiscernible] market widens our presence in the new untapped market and allow us to scale to a much larger company. More importantly, it allows us to continue driving product innovation across our product portfolio to what we can solve our customer challenges today and in the foreseeable future. [indiscernible] the acceleration of payment and commerce digitization, which is driving multiple secular tailwind. These payments have created a large market opportunity, which we are now in a strong position to capture in both [ near ] and the long term. [ The polling ] of our product portfolio and our marketing initiatives to bolster our customer base remain a top priority throughout 2021. These investments have resulted in partial growth drivers within our existing customer base and produce industry-leading net retention rate of 137%, indicating the mission-critical nature of our solution and our impact with a long-term partner on our customers' successes. I'd like to highlight some Q4 key notable wins as a result of this initiative. Nayax continues to be the global industry leader offering in the US, the most innovative compliance and secure EMV solution. We announced the first [ monopoly payment ] solution provider to offer [ incremental product innovation ] of EMV compliance, mutual production for food and beverage customers. With that, we are solving the negative consumer experience prevalent across the retail industry without a multibank transaction payment solutions, while also helping leftover revenue throughout increased average transaction value. We also continued the momentum in the U.S. with additional deployment of our solution to Tier 1 customers, including strategic national accounts like [ greenwater ] and customers, which are part of the largest building central group like 5-star food services. In Mexico, [ vending group choose not to ] expand its business going forward. Additionally, in Q4, we launched our Canadian E-com shop joining our U.S. E-coms introduced in early 2021. This launch continue our global expansion and allow our customers to purchase our best-in-class cash solution 24/7. In Europe, we are expanding our footprint in Italy by signing our first value-added total main product and service. And in the UK, we successfully expanded our contract with [indiscernible] for an additional 3 years was the main solution provider. [indiscernible] our fully owned subsidiary operating in the field of interactive customer even as we enable omni-channel marketing solutions for retailers had a great success in Europe by signing a new agreement with the distributor in Spain and Portugal. In Australia [ large comments ] on rolling out payment solution for PepsiCo. I'm also delighted that we stay focused on building a level footprint that extend our reach and diversify our revenue sources. Nayax has a strong presence in 4 major regions of the world. At the end of 2021, more than 44% of revenue was derived from Europe, over 33% from North America, 12% from rest of the world, and 11% from Australia. We are successfully expanding our footprint while establishing our certain key areas of the world that are still poised for growth in the transition of the cashless payment solution. On the M&A front, we executed on our [ valid ] M&A strategy by acquiring 2 companies that not only support our long-term growth strategy, but also enhance the value of our platform to extend our technology leadership to other retail platform and accelerate our expansion strategy. In 2021, we acquired Weezmo, and as mentioned above it is a startup in the field of interactive customer and digital receipt and an omnichannel marketing integrating regional platform, we will hold a great deal of promise for extending enhancing our consumer [ behavior ] and omnichannel platform. We also invested in Tigapo a smart AI cloud platform would offer a complete management and payment solution for amusement park in the family entertainment center industry. In January 2022, we continue our targeted M&A strategy with the announcement of the on-track innovation OTI acquisition, which is expected to close by the second quarter of 2022. This acquisition with an reporting step in our market expansion strategy and accelerate our growth opportunity in underpenetrated regions such as Japan. As we look forward, I'd like to emphasize our long-term growth strategy to remind you to our multiple growth levers in our 6 key areas of focus. Lending expense strategy as we consistently gain the trust of customers we expand within their installed base and offer our solutions to enhance their business, win new large enterprise and SME customers globally continue to innovate and develop new solutions, continue to expand internationally, enter emerging high-growth verticals and few targeted strategic M&A. Looking ahead, these multiple growth levers, combined 13 years' experience in the unattended business, increase our visibility and confidence in our growth trajectory. We expect that 2022 will be a year of continued investments in product innovation, global expansion and customer engagement to capture the larger opportunity in both unattended and attended market which we see ahead. However, I want to remind everyone that Nayax will continue to balance revenue growth with a focus on profitability than we did for the past several years. While we continue to expect our revenue growth to maintain its strong pace, we remain committed to becoming profitable by early 2024. Sagit will provide additional details later on the call. At the heart of this is an unrelenting commitment to the success of our customers with [ regardless of ] geographies, currency or type of payments. We believe this is a critical part of Nayax business strategy and a key element of the Nayax founder-led culture. With that, I will now turn the call over to Sagit. Sagit?

Thank you, and good morning, good evening, everyone. As Yair indicated in his opening remarks, we had an excellent Q4, ending on a strong note for the year 2021. Before we turn the financial highlights for both Q4 and 2021, I'd like to remind everyone how our ever new model works. Nayax has a powerful business model, driven by diverse and visible revenue streams with a strong focus on recurring revenue. Recurring revenue, consisting of SaaS subscription and payment processing fees represents 60% of our total revenue today. We expect this revenue source to continue to drive the majority of growth going forward as we're consistently growing our customer base. Let me provide some additional information about our business model. The 3 main revenue streams are derived from POS devices or point of sale, monthly SaaS subscription, and payment processing fees. The POS revenue for the device itself has a one-time fee recognized when the device is shipped. Devices we sell are enablers for growing the number of our managed and connected devices and in turn, create recurring revenue from SaaS and payment processing. The revenue generated from the sales of POS devices tends to be sensitive to cyclicality. The monthly SaaS subscription for connection allows for access to our telemetry and software management platforms. This includes the management suite, connectivity, telemetry, and support services. Payment processing services are determined by the percent charge from the total transaction value per month. The recurring revenue from SaaS and payment processing represents the core value our customers derive from our platform and the value-add they see from increasing sales on one hand and cost savings on the other hand. With every incremental device that we sell and connect, we established long-term relationships that help fuel highly profitable recurring revenue stream. For example, revenue from customers that initially purchased our solutions in 2018 grew more than 4 times between 2018 and 2021. Now let me turn to the financial highlights for Q4 and full year 2021. Nayax delivered excellent Q4 results across our key financial metrics. We reported strong customer growth, higher demand for our managed and connected devices, and strong increase in our [ recurring ] revenue. Total revenue for the quarter was $34.4 million, an increase of 40% from Q4 2020 and an increase of 11% compared to Q3. For the full year 2021, total revenue was $119 million, an increase of 51% compared to full year 2020. Growth in managed and connected devices continued to reflect strong demand, growing 40% year-over-year. As a reminder, these figures will consistently increase as we sell multi-OS devices and capture a larger market share. Another indication of the growing demand is the significant increase in transaction dollar value, which almost doubled this year to $1.4 billion compared to approximately $800 million in 2020. This is another catalyst driving a growing contribution from recurring revenue that Yair highlighted earlier in providing healthy recurring revenue gross margin, which remains strong and stable in 2021 at 57%. I'd like to highlight a strong increase in recurring revenue, which is an important growth indicator for us. Our recurring revenue grew 66% year-over-year in Q4 and 61% for the full year 2021 over 2020. For full year 2021, recurring revenue now accounts for 60% of total revenue compared to 55% in full year 2020. Turning to gross margin. As previously communicated, cost of goods sold grew in Q4 due to the global shortage in components. As a result, our gross margin in Q4 declined 35% compared to 40% in the previous quarter. Gross margin for the full year 2021 was 40%, a decline from 47% in 2020. The main driver of the decline is in gross margin due to ongoing global component shortage and supply chain dynamics, which we believe are temporary and already seeing some improvements as we enter into 2022. Our efforts to overcome these challenges, based on what we can control includes several mitigating steps to manage the price increase. They range from opening a new manufacturing line to redesigning our products using different and available components. We've also established a global agent network for purchasing available components in the open market and extending the component suppliers pool for long lead items. We are taking these measures in an effort to continue our strong POS devices sales, which lead to new customer acquisition and extend our relationship with existing customers. As I noted earlier, this land-and-expand strategy is one of our key long-term growth drivers. As previously mentioned, last quarter, we made a strategic decision to maintain our product selling price supported by our strong balance sheet to reflect our commitment to our customers in their growth trajectory, which will invigorate our long-term expansion plans. We have continued with this practice in 2022. Moving to adjusted EBITDA. For 2021, adjusted EBITDA was negative $4 million. This reflects the temporary increase in our product cost as well as the increase in operating expenses from investments in talent acquisition, customer base expansions, and product innovation. Additional investments also include higher go-to-market expenses and enhanced infrastructure to support our global growth as we become a much larger company. However, on a like-for-like comparison to 2020, adjusted EBITDA, including a bonus for nonsales employees that was introduced in Q3 for the first time as well as excluding product cost increase. On a comparative basis, the adjusted EBITDA improved to $1 million. Lastly, we ended the year with cash and cash equivalents of $87 million. For the year 2021, the use of proceeds from our initial public offering was allocated to strategic investments, as mentioned earlier, that's resulting in negative cash flow from operations. As we get closer to the end of first quarter of 2022, we continue to see the global acceleration in payment digitization and e-commerce, the shift in consumer behavior towards cashless payments and the momentum in our business. We believe the large market opportunity in unattended is just getting solid and our differentiated position sets us up well to capture the long-term opportunity. As before, we will continue to balance topline growth with a focus on profitability. We have a clear line of sight to profitability and plan on achieving it in early 2024. Let me provide some color. As I stated earlier, we have already started our strategic investment in the second half of 2021, and we expect those investments to continue in 2022 and early part of 2023. However, the pace of investment should begin to slow down by the end of '23. We also expect our [ hardware gross margins ] to return to levels of around 20% to 30%. So the combination of strong top line growth, slower pace of investment in late 2023 and improved hardware gross margin provides a clear path to profitability. Turning to our outlook. Based on the performance of our business in 2021 and the momentum we see heading into '22, we believe we are well-positioned to deliver a strong topline growth as we've shown consistently in the last several years and remain optimistic about our growth trajectory. With that, we are raising our midterm outlook and reiterating our long-term outlook. Annual revenue is now expected to reach $220 million in the midterm, fueled by organic growth and strategic M&A. The accelerated growth rate target is now updated to 35% in the medium term with customer growth, increased market penetration, and continued expansion of our platform serving as the main growth drivers. As for long-term outlook, gross margin in the long term is expected to reach 50% by providing leasing options for IoT POS and by growing our recurring revenue. Our long-term adjusted EBITDA margin guidance is set around 30%. Looking ahead, we are very excited about our strong long-term growth drivers and the large market opportunities. In the near term, we expect to continue seeing margin pressure compared to pre-COVID levels related to the sales of POS devices. As previously communicated, we have made a strategic decision not to pass increased component cost to our customers through higher device sale prices. Our durable business model is demonstrated by our diverse customer base verticals in geographies with strong secular tailwind and with our industry-leading net retention revenue, we believe we have a clear opportunity to continue to drive revenue growth in the future. I would like now to turn the call to the operator so that we can take your questions. Operator?

[Operator Instructions] The first question comes from Dominick Gabriele with Oppenheimer.

The revenue was much better in the quarter. And obviously, you're talking about a pretty good acceleration in revenue growth. Maybe you could just talk to us about what's coming from the existing base versus all the client wins that you've talked about over the last year and how that mix is affecting the acceleration in revenue growth? And I have a follow-up.

I think I can answer this, starting with [indiscernible] and maybe Sagit will follow up. But if you can see the divest customer base, [indiscernible] so just to come back to this, you can see that the way that we are holding our cost or serving our customers, there are more than 73% of our customers is a long tail. And actually, this year, it's almost 24% of our customers. And we're seeing these customers are the bread and butter of our growth into the future, and we believe this is what we can project in terms of the way that we're addressing our revenue in the future. I believe that what we're seeing in terms of the growth coming in is the land-and-expand base that we're having and [indiscernible] the presentation as well that, for example, the customers of 2018 is more than 4 times servicing revenue from Nayax in the last 3 to 4 years. This is continuing and happening all over again and again. So when we are acquiring a new customer, which is starting in a very small part of the fleet like 5 machines, 10 machines it is not really substantial in our revenue. And you can see that the [indiscernible] is growing more and more. Saying that when we acquire a new customer, which is big account, which is more than [indiscernible] of the year itself. Basically, we're bouncing between the long tail and the Tier 1 customers and we're seeing more of the customers that are within our base, 60%, 20% that represent our growth, and this is why we can see the future in a very bright future regarding how to project our revenue.

Okay. Great. And then if we think about some of the pricing pressures and you talked about it on the Connected POS segment, in particular, and you also talked about some offsets that you're going to try to put in place. Can we just talk about which one of the strategy of offsets the pricing? I believe this is really on the expense side you did mention again that you're not willing to -- you don't want to pass on some of these costs on the revenue side to your customers. And so if you just talk about the timing of some of these aspects that you have in your strategy? And which ones are the biggest lever versus the smallest lever and how we could actually see those flow into the EBITDA margin over time?

I think, again, I will take it and maybe Sagit will continue. There are 2 parameters that we're looking and both of them are under our control. One, of course, is the investment in terms of [indiscernible] and employees and R&D to support our growth, which we control, and we're optimizing this, and we see in the future, this is what Sagit mentioned, that we optimize a little bit during [indiscernible] and then we become much more profitable. And the second thing is in terms of the logistics and operation and also Sagit mentioned is that we're opening a new factory, a new line, which is outside of Israel. And just by that, we'll make a lot of difference to our cost. And of course, all the engineering part that we're doing within the Board to overcome shortages [indiscernible] and to change the Board according to what is available will compete in the market. All of this is already [indiscernible] in terms of marks or signs that we see in Q1 2022. And we believe we [ over test ] the bottom of the downside of the gross margin. But Sagit should give some more color to this.

Sure. So yes, exactly as Yair mentioned on the cost of goods sold, we've implemented several mitigating controls and steps to control the cost. One of them is that we established a new manufacturing line outside of Israel. We've changed the electric [indiscernible] to be able to use available in different components and we are basically now established as an agent, direct agent that can buy components, available components in the market. Control both the lead time as well as the price. So if I conclude all of those things, both continue to see the growth. And exactly, as you said, we've raised our midterm revenue projection as well as the percent of the growth. So that's one, continue to grow from a revenue perspective, beautifully as we have done in the last several years. Going back to levels of 20% to 30%, how do the gross margin that we believe that we can reach that in the next couple of years and as such that [ being ] second. And three, moderate the investments, as Yair mentioned, in talent acquisition, product innovation and customer base expansion in early 2023, all of that can control better the gross margin as well as the bottom line. And on the revenue -- on the gross margin side, I would say that the component shortage is a global issue that we are fighting daily. We're very grateful that we didn't have to close any manufacturing line, but we're able to manufacture as much as we need. And however, it does affect the cost of the product.

[Operator Instructions] And we do have a follow-up from Dominick Gabriele with Oppenheimer.

Okay. That's great. I mean, look, there's a lot to talk about. So I might ask a few extra questions what is going on here. So I mean, if you just think about the demand for products within your geographies, obviously, what's going on in Ukraine with Russia, you see some companies pulling out of Russia. Are there any impacts that you calculated among your geographies given what's going on in Europe that could affect the growth trajectory in any way or your outlook.

So we don't see anything regarding the immediate impact on our business in terms of Russia and Ukraine. Actually, we are not operating in Russia and Ukraine and we don't have any kind of customers or significant [indiscernible] base in Ukraine. And I don't know how to address this in terms of a projection in Europe, but I believe war is not the best thing in terms of the economy. Still with our business with how we're operating and which customers we are serving and how steady we are, even in Europe, 28 countries that we are working with and serving what we call basic FMCG products is not something that's usually affected by any kind of inflation or things I guess it's not really affecting us but this is the present. I don't know what you have in the future regarding the other yield will be part of it or not. But we believe that our trajectory is firm, and we believe that we can deliver, even with this condition, we can deliver growth which will accelerate.

Great. And then maybe one more here. When you think about the investment initiatives that you have that you would like to accelerate over the next, say, year or so. Can you just walk through in maybe more detail exactly what some of those investments are and how that affects the growth of expenses? That would be great.

I think the main thing that everybody has to remember or to remind everybody that what Nayax is doing is actually is dealing with all the long tails of retailers. In terms of retail, it's actually called nano merchants. And we are expert in terms of creating these nano merchants and all the onboarding and all the friction behind their business to make it a very profitable business for us and for them. And the idea behind this is a lot of automation, a lot of operation that is still taking out all the friction that is taken care of, for example, the [indiscernible] the e-shop that we are building, the ability of a connection between all the platform and enabling the customer to really make it very fast in terms of setting up himself immediately after 10 minutes will be in front of the machine. All this is creating a lot of challenges in terms of how to collect the data, how to put it directly to the customers and make sure that while at office or mobile or consumer engagement, all of this is coming in a very smooth way that enables the customer to stay with Nayax and to keep running the business [indiscernible] and we see this with a net retention of 137%. That's a remarkable number in terms of what you can see in terms of long term of [indiscernible] which is less than 3% in unbelievable number in terms of when you look about the small businesses around the world, any category, we're not reaching out to this level of so low churn. So this is the expertise of life, and that's why we believe we are so strong in our positioning in our brand recognition, creating a lot of impact on the retailers on the unattended market. And this is -- the more we are becoming expert in this, the more the flywheel of market that's the beauty of the business model of Nayax.

This concludes our question-and-answer session. I would like to turn the conference back over to Yair Nechmad, CEO, for any closing remarks.

So thank you very much, operator. Before we conclude the call, I want to share with everyone that earlier this quarter, we announced a [indiscernible] statement for our proposed initial public offering. The commencement of the proposed U.S. initial public offering is subject to completion of the rate review process reflects the share price and market and other conditions. More than that, I want to thank you, everybody, for joining the call for the questions and the interest in Nayax. I am proud of our overall performance in our first year as a public company and feel that we are adjusted to early stages of a tremendous growth opportunity in the cashless payment market. Our marketable achievement in 2021 and the long strong results in Q4 are estimated of our long-standing culture devoted to customer success, rapid innovation, and teamwork. I want to thank the entire Nayax team for their dedication and their commitment to this value and executing our strategic plan. We look forward to sharing more of this journey on future calls, and thank you very much for joining. Lastly, I would like to share our entity to our support and support to our development team in Ukraine. We are in contact daily with them, and I am happy to [indiscernible] all safe and sound. Thank you, everyone, and have a good day. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.