Nayax Ltd. (NYAX) Earnings Call Transcript & Summary

Day 2 of the 43rd Annual Growth Stock Conference. My name is Cris Kennedy. We appreciate you joining us both in person and online and the research analyst here who covers Nayax. For a complete list of research disclosures and/or potential conflicts of interest, please visit our website at williamblair.com. So I'm very excited to introduce Nayax. From the company, we have the CFO, Sagit Manor. Nayax is a leading provider of payment and software solutions for the unattended retail market. We've been tracking this company since 2018, became public in 2021 and we launched coverage earlier this year. So it's been fun to watch the business grow and evolve, and we're thrilled to have them here today. So with that, let me pass it over to Sagit.

Thank you, Cris. Do you guys hear me? I can hear myself. So good morning. Thank you for those who wake up early to come and hear the Nayax's story. So we'll start. And doesn't work? I'll tell you a little bit about myself, Sagit Manor. I've been with Nayax for the last 2 years. Was off? Okay. But being in the payment industry, most of my professional life, I was in Lipman and then in Verifone for many, many years, and excited to be here. So who we are? Nayax is in the unattended space. So if you think about the vending machine, massage chair, kiddie ride, laundromat, car wash, electric vehicle charges, every place that you go when there's no person that actually selling you something, that's where we operate. And our mission is to simplify commerce and payment for our customers. What does it mean? It means to help them grow their business in a better way, it means to optimize their costs and obviously, to do that while engaging their customers to them. What does it mean? For example, with dynamic pricing, we can actually create a happy hour in a vending machine that is done between 2 to 4. It can be that every 9 coffees you buy, you get the 10th for free and all kinds of engagements that our customers like. So just a little bit of who we are from a revenue perspective. We like to say that we doubled it ourselves every 2 years. We finished the year '22 with $174 million revenue, grew 46% year-over-year. And in 2023, our guidance is to grow at least 35%, so reaching $235 million to $240 million revenue. So we're very proud on our growth that we've shown over the years and planning to do the same this year despite the macroeconomic conditions. And on the right side, you can see the growth of our recurring revenue, which obviously is a critical point in our growth engines. And you can see how fast we're growing 47% year-over-year if we look at 2021 versus '22. But let's talk a little bit about who we are. So we founded the company in 2005 really with the mission to take that probably very boring vending machine business and make it interesting and help, as I said, our retailers to solve their issues. We've acquired a few companies over the years, our VPOS Touch, which our flagship was introduced in 2018, but VPOS is our product for many, many years. We've done a few acquisitions over the years. And as Cris mentioned, we've IPOed in Tel Aviv in 2021 and then did a listing at NASDAQ in '22. So we are the only global company today that's unattended. We have 9 offices around the world. We use distributors in other areas. So we can sell in 70-plus countries that we sell our product. We accept more than 80 payment methods and customers can use more than 50 currencies in our vending machines. I'll talk about the scale a little bit later, but maybe the most important KPI on this slide is the high 141% net retention rate and a very low churn rate, less than 4%. Now you see later who are our customers and mostly SMBs, small businesses that have maybe between 1 to 30 devices so you can even appreciate more the low churn rate that we have. So what is the problem we're trying to solve? We have the consumer that wants everything, the in-store and the online to be combined, right? Everything that comes from the unattended space into the mobile event. They want to pay in every payment method that exists in every currency and by the way, to be appreciated by the loyalty, right? And then you have the retail that needs to provide all of that on one hand, but also to manage each business better, right? Manage employees, manage inventory, get all the data, and they can do that today with the VPOS Touch, with our Nayax solution through the mobile. So think about how it used to be when it was cash that an operator probably comes every week to its vending machine to collect the money and put the inventory in. Not necessarily they know that the machine doesn't work for 5 days, right? They were counting on the customer to call and say, hey, I didn't get my coke, right, or whatever it is that doesn't work. Where today, they all have it on their mobile. So our end-to-end solution provides the best-in-class or we like to say the state-of-the-art hardware, but this is just the beginning, right? What we really see is the telemetry and the management suite that help them manage their business better. And it's the payment of cost. Payment is a center of gravity, but today is a commodity, right? Everything at the end of the day, you need to be able to pay. And then you have, of course, the loyalty, as we said, the engagement, the lock-in for them. So customers that implement Nayax end-to-end solutions actually see 25% to 30% increase in the revenue and 20% to 25% decrease in their costs. So think about it this way. To change the device from a cash to cashless, okay, from any solution that they have today to the Nayax, cost them the same, exactly the same on a monthly basis. But what they gain to their business is that increase in the revenue and decrease in costs. So what do we do? I'd like to look at this as to bringing the global solution into the local market. From a global reach, we are all over the world, 40% in North America. We have 40% in Europe, around 10% in Australia and the rest of the world. You can see that 70% of our customers are small businesses. As I said, it's 1 to 30 devices. It means that -- and we love our small businesses. This is how we build a business since 2005. At the same time, we love our Tier 1 customers. As you can see on the left side, between Canteen and Primo Water if you're from Europe, you will see here the Café+Co and many other customers that are Tier 1. Tier 1 can be even 25,000 devices, 50,000 devices, et cetera, very large customers. And as we talked about, is the net retention rate that all over through the years was high and the low churn rate. We love our land and expand strategy. And you can see even more if I focus on the cohort analysis, and this is over 6 years, you see how our existing customers grow, and we grow with them. So if I take an example, the 2018 customers that joined us, they are buying more and they're doing more with us and our revenue with them is 5x higher than when they joined us. So land and expand. What is our long-term view. So from a market research perspective, that we have done in 2021, just before we went to the Tel Aviv IPO, we've learned that there's 44 million devices out there in the unattended space by -- in 2020, growing to 54 million devices by 2025. What does it mean? It means that the unattended devices are out there waiting for us to replace the cash to cashless. Okay? We also believe that less than 20% of those devices actually accept cashless transactions. So very great opportunity in this unpenetrated space. On the left side, you can see that -- and I'll talk in a few minutes about our business model, from a processing perspective, right, transactions perspective, it's the same thing. Going from EUR 41 billion to EUR 123 billion in 2025. So this is, of course, as a result of the consumer behavior change. If you think about it 6, 7 years ago, 25% of the transactions in the vending machine were cashless. Today, it's 65%. So what do we mean by One Nayax and our One Nayax strategy. So obviously, the unattended space is the core business, is the foundation for everything that we do. but we understand that our retailers, especially the large ones, they want a full end-to-end solution. They want us to be the unattended solution in their unattended strategy outside of those stores and they want us to help them with the electric vehicle charger, which is a different strategy. Again, if they have around 6 or 8 parking places, but they also want us in-store in the kiosk, et cetera. And we do have a few other solutions. We have the solution of Nayax Capital that provides listing opportunity. So today, we sell our product on a onetime basis. We are now able to provide them with the ability to pay over time. And I'll give the last example, is CoinBridge, where we take the loyalty assets and convert them into currencies. And we'll talk about that later. So what is our strategy? 6 legs to it. One is land and expand, as I've mentioned, very critical to our success, to our growth, to our ability to forecast in such confidence 35% growth year-over-year. The second thing is new customers. Of course, we love new enterprise or SMBs, innovation. It's our -- I'd like to call it's our second name. So I've mentioned the CoinBridge, I've mentioned a little bit on the retail side, continue to expand internationally. We opened in -- last year in 2022, we opened our New Zealand office and our U.A.E. Actually, if you walk today to the Dubai airport, you'll think that Nayax is the only solution that exists out there. And then obviously, with the growth engines, we have the electric vehicle vertical. We have the retail vertical. And of course, M&A, when it's relevant. From a financial standpoint, so our business model is built on 3 legs. One is obviously selling the product. It's a onetime sale that we start every quarter. That's the hardware. We like to call it the locking, the enabler for the recurring revenue base. And the recurring revenue is comprised from 2. We have the SaaS, which is a monthly subscription that they pay -- our customers pay for connectivity to our management suite and telemetry. And then we have the processing fee that they pay as a percent of the transactions that's going through our devices. And very strong recurring revenue base, 60% of our revenues is recurring, 40% is hardware. And that will continue to be the ratio as we continue to gain market share and more customers and more managed and connected devices. If I look at the numbers, just a quick number -- Nayax by numbers. We have 770,000 connected devices growing significantly quarter-over-quarter. As you can see, we finished the year with $174 million of revenue. As I've mentioned, 46% growth and also recurring revenue grew as much. And if you look at the bottom 3, you can see that we're [indiscernible] double ourselves every 2 years, whether it's the customers that we are growing 5,000 a quarter, which is a very impressive number to the transaction value and transaction volume that's growing significantly through our devices. One -- few items to point here, high gross margin based on the recurring revenue around 50%. Our services have an 80% gross margin while the processing gross margin is around 30%. So a combination of those is around 50%. And gross margin of the hardware was affected by the global supply chain pandemic. It used to be around 25%, 27%. We've reached 12% this quarter in Q1 and we have guided the Street that we're going to reach the mid-teens by the end of the year and going back to what we've used to see in 2024. So I'm excited about that. And we'll talk more about, I call it the 2023 is the turning year. But before we get to that, 52,000 customers, as I said, growing 5,000 customers a quarter, a really record growth and also our managed and connected devices, as you can see, growing significantly. Transactions, as we talked about. And then let's talk about 2023 a little bit more. So again, the turning year, the year where we continue to grow at least 35% year-over-year improving our hardware gross margin to the mid-teens. OpEx at the same time will be relatively flat to Q4 run rate, annualized run rate and that's a positive change. At the beginning, we talked about a little bit increase, but now we see the accelerated investment that we have done in 2021, in 2022, in talent acquisition, product innovation, automation, infrastructure, et cetera, coming at an accelerated pace as we come into 2023. And as a result of that, we raised the guidance to reach profitability on the adjusted EBITDA in 2023 between $3 million to $7 million. Being profitable is not -- we're not unfamiliar to that. We used to before 2021. But as I said, we've invested in the last 8 quarters, and now we are going back to it. And lastly is our 5-year road map, right? We believe that we can reach $1 billion revenue company in 2027, '28. So in 5 years when we started to count on that, really focusing on the land and expand, as I said, in the unattended space, growing at least 35%. We do have all the growth engines that I've spoken about. And that's one of the reasons why we have invested so much because we believe that there are going to be a significant part in our growth in the next few years. We are committed to 50% gross margin. And then the 30% adjusted EBITDA that we are committed to, again, comes from our unattended space, OpEx optimization and of course, the growth engines that are service-based, so higher gross margin and can reach to the 30%. Thank you.

Great. So it looks like we have about 10 minutes for questions, feel free to chime in from the audience. And I guess I'll just start out. You mentioned net revenue retention is a key metric for you. 140% last quarter, and it's been over 120% for several years. Just talk about the key drivers of that and how you manage it.

Yes. So how we look at net retention rate is only the recurring revenue [ pace ]. Of course, so if a customer had 5 units and then bought 5 more, right, we don't count for the hardware, but we do account for the services that are coming from the new devices and the processing fee that comes with it. So one, it's only recurring revenue. It looks at the same customers from a year and from today to a year before, to see how much they bought previously and how much they buy today. That's how it's being count and annualized. What we see is a few things. We see them buying slowly, so buying 5 today and then 5 units more in 6 months and then 5 more, and that's one of the reasons why we started the Nayax Capital to help them sponsor those machines, the hardware machine, and maybe that would be a reason for them to buy the 20 or the 30 they have upfront and not over time. So we see that happening. And we also see an increase in transactions that are going through their devices. The higher transactions that go through our devices, the higher our processing fee is. So most of it comes from -- and this is exactly the land and expand, right? Because we look at the same customers, existing customers and how they're performing a year after. So really proud of that.

You mentioned gross margin on the equipment side was negative for the last 2 years or so, and it's starting to turn positive. Just talk about what happened recently and their maintenance going forward.

So first, we never been -- the lower we got is 1% gross margin. We never saw the product in a loss. But we did -- we used to have around 25%, 27% gross margin on the hardware. We do design and develop the product in-house. And we believe that this always was and still is a key element in our success because we were able to make very quick changes, whether it was through our electric board or even to develop a completely new device because of missing component in the world that happened at the pandemic time. At some point, I call it a component war. That's how it was. But at the same time, what happens now is that we see -- and I think I've talked about it already around September of last year, we saw the availability of the product, getting the component getting better, which, by definition, means that the prices will go down also, right? It's the supply and demand story. And indeed, what we see is that there's better availability, suppliers are starting to reduce the prices. There's a stickiness of inflation that I don't believe this will go away. And that's one of the reasons why at the beginning of this year, we actually raised our prices a bit. We set a mid-digit price increase simply because of the stickiness. We haven't done it before because we love and appreciate our small businesses where cash is king. Well, cash is king all the time, but especially for those small businesses. And we did not want to hurt them nor our significant growth, right, not to put any obstacle in our growth. And that worked for us, as I said, 46% growth in the revenue between '21 to '22. So back to the hardware gross margin. This year, we're going to reach the mid-teens. And next year, in 2024, we believe that we can reach -- to go back to what we've used to see, stronger than ever.

Any questions from the audience?

Can you just talk about competition? You just said [indiscernible] space...

Yes, sure. So Yair, our CEO, likes to say that the recompetition is the cash companies in the space. If you've seen the research market that we've done, you will see that there's 44 million devices out there, growing to 54 million devices by 2025. We believe that less than 20% actually accept cashless. So the real competition is cash. But in the cashless, in our area, there's many local providers so you see many of them in Europe that's relevant to the German-speaking countries or relevant to the Nordic countries or so you see many local players in the U.S. There is Cantaloupe with -- doing also -- is also -- they are also in the unattended space. If you look at the -- as from the companies that we are looking up to is actually none of those companies. It's really Lightspeed and Toast where their business model is really close to what we do. So there's the hardware with very nice gross margin in it. And there's the services or the SaaS component as well as the processing, again, different -- serving the small businesses. So it's very similar from a business model perspective, and that's where we like to be compared to.

Could you describe how you calculated the adjusted EBITDA [indiscernible]

Sure, sure. So actually, very simple. We go out from the operating margins. And then what we've taken out is the stock-based compensation and depreciation and amortization. So trying to get to a relatively cash basis, if you will, a profit, and that's what that is.

Depreciation of what?

Depreciation and amortization of our own assets. It's not the...

[indiscernible] hardware yourself?

No. How do we stay, we buy and we sell. We don't lease that. Right now, there's a small portion of it that's being leased and -- but very small. But it's our own hardware, our own -- whatever we buy, we sell those, et cetera.

Per your selling costs, what percentage of sales your SG&A [indiscernible] market impact? What percentage of sales is that?

So percentage from a revenue perspective, on a quarterly basis, our OpEx is around $22.7 million today. So out of 51%, the $52 million of revenue, it's around, I don't know, 40%?

And how do you [indiscernible] small businesses [indiscernible]

So actually, the -- we always work with small businesses. And we use that -- we use distributors to do that. So the cost, not necessarily is on us to reach the small businesses that we have. The way to take that down is really what we've invested so far, is to -- is the automation and infrastructure that we put in place in order for us to gain to where we need to be. And we've already seen that -- seeing that happening as we speak.

How do the distributors get paid?

How -- they buy our hardware. So...

[indiscernible] recurring?

No.

So they just take a markup on the hardware [ size ]?

That and they sometimes have the processing themselves. So they take a portion of the processing as well.

[indiscernible]?

Yes. So 3 ways. One, we have our 9 offices around the world where we do direct. So the Tier 1 customers -- we usually use our own team to sell. We have around 35 -- we call it professional salespeople all around the world, sitting in those 9 offices. The second thing, as I've mentioned, is the distributors. We love our distributors. We have many countries where we only have a distributor there that she or he does the work that we need to do. And then we do the OEM. And what does it mean? Our Asia office, our China office, their job is to make sure that every vending machine, massage chair, kiddie ride, et cetera, that goes from the manufacturing facilities have already the Nayax device. So when you -- if you are a Coca-Cola or if you are a LEGO, and you buy the vending machine, you're already going to buy that with the Nayax device. That's the purpose of that. So I always like to give an example, if you go to the Cleveland airport, okay? You receive a Nayax device probably everywhere from the CVS vending machine to then a few steps further, you receive the LEGO machine -- vending machine but also the massage chair that are further away. And you won't know if it's the airport that made a decision that because of secure payment, because of -- because of their reasons, they want the Nayax device. Either it's the LEGO, the CVS, the massage chair companies that contracted with us to buy our payment or the machine already came with the Nayax device from the facility in China. But the point is, is we're everywhere in that sense.

All right. With that, I think we should wrap it up. There will be a breakout down the hall. Thank you, Sagit.

Thank you, Cris.

Thank you all for coming.

Thank you.