Nexteq plc (NXQ) Earnings Call Transcript & Summary

Good morning, and welcome to the Nexteq plc H1 2026 Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Duncan Faithfull. Good morning.

Hi there. Thanks very much for the introduction, and welcome to Nexteq's H1 2026 results. Through this presentation, we're going to be talking around a performance snapshot for H1, but also just to talk through the progress we made through H1, but also the headwinds that we faced that explain some of the numbers that we'll come on to through the presentation. We will be focusing on some of the strategic successes we've made through this period and also what we're planning on doing through the second half of 2026 to ensure we position ourselves for the best growth through '27, '28 and '29. So I will start and go through the background of the business, and then we'll hand over to Matt, who you can see on the slide here, who will talk through the numbers a little bit later on. So as a reminder, who is Nexteq? So we're basically a technology enabler. So we allow our customers to really focus on what they do for a living. And we operate across a huge number of verticals, as you can see some of them in the left-hand diagram there. And we trade in land-based gaming through to medical, through to defense, through to transport and numerous others. So we are a true multi-vertical business focused on technology outsourcing. And Nexteq as a group sits in that perfect intersection of what we are expert in, whether that's embedded computing or displays and HMI solutions or the software and the integration that goes behind all of those. So Nexteq has a tremendous opportunity. And you can see our enviable list there of customers that we trade with, and that's just a small selection of those. But the fact that Nexteq has all of these different areas of expertise means that we have sort of unlimited opportunity on our doorstep really with people we currently trade with. So over recent years, Matt and I have been focusing on looking at the One Nexteq principle that we've talked about before, where we combine all of our skills to deploy solutions across all of those customers, whether that's displays or computing. And that will carry on being a focus of the business as we move forward. So H1 2026, I think it's fair to say it's been a challenging period. And that's primarily because our largest historical market vertical that we trade in, the land-based gaming market, has had some real issues that it's been dealing with through the course of this period and, in fact, through 2025 before it. I'll talk more about those headwinds shortly. But really, what we've been focusing on in H1 as a group has been what we can control. And so we have been continuing to provide superb customer service to the customers that we have. In Densitron, our displays business, making real progress on the strategic agenda of becoming more than a display. And again, we'll talk about that a little bit later. And from a strategic delivery perspective, as we outlined in our 3-year plan at the beginning of 2025, really focusing on how we create new products and solutions that will deliver new growth and new sustainable growth as we go through the next 3 years. So the summary of a difficult trading environment for our heritage business, but really focusing on what can drive a different outcome as we move forward through the next few years. But what was that, that we were looking to do in H1 2026? So largely, as a reminder, and I know I've spoken to you all about this before, but that diversification agenda is critical to us. And it's critical because, for too long, the group has relied on land-based gaming for the majority of its revenue, particularly in North America. And within land-based gaming, we've relied on 2 very large customers for a long period of time. And as many of you will know, that changed quite dramatically in 2025 when our largest customer was acquired by someone who didn't use Nexteq, and that's had a fairly significant impact on the business. So how have we been driving that diversification agenda? Looking at a product called Launchpad and how we monetize our clear and obvious software capability in gaming, looking at how we become more than a display and using our HMI expertise in order to do so. And both of those are part of a reinvigorated and reenergized product road map that we've developed that really enables us to target new markets with new products, and I'll talk about that again a little bit later on. And finally, in the top row there, you can see the target operating model. Matt and I have been really focused on managing our costs, and through H1 2026, that carried on. But at a wider level, we're looking at how we really are going to deploy our solutions into our markets in a new way. And again, I'll touch on that again a little bit later. But just getting into some of those headwinds that we talked about. Now you can see on the bottom row of this chart in the orange color from left to right, tariffs has had a huge impact on us. Traditionally, 2/3 of our gaming business has been in North America. And whilst our computers that we provide to that market do not attract tariffs, the rest of the bill of material for our gaming customers for their cabinets, they do. And the cost of those cabinets have therefore gone up considerably. And as a result of that, casinos and other gaming venues across the world, but mainly in North America, have been buying less cabinets, and that's really flowed through to our numbers because less cabinets sold, less computers are required. So tariffs had a real impact on our trading volume. That, coupled with what's been going on with the graphics chip providers, but also the memory providers, has meant that the cost of our products to our customers have also gone up. And memory continues to be something that we have to watch as we go through 2026 and beyond because the issue with memory has been driven by the AI companies and their development, and that doesn't look like that's slowing down. So more and more of our focus around how we manage our computer products going forward will be with memory in mind. As a result of those 2 issues, the North American gaming sector is very uncertain in terms of how it's investing. And we're seeing that across both the large casinos you'd expect to see in Nevada, but across all of the other route markets that we see in North America. So sort of uncertainty at the current economic situation, plus what's going on with sort of geopolitical uncertainty in the world, is just making people hold off on big capital investments. And the final box on the bottom row of this chart really talks about that specific issue around IGT and Everi. The trading position of Everi has deteriorated quickly as IGT has integrated them into their business. And the slowdown of our business, therefore, with Everi has been quicker than anticipated. There is some news that has come out around IGT that I will talk about towards the end of the presentation. But the headwinds really facing the gaming part of our business with Densitron, as I said earlier, trading to expectation levels. So in terms of what have we delivered in H1, you can see the objectives along the top of this chart, but in the green boxes. So from the point of view of revenue diversification, as you will have seen in some of the market announcements, we've been winning significant pieces of new business with IDS control solutions, which is part of our Densitron business, as well as other significant advanced display wins. Now a lot of you who followed our business for a long time will know that the sales cycle and the integration cycle is reasonably long. So the embodiment of the strategy about winning these customers is one thing, but there is then a life cycle then of integration that can typically take about 18 months. So we're making great progress on winning new diversified revenue, and we're in that process of integrating that. Launchpad is a real focus for our business, and I'm delighted to be able to say that we have 3 Launchpad customers who are in the integration cycle now and more lining up to be next in line. So Launchpad really is striking a chord in the gaming sector. And the great thing about the Launchpad opportunity is not only does it give us new recurring software revenue, but it also means that we win new hardware customers, which is the traditional revenue stream for the Quixant business. Tactila has been a massive focus for us in the HMI solution agenda. And we're really proud to be able to say we've won some new Tactila-backed wins that, again, are going through that integration cycle now. So again, the strategy around how we diversify revenue is really starting to make progress. But at the same time that's been going on, we're having to watch those memory markets very carefully and our cost management. And again, through H1 of this year, we've removed just over $1 million worth of annualized cost at the same time as investing in those critical supply components, particularly memory, that allow us to, a, buy at a sensible price, but also means that we can satisfy our customer demand as we go through H2 and into 2027. Brazil has been a big topic of conversation for us over the last couple of years, and there's been significant movement on that through H1, so much so that we believe that 2027 really will be finally the launch for the world of gaming, particularly in the lottery space, in Brazil. And part of our product road map has been developing a specific product for Brazil that allows our partners to work in regulated and unregulated markets in Brazil, but with the same computer. So true innovation, which, of course, is at the heart of what Nexteq really delivers to its customers. But in summary, what are we really trying to be? We're about going up the value chain of technology solutions. Historically, we would have thought of ourselves as a component supplier, be that displays or computers, depending on which market vertical we were looking at. Over the last year, we've really targeted moving up that value chain to fully integrated advanced solutions, be that software and hardware in gaming or in the display verticals we trade in, a full system solution incorporating our computer skills, our display skills and our HMI skills. And so that part of our strategy, we are really pushing and making really great headway on. But it has been a tough time in H1. And to talk through some of the numbers, I'll just pass over to Matt now, who will describe where we are.

Thank you, Duncan. So looking at the income statement performance for H1, we've delivered revenue of $26.7 million, which was a 34% decrease on the prior year. The main impact behind this was the demand from U.S. gaming customers, which faced significant challenge, and the headwinds, which Duncan talked about previously. In terms of gross margin performance, the gross margin was 30.3% across the group, which was down 280 basis points on the previous year. A big factor behind that number is the DDR4 pricing challenges and other component cost increases that we've seen through the first half. Really positive point on the gross margin is Densitron, which last year hit a record gross margin of 38%. And pleasingly, it's maintained that 38% gross margin performance in H1. In terms of adjusted operating expenses, we're down marginally on H1 last year. That's a result of savings that have been implemented, partially offset by inflationary impact of cost increases elsewhere. We've just initiated a program over the last 2 months to implement further savings in H2 this year and that roll into kind of further savings going into 2027. So overall P&L performance was adjusted loss before tax of $4 million in the first half, and that reflects the lower revenue and gross margin performance that we've come -- that has resulted from those headwinds, and we're certainly expecting the H2 performance to be much stronger than that with increased revenues and margins driving better performance in H2, which more ties in with the traditional second half weighting that we see in the Nexteq business. So looking at Quixant in more detail. Quixant business delivered $12.7 million of revenue in the first half, which is 53% down year-on-year. Huge impact of that was the demand for our gaming platforms. So our PCs sold just under 9,700 platforms in H1, which is 56% down year-on-year. You can see that from the chart on the right-hand side, also significant reduction in high-end and mid-range units sold, which is typically the units that we sell to the U.S. gaming customers. And that, therefore, is also driving down the average selling price of our gaming platforms in the first half. In terms of Densitron, much better picture for Densitron. So slight increase, 1% higher than we delivered in H1 2025. So $13.9 million of revenue for Densitron. We had new wins coming through, making a very positive impact, but some of those wins were partially offset by delays with existing customers, offsetting that ramping of new customers. Really pleasingly as well on the Densitron side was our sales pipeline performance in the first half. So we converted $12.7 million of sales pipeline opportunities, which represents the lifetime value of those opportunities over 5 years. And from that conversion, we're expecting to have $1.9 million of revenue in year in 2026 from that new pipeline and also a new $1 million customer is expected to come from those wins, albeit not in 2026, given the time for that customer to ramp, as Duncan was talking about earlier, the typically 18-month integration cycle. And in terms of H2 sales pipeline outlook, we've already converted more pipeline opportunities in H2 than we did for the whole of H1. So certainly expecting second half to be really strong in sales pipeline performance for Densitron. So looking in detail at cash flow. So we closed H1 2026 with $10.7 million of cash. That was down from $25.3 million at the end of December 2025. There's a few key areas which drive that reduction in cash balance. So we returned $8.5 million to shareholders through dividend and share buyback in H1. There's also the trading performance in H1, driving down the cash flow from operations, which in previous halves has been positive, but obviously negative in H1 2026. We made a strategic investment in stock to secure DDR4 components to help mitigate the price increasing challenges that we've seen in the market, but also availability to ensure that we have product on hand to be able to support customer demand. And in the middle there, you'll see 2 fairly big blocks in the bridge, which reflects the purchase of the Taiwan office in H1. So we purchased a new office in Taiwan, which included mortgage financing. So a net cash outlay of $1.5 million to secure that property. We actually had an offer from a third party to sell that in August, and we've reached an agreement with them to conclude on that transaction, which we expect to close out in October. So in the second half of this year, we'll see a positive cash inflow coming back in relating to that same Taiwan office. And those are really the key movements that's driven our cash flow and adjusted operating cash conversion of 50% in the first half. So moving on to the balance sheet. There's a few key movements to pick out here from where we were at the year-end. So property, plant and equipment, the increase there reflects the acquisition of the Taiwan property. The inventories balance in current assets really reflects the investment in strategic stock as well as the build of stock balance towards the end of H1 to support a stronger revenue number in H2. The cash we talked about on the previous slide. And then in terms of liabilities, loans and borrowings has obviously increased by around $12 million for the new mortgage on the Taiwan office. But as I said, we'd expect both the mortgage and the PPE changes to reverse out by the end of the year through the sale of that property. So in terms of outlook and priorities for H2, I just can kick off there with talking through our Signpost to Success, which we outlined back at the start of 2025. And we had 3 key signposts, which we're very much monitoring and actively planning against to support driving growth in the business. So the first of those is around pipeline growth, targeting to grow our sales opportunity pipeline to $630 million. That's grown to $505 million at the end of H1, which is a 5% increase on the pipeline since December 2025. That factors in as well us closing $27.3 million of wins from the pipeline through H1 across both the Quixant and Densitron brands. The second of the Signposts to Success was around driving new IP revenue growth. We've seen in the first half of this year, pre mass production revenue for Tactila and having won an additional customer for Tactila. And going into full mass production in the second half, we'll see that numbers of Tactila revenue increasing for Densitron. And also on the Densitron side, as we're driving the strategy behind more than just a display, we've seen new product wins incorporating our IP, particularly around button technology, driving IP revenue flows in the first half. And we'll also see our first Launchpad revenue coming through in H2 as we close out the integration of those first customers -- first 3 customer wins, which Duncan talked about earlier. The final signpost was around $1 million customers. So we had a target to increase the number of $1 million customers to 20 by the end of 2027. In 2026, we're trending towards having 10 $1 million customers, which is down from 14 that we had in 2025. The biggest driver here, which is changing that number of $1 million customers year-on-year, is the demand from the U.S. gaming customers and also gaming cabinet sales, both of which are reduced year-on-year. But we've seen from the pipeline conversion that we had in the first half, there's 3 $1 million customers that we expect from those customer wins, albeit those will ramp into future years. So we're not seeing those as $1 million customers in 2026. So I'll hand back to Duncan, who will talk through the H2 priorities.

Thank you, Matt. And just to finish on that point about $1 million customers, of course, as I said earlier, this is -- the reduction in revenue in North America is not through lost customers. So we are expecting some customers over the next few years to come back to being in that $1 million category. Obviously, it's hard to predict some of those headwinds in gaming in North America. But you will have seen this chart last time we spoke. So this is really talking about sort of the actions we're taking to diversify our revenue and build a different business to the one of a few years ago. And starting on the left-hand side, which is the orange for Quixant, just going through some of these -- the elements of this plan. We have to -- the bottom point there about DDR and SSD is really, really important because we have to continue to manage those markets in the face of the competition we have against the AI companies for those components that are critical to gaming computers. So that's going to be an ongoing story for us. Launchpad, you've already heard that we're making great progress. We've got 3 on the books already. And Launchpad again will be presented to the customer base in North America for the first time actually at G2E in October. So really, really pleased with Launchpad's development. And again, it's important to remember that's recurring software revenue. So it's the first time we've ever monetized our expertise in gaming software. Really pleased to announce that we are launching our monitor range at G2E, which is again, sorry, October. So within the time frame or thereabouts that we said we would at the start of the year. And this really is a chance to take advantage of the relationships we have through our computers to grow organically with those by offering more products for their cabinets. And we have some excellent products. They're really high-quality solutions. Now IGT, just to touch on that for a second. So IGT, again, last time we spoke, we're talking around the RFP they were going to issue for the main platform, the main computer for the IGT-Everi combined estate. We literally received that at the beginning of this week, and we are responding to it now. The plan is we have to respond to that by the 16th of September, and it's a significant piece of business, but it is different to our normal business model in that IGT really are looking for a manufacturing partner as opposed to a design partner. And we see ourselves as absolutely in the innovation and design space. So we will see where that RFP goes, but really pleased to say we've been included in that tender and many of our competitors haven't. So it's a good step 1 to getting back to talking to IGT. New cabinet solution, we are launching that through H2 this year and already have a really good pipeline developing for new cabinets, and we've already talked about some of the cabinet business that we've won before. The top 2 on the left-hand side of this chart are really important. So integrating Snapdragon as part of our gaming solution base is really important as AMD and Intel, who are our traditional graphics chip solutions providers, as they move into a much more AI-focused space, it's very important that we create solutions that are market appropriate and price appropriate for some of the markets that we sell into. So Snapdragon through Qualcomm gives us a real opportunity to diversify those traditional revenue streams and open up new opportunities in gaming. And at the top there, you can see a new computer for Tier 3 companies. So that includes Brazil, that includes some of the route markets in North America and in Spain. And it really is a true piece of innovation that will enable our customers to build a modular solution for where they're operating in different regulatory environments. So again, those real core strengths of Quixant about real in-depth knowledge of the market and the regulations and bringing out unique solutions that cater for those. So focusing very much on delivery and execution of what we've talked about, and we've made really good progress across all of those -- the elements of that plan. On the right-hand side, you can see some of that innovation agenda around Densitron and being more than a display. So again, we've talked a little bit about some of the successes we've seen early on in the provision and execution of this strategy. But we're making real progress. And actually, this is something we are going to really double down on as we look at all of the different verticals that we can apply this outsourcing to as we supply everything from the computer through to the housing of a display. And as we speak, again, at the end of this year, we'll be able to tell you more about some of the exciting wins we've made. But to put it into some sort of context in reality because that sort of really helps. On this slide, you can see some of the solutions we've created and have won business with. Top left, that's a broadcast solution that's really unique in how that works and operates for one of our customers. Bottom left, that's a smart home control solution that has been launched very recently actually, and we've secured a multiyear PO for that solution. And on the right-hand side, you can see the full system solutions for, at the top, a testing mechanism in medical and, at the bottom, a specific solution for the defense market. So the strategy around becoming more than the display is multi-vertical applicable. And that's what's really key for us as we look about how we diversify our business going forward. So H2, what are we expecting to happen as we go through towards the year-end? As Matt has already talked about, as traditional with Nexteq, H2 will be a stronger year in terms of revenue. And we've already got really good order book coverage across the group. So we're confident in the number that we talked around in July and in May about what we thought 2026 would look like. New client wins, really, really important, and the sales team are hungry looking to convert that pipeline that Matt has talked about. But we're a product and solutions business. So we're really focusing on how we take those really good ideas, but executing them really well, particularly around IDS, the control system for broadcast, for Launchpad, we have talked about in gaming and then Tactila as an HMI solution. And Brazil will be something that we have to watch as we go through the early part of 2027 because these opportunities are significant and currently unforecast in terms of our longer-term numbers. Really, really focused on cost management, as you'd expect. And as Matt already talked about, we'll be looking through H2 about how we continue that process of making sure our overheads are in line with our business. So really, the next half of 2026 and through 2027 is really focused on the flawless execution of the plans we've already talked to you about. And whether that's advanced displays -- and when I'm talking about flawless execution, that's everything from how we market to our target verticals through to how we actually make and distribute these really advanced display solutions. And as a part of that, HMI and especially Tactila, really, really important. But in our computer business, as you know, we've been focused on land-based gaming since Quixant was founded in 21 years ago, sorry. But really now it's time that we take those skills that we have, utilizing sort of edge AI technology into new verticals. And as we tell the story as we go through '27, '28 and '29, you'll see a real focus on how we take those core skills into new markets. But not forgetting where we've come from. The gaming market, whilst it is under some pressure at the moment through those headwinds that we've discussed, there's real opportunities if we have the right products and solutions. So that new product I've talked about for the Tier 3 market plus Launchpad as a combination is really powerful. And our sales team is absolutely focused on ensuring new customer wins. And at the same time, as markets normalize, customer service to the current customers will always be critical and important to us. The final bullet point on this slide is a really important piece of work that Matt and I are starting, which is looking at how we actually create and make the solutions that we provide to our markets. Currently, everything is very much focused on what we do internally. We'll be looking at how we partner with different people to create a more effective and more efficient operating model so we can maximize speed to market and the profitability of the new wins that we're seeing. So that's a summary. That's a very quick fly through H1. I appreciate that for Nexteq. As ever, we look forward to your questions. So look forward to seeing those, and I'll hand back now to the invigilator. So thank you very much.

That's great, Duncan and Matt. Thank you very much indeed for your presentation. [Operator Instructions] While the company take a few moments to review those questions submitted today, I would like to remind you the recording of this presentation along with a copy of the slides and the published Q&A can be accessed via our investor dashboard. Duncan, at this point, if I may now hand back to you and kindly ask you to read out the questions where appropriate to do so, and I'll pick up from you at the end. Thank you.