Nayax Q2 2023 Earnings Call Transcript

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August 9, 2023

There are 6 speakers on the call.

Operator

Everyone, and welcome to the NIEC Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the speakers' prepared remarks. I would now like to turn the conference over to Ms. Virginia Stewart Gibson.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and everyone for joining us today on this conference call. With me on the call today are Yair Nakhmoud, NIAC's Co Founder and Chief Executive Officer and Sajit Manur, 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 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.

Speaker 1

We have no obligation to update these statements except as required by law. You can read about these risks and uncertainties in our supplementary Investor presentation released earlier today and our regulatory filings. In addition, today's call will include a discussion of non Management believes non IFRS results are useful in order to enhance our understanding And our ongoing performance, however, these measures should be considered as a supplement to and not as a substitute for IFRS financial measures. Reconciliations to Vinera's 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.

Speaker 1

These key performance indicators may be calculated in a manner different from the industry standards. And finally, Please note that all figures in today's call will be reported in U. S. Dollars unless stated otherwise. Yair will start the call with key financial highlights and then provide operational and strategic updates.

Speaker 1

Sujeet will go through the details of financial results and discuss the outlook. With that, I would like to turn the call over to NIAC's CEO, Yair Daghmad. Yair?

Speaker 2

Thank you, Virginia, and thank you to everyone for joining us on our Q2 2023 earnings conference call. On today's call, I'm going to focus my comments on 2 areas. I'll briefly highlight key results of our excellent second quarter and provide an outlook on the business. Overall, we once again delivered another standard quarter for both operational and financial performance, Highlighted by strong revenue growth, improved gross margin and accelerated profitability. Agit and I are excited to report an operational accomplishment this quarter, which was demonstrated By the significant improvement in our hardware gross margin and ongoing operational efficiencies.

Speaker 2

Hardware gross margin improved to 19% from 12% In Q1 2023 and 9% in Q4 2022. Building on Q1 2023 improvement, We continue to execute our playbook on company's cost management and operational efficiencies across the business to further drive our profitability. The hard work is paying off, and we would expect to see improvement throughout the rest of the year. David will have more to say about our profitability outlook later on the call. For the Q2, revenue growth was strong.

Speaker 2

We delivered revenue of $56,200,000 growing 36% year over year, Driven primarily by our organic growth initiative and another quarter of exceptionally strong recurring revenue. The growing revenue grew 43% year over year, increasing to 65% of our total revenue. Our first half result for 2023 in terms of revenue were also strong. We reported first Half twenty twenty three revenue of $109,000,000 growing 44% compared to first half twenty twenty two, Again, driven mainly by our organic growth initiative and recurring revenue year over year growth of 33%. Turning to gross margin.

Speaker 2

We are able to deliver an outstanding margin expansion in Q2. We reported gross margin of 37% for the quarter. This is a strong improvement from last quarter, which was 34% from Q4 2022, which was 33%. This improvement was driven mainly by the significant hardware gross margin improvement I highlighted at the beginning of my remarks. This positive outcome is due to our focused execution on company's cost management In addition to favorable hardware selling price we experienced in the quarter, adjusted EBITDA Since Q1 2021, this is a marked improvement of $4,500,000 to adjusted EBITDA compared to a negative $3,200,000 in Q2 2022.

Speaker 2

This ongoing profitability improvement has been driven largely By our consistent revenue outperformance and higher efficiency capture across the business as we further automate and scale. Adding to the profitability outperformance in Q2 was the significant improvement in our hardware gross margin. Our Q2 and first half results clearly reflect the positive momentum we continue to see in the business and again demonstrate Our scalable business model and our capital management decision are putting us well on track towards our long term targets of 30% adjusted EBITDA. We communicate all along our efforts to continue to deliver our exceptional growth while focusing on operational excellence And improved profitability. Q2 is another great quarter moving us towards our targeted profitability.

Speaker 2

Let's take a look at the significant operating leverage we continue to see in our business model and the confidence we have on our path to profitability. Looking at H1 2023 over H1 2022, we've delivered an increase of $33,000,000 in revenue An improvement of $7,000,000 to adjusted EBITDA, representing revenue growth outpacing expense growth, resulting in an exceptional impact in our operating leverage acceleration flowing directly to the bottom line. As I mentioned, each quarter, 2 metrics that I'm particularly proud of And pay close attention to our net retention rate, which measure our customer loyalty and our churn rate, which measure our customer satisfaction. Our net retention rate remains elevated at 139%, Reflecting the high value and confidence our diverse customers place for next end to end platform and solution. Our churn rate remained low at 4.1%.

Speaker 2

I want to now Provide a brief update on our emerging growth engine, which provide us with a large addressable market opportunities beyond our core attended market Over the next several years and is critical component to further drive our SaaS revenue. As a reminder, our emerging growth engine as outlined at our Capital Market Day in March This year include NICE Capital, our embedded financing solution for micro operator and SMBs PointBridge, our loyalty asset solution EV Meter, our electric vehicle platform and IX Retail, our self checkout platform. All these new services and solutions generate revenue except for Kornbridge, which will start generating revenue in the second half of twenty twenty three. I'm pleased with the progress each business unit is making towards their strategic goals. Overall, The team are excited about executing their mission and operating plans, and they are pretty much where they are expected to be regarding internal milestone, customer adoption, go to market strategy and product launches.

Speaker 2

I look forward to providing updates as these opportunities evolve. I would also like to share our thoughts on the business for the second half of the year. Heading to the second half, Knife's business fundamentally remains strong. Our differentiated growth strategies And value proposition as a global solution provider with a complete end to end solution continuing to resonate with our diverse global customer base. We continue to benefit from the secular growth trends and consumer behavior shifts, driven the global and under Penetrated unattended markets.

Speaker 2

Our global footprint in major regions such as North America, Europe and Australia Provide revenue diversification and scale as well as exposure to some of the most attractive growth markets contributed to our overall growth. For example, in Q2, we added Synergy Energy as the new Tier 1 customer in Australia. Synergy Energy is Western Australia's largest energy retailer and generator. Synergy has chosen to roll out their EV DC chargers with NIAPs devices embedded. This deployment of EV fast chargers with cashless payment is the first in Australia And NIAPs is at the forefront of this growth dynamic.

Speaker 2

So in summary, Our Q2 and first half results were strong, demonstrating that our business fundamental remained intact. We have delivered revenue within the guidance range, which we have previously communicated, and we have accelerated the pace of our profitability. Again, we continue to execute on our long term growth pillar continue over the past year, and we are scaling the business based on our strong customer momentum and the rapidly increasing number of processed transactions across our growing base of managed and connected devices. These positive underlying trends give us confidence that we are tracking in line with the revenue guidance we gave for the full year and reflect steady progress against our long term growth aspiration. With that, I will now turn the call over to Sajid

Speaker 3

Thank you, Yair, and good morning, good evening, everyone. Overall, We had a great quarter with growth trends across the entire business and effectively delivered against our commitments. We achieved strong revenue and adjusted EBITDA accelerated. I'm going to walk you through some key financial highlights for the quarter and then share some color on our financial outlook. We delivered revenue of $56,200,000 which represented a 36% increase year over year.

Speaker 3

These strong top line results, Combined with our cost management execution and the ongoing efficiencies gained from our investment In automation and scaling the business resulted a significant improvement to adjusted EBITDA of $4,500,000 over prior year quarter. We reached profitability this quarter and delivered an adjusted EBITDA of positive $1,300,000 compared to an adjusted EBITDA of negative $3,200,000 in Q2 2022. Now let's turn to some of the key factors that drove our strong second quarter results, Starting with an overview of the revenue performance. We continue to see a strong increase in recurring revenue, which is an important growth indicator of the underlying business. As a reminder, recurring revenue is comprised of our SaaS Subscription and payment processing fees.

Speaker 3

Recurring revenue for Q2 2023 grew 43% over Q2 2022 to reach a new high of $36,000,000 in revenue and accounting for approximately 65% of our total revenue. As a reminder for those new to the NIAX revenue model, Our 3 main revenue pillars are derived from point of sale or POS devices, monthly SaaS subscription and payment processing fees. The impact of foreign exchange on revenue in Q2 was immaterial. Other revenue in Q2 was strong, contributing approximately $20,000,000 to our overall revenue, growing 26% year over year. Now let me turn to the highlights of our customer expansion and the growth of our managed and connected devices.

Speaker 3

These metrics are key indicators of the scale we're building in our business and our ability to execute against one of our strategic long term growth Starting with our global and diverse customer base, we reported strong customer growth of 47% over prior year quarter as we expanded our customer base to 56,000 at the end of Q2. With the large market opportunity ahead of us That remains underpenetrated. Customer extension remains one of our key growth drivers as it is an indicator of our successful execution in expanding internationally and entering key growth markets for cashless payment solutions as well as growing market share. Turning to the growth of our devices. Managed and Connected Devices showed healthy year over year growth of 38%, ending the quarter with almost 824,000 devices.

Speaker 3

We reported significant increase in transaction dollar value. In Q2, transaction dollar value grew 51%, reaching a new high of $885,000,000 compared to $585,000,000 in Q2 2022. This metric remains a key contributor Recurring revenue and recurring revenue gross margin, which was 47% in Q2 and mostly reflecting higher payment processing fees Turning to gross margin. Our Q2 gross margin was 37%, A strong improvement from 34% in Q1 2023 33% in Q4 2022, largely Due to the significant improvement in hardware gross margin as Yair highlighted in his remarks, as communicated on last quarter's earnings call. We were expecting to see additional hardware gross margin improvement to the mid teens throughout the year from our hardware component cost management.

Speaker 3

We also shared that we were already seeing the benefits as we headed into Q2. For the first half twenty twenty three, We were able to report higher gross margin of 15% as previously indicated. This accelerated improvement was the result of our focused execution on component cost management as well as favorable household selling prices from select Customers with an attractive margin profile. Similar to last quarter, gross margin overall was impacted by the higher mix of payment processing fees, which had another quarter of exceptionally strong growth of 51% year over year. As a reminder, payment processing fees have lower margin relative to SaaS revenue.

Speaker 3

I would have more to say about the directional gross margin during my outlook discussion. Moving to operating expenses. Total operating expenses of $24,200,000 increased 6.5% from Q1 2023, however, remained at the same level as a percent of revenue. The dollar increase is due to select hiring in the R and D and SG and A functions. On a percent of total revenue basis, operating expenses declined approximately 900 basis points to 43% in Q2 2023 from 52% in Q2 2022.

Speaker 3

This highlights the operating expense leverage across sales, R and D and G and A. As Jirga noted, It represents revenue growth outpacing expense growth, resulting in an exponential impact In our operating leverage acceleration flowing directly to the bottom line. In Q2, we did not see any material impact Foreign exchange rate on operating expenses. Turning to the balance sheet. We ended Q2 with cash and cash and short term deposit of approximately $32,000,000 in line with last quarter.

Speaker 3

The cash balance Is a direct result of our focus on managing cash prudently and by adapting to a better cost structure. We reduced our inventory levels, as communicated last quarter, by $4,500,000 During the quarter, we secured an additional credit facility of approximately $7,000,000 and we reduced our outstanding long term debt by $1,000,000 Our outstanding debt balance at the end of the quarter was $25,000,000 Let me finish with our outlook for 2023. As a reminder, our 2023 guidance is based on what we are actually seeing in terms of behavior from our customers around the globe. It, of course, reflects what we know today about the secular shift in payments that continues to be strong tailwinds, Our stronger market leadership and the robust demand from both our existing customers and the large and Today, we are reaffirming the revenue outlook On a constant currency basis provided on our last earnings call on May 10, For the full year 2023, we expect our revenue to be in the range of $235,000,000 to $240,000,000 representing year over year growth of at least 35% as previously communicated. We are reaffirming our gross margin outlook and expect it to continue its improvement throughout the year to the mid teens.

Speaker 3

As Yair mentioned, we are pleased by the direction of how do our gross margins in Q1 and Q2, and we expect to maintain this ongoing improvement throughout the year. We will continue to update the market on our gross margin as we see development play out. Given our accelerated pace in moderating And the ongoing efficiencies gained from our investments in scaling the business, we continue to expect Operating expenses for the full year 2023 to be flat from the Q4 2022 annualized run rate. We are reaffirming our adjusted EBITDA guidance to be between $3,000,000 to $7,000,000 in 2023. As for the long term outlook, we are reaffirming our outlook and remain confident about reaching these targets.

Speaker 3

We expect our revenue to continue to grow 35% year over year. Gross margin in the long term is expected to reach 50% by providing leasing options for IoT POS, growing SaaS revenue and payment processing fees from our core business And services offerings through our growth engine initiatives. Our long term adjusted EBITDA margin guidance is set around 30%. Our focus on delivering strong revenue growth and improved adjusted EBITDA remained a top priority, and I'm pleased with the consistency of our I would like now to turn the call to the operator so that we can take your questions. Operator?

Operator

Certainly, we will now begin the question and answer The first question comes from Trevor Williams from Jefferies. Please go ahead.

Speaker 4

Great. Thanks. Good morning, guys. Yes, Sajid, I wanted to follow-up on the hardware gross margins. It's really good to see the improvement there.

Speaker 4

I know you guys It's been a really big internal focus. Any way you could dimensionalize just the amount of improvement coming from The dual sourcing versus some of the pricing initiatives more recently. And then just where you're at in the first half, I think you're around 15% Year to date, you're keeping the mid teens outlook for the year. It feels like maybe there's some of that conservatism in there with the expectation that You should continue to see sequential progress over the course of the year. So maybe just kind of talk us through the thought process of keeping the mid teens given it seems like you're on a really good trajectory for the rest of the year.

Speaker 4

Thanks so much.

Speaker 3

Thank you, Trevor, for joining and thank you for your question. Yes, we are very proud of the improvement in the gross margin as we've seen in the last few quarters coming in. And As communicated at the beginning of the year, we are expecting that the overall gross margin for the hardware would reach the mid teens, And we are progressing towards that as well. The reason for it, it comes from various aspects. 1, We've spoken about increasing our hydro selling price in 1 digit percent, Mid digit percent just to reflect the sticky of the inflation that we've experienced.

Speaker 3

We also mentioned this quarter that the component cost improvement that we were able to achieve It will impact the impact of Q2 and will continue to impact the remaining of the year. And also, we had a favorite selling prices this Also, as we I'd like to say that as we have a significant market share, We actually being able to be selective on the deals we're taking and enjoy a higher selling

Speaker 4

That's great. And then as my follow-up, I wanted to ask on The net new devices, just looking at the quarter over quarter growth this quarter, it was I think it was about the biggest jump we've seen Sequentially over the last couple of years, just any callouts within that, if there was anything lumpy in the second quarter and then maybe we see Slower pace of sequential adds in 3Q and 4Q or maybe there's been some impact from some of the newer verticals that we're starting to see come through in new devices, But any additional color there would be great. Thanks again, guys.

Speaker 3

So I'll take it and Yeyda, Feel free to add. I think we're continuing to grow in all of the markets that we have in All of the investment that we have done, right, to provide an end to end solution to our customers is paying off. There wasn't any specific deal or specific market that grew more than other. It's really in all of the verticals that we're working at, In all of the regions that we're playing in. So yes, just continue to grow as planned.

Speaker 3

Yeyo, I don't know if you want to ask.

Speaker 2

Trevor, hi. It's Yeyo. Thank you for passing the question. I think the What we're trying to stick is to tell the story and execute upon the story. And I think what we're trying to do, And this is the numbers that now prove this is the flywheel that we're building.

Speaker 2

And we expect in terms of Working with small and midsized merchants and even big merchants to come on board in an easy way, And the numbers should reflect this. This is an ongoing process of improvement and ability of us to scale upon the platform And created a, what do you call, bottom line improvement in the profit wise. So we think this is actually what we're doing and what we're building, and we hope that this will continue as well.

Operator

The next question comes from Chris Kennedy from William Blair. Please go ahead.

Speaker 5

Great. Thanks for taking the question. Can you provide an update on some of the newer markets that you're looking to Stand into whether it's the Middle East or the Far East and just talk about the opportunity in your strategy.

Speaker 2

Thank you, Chris, for the question. What we are doing and And expanding our footprint, for example, the region of the Middle East around Dubai is a good example to see What we're doing and we're reaching out to new territories when we see that there is an unattended machine, which is The minimum requirement that we have in our business model. And just for the sake of the example over here, we are Really growing quite fast in the Dubai, for example, and we're seeing this as a very good promising market and then Potentially extending this to other Middle East countries whenever it would be open from our perspective. Regarding the Far East, the Far East is mostly what we're doing is in China and Australia and Japan, these are the markets that we're already operating. Each and every market is a little bit different in the way that we're operating.

Speaker 2

It's more of an OEM market from our perspective. Australia and New Zealand that opened recently like a year ago It's growing very well. It is not as big as Europe and U. S, but still these are the markets that we're looking To extend, potentially in the future, we'll have more markets in the Far East that we'll find a way that we have a value that We can contribute to the markets.

Speaker 5

Great. Thank you. And then just as

Speaker 2

a follow-up, can you Give a little bit

Speaker 5

of an update on your retail business based in Israel.

Speaker 2

On our retail business in Israel, maybe let's take a context of regarding retail As a general, it's a big market. But in each every retail, you have a segment of Whether it is apparel, restaurant, hospitality, you need to manage the ability of The product feed to the market. So we started with the apparel market, and we gained a Big major market major customer growth over here, which we are serving more than, I think, 400, 500 stores, Which is an excellent achievement. Now we're moving to the more to the restaurant market, and we're gaining more and more momentum on this side We believe we have a very good progress in the Israeli market that will be a jump Into other markets, Europe and U. S.

Speaker 2

In the future. But for the time being, Israel is what you call the sandbox Putting more expertise and more knowledge about the quality to the market.

Speaker 5

Thanks for taking the questions.

Operator

This concludes the question and answer session. I would like to turn the conference back over to Yair Nakhmat for closing remarks.

Speaker 2

Thank you very much for everyone for Joining us on the call, I'd like to thank our teammates for their endless dedication for our customers and partners And for their continued commitment to making NICE a great integrated payment company. Thank you very much.

Operator

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

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Nayax Q2 2023
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