Ctech finance poalim


“For 17 years we worked in the trenches so we'd have the ability to fly high"

Nayax, which manufactures payment terminals, became last year the first Israeli unicorn to go public in Tel Aviv rather than the U.S., but it took it many years to reach that point

Sophie Shulman 10:0316.01.22

Yair Nechmad does things differently. Most high-tech executives are preoccupied with the image of the company and love to talk about it, but Nechmad has never given an interview. Most companies have frequent funding rounds, even when there is no shortage of funds. However, Nechmad, the CEO of Nayax, has run his company for 17 years without any external funding, and the company has only taken out loans occasionally. In a world where the relationship between founders and investors is close, very close, sometimes too close, Nechmad didn’t even know any investors until this year. In May, he and David (Dudu) Ben Avi, the founder of the company and its CTO, led the company to an IPO in Tel Aviv, led by Jefferies, in which foreign investors purchased approximately 70% of the offering, at a valuation of NIS 3.4 billion (approximately $1.1 billion).


As mentioned above, Nayax is not an ordinary company and Nechmad is not an ordinary CEO. This year he was forced to dive into a world which is completely foreign to him, going from zero involvement of external investors to intense and investigative conversations, from a liberal management with lesser funds to a management with more funds but under the scrutiny of people who have an opinion on every word which he utters. He is not used to this.


“I was not aware of many things about investors, from the language they use to the questions they ask", admits Nechmad, in an exclusive interview with Calcalist. “Only after the questions started did I understand what and how they think."

Nayax CEO Yair Nechmad. Photo: Yuval Chen Nayax CEO Yair Nechmad. Photo: Yuval Chen


And what did you discover?

"That the Israeli investors are completely different to the American investors: Americans only talk business, ask questions which are solely related to the mandate given to them, whereas Israelis do not ask about the business model, they mainly want to make sure that you are credible and that you do not have any demons in the closet. They do not want to be taken for a ride.”


So who was easier to answer and who did you manage to convince to a greater degree?

“The Americans, of course - I did not have to prove anything. I tell the investors directly: only if I do not succeed in growing by 30% a year will you raise a yellow flag, because in the market and competitive position of Nayax, 15% is not considered growth. Even at our level of maturity, we will grow by 30% since we are a growing company."


Investors are accustomed to these types of big promises; however, perhaps in the case of Nechmad, precisely because he is not used to coming out with bombastic statements and nice stories, they are less doubtful of the company. Nayax, which was founded in 2005, manufactures payment and clearing terminals for vending machines and autonomous cash registers. They not only developed the software, but also the hardware. This is a growing market, in a world that is moving away from cash, and due to the Coronavirus - the need for payments without human contact and the shortage of workers - has caused it to escalate even further, increasing revenues this year by approximately 50%, to an amount of $115 million. Like any self-respecting unicorn, Nayax is still not profitable, but it is at least heading in that direction, and it estimates that it will reach that point as soon as the demand for the hardware, which currently accounts for 40% of sales, decreases and ceases to be a burden on its profits.


"There are currently 44 million machines in the world, and the trend of machines without human contact is continuing to grow,” says Nechmad, "plus there is also a boost in both avoiding contact with cash and the shortage of manpower in restaurants, cafes and stores. This is very noticeable, for example, in canteens which operate 24/7 and in workplaces, which in the past used to operate in shifts and today their operators do not have sufficient workers. There are places which have transitioned to 100% self-service, thereby providing a wider range of products than those sold in machines."


Unlike other technology companies, which skip the local market, Nayax products are visible everywhere in Israel: the yellow terminal on vending machines, the smartphone-shaped mobile cash registers used by small businesses as well as the regular cash registers of large chains such as Golf and Arcaffe. On the eve of the IPO, Nayax also purchased the Israeli company, Weezmo, for several million shekels, adding the technology to transmit a digital invoice and allowing the retailer to store important data on purchases. At the same time, and with its characteristic calm, Nayax is also developing a start-up in the field of household charging devices for electric vehicles with meters that will split the billing amount between users in co-op buildings, a rather volatile issue that is no small obstacle on the way to purchasing an electric car. The Israel Electric Company is even a partner in this Nayax pilot. And as if that is not enough, about six months ago, Nayax purchased Tigapo, an Israeli company with a smart payment and management platform for arcades and amusement centers. Machines and cash registers, mobile invoices, building parking lots, children's games – all under the radar, it seems as if Nechmad is turning Nayax into an empire which is surrounding us from all sides.


Nechmad still finds the exposure difficult. He is 60 years old, a resident of Even Yehuda, married and the father of three adult children. He actually studied political science, started out as an advertiser in the offices of Kesher–Barel, went on to work in marketing at Coca-Cola, and from there moved on to Mey Eden Israel, which he managed. After leaving, he met Ben Avi, who had rented an office for Nayax in a property owned by Amir Nechmad, Yair’s brother. They clicked, and continue to click even though both leaders avoid the media. This is evident in the conversation with Nechmad - he is open minded and honest, more than well-trained CEOs, but is also hesitant, cautious, and tries to keep a low profile even in a newspaper interview.


Nayax - which employs 530 people, 350 of them in Herzliya and the remainder in the rest of the world - is currently being traded at a value of NIS 3.7 billion, which is also exceptional; Most of the unicorns which completed an IPO this year, especially those that did so through a merger with SPAC companies, are traded at a much lower value compared to when they were issued. Nayax, admittedly, has also already recorded a higher value of NIS 4 billion in August; however, this was followed by a profit warning which revealed Nechmad’s lack of experience in dealing with the capital market. This occurred in October, a few weeks prior to the publication of the full financial statements for the third quarter; the company advised that its revenues would amount to $30 - 31 million, similar to the previous quarter (and 40% more than the corresponding quarter last year). Nechmad thought this would be encouraging news for the investors; they regarded it as bad news. The stock has fallen to the value at which it is currently being traded.

Photo: Nir Selkman Photo: Nir Selkman


What happened? How did you manage to scare the investors so much?

“We decided to make a trust building decision and not to wait for the reports to be published. We said, ‘let’s try something that does not currently exist in public companies, and we will even earn brownie points.’ We were not aware of the manner in which the Israeli market compares the various quarters. After all, the worst case scenario this year is a revenue stream of $115 million in comparison to $78 million in 2020; is that good or is it bad? These are the growth percentages which we promised. In my opinion, it is also not sufficiently understood that we have the hardware component together with the sales of the software in the SaaS model (an annual subscription to the software instead of it being sold as a one-time transaction). The sale of hardware is volatile, dependent on the lockdowns and the Coronavirus; however, the software segment continues to grow quarter by quarter, and in the end this is our business. The hardware is just the infrastructure that enables growth, plus we also have very low abandonment rates, approximately only 3% and in practice actually less, since usually the machine just changes hands which results in a new customer. We have almost no competitors."


There is a saying that if there are no competitors there is also no market.

"There is one competitor, Cantaloupe, an American company (which is traded on the Nasdaq at a value of $500 million), but they are different. We handle all aspects from beginning to end; it is no coincidence that we also deal with the hardware, since this provides us with the possibility to make adjustments to different machines, consumers and different networks. If you do not control the entire gamut, it is difficult to serve the huge variety of machines which exist - there are about 700 types of machines in the world, including some that are very basic mechanically, for example coin–operated washing machines which work on American coins. Each has a different protocol, and this is the reverse engineering which we have been performing for 17 years. The technological barrier for entering the field is also high, on the one hand you need to have the hardware but 60% of the revenue comes from the software."

You worked on the development of the product for 17 years in order to adapt it to 700 different types of machines on the market. Presumably, if Nayax had outside investors they would not have permitted you to "waste" so much time on reverse engineering.

"My advice to every entrepreneur is that if he can operate without venture capital – that is obviously preferable. It is possible that a venture capital fund would have forced us to focus on something else and suggested a different direction. In retrospect, we are currently in a great position and we have a platform that does not exist in any other company, there is no one today who is familiar with all the parts of this operation."


However, it took you a long time. Your IPO is taking place at the same time as companies which were founded five or ten years after you.

"I get my inspiration from Amazon. Jeff Bezos started in 1992, and remained under the radar for many years. He did not progress for almost 15 years, following which he started to grow in an exponential manner. I think that that is what we will do. Many people tell me 'you are at the beginning of the road', and that is correct. We now have a better ability to move faster, and we need to create a size advantage. I do not envisage that the 30% growth we have been discussing will cease in the next ten years, and that means that Nayax will double itself every two years. Therefore, the date of the IPO which we implemented in Tel Aviv was on the best date - there was no point in being with us prior to this. Even though the growth was 30% a year previously, it was based on small sale orders, NIS 20 million and then $20 million. Today we have sales of more than $100 million, we will double the sales in two and a half years - and that is the real story. Up until now we have worked in the trenches and now we have the ability to fly high."


Nevertheless, is it not difficult to constantly be in debt and under pressure to fulfil payments in the midst of the process of product development?

"We have had several options to raise funds through venture capital funds and angels; however, the value we received in these offers was always significantly lower than our idea of what the company was worth. There was always doubt about the size of the market, and we always knew our market was worth much more. Since we always had recurring revenues and a low abandonment rate, we managed to receive financing through loans. If someone had offered us a value which would have catapulted us four years forward, we would have naturally accepted that outside investment."


The banks have not exactly been chasing after you to provide you with credit.

"As far as I understand about banks, they have a decision-making process which is based on repayment, and when there are no tangible assets in the balance sheet they are unable to provide a loan. They were very picky when we needed the credit, so our financing originated from loans. This is indeed much more costly and involves double–digit interest; however, for example, the Lahav Fund of Giora Ofer and Yael Git realized how much Nayax is actually worth. In my opinion, this is what dictates the decision of whether to go down the investor route or to remain without external funding. This is the market: if your market is a blue ocean, in other words a giant without any other competitor, and you can become number one or two within a few years, then, naturally, you need to take as much money as possible from the funds and burn it on marketing in order to take control of the market share. In such a situation, even if you make mistakes 49% of the time, you will still become the market leader."


You operated in exactly the opposite manner.

"For companies operating in certain types of markets this is definitely the right thing to do; however, this is not so in the case of Nayax. In our case, funds would not have solved the challenges since it was a matter of market maturity. Venture capital funds would have even posed a risk for the company – we would have made huge mistakes due to the pressure from the venture capital funds for fast growth. We would have been forced to give big discounts and this would have eroded the gross profit. Sometimes funds are blinding, and we were not there yet. We wanted to make a living from what we were earning."


However, when Nayax was in the trenches the company received financial backing from Amir Nechmad, the CEO's brother, who is a prominent real estate investor and is also married to Dafna Meitar, the daughter of Zvi Meitar, one of the founders of Amdocs. The Nechmad brothers and Ben Avi held all of the Nayax shares on the eve of the IPO, and even thereafter they each still hold 26% of the company. Most of the funds they received in the IPO were used to pay off debts; however, the current value of Nayax has turned each of them into a billionaire (in Israeli Shekels).


Their high holdings have dampened investor enthusiasm for the stock. In addition, Nayax has not yet rid itself from the image of a company which is being managed without external supervision - it employs quite a few family relatives, some of which hold senior positions. For example, Ben Avi's brother, Shay, is the Chief Software Architect, his brother–in-law, Oded Frankel, is Chief Customer Officer, leading the Customer Support department, another brother–in-law, Reuven Amar, is the Director of the Laboratory and Logistics, and Yair Nechmad's son, Arnon, is the Manager of the Electric Vehicle Charging Customer Department of the company. The terms received by everyone are relatively modest, and yet this is still an unusual case of employment of family members in a listed company.


It is nice to be without outside investors, seeing as in fact you always knew you had the backing of the Meitar family. How much money has Amir transferred to the company over the years?

"I cannot comment on how Amir operates, I can only say that for some of us it was easier to have funds from home and for some of us less so – however, everyone brought funds from home. When we could receive loans from him, we did, but he was the one who provided the loans, not the family. We also received assistance from Dudu (Ben Avi), who grew up in Kiryat Gat - his father was very helpful for us in securing a large line of credit. He deserves all the credit because he took a huge risk. It was not a matter of favors; it was a matter of safeguarding the asset. Even now, when we sold the shares in the IPO, the intention was to repay, and not to evade, the debts to everyone. We still hold a large block of shares in the company, since it is clear to us that Nayax will be worth $10 billion in five or six years."


Will you reach this value in Tel Aviv, or will you switch to the Nasdaq at the first opportunity, after having utilized the local market?

"We were not ready to be listed on the Nasdaq. The consultants and the banks told us that if you issue at a value of less than a billion dollars you will be transparent and nothing will move after the issuance. The Tel Aviv Stock Exchange is an opportunity for us to integrate investors; if this was a matter of raising funds from only Israeli investors, we would have avoided it. 70% of the current investors are global investors, and we are now practicing being a public company. However, in the medium term, within three to five years, we will issue another 10% -15% of the company in the United States."


Following the issuance in the United States will you be delisted in Tel Aviv?

"We will continue to be traded in Tel Aviv as well. The Israeli market, which is very sophisticated when it comes to bonds, knows how to provide debt in the best manner in the world. We can benefit from American investors which will receive more liquidity; we will raise debt locally, which is best for all parties. We are currently working on an IPO in the United States, but nothing has yet been signed and there is no date."


What is more difficult for a CEO - to think about loan repayments or investor expectations?

"I understand that when investors put their money in Nayax stock based on what I have said, I have to back this. We cautiously try to be precise and the American investors have taught us to promise less. We promised a 30% growth but it is surely clear to you that I discuss completely different numbers with the employees, a growth of double that rate. I am completely confident of a growth rate of 30% over time, and the market will eventually recognize that Nayax is a company with aggressive growth."


Why was it decided that you would be the CEO, and not Ben Avi, the inventor of the product?

"Dudu and I work together with full cooperation; he is the CTO only because we really needed to define the division prior to the IPO. If you ask the employees, they will attest to the fact that part of the responsibility which is usually that of the CEO, is actually assigned to Dudu, such as everything in connection with human resources, whereas I, not belonging to the technological field, ask the right questions. We actually operate as co-CEOs.


The difficulty in exposure is probably not just related to investors. As a public company, all your neighbors are now aware that the management fee you received last year amounted to approximately NIS 600,000.

"My salary is not the issue; after all it is only an invoice. I do not feel that this is different from the previous situation - but yes, we find it difficult to see our pictures in the newspaper."