Araxi Limited (AXX) Earnings Call Transcript & Summary

God afternoon, ladies and gentlemen. My name is Motty Sacks, and it is once again my pleasure to welcome you to the Capital Appreciation results, the interim results presentation on this occasion for the 6-month period ended September 30, 2021. The format of the presentation will be the same as in previous presentations. Bradley sacks, the joint CEO, will give you an insight into the group businesses, the fintech markets, the group's operating divisions and our product prospects. And Alan Salomon will once again present the financial detail. And Bradley will take or manage any questions thereafter. So without further ado, I will call upon Bradley to deliver his presentation. Brad?

Thank you, Motty, and welcome, everybody. Motty has given you the outline, and so I will jump right into it. Everybody understands what Capital Appreciation is by now. We have 2 operating divisions, being payments and software, and we do a fair amount in the enterprise development area and the primary target of those activities is GovChat. But what's new on this slide is we have opened up an international division with the opening of an office in Amsterdam. And that office is going to be responsible for all of our activities, payments and our software activities. And at the moment, is very focused on some of our international expansion, which you'll hear about and propagating our halo payments activities and initiatives. What I want to start off with is just revisiting the impact of COVID, the impact for us was relatively short-lived, and it was well contained. It does not mean, however, that we were unaffected. And I think you will all agree, and we are exceptionally proud of our results and the results that we posted in the face of these headwinds, I think, are that much more impressive. There is absolutely no doubt in my mind that the effects of COVID are going to have an exceptionally long tail, not only in terms of our day-to-day activities. But in terms of our conduct, people are created a habit. And through this period, we have started to adopt new payment approaches. We just started to adopt new ways of working. And all of those things are going to persist with us for a very long time. And so the long-term effects for us are really strong positive secular trends that affect our business in a positive way, notwithstanding Omicron and all of the other variants that we should expect. We think that we have managed through those very well, and we will continue to manage through those. I'd urge you to read each of these points because I do think they are pertinent to how we will operate our business and why our business is well positioned going forward. There has been a recent focus on ESG. And what we wanted to demonstrate, while we haven't called this out in the past and identified it as ESG, we have had a long history of ESG focus, whether it's the governance that we have around our Board and our disclosures. And I think you will agree that our disclosures in our annual report are comprehensive and hopefully are clear. We did win an award for our disclosure. So I think there's broad recognition of that. The -- we have a low environmental impact. We try as much as we can to recycle and repurpose the electronic equipment that we use. And most importantly, we have a proud history of transformation through our BEE structures, our ownership and the initiatives. And importantly, the types of products and services that we offer, which are driven towards financial inclusion. On the right-hand side, we've demonstrated some of the monies that we have spent on ESG initiatives. So for us, this isn't a Johnny come lately issue. It's something that we have done for a long time. Similarly, with respect to our commitment to the BEE, it is something that we have worked on for a while. Right from the outset, we had a very strong BEE ownership, whether it's through the PIC or the work that we did with the student funding mechanism or in our relationship with ARC. We have continued to pursue those types of initiatives through our directorship and through HR Led initiatives throughout our organization, really trying to focus on training and internal recruitment. We have spoken about some of our investments in outside initiatives, be that CSI or enterprise development, and that is something that we continue to do. We are exceptionally proud of Synthesis. They just recently got re-rated as a Level 2, previously being a Level 3. And I think that's a demonstration of our ongoing efforts in that regard. In terms of our positioning, we are believers in our strong position across a number of dimensions. Importantly, we have a strong balance sheet. We have a very experienced team of executives and running each of our divisions. We have tremendous domain expertise in the areas that we operate in. And importantly, the sectors in which we operate are experiencing an expansion. And so we have a good growing business in an expanding area, and we think that, that helps us with our addressable market. Our clients are all very strong blue chip clients. And we have almost 0 bad debt and so from a business perspective, we are very strong. We have an operating model, which is capital-light, and we are very cash generative. And so from a business model perspective, we think we are very well positioned. I've spoken about some of our clients in the past. We thought we addressed, identified who they are in the financial services sector. We obviously have clients in the retail sector, in the health care sector and others who are equally well noted. And so we wanted to make sure we didn't lose sight of that. When we turn over to the group highlights for the period, I think you can all agree that these are really great results, and we are very proud of our team that has put these forward. People have worked very hard. We have grown our revenues by 30%, but our EBITDA margin has gone up to 31%, and EBITDA itself has grown by 70%, which is a function of the operating leverage that we have within the business, both in terms of the efficiency but also in terms of cost savings that we have implemented through the business. And so these are results we are very pleased with. I'm also delighted to indicate that as of the close of business yesterday, the cash balance that we had was just under ZAR 590 million or ZAR 0.48 a share, and that compares to the ZAR 446 million at the period end, the difference attributable to accounts receivable and some inventory that we had on the water at cut off period. But you can see that the businesses continue to be very cash generative. We are delighted to declare a dividend of ZAR 0.0375, which over the few years that Capital Appreciation has been listed, allows dividends to total ZAR 0.225, which we think is a great indicator of our continued prospects and the cash generation that we have in the business. The delivery over time has been consistent and growing. You can see that over this 2-year period, revenue is up 50%. EBITDA has more than doubled. Our operating profit has more than doubled, and our headline earnings per share has doubled. That's in addition to the growth numbers which are period-on-period in this graph. And so I think this is a testament to the excellence that we have seen from our operating units. We've continued to see operational expansion across the business, whether you look at terminal sales in this half year, it exceeded the total terminal sales of last fiscal year. Our transaction-related revenue is up almost 60%, our international income period-on-period is up very nicely, and we have continued to be an active recruiter and looking for more talent. So in terms of payment highlights, we have -- we ended the period with just under 260,000 terminals in the hands of clients, which is up 28% year-on-year. We are present in our decision to advance Android, and those solutions have been exceptionally well received by customers. Our Halo Dot offering has done very nicely and has been well received. We started with Nedbank. As you know, we have now announced 2 additional customers and more are imminent. We've increased the portfolio of services and transaction solutions that we offer to which we attribute the increase in our transaction-related revenue. And overall, we have had an excellent performance in our payments division during this period. In our services division, not to be outdone, they have done exceptionally well, too. We just have a slow start to the half year, but the second quarter saw material increased momentum. We have increased our number of clients by 19 over this period. And so there was a little bit of incremental expense that you'll see associated with the onboarding of those and the expenses associated with Halo, our accreditations with AWS continues to be leading for the African continent with over 200 accreditations. We have expanded into additional industrial fields of endeavor, which is tremendous. And the team overall has done exceptionally well, and we have a great foundation for continued growth. And the momentum in H2 continues. So we are very pleased with that performance. We've spoken about our international operations slightly. It launched only in August in Amsterdam. We started with a sponsorship at the Money20/20 conference in Amsterdam, and we promoted Halo, and that has given us some fantastic leads globally. GovChat. I'm going to address now. Last week, people may have seen an article in the financial mail, which was based on a report prepared by Black Sash and Open Secrets to organizations that have done some really great work in the past. It was an unfortunate attempt to malign GovChat for things that it has yet to do by association with doing work with SASSA. And everybody knows some of the misfortune that SASSA encountered in dealing with Net 1. And this article looked to malign GovChat in advance of any wrongdoing. The article does not talk or point to any wrong doing at GovChat, and I want to just reiterate that there is no contractual issues at GovChat. They did not abuse the process in how they're contracted with any of the government departments that provide service to. There is absolutely no abuse of data. There is no misrepresentation. The conduct of Net 1 has absolutely nothing to do with GovChat. And it was unfortunate that GovChat was targeted in the way that it was. Let's talk about what GovChat did last year. It helped SASSA in dealing with the SRD grants. There have been more than 12.5 million grant applications that were processed. These were done in an unbelievably short period of time. There are 8.2 million active users. We've processed more than 500 messages. We've also been able to put in place a relationship with the United Nations and GovChat continues to do fantastic work for government and other not-for-profit organizations, and we will continue to support GovChat in its endeavors. The work and development of the platform was done by Synthesis, as we've spoken about in the past and was recognized by AWS as one of its top global projects on social development. So the question is, what's the opportunity? Cloud, we have spoken about in the past and the huge growth prospects. That hasn't changed. In fact, we have seen with COVID an acceleration of that. We're experiencing that as we speak in the second half of our year, and it's an area that we continue to invest in. The reasons for it are not the cost savings and the operational resilience, which are important, but it is the most important, which is the ability of a business to compete, and that's the business agility. It's the ability to experiment, it's the ability to respond to clients. And if you do not have a robust, flexible cloud platform, you are going to be left behind. It is one of the reasons GovChat was able to respond to the SRD within the within the 5 days between the announcement of President Ramaphosa that the grants were going to be issued and going live, it is because of the agility of a cloud platform. So I'm not going to belabor this. As presented in the past, the net conclusion is we think COVID is going -- has had a long-term effect on people's behavior, and that has resulted and will continue to result in increased digitization, in increased digitalization of payments, which is beneficial to our business. How does that play out? Well, there was a report that was issued recently by global data. It was issued May 2021, which is very recent, which talks about the expected growth in digital payments. You could see that from 2020 to 2024, they're talking about a 33% growth in digital payments. In terms of volume, in terms of value, they're talking about a 29% increase over the same 4-year period. The same report then also looked at payment infrastructure to give a sense as to what the market demand might be for devices, which is an area where we are notably strong. And you can see that during this period from 2020 to 2024, they're expecting a 37% increase, and they're expecting a market opportunity of just under 800,000 devices from roughly 400,000 in 2018. So our market has obviously grown, the importance of what does that growth look like and what is the mix of that is important. And so when we look at this, there's obviously the traditional market, which we've spoken about in the past, which are the larger corporates, the medium-size enterprises, and then you've got the much smaller merchants. Given the advent and introduction of Android devices, we are absolutely committed to being able to go after the broader market and be able to provide infrastructure into that market, whether it's the Newland devices that we supply or being able to use a merchant's own Android phone, there is no doubt that the market can be expanded, and we have form factors and device alternatives, which are appropriate for each of those segments. We've spoken about payments in South Africa in the past. And we put it up again. A large portion of South Africa's transactions are still cash based, and it's those transactions, which we expect to evolve into digital payment. Particularly as social grants continue to be distributed digitally, there are 50 million debit cards currently in the market that are SASSA enabled. And -- sorry, the 50 million debit cards in the market, many of them is SASSA enabled, and those are going to be the vehicles through which payments are made in the smaller merchant segments. So the question is, how do we execute against that? And our execution strategy has not changed from the beginning. We look to partner with our customers and clients. We innovate, we lead with innovation, and ultimately, we have to execute. And our success is in the execution. And I would posit that the execution that you've seen from us in this period is exemplary of what we can do and where we'd like to continue to head. The terminal estate, which we have often spoken about and shown in the past, we've reduced the number of grafts from 4 to 2 because I think the message is the same. 259,000 devices in the hands of clients at the end of the period, of which 192,000 are active in the market in the face of a very difficult economic environment and also the challenging COVID environment, I think that's just a tremendous outcome. And so I congratulate our payments team and thank them for everything that they have done during this period. Halo. We have spoken about in the past, but in summary, it allows every Android device to become a payment acceptance device, and we have 3 different offerings and we have 3 different revenue models. And as it so happens, at the moment, we have 3 announced customers in Nedbank, Ukheshe and Rapid Pay. And we have quite a number who are lined up and will be announced in the not-too-distant future. This is tremendous when we were in Amsterdam at the Money20/20 show, the power of the Halo model was evident. There were a number of potential customers who were exploring alternatives when they saw what we had to offer. They terminated those alternate discussions that they were having and have engaged with us in a very deliberate and aggressive way. So we are delighted by the international recognition of Halo. Here's a picture of the globe and current jurisdictions in which we are pursuing opportunities. And so you can see that Halo has global appeal, and we are determined to take Halo into the global markets. The payment services offering continues a pace in terms of transaction value that we process on a year-on-year basis, it's up 20%. This was a relatively difficult period for South Africa and the retail sector, notwithstanding that we have continued to make great progress, and we are quite pleased with what that division is doing. So in light of the successes that we are having, Dashpay is going to be undertaking a rebranding. We have highlighted here the new brand identity that Dashpay will have, you will start to see this in the marketplace and look out for it purple devices that are branded Dashpay on our proprietary devices that we process transactions for. We spoke previously about the initiative that we have with the Attacq Group and the Mall of Africa. I'm delighted to say that, that initiative, which the app is called SHôPING was launched. It was launched with great success. The success has resulted in Attacq now launching SHôPING in the Eikestad Mall in Stellenbosch, and we look forward to them rolling it out elsewhere. As a reward to all of you who have registered for today's presentation. And if you gave us your cellphone number, you will receive an SMS, suggesting that you download the SHôPING app. If you do, do that, you will be rewarded with ZAR 100 voucher, which you can use at the Mall of Africa. It's accepted at many stores at the Mall of Africa. But I've given you ZAR 100 doesn't buy you very much, but you can go get yourself probably a cup of coffee and a croissant. I -- and there are a number of places, food outlets at the Mall of Africa that you can go and visit and use your vouchers. So you can see Capital Appreciation's technology at work for yourself. LayUp is an initiative that we announced last presentation. There has been a huge amount of publicity around Buy Now Pay Later. This is a derivative of Buy Now Pay Later. It deals with Lay buys. It has a huge market opportunity ahead of it. It has opportunities, not only in South Africa but elsewhere, and we are very pleased with the progress that LayUp is making in the market. So our payments' growth strategy is to continue to grow the market for devices. We are looking to continue to take market share in the segments in which we operate. We are going to work with our existing clients, both in South Africa and as they grow across continent, which they are doing. And we will continue to innovate, deliver new to new products and services and halo for us is an important initiative for expansion in other international markets. Within Synthesis, if I turn to that now, our software division. You have seen previously the different business units within Synthesis, our channels business, cloud and our RegTech initiative, our innovation lab in Synthesis Labs and our training academy. But the areas where we're seeing great growth and opportunity are in the areas of Intelligent Data and Managed Services. We are looking for ways to apply our technology as opposed to just developed technology for technology sake. And our Payments and Crypto teams are focused on Halo and our other product, Keystone, which we have spoken about in the past as well. Synthesis leads with ideas. I don't think there's any other way of describing it, whether it's in dealing with clients, in dealing with innovation and how they present themselves in the marketplace. You're all aware of the Synthesis podcast, which occurs on a Sunday, which is led by Howard Feldman, who we are lucky enough to have as our Head of People, dealing with the COVID outbreak. We've hosted many other podcasts on various topics with organizations who are both clients and not clients. We have had a great response to our YouTube initiatives and the articles that we publish. 200 certifications at AWS is a first, it continues to cement our leadership and we are particularly proud of the work that, that team is doing. In the past, I have given you some examples of work that Synthesis has done, and many of them have been with big brand name organizations, ones that we use daily like Standard Bank, like Nedbank, like Discovery. But today, I wanted to highlight some of the smaller, more dynamic companies that are out there for whom we provide services as well. Trackmatic is an example of one of those clients. And we are very proud to be able to offer those types of services as well at different price points, which is a result of some of the productization of the services that we have offered. With Discovery Vitality, we have had a long standing relationship. We continue to do more work for them. And this demonstrates our ability to tailor our solutions to our clients' needs. We don't only have a single model. We work in a way that is responsive to what their current budget and needs might be. And lastly, I would show you Investec Mauritius, where we have built an entire banking platform for them in Mauritius with a team that is partially based there and partially based in South Africa. It has been a long relationship where that has been beneficial to both parties and demonstrates the breadth of the services that we offer. With that, I will hand it over to Alan and ask him to review our financial performance. Alan, over to you.

Thank you, Brad. Good afternoon, ladies and gentlemen. Once again, thank you for your continued interest in Capital Appreciation. We are very pleased to present a strong performance in the current challenging environment. We believe that these results reflect the robust demand in the market for Capital Appreciation, innovative technology products and solutions. We are extremely proud of the way our businesses have continued to serve their customers with distinction. They continue to innovate, build proprietary owned intellectual capital for future digitalization, applications and attract new high-profiled customers, which we believe is in no small part attributable to the well-established reputations and track record of each of our divisions and our management team. We congratulate each of our businesses for their tenacity and focus in challenging markets to deliver these results. This set of results is particularly clean and uncomplicated with no unusual accounting treatments to affect comparability, no post period [ in the variance ] or any other normalized type transactions to consider in conjunction with the results. Capital Appreciation generated a group gross revenue for the period of ZAR 439.4 million, up 35.7% and group EBITDA of ZAR 138.7 million, up 70%. We have presented the trading results in graphs for the 2019, 2020 and 2021 interim financial periods, which highlight the sustainable growth period-on-period in revenue, profits and headline earnings per share throughout the peak COVID era. Turning to the divisional results. The payments division showed excellent growth in revenue and profit, benefiting from a significant pipeline of terminal orders and the commencement of new business relationships. The division grew revenue by 46% to ZAR 314 million, and EBITDA of ZAR 126.3 million, almost 90% higher than the EBITDA achieved in the comparative period of ZAR 66.5 million. Revenue benefited from the fulfillment of large terminal orders in the period as well as pleasing growth in terminal transaction income. As mentioned before, the nature of customers' capital investment in terminals is that it is unpredictable, uneven periodic and time inconsistent and therefore, does not follow financial years and cut off reporting periods. The scenario is further exacerbated when customers require bespoke terminals, which often extends the anticipated 3 month lead time from suppliers. A 57,000 terminals were sold during the period, up 28%. Android terminals, in particular, were in great demand, given their attractive price points and additional functionality. Dashpay has been in a startup and development phase since acquisition, building, refining and upgrading its platforms, systems and infrastructure. It is particularly pleasing to note that this business generated its maiden operating profit and became cash-generative toward the end of the previous financial year. Dashpay has continued its strong growth in profits and cash flow in these interim results. The new key in-house developed proprietary owned software technology went live in this period. These new developments will allow Dashpay to roll out a Halo-based payment as a service solution to the South African market with the first merchants due to go live by Feb 2022. Brad also discussed the successful launch of the SHôPING app in the Mall of Africa, which is another of the [ applications ] that went live during this period. Payments continue to manage expenses prudently and in line with growth in business activity. Increased expenses stemmed primarily from advertising and marketing of the new products launched as well as international shipping finance and insurance and additional staff costs. The Payment division achieved operating leverage through increased sales, which contributed to improved operating margins. The payments revenue composition. The payments business has diversified its revenue streams. The sale of terminals contributes to the bulk of income and grew by 68% to ZAR 210.4 million for this period. Annuity income from maintenance and support fees increased steadily as customers deployed the acquired terminals to their merchant base. The payment division provides end-to-end terminal estate management services for its clients. This has enabled the company to build a growing long-term annuity revenue stream as the sizable and growing terminal base is being deployed. Value-add services grew by 56% in the current period, boosted by the new products that came online. Rental income was stable as good new terminal growth compensated for the loss of leased terminals that had reached the end of their useful life and will replace to bank-owned terminals. We remain very positive about the outlook for the payment division. Our accelerating order book and the growing annuity income bodes well for future performance. The further adoption of alternative payment solutions and the recent venture into Android technology is showing excellent results. As discussed earlier, however, given the lumpy nature of terminal sales, the group remains susceptible to global supply chain challenges and delivery delays. I'll now move to the software performance. After a slow start with Synthesis in the first quarter due to COVID induced delays in the start of projects for plants, the second quarter saw an acceleration in commercial activity and a significant pickup in demand. Synthesis made strong progress in expanding its client base. The business developed a solid set of financial results, increasing revenue by 15.6% to ZAR 125.3 million and EBITDA by 3.6% to ZAR 29 million. Profit margins reduced slightly due to the investment costs made into Synthesis' payment products, Halo Dot and Keystone as well as increased sales of third-party partnership software products, which attracts a lower gross margin. Synthesis made a further investment in new and exciting infrastructure and intellectual property, which will continue to support revenue growth and profitability in the near future. Brad has already given you an overview of the operational progress that [ some ] made over the past year and the strong demand that the company is experiencing for its current and exciting new services. We believe the opportunities for this business is exceptional, and we are seeing some exciting prospects for international expansion. Now referring to software revenue composition. Services and consultancy fees grew by 17.4% due to the increased demand for cloud and digital products, while the annuity-based revenue in the form of license and subscription fees remained stable. We achieved good traction in markets outside of South Africa, with international revenue growing by 20%. Our new office in Amsterdam will provide an excellent platform from which to expand our international offering. In addition to strong pipelines in its traditional businesses, synthesis also achieved a strong contribution from new areas, such as managed services, intelligent data payments, cryptography, albeit off a lower base. We continue to be very excited about the Halo Dot and Keystone products, both of which we expect to show substantial growth in the coming years. There's a strong focus on third-party subscriptions and resale of products, most of which is U.S. dollar denominated. I'll now refer to the statement of comprehensive income. In looking at the statement of comprehensive income, there are a couple of items to look. We have mentioned the significant growth in revenue. The strong demand has continued. We are pleased to report that each of the businesses also has a significant pipeline for the next period. We achieved improved operating margins due to scale benefits and operating efficiencies. Operating expenses have increased by 13.5% on the back of increased spending on the launching and marketing of our new products and business development. The group increased its headcount by 13% to 365 staff members to accommodate the demand and also increase our learnership base. We strongly believe these are investments in future growth. Our share-based expense line increased due to the allocation of new long-term share awards during the year. The FinTech sector is a skills intensive industry, and our share incentive scheme provides the group with the ability to offer an attractive employee proposition and a competitive advantage to attract the right skills. The amortization of intangible assets increased notably due to the in-house proprietary developed software technology that we mentioned earlier, which went live in this period. Finance income on the group's significant cash balance declined by 10.4% to ZAR 10 million. The decrease -- the decrease is commensurate with the lower interest rate environment. The group also benefited in the previous year from structured interest yielding notes that protected us against the drop in interest rates for part of the comparable period. Headline earnings increased by 68.3% to ZAR 91.2 million, translating into headline earnings per share, up 67% to ZAR 0.0743 compared to ZAR 0.0445 last year. Capital Appreciation repurchased 13.4 million shares during the period at an average price of ZAR 1.23 per share. As of September 2021, the group had a total of 93.4 million treasury shares at an average cost price of ZAR 0.77 per share. Given the appropriate circumstances, the group will continue to consider future repurchase of shares in the market. I'll now refer to the statement of financial position. Capital Appreciation, which consists of asset-light businesses, maintains an uncomplicated, easy to understand balance sheet with no contingent liabilities, no post-retirement obligations and no post interim end events. Capital Appreciation granted GovChat a further ZAR 11.5 million of loan funding to continue developing its technology platforms and services offered. We believe that GovChat has a critical role to play as a partner to government in engaging with its citizens. Our 26.52% investment in LayUp Technologies, which is in its early stages of development as an interesting opportunity set. Trade and other receivable doubled in the current year on the back of large terminal sales and cash and cash equivalents declined to ZAR 446.1 million as a result of the growth in working capital assets. The majority of trade receivables converted into cash post period end with a net cash inflow of ZAR 143 million. Cash balances at November 29, increased to ZAR 589 million. In terms of its capital allocation, the group remains strongly focused on, first and foremost, supporting the organic growth of our divisions and thereafter, acquiring companies that can expand and generate scale within a reasonable time frame. That can provide satisfactory organic growth and returns to shareholders and where Capital Appreciation's capital and strategic capability can be successfully leveraged. Capprec cash is invested in South Africa's top banks and interest rate risks are managed very conservatively and with a view to maximizing yield to appropriate interest rate cover. The underlying businesses generate the robust operating cash flows necessary to take advantage of organic growth opportunities available to each of our business units. As a group participated in a high-growth sector of the economy, we continue to invest judiciously with a full understanding that for some of the costs incurred, we will only hit the financial and earnings benefits in future timing periods. The pandemic has, in many cases, accelerated and expanded the need for our products and services as well as our platforms and skills, and I have no doubt that we will continue to benefit from investments made. The net asset value of the group, net of treasury shares increased by 4.5% since year-end March 31, 2021 to ZAR 1.17 per share. I'll now refer you to our cash flow. Our asset-light businesses remain highly cash generative, and the modest cash flow from operations for the reporting period is distorted by the short-term growth in working capital assets, which returned to normality during the months of October and early November. The key features slide on cash flow, reflecting the September 2021 and 2020 interim periods highlights the main cash flow items. I have already discussed the trade receivables, change in finance income received and purchase of treasury shares. Cash and cash equivalents at November 29, have increased to ZAR 589 million. Our dividend history. We are fortunate and proud to own businesses that can generate meaningful profits and cash flows despite the challenging economic and COVID environment, and that is after paying full tax. We have consistently paid increased dividends for the past 4 years. Generously covered between 2.7 and 3.2x by cash flow from operations. For the interim period, the Board has declared a dividend of ZAR 0.0375 per share, an increase of 50% relative to last year's ZAR 0.025 per share. We are in a very strong position to benefit from the exciting opportunities in the growing markets we serve. While our outlook remains dependent on the South African economy, we are optimistic given that each of our underlying businesses is a solid pipeline for the next period. We are well entrenched with our existing customers, international principles and suppliers and have several exciting products to capitalize on in growing markets. I will now hand you back to Brad. Thank you.

Thanks, Alan. I will turn over to the prospects. And our prospects continue as we have laid them out before. I think given the description of the market opportunity that I have presented previously, I am convinced that there are tremendous organic growth opportunities for each of our businesses within the segments in which we operate, whether it's expanding within our existing client base or extending the clients that we serve, in some instances, expanding into new industry verticals. The opportunities continue to grow for us. And for that, we are lucky, we also have provisioned ourselves to be able to exploit those opportunities, and we will continue to aggressively pursue them. We have also spent a fair amount of time looking at acquisition opportunities in the sectors in which we operate for businesses that are either allied 2 or tuck-in acquisitions to expand our offering who even to start a whole new initiative. Some of the opportunities have been large, and some have been smaller. We haven't been able to conclude any to date other than the few small ones that we have announced. We're hopeful that we will continue to be able to pursue bolt-on acquisitions because we think they make sense. And our most important criteria is the expertise of the management team and the acceptability of their product in the marketplace. And there are a number of those that we currently have under review. Both in payments and in software. And we think that the opportunity for a company that is well capitalized, that has good relationships with the end market customers is very good. And so we continue to look at both organic and acquisitive opportunities. In terms of our investment case, I think the case is relatively simple. And our track record, I think, speaks to these issues. Excuse me. We do have a leadership position in the markets in which we operate. We think that's really important. Our customers recognize that, and we have the benefit of strong secular growth trends in those areas. We continue to invest in those areas. We continue to innovate in those areas, and we will pursue those opportunities aggressively. We have a strong culture of innovation, and that has led us to the position that we're in. We are going to continue to do that. We encourage people to think about new opportunities. We have the resources to experiment, and we will continue to attract individuals who like working in an environment where there is a little bit of uncertainty and every day presents new challenges. And I think that's one of the value propositions that we present to potential candidates is come work with us, and tomorrow will present new exciting opportunities. We have a track record of delivery now over a number of years. We have become a trusted partner to the clients that we serve, which goes to the longevity of the relationships that we have with them. And we have a very healthy balance sheet. So our focus is not on can we make payroll can we invest in a new R&D initiative, we can focus on the business and grow our relationships with our clients. So all that is left for me to do is to really thank all the people who have made this half year possible, the leadership teams of each of our businesses and all the people in each business unit. It has been a very tough environment in which to operate. People have been working remotely. We have spent a lot of time on emotional wellness of our team and the results, I think, are paying off. So to our teams, thank you to our investors. Thank you for your continued support. And with that, I will open it up to questions. There is a block on the webcast where you can enter questions that you have. And [ Lydia ], if you could lead us through that.

The first question comes from [ Mark Tobin ]. He says, why was cash conversion from EBITDA to operating cash so poor? I think that's for Alan. And then also, he's asking about the makeup of the loans to associates what are the repayment terms of those and what guarantees are in place to protect shareholder capital?

Go ahead, Alan. Alan, go ahead.

I think I covered the question relating to about the cash flows for the interim period, so the cutoff at September 30. It is really evident that we've generated ZAR 143 million worth of cash, which came from those working capital assets, i.e., the receivables in October, and early November.

And I think to put a final point on it, Alan, the cash was used, Mark, to pay for the inventory that we had on sold. And so it was tied up in that working capital. And once the orders were delivered and invoiced, we had to wait for payment. So the cash conversion continues to be very strong within our businesses.

Also from Mark, there's a question about GovChat, the strategy to monetize GovChat and does it still offer potential IRRs acceptable to the Board?

So let me just deal with the loans to associates because that was one of Mark's questions. Each of the loans has its own terms, Mark, in our financial statements that we issued in our integrated report, there is some disclosure as to what some of those terms are. Some of them are secured. Some of them are unsecured, but we are comfortable at the moment that all of those loans are good. And we have put in place mechanisms that we think appropriately protects the capital that we have advanced. In terms of GovChat, we still believe that it offers good IRRs for our investment. The business is scheduled to roll out a monetization strategy over the course of the next number of months. It is to provide services to government, and we would hope to be in a position to charge appropriate fees for those services. And so we're still comfortable that we have a good investment in GovChat.

And we have a question from [ Komoto ] maybe to Michael Pimstein. Do you have plans or strategies to improve the group BEE rating? Or are you where you want or can be?

[ Lydia ], Mike was having some connectivity issues earlier, so he may not be on. So the answer is BEE continues to be an area where we continue to evolve. BEE is not a static ambition for us. It is an evolving area. It's something that we started on right at the beginning of the launch of Capital Appreciation, and we are looking to continue to improve our BEE rating all the time. As you can see, in Synthesis, where we previously were at Level 3, we were just re-rated at Level 2. We have -- each of our businesses are about to embark upon a new rating exercise. And we have implemented plans, most of them HR led, as I indicated, to continue to focus on evolving our BEE status across the group.

I have 2 questions from Mark Tobin. He says has Board considered an underwritten dividend reinvestment program to try and improve liquidity in the stock and bring on some larger funds? And also, has the Board considered the secondary listing on DC markets in the U.S., given that Brad is based in the U.S.

So we haven't spoken about a DRP program, but if Mark thinks that, that's something we should consider, we -- I'm happy to have a conversation with him and explore how that may work. With respect to an OTC listing, even at our market cap today, which is in excess of ZAR 2 billion. For the U.S. market, we are still very small. And there's a lot of incremental costs associated with that. So we haven't considered an OTC listing. But as we continue to grow, that's obviously something we can continue -- we can consider.

Then from Komoto. He says, please comment on terminal orders from existing versus new clients. So are you seeing orders from SMMEs? And please comment on cyber and fraud risk strategies as electronic payments increase.

So we have seen orders from existing clients and from new clients on our terminals, and that has been really pleasing for us. And we continue to approach new clients all the time about ways in which we can help them solve problems. And so we think we now have a full array of device form factors at various price points from effectively costless. If you use the Halo Android to relatively cheap add-on devices to the Rolls-Royce of devices for multilane environments. And so we think that, that's a really great bouquet of options that we have to offer to potential customers. With respect to cyber and fraud, that's obviously an area that we spend an enormous amount of time focused on. I'm sure some of you have seen one of our competitive products is provided by a company called PAX. PAX was raided by the FBI recently because the suggestion that the PAX platform was used to launch cyber attacks into payment providers in the United States. And it is an issue that we focus on. So cyber is an area that we spend enormous amounts of time and effort in combating and being prepared to try and address. And so we think that electronic payments are here to stay, and we're going to have to figure out ways to manage those risks over time.

The next question comes from [ Adam ] from Allocated Capital. He says, which new customers have been secured for the Halo product? We've spoken about 2 or 3, I'm asking specifically about the remaining big banks in South Africa.

So Adam, we can't disclose customers in advance of them publicly disclosing their choice. We have disclosed 2 today being both Ukheshe and Rapid Pay. And we have a good pipeline of others. So as soon as they are ready to disclose their choices, we will let people know.

Mark is asking whether there are any plans to cancel the treasury shares with the JSE, Alan?

There's no intention to cancel those treasury shares later. They are very well-priced for the purpose to the -- we began to avoid further dilution by issuing shares for long-term incentives that are starting to become vested and/or when we hopefully are going to make some acquisitions, which will involve, to some degree, a cash component and a share component. So we believe that those 93 million treasury shares will be put to good use in ensuing 12 months or financial periods.

[ Mike McLaren ] says he is very intrigued in the LayUp acquisition, given that the global market for it is so substantial. He says the question is, have you increased your shareholdings since the last reporting period? Or does it remain at the [ 20.6% ]? Do you have Board representation or otherwise provide strategic advice to LayUp? And assessing the target market for LayUp, what's the focus on the retail sector exclusively? Or does the business ultimately intend on focusing on the subscription payments market generally, which seems to be the global trend?

Given how much Mike is focused on the Buy Now Pay Later, maybe we should offer him a drug to come in and help us grow that business. It's really -- and I'm being a little bit flipped, Mike. The area is tremendously exciting and is evolving rapidly. We do have representation on the Board, and we are actively involved in helping Andrew. Andrew is a great executive who is very ambitious, who has developed a super business who is energetic, but we are making the Capital Appreciation resources available to him to help grow that business. We are looking at lots of different ways to try and expand the technology capability because the technology is very well architected, and it has application in many areas, including subscription revenues. But the question ultimately is, with respect to each merchant that you talk to, what is the value proposition to them. Some are interested in subscription, and some are not interested in subscription. So when you talk to a merchant, you respond to what their key pain point is, and that's the flexibility that the LayUp model provides. And so we're going to continue to help Andrew propagate the model and explore options with various merchants. But we do believe it is a great area and one that we're pleased we invested in.

We have a question from [ Peter Woodrow ] or a couple, he says fintechs in Africa all have recently raised significant capital to invest in growth, while our strategy seems to be more conservative by paying dividends and maintaining a large cash balance. Are there near-term plans to use a portion of the cash balance to accelerate growth?

Well, we have been using our cash balance to accelerate growth, and that's what we have been investing in, in terms of our organic growth. Our businesses are highly cash generative. So no matter the fact that we've used some of the cash to invest in the businesses, we've generated more cash. But our intention is to continue to invest in our businesses, and we will make some acquisitions if we find the right value proposition.

Question to Michael Shapiro. Also from Peter Woodrow. He says, is revenue from Halo disclosed in the payment or the software divisions? Has Halo received interest from international investors? And would the Capital Appreciation team consider minority global fintech investors?

Thanks, [ Lydia ]. So good questions relating to Halo. At this point in time, we don't break out the Halo revenues. It's contained in the software and services division at a point in time where it becomes substantial, and we can look at comparisons, we will do that. In terms of interest from international customers, we've experienced significant interest. Certainly, there is interest from investors as well because it is a hot new area going to revolutionize the way in which payments are accepted. And we'll consider all sorts of opportunities that will benefit the Capital Appreciation investment in this innovative technology. So certainly, various initiatives are underway to ensure that we maximize the sales, the exposure and access to different markets for the Halo product.

And a question also for you, Michael, from [ Ernest Kaplan ]. He says, can you please go through the software division with respect to the reduced margins? It is a strong growing area. Why are the margins reducing?

It's a great question. Thank you, Ernest. I think Brad actually touched it in the earlier question around, are we investing in the business. And that's totally aligned to the reduced margin that appears in this financial period. So our revenues are up significantly. The 15.6% increase in revenues, and our EBITDA is up only 3.6%. And that's because of the investment we've made in products such as Halo and Keystone, plus growing our human capital, ensuring that we have enough supply to service the demand in these areas. So we're still in a growth phase of the business. We've made significant investments in our business development activities and team to ensure that we can not only capture the local market, but also part of our international expansion in endeavors. Those costs come into the financial reporting period and appears that the margins are under pressure, but it's not the case. We still show healthy margins in our project business. And then we also have the symptom where we are reselling a certain amount of software, it doesn't make up more than 10% of our total revenue. But that is sold at lower margins than the project work or the software that Synthesis develops for its own account and its own intellectual property, which attracts a lower margin. So that deals with the question of how we're growing the business and building it for scale rather than a symptom of reduced margins in the business.

And Mike, I think it's important that when we talk about investment in the business, this is investment that we expense as opposed to show as capital expenditure below the line in the cash flow statement. And so that has the effect of showing reduced margins.

Correct.

Mike, would you comment on the choice of Amsterdam as the European or U.K. launch country?

So Amsterdam is one of the fintech hubs in Europe. It's a very growing area for fintech. In fact, the U.K. has become less of an important area given Brexit. So for tax and for sales purposes into the European market, Amsterdam and particularly the area of fintech is hugely growing in that region. So it's been an excellent choice for us. There are a number of fintech companies that are located there. There are a number of South African investment holding companies that have large venture capital stakes also in the Amsterdam area. Our AWS team is in the Benelux area, very close by to the Amsterdam area. So there are many reasons that we chose, Amsterdam. And so far, it's been an excellent choice as borne out by the conference we attended at the Money20/20 FinTech Conference, which attracted huge turnout. It was one of the few conferences that got underway in person. And our Halo product received significant interest from many banks and payment service providers that are operating out of that European jurisdiction.

Brad, there's a question from [ Canelis ] who says what is your estimate of the terminal market share in South Africa?

It's not something that is easy for us to measure. The only metrics that I can use would be to look at the market size analysis that was put together by global payments, which we have in the presentation and look at the number of terminals that we have against that. And so if I go to those slides, and I will have a look at what it is for 2020. They're talking about 600,000 devices in South Africa in the market, and we had 260,000. And so that would give you a sense of the market share-based on this data, but more than that, I can't comment. With some clients, we have tremendous penetration, with other clients, we have growing penetration. And so it is all over the Board. I can't use those metrics as a gauge either.

[ Tando ] asked, please, can we provide some information on LayUp numbers as in revenue or customer numbers and will LayUp be integrated with the existing payments businesses to accelerate the rollout?

So on the first question, the simple answer is at this stage, no. It is a very competitive market, and we are allowing LayUp to grow without the pressure of public disclosure. But we're very pleased with their performance to date. And once it gets more momentum, we will be in a position to start to provide that data. The plan -- turning to your second question, the plan is absolutely to integrate it. And so LayUp has 2 forms of offerings at the moment. One is an e-commerce offering, which is available on the e-commerce website. But the other, which is very exciting and is part of the value proposition. It is now launched as an app on our Android devices so that when a merchant has one of our supplied devices at a point of sale, you can use the LayUp payment mechanism in a retail point of sale. So it is a very important value proposition for LayUp and also the merchants in allowing their retail in present store customers to take advantage of that solution to.

From [ Michael Becky ] from [ Batali ] says we've mentioned that Synthesis is currently working on almost double the pipeline of the last year. How should we think about the pipeline mix between third-party partnership software products versus in-house software in terms of what it will do to the margins.

So the vast majority of our pipeline sits in the synthesis related product and project services. A much smaller percentage relates to third-party sales, and that's evident in the current results and in the pipeline going forward. So the third-party sales do make up a small amount, a small percentage of our revenue, but they provide ancillary opportunities, and that's why we progress them. And so that should give back you some insight into what the pipeline looks like.

Then the last question from [ Darryl ]. He says in the last year's annual results presentation, it was advised that there was a significant order not processed of terminals, and it was processed in this set of results. Could you please advise the value of that order.

We're not going to break out those orders separately. But there is -- but when we released our year-end results, we had received the order, and we had processed that order, but it wasn't captured in our year-end results because of delivery only occurred after March. And those are reflected in these numbers. But we've had great demand and orders above and beyond those terminals during this period. And so we're just going to present the numbers as a collective for this period as opposed to try and break them out. And what we've concluded is that we're going to have lots of these cut off related issues on an ongoing basis because with supply chain problems that we're encountering and the large size of some of these orders, we are going to have to deal with the vicissitude of that variability. And so we think that the better way of thinking about this is on an annualized basis and looking at the terminal sales annually because I think that will get rid of some of the lumpiness because we can't control the activity around cutoff, no matter how much we try. So we're not going to disclose that separately.

That's all -- that is the conclusion of all the questions.

Okay. So everybody, thank you. Last time people did comment and ask us to deal with more of the questions and allocate more time. We have run over the hour to by 15 minutes. So thank you for everybody who's continued to listen. I hope we have been responsive to the questions that you have asked. And thank you for listening to our teams. Thank you for everything that you have done in getting us here. I wish everybody a joyous, safe and healthy holiday season. And we will be back in January with our nose to the grindstone, getting ready for releasing our year-end results, which will come soon thereafter. So thank you, everybody, and thanks for your time.