Araxi Limited (AXX) Earnings Call Transcript & Summary

Very good afternoon to you. My name is Howard Feldman, and it is my honor to welcome you to the Capital Appreciation Results Presentation that's, of course, for the Year Ending March 2023. On behalf of the Executive Chairman of the Board, Michael Pimstein; Chief Executive Officer, Brad Sacks; Alan Salomon, Chief Financial Officer; and the rest of the Board, it is my privilege to host this event and to welcome you here today. I would like to also acknowledge Motty Sacks, a co-founder of the company, who has served in the capacity as a nonexecutive Chairman since the company's listing on the 16th of October 2015, the Board and the entire Capital Appreciation family would like to thank Motty for his years of excellent leadership and commitment to the business of the Group. We wish him all the best in his retirement. The format for today is a simple one. There's going to be two presentations. Bradley Sacks will take us through an overview of the Group and then Chief Financial Officer Alan Salomon, will detail all the financial side of the performance. Following above, we will ask the presenters to address any questions that you might have. We will introduce on Michael Shapiro as well -- to that as well as Michael Pimstein in case any questions should be addressed to them. Please list the questions in the space provided and we'll do what we can to make sure that we cover as much as we are able to. If we don't and if we are unable to answer your question to your satisfaction, well than e-mail us, send an email to [email protected] and we'll make sure that to get the information you require. Well, with that up the way, I'm delighted to hand you over to Chief Executive Officer, Brad Sacks.

Thank you, Howard, or should I say our very own Hugh Jackman. It really is a pleasure to be here today. So thank you all for taking the time to come and join us. We are going to walk through the presentation as Howard indicated, and we start with a view of the Group. You can see how this Group has grown over the course of the last number of years. We started as a cash shell. Today, we have a number of companies within our portfolio, and we are delighted that we will soon be able to also include the Dariel team as part of the family with the transaction that is expected to close towards the end of -- excuse me, the end of this month, that will take us to a Software division that is circa 500 people, which I think is a fantastic position for us to be in. So let's talk about our investment case. We have what I would consider to be a really great foundation on which we can continue to grow and prosper and then walk through each of these points because I think each of them is important to where we are today. We are in a sector that is experiencing really good, strong growth trends. And it is playing to our ability to be able to service those demands. The market opportunity, the addressable market for us is large, both domestically in South Africa and across the world. And we have started to embark upon that international expansion, and you can see that in our results. This doesn't come without being a truly trusted partner to fantastic clients, and I think we have that in spades. Our track record precedes us in all of the conversations that we have. So we are very proud about what we have done. And most important, and you will see in this set of results, which we've tried to highlight and emphasize, we are not focused only on this quarter. We are really focused on trying to balance the current present operations with our investment in the future and the growth opportunities that present themselves. So in aggregate, over the course of this half year -- of this year, we spent ZAR 132 million on growth-related initiatives. That's cash we spent; ZAR 109 million of that we expensed and ZAR 23 million of that we capitalized. And that has obviously had an effect on our short-term profitability in this half year but it is setting us up to be exceptionally well-positioned as the business continues to evolve. Our businesses are all cash generative, the investment that we've made has been funded from our cash from operations. And so we have the luxury of being able to invest in the future because our businesses are sound and solid. We have a good healthy balance sheet, which allows us to pursue opportunities for growth. And Dariel is an example of that. In terms of our cash resources, we have it all shy of ZAR 500 million of cash on the balance sheet at the end of March, which has grown to about ZAR 520 million as we ended the month of May. So the business continues to grow nicely. In terms of recent highlights. Howard mentioned the retirement of our founding Chairman and the appointment of Michael Pimstein as our Executive Chairman. Importantly, we relocated our Payments division and our corporate office and that's no small feat in a business which has very high security regulations within a short period of time. And so we are now in Linbro Park, we have substantial capacity for growth, which is what we see in our payments business going forward. And we will host a shareholder get together at our facility to be able to show you what we have done. Our commitment to BEE is something that we have spoken about in the past and we're delighted that Synthesis has reached a level 1 and the rest of the entities within our Group are Level 2. And overall, in terms of the responsive transaction, that was exceptionally well integrated and we are quite proud of what we have done. It has been a busy year for us. In terms of our financial performance, we see very pleasing momentum across all of our divisions. The demand for our products and services continues to grow. Our estate is up 18%. In terms of the balance of the revenue between annuity and non-annuity revenue within payments, that has grown nicely to be up 24%. Our revenues were up close to 60%. Our international revenues, 177% and we have exceptionally strong pipelines going into this new fiscal year, fiscal year '24. You would have all seen our revised trading statement that we issued yesterday, correcting for the way we treated the provision related to the loans advanced to GovChat, which we term an expected credit loss. We were alerted early on Friday evening that the provision was not headlineable in terms of IFRS, which we believed it was in accordance with IAS 36. We continue to believe that headline earnings, excluding the expected credit loss is a more appropriate way to evaluate the health of the business. The provision is a nontrading item and unrelated to our operating businesses. Therefore, we have shown headline earnings, both including and excluding the credit -- the expected credit loss. And so if you look at the middle chart, you will see that there is just a slight reduction in our headline earnings this year versus last year and you will see very shortly as to what we attribute -- to what we attribute this. We have had very strong top line growth. We are just shy of ZAR 1 billion in turnover -- in revenue. This was a target for us this year, which we did not hit, the reason is a slightly disappointing number of terminals that were sold, which we will get to. The mix in our product that we sold has changed a little bit and so there has been a 160 basis point reduction in gross margin. And when that filters down into the EBITDA margin operations, while down 60 basis points, we only need to explain 500 of that. The most important item is that there was ZAR 109 worth of expenditure in this year related to growth initiatives, which will evidence themselves in this year and the years to come. And so we are quite comfortable with where we ended up. It certainly wasn't what we had planned for. We had hoped for a little bit more revenue, which would have dampened the impact on our earnings but we understand why that occurred and are quite happy with the overall performance. When we look at the performance through the Group, what you can see is -- our terminal estate has grown by 18%. We have our payments annuity revenue now representing almost 50% of the revenue within our Payments business. This should help dampen the impact of variability in the terminal sales, which we have experienced. But the real reason for this is we experienced a little bit of a delay in terminal sales which we attribute to the tough economic times in the economy where a number of terminals to smaller merchants were repurposed and recycled as opposed to just having to deploy new terminals. So we actually have come to the view that this was a temporary issue. We've had some good orders already in this year, in fiscal year '24, and we're hopeful that, that will remedy itself. Software revenue, you can see was fantastic. It grew by 58%. Our international revenue, while off a small base, was up 177%, and it is proving to be a well-worth investment in expanding our office into the Amsterdam in the Netherlands. Our employee count has gone up. This is something we are very proud about in terms of our commitment to ESG and creating employment in South Africa, particularly in a very tough economic environment. So when we think about these trends that are affecting our business overall, you get to a point where since COVID, everything has gone digital and it is affecting the overall state of demand for us. It is affecting our payments business. There is increased demand for payment software solutions, where we have some real deep expertise. We do think that there are shorter terminal replacement cycles that are starting to evidence themselves, which bodes well for the demand. We are seeing in the software sector demand across multiple industries and in geographies. And interestingly, we are seeing some technology innovation, which we think is going to materially alter the pace and nature of deployments that we can make around AI and generative -- generative interaction through AI models with customers, clients and even our own internal work that we do. So we are seeing this continued growth in sectors, not only in financial services, where we are particularly strong, but in other sectors as well, and we continue to evolve our activities. Dariel helps us expand that as well. So in terms of how we have spent the money, we think it's important to demonstrate where we have been. And in this instance, you can see we have spent the ZAR 109 million in the following areas, ZAR 30 million of it related to the launch of Halo Dot and Dashpay Glass and our international expansion in Europe. New employees represented ZAR 36 billion, and those are the new hires that we spoke about previously. That is capacity to satisfy the demand that we are seeing. Many of those people only started earlier this year, so at the tail end of our prior fiscal year. Responsive acquisition accounts for ZAR 40 million and ZAR 3 million of costs were expense related to the Dariel transaction. I know lots of people ask what the impact of load shedding is, the direct impact on our Group, I think, was relatively limited other than what I would consider to be a delay in terminal orders from the banks because of the first derivative impact of load shedding, which is the dissolution of small businesses. But other than that, I think what we've come to the conclusion is that our terminal states are very resilient even with the power surges that occur and the terminals have performed very well. But the other, as it relates to software is that the demand and need and importance of Cloud is being evidenced day-over-day when you see the outages that occur as a result of power failures. So in terms of GovChat, we continue to work with the business rescue practice now on looking for a solution for the GovChat business. We have mentioned before that the technology and the platform is robust and sound. It delivers real value in terms of the process with Meta, we have had the intervention application argued in front of the tribunal. We are expecting a decision from them in the not-too-distant future. And importantly, we think that there is a very good prospect of recovery of our loan over the longer term given the Meta claim, which we have -- at which we will have outstanding against it. So in terms of our approach to ESG, it has been a consistent one over time. We have demonstrated this in the past. We continue to invest in this. Importantly, as I've mentioned, we have created 385 jobs since we bought these businesses and that to us is one of the most important things we can do as a business for South Africa. In terms of our BEE ratings, we have indicated our focus on this in the past. We have a comprehensive approach to BEE through training shareholder profile, enterprise development, drug creation supply development. And you can see the results of that -- in the chart below. Now I'm going to just spend a few minutes talking about the Dariel transaction. Firstly, I would like to welcome the Dariel team to the Capital Appreciation family. I did make a small presentation to them earlier this year and the date of announcement together with Alan Salomon and Michael Shapiro, we -- were very warmly welcomed, and we are very excited about this transaction. We have done extensive due diligence, but I think it's important to also recognize that not only are we prudent in how we proceed, we are prudent in how we think about structuring a transaction. So from a headline basis, you can see that the transaction has a headline value of ZAR 131.2 million, paid out in tranches depending on the company's performance. We fully anticipate that the company will perform against its warranted profits, which will translate into ZAR 131.2 million paid out over the course of the next 24 months or so. It is a cash and share transaction. So everybody has given the game, and we are pitched to each other on our mutual success. In terms of other important elements that get to why we did the transaction, we think that there is a really experienced leadership team that exists there, they have a 22-year track record in the business. They think about the business in ways that are very similar to the way we think about our software development business within Synthesis. The model and the culture is very aligned to us. We have found very little duplication in effort, although there is focus on the same industries with good expertise and similar product offerings. We have not competed against them in many circumstances. And ultimately, we think that there is enhanced opportunity with having an enlarged cohort of engineers focused on software development, which will take us to about 500, as I mentioned earlier. The Dariel Group will be part of our software division going forward. As we look at this chart and we think about where Dariel is positioned and the nature of the operations. You can see that it is very complementary to what or how we describe our Synthesis business to be. There is an ethos, a commitment to clients, a passion and a discipline in the way that they approach their activities, which is very similar to us. This also allows us to expand into the healthcare sector and the leisure area as well. But the financial services pedigree that Dariel has, we think is a really good foundation on which to grow. And if you have a look at the bottom of the page, Malcolm Rabson, who is the Managing Director of Dariel, has a view that "Engineered software is an art," and that strikes us as quite profound, it is similar to how we think about what we do within Synthesis. So in terms of the opportunity and where are we going forward. We have shown in this chart in the past, and I think it's important to demonstrate why this has such relevance. It is the business agility and the productivity, which is the most important thing on Cloud migrations and Cloud opportunities. We are all probably aware of ChatGPT, it is a commercial offering that has been developed by a company called OpenAI, it is not the only large language model that is out there. There are quite a few. But the area around AI and Generative AI and its impact on business is going to affect everything that all of us do in ways that we cannot even determine today. The difference between these models and the success or failure is going to be based on things around the coherence of the response, the speed of -- and response time associated with queries, the accuracy of those queries, the ability to train or customize the models and ultimately, their availability. And I want to demonstrate a truck, which I think is just absolutely astonishing. If we look at the time taken for people to adopt this technology, this could not happen without Cloud. If you look at the left-hand side of the chart to start with, it took only 5 days for people to reach 1 million users of ChatGPT. 5 days for 1 million users. Think of what that would have acquired if it wasn't a cloud-based application. To get to 100 million users, it was only 2 months, which is 60 days, 60 days for 100 million users is less than the number of days it took for Instagram to get to 1 million users. The power of Cloud is evidenced here in terms of its elasticity and its scalability, and you cannot underestimate the importance of this. The ease of use is also something which is really important and so if we turn to this picture, it is a picture of our family dog, her name is, Lucy. The interesting thing is that the text message on the right-hand side was sent to me -- or sent to my wife by our petsitter, who is a woman in her late 60s and she used it to generate a poem about Lucy with very little technical knowledge. You can see the quality of the phone is not fantastic, but it's certainly possible and it took her less than a minute to do. So this is going to impact everything that all of us do going forward. We are internally evaluating how to use this type of technology in our own operations as well as how to deploy it within clients. Getting to the payments area, the drivers of demand going forward, there are a number of them that we think are quite compelling. And so we are relatively bullish about the ongoing demand for our terminals. You can see that in 2021, there was approximately 9 million terminals sold within the Africa and Middle East region, which was a growth of almost 36%. We think that when we see the results for 2022 they will emulate a similar type of pattern and trajectory. So overall, we are quite pleased about how that is going to evolve. So in terms of our strategy and our execution, nothing has changed since we first acquired these businesses, and it applies both to our payments as well as our software sector. We are totally committed to our partners and our partnerships. We think that innovation is our lifeblood, which is why we continue to invest in new initiatives, which is to what we attribute the ZAR 109 million of expenditure and then we have to execute like mad and deliver on the promise that we have presented. In line with that, we've continued to lead with innovation around our Halo product. We have a differentiated offering, we are unfortunately constrained by the pace of our clients' willingness to announce their rollouts and deployments, but we are pleased with the progress that we have made and we will continue to evolve this to capture the opportunity that we seeked. In terms of LayUp, it's important to recognize that it's still early days. So the growth statistics are off a low base. But we are pleased with the progress Andrew is making. What I have included in this chart is the unit of measurements so that you know what we are measuring this in. And so -- by way of example, the top line payment plans created its quantity, we're measuring that in thousands, in terms of the value of merchant orders that's in the tens of millions of rands and so you can have a look and see how we are progressing as a business and something that we are positive and supportive of and we'll continue to do so going forward. In terms of our growth within payments, we are not -- we don't think that we're short of opportunities, particularly for a company with a proven track record and deep domain expertise, which is what we have. We are very focused on introducing new payment services and capabilities, and we have invested in that development cycle and we'll continue to do so in response to the needs and requests of our partner banks and payment service providers with whom we work. But we think that there are really interesting growth opportunities, particularly around the replacement and refreshing of terminal estates with the wind down of the 2G and 3G networks. In terms of our growth strategy for software, we are very focused on AI. And with [ 3 ], as I have indicated already, we are committed to our partnerships. We have a number of them that are existing. We are forging new ones all the time. We have a model, which is designed to grow our portfolio of proprietary software, which gives rise to license revenue. And we think we have a competitive pricing advantage being based in South Africa when we look at international markets. And the evidence would suggest that our activities are proving that to be true with the enormous growth that we have shown in our international division. So when we speak about domain expertise and capabilities and organic growth opportunities within payments, we had that as well within our software business, and we are very pleased with the progress that they are making. When we look at the operating units within Synthesis, we think we are very well-positioned. You will recognize a number of similarities in how we present the synthesis business versus how Dariel presents theirs, and you can see the alignment and opportunities for expansion together. We have some really great partnerships with the likes of Confluent, HashiCorp, AWS, Cloudflare, [ Talus ] and others, and that will continue to help drive this business going forward. As is custom, I have tried to demonstrate what we do within Synthesis in case studies and you will probably or many of you will probably be aware of the launch of PayShap in South Africa as a person-to-person or peer-to-pee rapid payment platform. We are very proud that Synthesis was involved in the design and development of the Cloud infrastructure on behalf of BankservAfrica for the launch of PayShap. And we think it speaks volumes to the capabilities of the Synthesis team and our deep expertise and knowledge within the payment sector. The second case study I want to quickly highlight is some work we did for a large South African financial services and insurance company, where we have effectively deployed software robotics to help them manage their reporting that they need to make to the regulators. They have to do this twice annually and the number of records that they have to process is in the hundreds of millions. It was a very burdensome and onerous process. They have tried to do this before they were unsuccessful in doing so. They are, I am told, delighted with the work that we had done and are going to be hosting us within a larger forum or a description of how we were able to achieve what we did. So congratulations to our team and there is plenty more where this came from. So this is the type of work that we are doing, which is truly on the cutting edge of regulatory reporting. So with that background, I'd like to turn you over to Alan, who will walk through our financial performance more specifically.

Good afternoon, ladies and gentlemen. We appreciate your participation in today's results presentation. We are pleased to present a resilient performance in a tough inflationary environment of low economic growth, both locally and globally. The consistent characteristic of the 2023 and prior year results is that Capital Appreciation is in a significant growth infrastructural phase, fueled by strong demand for the Group's products and services. However, this is not very clear at first glance and one considers the modest outcomes on an EBITDA and headline earnings level in this set of results. That is because we needed to expense substantial investment costs to fully capitalize on the opportunities that are currently and futuristically ahead of us. We trust that by the end of the presentation today, we have given you a clear understanding of the strong momentum in our underlying businesses so that you can see the exciting opportunities going forward. We are proud of the way our businesses have continued to attract new blue-chip customers as well as diversified new revenue from existing customers. We believe it is because of our businesses track record of serving their customers with distinction and continuing to innovate and help customers differentiate themselves in the markets they serve. Our presentation today has detailed disclosures, which will assist you to more than easily compare, our operating results with last year's strong performance. These results include the first-time inclusion of a full set of results for the Responsive Group, which was acquired in March 2022, the raising of an expected credit loss provision on the loan for GovChat and a detailed analysis of the growth in key expenses. I will highlight the impact of these issues as we move through the presentation. We have also taken the liberty to show you the headline earnings without the impact of the expected credit loss as we believe that this more accurately presents the underlying operational performance of the group. It is important to note the amount of investment and effort in growth-related initiatives, which we will see across the businesses. There are no undisclosed post-period events to consider in analyzing these results. Capital appreciation generated excellent revenue growth for the period, up 19.8% to ZAR 995 million. In the final revenue analysis, the group successfully diversified its revenue in new product categories, reduced customer concentration and widened its geographic reach. Reinvestment into the respective businesses for future growth initiatives did, however, impact EBITDA, which decreased by 6.3% to ZAR 235.7 million. And turning to each of the underlying divisions, I want to refer you to now Slide 36, starting with payment performance. Revenue in the Payments division was marginally down decreasing by 1.7% to ZAR 524.8 million. Terminal sales decreased against the record base achieved in the prior year. Small business closures led to reduced volumes, which, together with a change in product mix towards lower-priced Android terminals, moderated revenue growth. This was offset by a pleasing 24% sustainable growth in annuity-based income. Followers of Capital Appreciation will know by now, that we often have terminal orders that we received just before or after a cutoff for our financial reporting periods. This again, occurred, which affected both revenue and working capital as well as post period in cash flow movements in the reporting period. The terminal estate increased by a healthy 18% to 328,000 terminals in the hands of customers representing a compound annual growth of 37% per annum in the 6 years since we acquired the business. This growth was made possible by a combination of a growing terminal market as well as the group gaining more material market share over the past 6 years. As previously mentioned, Capital Appreciation has continued to invest extensively in growth projects, all expensed through the income statement and the tap on phone, SoftPos app for Android phones. Dashpay Glass is a prime example of the products we have and are continuing to develop. The payment division continued to manage expenses prudently and in line with growth in business activity and inflation, which, together with a slightly lower revenue translated into a decline in EBITDA for this division of 5.5% to ZAR 206.3 million. Payments continues to be a strong cash generator in line with their asset-light businesses. I'll now look at the payments revenue composition. The payments business has diversified its revenue streams over the past few years. The sales of terminals still contributes about half of the income and generated ZAR 255 million for this year. Sales were, however, lower in rand terms than the record sales of the prior year due to a lower volume of terminals sold as well as a change in product mix towards lower-priced Android terminals. Which are proving exceptionally popular given their higher functionality and better price points. Annuity income from Maintenance and Support fees is the second largest revenue contributor in the Payments division and has increased in line with the growth of the terminal estate. Income from transaction-related activities also grew by a healthy 35%, in line with the growing size of the Android estate. Terminal rental income. Growth has been encouraging after a long period of attrition of our legacy lease terminal state, which had reached the end of useful life and was subsequently replaced with bank-owned terminals. It is interesting to note that some customers are starting to move towards a hybrid model of partially owning and leased terminal assets. This is evident in the rental growth in this financial year, which benefited from a new 3-year rental contract in quarter 4 with a major bank. There is a strong customer demand for the group's payment-related software solutions. The division was recently awarded a new software contract by one of SoftPos leading banks and payment software solutions for other end markets are also in the process of being rolled out to create further revenue and customer diversification. We remain positive about the medium-term outlook for the Payment division, particularly as a result of technological advances and regulatory changes which will increase the demand for the replacement of terminals in addition to organic growth. A key case in point is the South African government's recent announcement that the 2G and 3G networks will be shut down between 2024 and 2025, which will require extensive bank estate reinvestment. I'll now move to the software performance, the Software division produced excellent results, albeit that not all of the exceptional revenue growth translated into bottom line profit. This was due to the significant investment in business development innovation, building the client base, additional skills, infrastructure and international expansion. Software revenue and EBITDA increased by 58% and 28%, respectively. Software's core cloud, RegTech, intelligent data and digital have all experienced exceptional growth and have maintained consistent, steady gross and operating margins for a long period. The expansion of the resale of security, hardware and third-party licensed products and services -- in recent years, has diversified the software division revenue streams and proved to be a lucrative source of incremental revenue. The growth in these product sets, which attracts our expected lower resale gross margin does however, dilute and distort the comparability of the division's total gross and operating margins. However, the third-party resale products have added advantage that most are dollar-denominated and will also lead to cross-selling opportunities with existing customers. We believe the opportunities for the Software division are exceptional, and we are seeing some encouraging prospects for international expansion. I'll now move on to software revenue composition. Services and Consultancy Fees grew by 39% due to the strong demand for Cloud, Digital and Intelligent Data Projects. Synthesis continued to grow its leading position in Cloud migration as an AWS advanced consulting partner. Its capabilities are being extended to Microsoft Azure and the Google Cloud platform and these capabilities will be further strengthened by the recently announced Dariel acquisition. Digital is, amongst others, involved in a large multiyear logistics project in Singapore, which has increased the division's international exposure as well as the foreign currency revenue it generates and has won further projects in South Africa and internationally in the past year. Responsive Group's strong design and user interface, UI and user experience, UX capabilities have also contributed to this growth. Intelligent data grew revenue strongly year-on-year. The business unit has landed its first Netherlands client, a large insurer as well as a new local banking customer in the past year. Annuity-based revenue in the form of license and subscription fees grew modestly. Halo Dot won new SoftPos contracts, one being with a major local telecoms business and another with a major international bank. Security hardware and third-party license fees soured to ZAR 104 million in the period. This was particularly due to the upgrading of some of the software divisions, major customers' hardware refreshes. State-of-the-art hardware security modules, HSMs are used for enterprise encryption and to protect payment card pins and contactless payments. These HSMs typically need to be refreshed every 5 years. The revenue growth was also supported by a substantial increase in partnership resale transactions during the year. I'll now move to the international performance. We achieved exceptional traction in markets outside of South Africa with international revenue growing nearly threefold to ZAR 150.9 million, now comprising 15.2% of Group revenue compared to 6.6% just 12 months ago. This geographic diversification of revenue streams creates notable growth opportunities for the group. Currently, the majority of this hard currency revenue is managed, transacted and executed directly from South Africa in foreign currencies. The international division remains in the early stages of its development, having been launched in 2021. Our office in Amsterdam will provide an excellent platform for which to expand our international offering and have already successfully attracted 2 major international contracts. One of its key initiatives is to commercialize and sell software services and the Halo Dot product globally. Halo's tap-on-phone initiative continues to make good progress and is achieving notable interest locally and internationally. This is a long-term strategic initiative with significant upside potential and the Group is committing funds to business development and marketing costs both in South Africa and internationally to realize these benefits. I now move to the statement of financial position. Capital Appreciation, which consists of asset-light businesses maintains an uncomplicated easy-to-understand balance sheet with no undisclosed contingent liabilities, no post-retirement obligations and no undisclosed post year-end events. Capital Appreciation's underlying businesses are very cash generative, delivering ZAR 183 million of operating cash flow in the past financial year. Notwithstanding continued investments, higher dividends and taxes paid, the purchase of 2 generators, new office and IT equipment, leasehold improvements for the new premises, growth in the terminal rental assets book and further loans to our associates, the group at the 31st of March 2023 at ZAR 495 million at its disposal to utilize and pursuing growth opportunities and strategies. Inventory levels of terminals and spare parts have been increased to ensure quality service levels for customers. Trade receivables, which increased notably at year-end, we settled together with related payables to suppliers in April and May post year-end. The underlying businesses generate robust operating cash flows necessary to take advantage of organic growth opportunities available to each of our business units. As a group participating in a high-growth sector of the economy, we continue to invest judiciously, with the full understanding that is for some of the costs incurred, we will only see the financial and earnings benefits in future timing periods. Capital Appreciation's cash is invested with [ selective ] top rates to banks and interest rates are managed very conservatively to maximize yield through appropriate interest rate cover. 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 return to shareholders, knowing Capital Appreciation's capital and strategic capability can be successfully leveraged. Net asset value, net of treasury shares, increased margin in the past year to ZAR 1.21 per share, of which ZAR 0.40 is represented in cash. I now refer you to our income statement. In looking at the statement of comprehensive income, there are a couple of items to note. I have already mentioned robust revenue growth, which came within a whisker of generating a milestone of ZAR 1 billion for the financial year. The strong demand is continuing. The revenue growth also includes, for the first time, the full year contribution of the Responsive Group, which accounted and amounted to ZAR 51 million. Gross margin contracted by 140 points due to, amongst others, as change in product mix towards lower valued Android terminals and a weakening rand but the most significant impact came from the 485% increase in security, hardware and third-party license fees, of which materially lower margins are earned. The gross margin after the elimination of third-party resales was 54.8% this year, a 40 basis points increase on the 54.4% comparable gross margin in the prior year. Operating expenses have increased notably on the back of a variety of growth-related initiatives during the year, the relevant benefit of which will only manifest in the medium term. Operating expenses have increased notably on the back of a variety of growth-related initiatives during the year. The relevant benefits of which will only manifest in the medium term. I will deal with the main elements contributing to the increase in expenditure individually. As a result of the promising pipelines in our underlying businesses. The headcount was increased by 97 new staff members or 22.7% year-on-year, which includes a sizable intake of new applicants for our graduate, recruitment and leadership programs. Employee-related operating expenses increased by ZAR 35.5 million, as a result. Employment costs make up the bulk of Capital Appreciation operating expenses. The Responsive acquisition added ZAR 39.8 million in new expenses before reallocation to cost of sales. This is the first year, which includes a full 12 months of Responsive expenses. The previous year only included 1 month of ZAR 3.5 million. The increase in expenses should, however, be seen against a revenue contribution from Responsive of ZAR 51 million this year. The infrastructure and the [ additional ] cost for the international office in Amsterdam amounted to ZAR 7.7 million relative to ZAR 2.1 million in the prior year. Investments in expenses in developing new technology solutions for Halo Dot and Dashpay Glass added costs of ZAR 15.9 million compared to ZAR 4.8 million last year. Advertising and marketing spend was ZAR 6.9 million this year compared to ZAR 2.6 million last year. Due diligence and acquisition costs amounted to ZAR 3 million, this is another clear example of costs incurred in the 2023 financial year when the Dariel acquisition will only happen in July. We have provided a detailed reconciliation and summary of expenses in our Note 12 of this announcement. While expenses have increased considerably, these increases were carefully considered, approved and budgeted for and there remains a continuous focus on cost efficiencies. During the year, the payments division and corporate office move to larger premises in Linbro Business Park, providing capacity for expansion for the next 5 years as well as meaningful cost savings on accommodation costs. The growth-related expenses in the aggregate amounted to ZAR 109, have had a short-term impact on profit margins with the EBITDA margin for the period decreasing by 660 basis points to 23.7% from 30.3%, in 2022. The drop in EBITDA margin is made up of 140 points of gross margin and 520 points in expense driven growth. Finance income earned on the Group's significant cash balances increased on the back of the 3.5% increase in interest rates year-on-year. The expected credit loss provision or ECL, raised on the GovChat alone, impacted EPS and HEPS to the extent of ZAR 0.0575 per share but have no material impact on cash resources or net asset value. The majority of the ECL amounting to ZAR 54 million arose in the 2022 and prior years dating back to 2019. Basic and headline earnings declined by 44.7% to ZAR 0.0739 and 44.5% to ZAR 0.074, respectively. We refer you to our sales announcement yesterday that the expected credit loss provision has now been accounted for under IFRS 9. Excluding the ECL on the GovChat alone, the underlying businesses produced headline earnings per share of ZAR 0.1319 per share, only marginally 1.6% down on the prior year. The group had small share repurchase 200,000 and sold 4 million treasury shares to settle vested share options during the period. As of 31st of March 2023, the Group had a total of 77 million treasury shares at an average lower book cost of ZAR 0.57 per share. Given the appropriate circumstances, the Group will continue to consider future purchases of shares in the market. I now turn you to the important cash flow story. Our asset-light businesses remain highly cash generative, as can be seen from the ZAR 183 million cash generated from operations in this period. We have generated nearly ZAR 1.17 billion in operating cash flow in the past 6 years. This is a notable achievement and the Group's cash flow have resulted in an approximately 5-year payback for the businesses we acquired in 2017. A key features slide on cash flow reflect the March 2023 and '22 periods highlights the main cash flow items. I've already discussed the higher finance income received and the growth in dividends and taxation paid. Working capital remains a strong focus. I've explained the working capital buildup and the reasons for it. Responsive acquisition, we are very happy with the seamless integration of the Responsive acquisition into the software division. Responsive materially exceeded their profit warranty and their contribution to revenue and profit exceeded our expectations, assisted by the synergistic benefit of being aligned with Synthesis. The group granted LayUp Technologies, a further ZAR 6.3 million of funding during the year, bringing the total loans to associates to ZAR 12.2 million. A new ZAR 9.2 million convertible loan agreement with LayUp was also introduced post year-end. All loans [ pay interest at prime ] and are repayable in November 2025. The group subscribed for 20% of the equity in Regal Digital BV in the Netherlands in May 2022 and also granted them a long-term loan of EUR 494,000 which has translated into ZAR 9.5 million, which is noninterest-bearing and has no fixed terms of repayment. Another European-based Fintech investor invested simultaneously with us with Regal Digital on the same terms as Capital Appreciation. Cash and cash equivalents at the 31st of March 2023, were ZAR 495 million, which has grown nicely as we're reporting these results today. I'll refer you now to our dividend history. We are fortunate to have businesses that are cash generative and generate meaningful profits and cash flows despite the challenging economic environment, and that is after paying full tax. We have consistently paid increased dividends for the past 6 years, generally well covered by current period cash flow from operations. For the current year, the Board has declared a total dividend of ZAR 0.0825 per share, an increase of 10% relative to last year's ZAR 0.075 per share. We are in a strong position to benefit from the exciting opportunities in the growing markets we serve. While our outlook remains dependent on a number of micro and macroeconomic factors, we are optimistic over the medium term given the strong opportunity set for our underlying businesses. Looking forward and towards the 2024 financial year, our businesses have a good pipeline of projects and are expecting positive growth in the year ahead. We are well entrenched with our existing customers and international principles and suppliers and have several exciting projects, products and pending Dariel solution to capitalize on in growing markets. We are in the final stages of completing the Dariel acquisition, and we anticipate the closing date to be on or off the end of June 2023. It is probably appropriate at this point, as I conclude, to take a moment to consider the robustness of our acquisition processes given the recent acquisitions. We are really conservative in our approach. And once we've embarked on a potential acquisition, we undertake a very thorough due diligence process covering every aspect of the acquiring business. We believe that it is the thoroughness of our processes that has led to a very successful integration of the businesses we bought in 2017 and more recently, the Responsive acquisition. We look forward to achieving the same outcome with the pending Dariel acquisition. Thank you, and I'll now refer back you to Brad.

Thank you, Alan. So I'm going to wrap up with the prospects and I think the takeaway that you get from the presentation and what Alan and I have shared with you already is that we are quite pleased with our strategic and competitive position as we stand in the market today. Our businesses, notwithstanding the short -- the slight shortfall that we had in terminal sales over this year are exceptionally well-positioned. The pipelines are good and the prospects are quite compelling. The opportunities are not only organic. They are also, by way of acquisition, as we have demonstrated with 2 acquisitions already announced and the opportunities for investment in smaller companies, LayUp is an example of that. And there are a number that we are working on. The economic climate that is affecting South Africa cannot be ignored. It is affecting our clients and our clients' clients. But luckily, we are an underlying provider of what are essential services in today's world. And so far, we are relatively protected from that, and we'll continue to evaluate the opportunities accordingly. I think it is important to think about some of the new technologies that are out there and how those are going to impact our businesses going forward. And we are spending, as you can see, a substantial amount of money in making sure that we are very well-positioned to capitalize on those opportunities going forward. And lastly, as it relates to the expected credit loss, we are continuing to pursue our position against -- our GovChat's position against Meta, and we will update the market as and when necessary on that score. But overall, the prospects for the business are solid and sound. And we, as a management team, are quite enthusiastic about where we are. On an investment case -- the last slide, we continue to believe that we have a strong leadership position. Our historical track record on innovation should give you comfort that we know what we're doing. Our clients certainly think that. And we have the cash resources to be able to continue to grow our business. So overall, a really solid set of results when you look through the headline numbers, and so we are pleased about this. I want to thank Marsh, Andrew and Brandon for the constructive way in which they have integrated the responsive companies into the Group, and we look forward to welcoming Malcolm, Greg and Wayne as the year unfolds. We did mention, but I'll just reiterate that we have received competition commission approval for the transaction. There are a number of conditions that are still being satisfied but I'm hopeful that, that gets satisfied within this month, and we will close the transaction by the end of June. On a personal note, I just want to end by noting the retirement of our prior Chairman, Motty Sacks, who all of you know is my father. It was really an honor to be able to work with him in a formal capacity and we wish him all the best in his retirement. So with that, I will bring this to an end and turn it over to Howard, who may have some questions to pose to us.

Thanks, Brad, and thanks, Alan, for the extensive presentation. There's a significant or a very decent number of questions. We're not going to be able to get to them all. But if we can maybe just address some of them. I welcome Michael Shapiro and Michael Pimstein as well. And I see that Michael Shapiro, there seems to be one here for you which I think could be quite interesting. And it comes from [ Betty Tetwal ] who says, how should we think about where margins settle in the software division? And when does management foresee the business will be rightsized for the opportunities ahead, that's the first question from Betty for Michael.

Yes. Thank you, Howard. I think the group still views the potential for growth in the software division. So we have various parts of our business, Helen went to great lengths in providing some of the breakdown so that the analysis can be done. The business isn't just monolithic, there are many different components. Some of those components are growing at our historic margins, and we call that our core business, and we're very comfortable. At the same time, we're making investments into new strategic initiatives, and that requires expense now to see the exponential reward in the future. Additionally, we have a third component that the products that we sell on behalf of third parties, such as our hardware attracts a lower margin. So all of that makes up the margin mix. We think that the current levels where the margins are sitting at other long-term goal, if not, in the future, to be improved through operational leverage that we achieve. We also are building the Software division to incorporate all of the new companies that we have acquired, Responsive and soon Dariel, and some of those expenses have taken place to ensure that the transition into a more compelling and larger software division happen seamlessly and as evidenced by the seamless Responsive transition into our Group, we feel that this goes well for Dariel and potentially others to be part of the group going forward.

Whilst I've got you here, there's the growth in the international -- on the international side has been a tremendous -- there was just one or two questions about -- and this comes from [ Thalia Timsberg ]. She says International revenue has increased this year. How do you plan on growth -- continuing to grow the international footprint? And what is the competitive advantage in the segment? Whilst you get Michael, maybe it's a good one for you to address.

Yes. So the way in which we want to grow is conservatively. As you can see, the split out of our international costs is really not a significant investment. We're doing this very judiciously. We're using our partner network to help us land new business, and we feel that that's the most successful way to grow it out. At the same time, being a very strong technical company with English-speaking resources on similar time zones to Europe and the Middle East, where we're exploring these opportunities, we found that within these niche areas, won out significant business. And this is helping us grow that U.S. dollar, euro or pound revenue with predominantly South African costs. So that will also talk to the earlier question around margins and will help us increase these margins going forward.

Thank you, Michael. Brad, maybe if I can put this question to you, comes from [ Cornelius Macari ] and he says, why are you using shares for acquisitions and not cash? Are you saying that your shares are fully valued at the current levels.

So that's an interesting question. And Cornelius, the answer is shared risk, shared return. When we -- when we make an investment in a company, we are asking that company's management to simultaneously make an investment in us. And so the modest pricing of the Capital Appreciation shares is an incentive for that management team as well to participate in the growth of the share and our business as we expand. And so we see it as a way of ensuring real alignment between ourselves and the incoming management team who are most often vendors in the acquisitions that we are pursuing. So it's not an [ indictment ]of the current fully valued share price of Capital Appreciation.

All right. And Alan, maybe I can just ask you this question. It was, in fact, answered to some extent, but a few people have asked it. So this comes from [ Sandy Ley ] just -- can you please talk about the investment spend in growth in granular detail. What was that comparable investment spend in growth last year given this figure was ZAR 109 million this year. But I'm not sure, Alan, if you want to talk to that.

Yes, with pleasure. I think if you look at the presentation today from Capital Appreciation, Brad's presentation and my presentation, we've been very, very thorough in trying to disclose as much information as possible. If one actually goes and read the entire long-form announcement, it's fully documents where we spent the money in expenses that were -- that we expensed the income statement, where we actually have not been able to see the benefits of revenue and income in the current period. So I think we've been very thorough in giving the detail in that respect. We've also highlighted where we've actually expanded cash flow and expanding our business and growing our business. Moving to new premises, as Brad previously alluded, it was a mammoth task of moving the entire operation to Linbro Business Park. The costs that went in the disruption, as you can appreciate with the move, the cost of generators has an impact in terms of cash flow, the new furnishing and fitting as we require. And for that matter, we are actually -- there's a pending big move into much wider and larger premises of one of the software division in the later part of this year. So I think it's very, very, very detailed in the long-form announcement. And say for repetition, I think the market should be reasonably understanding is that we're putting in a lot of investment effort and money into the future. And we are very confident that you're going to see some element of tapering off of this type of investment and some of the expenses that have been incurred and you'll be able to see some of the incremental marginal improvements in margins and in profitability.

Thanks, Alan. Keith, I think that answers your question as well. A few of the questions are, I'll try to group them together, as possible. I haven't answered. Then if I haven't, I'll give you the address as well where we can -- where you can send those questions as well. If I can just get a sense and anybody can take this question is, what is the feeling about these results? How are you feeling right now having presented these results?

So Howard, I'll take that. And the answer is I'm waiting to see the reaction of the market, and I'll know how well we did. But there's one more. Objective measure on the rands and cents, we are really pleased with how the underlying businesses are trading. We have great relationships with our clients. The teams are working very well together, particularly in a very challenging economic environment. We are -- to be blunt about it, we are a little bit disappointed with the revenue generated in our Payments division because the economic climate is so tough. So we can't -- we can't say we're pleased about everything. That was slightly disappointing. We hope to exceed ZAR 1 billion of revenue. But we are quite confident that the future continues to be bright and we are in the right place with the right solution set. So overall, I think we are quite pleased with how we did overall.

So then, Brad, since you're here, I'm going to ask you the final question is, what excites you most about the year to come?

Howard, there are a lot of things. I am really interested to see how we are able to apply some of these new innovative technologies to improve our own internal processes and then convey those similar learnings to our clients. If -- last night, as I sat with the presentation and I showed my daughter, the starring role Lucy was going to play. And she said, "I love ChatGPT because it helped me with my research paper." And I asked her what it was about and she participated in something called Model UN and she said, "I do all my research for Model UN using ChatGPT." So if we think about with that little exchange [ portends ] for commercial opportunities. I think the faster, better, improved processes that we can all enjoy as a result of deploying new technologies is a truly exciting experience. So I look forward to LayUp's team coming up with some -- or starting to try and commercialize some of the innovations that they have already incubated and I think it's important to indicate that many of these ideas are in incubation. And the test of our capability is seeing how these things can be deployed into the market. So that's the challenge I set for ourselves. So on mic, you've heard it here first.

And that is really all we have time for. Thank you for participating today. If we didn't get to your question, we're going to go through the questions again and just to make sure that we've answered what we could. If not, we will come back to you on that. If we haven't, and if you have additional questions, please e-mail [email protected], and we will endeavor to, of course, give you all of the answers that you need. I do thank you. I thank the team for participating. Thank you to the Capital Appreciation family for the incredible support that has brought this together today, and thank you for your time this afternoon. And I hope it was as informative as you hoped it would be, have a fantastic afternoon and be well.