I would now like to hand the conference over to Mr. Robbie Cook, CEO and Managing Director. Please go ahead.
Thanks. Good morning, and welcome, everybody, to Taro's half year results call. I'm here with Parth Power, our CFO, who will be presenting with me this morning.
Our
plan today is to focus on our published results for the first half of FY 'twenty one. We'll also provide an update on our trading in January February today, and we'll talk about some of our key areas of focus for the balance of the year. Prav and I will spend about 30 minutes running through our results and will then take questions. We'll talk to the slide pack earlier today, which is also available on our website. And just for noting, a recording of this morning's call will be posted on the Investors section of the The formality is out of the way.
We'll get started. And if you could turn to Page 2 of the pack, please. So before I talk about our results, I just wanted to reinforce what Tyres stands for and With payment solutions and complementary banking products largely developed on our core proprietary technology platform, We're creating an integrated ecosystem with payments at its core, enhanced by value adding features and products designed to attract new merchants and to retain existing ones. The majority of our customers are small and medium sized enterprises operating in the core verticals of health, hospitality and retail. Purpose built solutions have been designed with those needs and preferences in mind.
Turning to Phase 3 and just looking at the half in a glance. It definitely remained a challenging 6 months for many of our merchants in our core verticals with COVID still impacting Trading. This being exacerbated by the sudden and sometimes unpredictable lockdown occurring around the country. As was the case last year, we continued our focus on actions and initiatives to assist our medicines in navigating the COVID impacts. Despite these headwinds, we're proud to have processed a record $12,100,000,000 in transactions for our merchants.
And considering the challenges faced, our performance in the half year was strong. At a high level, we still achieved record transaction values, record gross profit and a record EBITDA result. In summary, our transaction values were up 9.5%. Our revenue is down 2.1 percent at $114,800,000 due to a COVID caused card mix which I'll discuss in a bit more detail shortly. Our gross profit was up 21.6 percent to $61,200,000 Our EBITDA was a positive $8,500,000,000 a 464% improvement on the same period last year.
Operating leverage was demonstrated in our results with our operating expenses increasing a well controlled 8.1%, whilst our EBITDA margin expanded in half on FY 'twenty to almost 14% in the reporting period. And finally, our merchant numbers were up 13.2% with almost 37,000 merchants choosing to work with us. We've been particularly focused in the half year on pre integration work required to commence We expect to achieve commercial completion by the end of the second half, and at that point, we'll commence the rollout. We are also soon to become the payments platform for me and you, a business we invested in, in November 2019, Which provides hospitality venues a tap order and pay solution, perfect in today's COVID world. We've also invested in Paper Plane in the half year.
Paper Plane is a payments platform which is transforming recurring payments. It has developed a proprietary solution focused on removing known pain points in recurring payments for banks and businesses alike. Building up its position in the market with 10 leading apps signed and 71 active merchants on the platform today. Turning now to Slide 7 and our payments operation in a little bit more detail. As mentioned, the value transactions processed in the half year lifted 9.5%, reaching a record $12,100,000,000 This growth was assisted by 13.2% increase in merchants selecting Tyrell as their payment provider with 36,720 It's dampened transaction volume growth for our merchants.
The half year commenced well with transaction values lifting $0.11 in July 2020. I believe gains were taken back in August when Victoria entered a hard lockdown. Growth returned in September And consistent improvement was experienced through to the end of the half year. In fact, December 2020 delivered 90% growth with transaction values reaching $2,600,000,000 an all time record month for us. Merchants in our 3, 4 verticals, health, hospitality and retail, representing 86% of our merchant count and made up 91% of the transaction value for the half year.
Our strongest growth is delivered in our retail vertical at 17%, with hospitality growing at 6%, Whilst our health vertical was down slightly due to fewer elective procedures in the COVID environment. Geographically, all states other than Victoria and New South Wales experienced double digit transaction value growth and collectively were 29%. Victoria was down 16%, and New South Wales, our largest state by transaction value, was up 7% on the PPP. At the end of the half, we lifted merchant numbers 13% on the same period last year. COVID restrictions had limited impact on new merchant applications.
And specifically, in July, we attracted 10 19 new merchants. In August, that number was 924 in September, 1133 In October, 1182 November, 1121 and in December, 879 new merchant applications were secured. Our e commerce solution grew strongly, albeit from a low base. This solution enables merchants to work with us for the install and online transactions. This solution simplifies the day to day for our merchants by providing one point of contact Together with single settlement and reconciliation, removing the need to manage multiple payment providers.
While still very much a work in progress, at 31 December, we had 379 merchants utilizing our e commerce solution with $14,800,000 generated in transaction value. Our integrated Alipay also remains in the rollout phase with more than 31,000 merchants now enabled to switch on Alipay as a payment option. Alipay offering has been significantly impacted by the lockdown of Australia's international borders with only 1 point $8,000,000 in transaction value generated in the half. We are, however, confident this payment type will return to growth once international travel resumes. We introduced a payment and rebating solution to facilitate telehealth in a direct response to COVID.
It enables health practitioners processing Medicare benefits scheduled bulk billed telehealth payments through the Taro terminals $6,000,000 was transacted through this channel in the reporting 6 months. It is our belief that telehealth will continue to be offered by health practitioners even after the risk of state of passage as it is popular to patients and health care professionals alike. Whilst transaction values and merchant numbers were up, our payment revenue was down 5.2% to $107,700,000 This is reflective of the change in our card mix and arose from a significant drop International credit cards attract significantly higher merchant service fees, and our mix shift away from transactions via these cards negatively impacts our revenues. These international cards, however, carry significantly higher interchange in scheme fee costs, And thus, a mix shift away from transactions by these international cards positively impacts our profits. International credit cards represented 0.7% of our transaction value in the reporting period compared with 4.4% in the corresponding half.
The converse applies in relation to debit cards. In the period, we processed more lower merchant service fee debit card transactions, which attract lower scheme fees and interchange fees and as such, have a more positive profit impact. Debit cards represented 61.5 percent of our transaction value in H1 FY 'twenty one compared with 56.5% in the corresponding half. Karl will talk to our merchant service fee and merchant acquiring fees later. But of note, this change in car mix, Whilst impacting revenues negatively, positively impacted our payments operation gross profit, which lifted to 54,300,000 Up 15.9%.
With the close to 68,500 terminals now in the field, We remain the 5th largest merchant acquiring bank in the market, sitting behind the 4 major banks. Our focus on brand, Customer satisfaction and retention continue to shine through in the half. Our most recent net promoter store at 31 December reached 44%, up from 43% a year ago. Our prompted brand awareness was lifted to 17%, up from 12% a year ago. And our customer retention rates remain very strong with customer churn measured by transaction value 7.7 percent 0.5% Compared to 8% a year ago, and our churn rate metric by tax on the number reduced from 12% a year ago to 10.2%.
Turning now to Slide 10 and our banking products. Although our banking operations still only represent a small part of our overall business, it presents an alternative to the major banks strong prospects for continued growth. Our products are focused on providing our customers with innovative ways to meet the transactional banking and unsecured lending needs. Our Taro bank account is a fee free interest earning transaction account. 4,150 Taro Merchants were actively using the Taro Bank account, up from approximately 3,100 a year ago, with $99,300,000 on deposit as of 31 December 2020, up from $39,000,000 at the same time last year.
Our new term deposit offering, which is available through the Tylo app, held $4,700,000 in term deposits as of 31 December 2020. Our cash flow based unsecured loan product is designed to assist SMEs in growing their businesses. Our business loan is repaid from a merchant selected predetermined percentage of card transaction volumes as generated by the individual business and is offered on the basis of an upfront fee. The innovative feature of this product is that repayments cycle up or down in accordance with the Merchant's Daily Card Transaction volumes. Prior to the onset With COVID, our loan application process is streamlined, giving all thorough merchants the ability to check their eligibility for a loan through the Taro app.
If eligibility was not automatically satisfied through the app, a manual review could be initiated with our loans team collecting additional information In assessing the application with the benefit of this data. Post Kalian and from 1 April 2020, assessment process is adjusted making use of this manual assessment path rather than our automated functionality. This proactive step is implemented to ensure our credit risk in the COVID operating environment did not exceed our internal risk appetite. As expected, this decision to adjust the credit assessment process saw originations fall sharply in the half year. Originations in the half reduced to $2,600,000 down 93% versus the $37,400,000 in the corresponding period.
Additionally, we managed the lift within the portfolio closely over the period, resulting in lower write offs than provided for at 30 June 2020. In combination, these factors for lending income for merchant cash advances declined 20.5% to a net $2,000,000 average loan size in the year was around $23,000 lower than the $31,000 average a year ago. We are returning to a higher limit, automated loan assessment process currently and are hopeful that this loan offering will start to progressively return to levels experienced Please proceed. Brad will talk in more detail on our banking operations' financial performance shortly. Turning now to Slide 11 and our ThyloConnect solution.
In recent years, there has been much growth in a number of customer facing These apps typically seek to integrate with multiple point of sale systems to distribute their services in the merchant's operations. This can create duplication, costs and other inefficiencies to pod suppliers, merchants and the app providers. Tarek Connect is a solution to this friction point. It's designed to be an integration hub for apps and POS systems, a plug and play solution to address merchant pain points around countercutter and manual processes. It also aims to make it easier for Pulse system partners and app providers to meet customer needs.
CyroConnect went live in February 2020 with its first integration partner being near and you, Which as I mentioned, provides hospitality venues with a tap order and pay solution. Today, Tyro Connect has 10 industry leading apps signed up to the platform And 71 active merchants. ClariConnect seeks to reinforce our value proposition to merchants, Welcome, setting us more deeply in the commerce ecosystem and enhancing our ability to capture data and insights. I'll now hand over to Prabh, who's going to stick through our financial performance in more detail, and I'll then return to discuss our second half and our outlook. Thanks, Garth.
Thank you, Robby, and very good morning to all. If you could all please turn to Slide 13 in the pack, And I'll go through a summary of the financial performance for the half year ended 31 December 2020. As mentioned earlier, the results are pleasingly in what continued to be quite a challenging environment for our merchants. We transacted $12,100,000,000 in transaction value, a growth of 10% to the comparative period. The 6 month growth was subdued largely due to the current lockdowns.
We have been reporting our transaction value weekly, and you would note the negative 4% growth in August when the lockdowns had their full impact. Adjusting for Victoria, the growth in transaction value for the 6 months was 18%. December 2020 was a record month when we processed $2,600,000,000 in transaction value, representing an exit rate of 19%. As mentioned in our June results call, transaction value mix changed significantly in the last quarter of the 2020 financial year, And this trend continues into the first half of twenty twenty one. We processed less than 1% in international card transactions in the 6 months compared to over 4% in the prior comparative period, while debit cards increased from 56% to 61%.
For the 6 months, the scheme changed their cost structures for debit card significantly to compete effectively in the lease cost driving space. As a result, our direct costs dropped. And with our portfolio structure being 47% cost plus and 53% either blended or other, You would recall that at June 30 last year, 30% of our loan portfolio was on a repayment holiday of up to 3 months with 0 additional interest. The extension did not attract any additional fees by the merchant and represented actual relief to those impacted. Pleasingly, most of the merchants on the repayment holidays settle their loans as they overcame their economic challenges.
Loan balances declined over the period as we tightened our credit policies. As the portfolio is small, we were able to manage these loans at an individual level. While total lending losses for the 6 months was $500,000 We released $1,000,000 in provisions in the form of fair value gains during the period as a result of better than expected portfolio performance. In summary, the payments business gross profit, therefore, grew by 16% given the improved margins, while our banking business was negative 23% off a small base. Together with JobKeeper income of Together with JobKeeper income of $4,500,000 our half year gross profit of $61,000,000 was a growth of 22% and a new record.
In comparison, our operating expenses, which largely comprised employee expenses, grew 8%. The operating leverage we have talked about previously was demonstrated perhaps earlier than expected. This was in no small path due to the support of our team, which continue to deliver despite the strict measures in place such as a freeze on new hires since March 2020 And no remuneration reviews in the period. We continue to balance our decisions between building on our core value propositions and buying where it makes sense. This explains an increase in administrative expenses from $8,200,000 to $9,600,000 and is mainly to do with license costs as well as contracting specialized skill sets to complement our internal capabilities.
Marketing expenses are an area of focus as we have mentioned previously. For the half year, however, marketing costs were deliberately controlled and in fact were lower than the prior comparative period given the external environment. We spent $2,500,000 for marketing in the half year compared to $2,700,000 in the first half of twenty twenty, a decrease of $200,000 However, prompted brand awareness was up at 17% at December 2020 compared to 14% in June. I would expect our marketing costs to increase in the future as we target merchant growth. As a result of gross profit growing by 22 In operating expenses growing by 8%, we achieved an EBITDA of positive $8,500,000 for the half year compared to $1,500,000 in the prior 3rd period, a greater than fourfold increase.
Excluding JobKeeper income, our EBITDA was $4,000,000 or an increase of 167 The return is consistent with our growth strategy, our continued close management of margins and investing in future value creation, some of which Robbie has already spoken about. All our other expenses decreased other than depreciation, which is in line with our growing fleet of terminals and a small loss recorded from an investment in an In summary then, our total expenses are $64,600,000 for the 6 months compared to total expenses of $69,500,000 in the prior comparative half. The comparative half, however, included $9,000,000 in IPO costs. Adjusting for this, the growth in total expenses was 7%. Of the $64,600,000 $52,700,000 are operating expenses, of which 70% is staff related, and that grew 8% on the comparative half.
Headcount was steady to the prior comparative period, increasing by net 1 to 4.82. The half year had strict cost controls. However, project resourcing will increase as we move towards completing the Bendigo alliance in the second half. Breaking this down in a different way, 38% of our total operating costs related to product development and management. Around 21% was in sales and marketing, with the remainder in product delivery and general overhead.
Of the noncash items, share based expenses were $4,300,000 down from $5,300,000 in the prior comparative period. Of these, dollars 2,000,000 relate to general accruals for 2021 short term incentives, while $1,000,000 relates to performance instruments issued in prior periods. These instruments will only vest on meeting specific growth and profitability hurdles prior to the expiry, Endy expense assumes 100% probability of vesting. The remaining expenses comprise the tail of the liquidity events, performance rights and various annual and monthly uniobasing instruments issued in prior years. Share based expenses decreased 19%.
As a result of all of the above, Tayra recorded a statutory loss of $3,400,000 before tax compared to a statutory loss of $19,200,000 in the prior comparative period. On the next slide, provide an update of our key operating metrics, which graphically summarizes our profitability trend Over the last 5 years, our merchant service fee, or MFS, has been relatively stable, and that's including up to February 2020, 1, the MSF for the 8 months was 91.4 basis points. As reported in our June results, the last quarter of the 2020 financial year changed dramatically in terms of card mix, Partially from international border lockdowns, which carried its bonds into this half. As I mentioned earlier, The expensive international card volume dropped from over 4% to less than 1%. Debit card increased in proportion from over 50 percent of total transaction value to 61%, while the costs of the debit card came down.
As a result, the MSF dropped to under 80 basis points as 47% of our portfolio by transaction value is on a cost plus basis. The drop in the underlying cost, which you can see in the gray line dropping from 56 basis points to 40 basis points, was passed straight through for these transactions. For the remaining 53%, the decrease in the underlying costs increased our unit margin and compensated for the lower transaction value as well as providing us the ability to There are other cost changes that may come through later in 2021, and I expect the weighted average cost to gradually rise again. Notwithstanding this, the results for the half year are pleasing as the 15 basis points drop in direct costs more than outweighed the 11 basis points drop in NSF and improved our unit margin for the first time in over 4 years. We manage our payments business as a portfolio.
And with the pricing composition of our portfolio, we are well placed to work Any structural cost changes in the near future. Achieving operating leverage with scale is the key takeaway from this page again. The red line is our operating expenses as a proportion of transaction value. As mentioned previously, we are on a trajectory to profitability as we leverage the scale of the business, demonstrated by the positive jaws between the green and the red lines. Admittedly, this leverage has come earlier than expected, both due to the changes in the debit As we move back into a business as usual mode, you should factor in some one off distortion in the flying over the next year.
The The half year draft nevertheless demonstrate our ability to manage the business profitability at short notice where required. Please turn to Slide 16 for a summary of our financial position. The IPO in the 2020 financial year saw a net capital injection of $109,000,000 further strengthening our balance sheet and positioning us growth even under challenging conditions. This was never truer than in 2020. Our capital ratio was a healthy 143% at balance rate.
The drop from June's ratio of 162 percent is as a result of our investment in Bendigo and Paper Plane in the half year as well as an increase in cash from merchant deposits, which ended the year at $104,000,000 As we complete Bendigo under the accounting standards, we will recognize significant assets and payables up Presenting the presentation, and you will see the ratio drop to a more efficient level by 30th June 2021. More details on these have been provided in our capital commitments now. Our loans balance Reduced significantly to $4,400,000 We originated only $2,600,000 compared to $37,400,000 in the comparative half given the downturn in the economy. While small, our loan book loans book performed better than expected, and we reported lending losses of only $500,000 As a result, we were able to release $1,000,000 of provisions reflected in the form of fair value gains on loans in the income statement for the half year. In terms of other investments, we booked $3,000,000 in intangible assets being the upfront deposit for our alliance with Bendigo and acquired shares in Paper Plane for $1,900,000 On the other side of the balance sheet, our deposit account balance More than doubled from June 2020, closing at just under $104,000,000 This has been a very successful product for the company.
We moderated the interest rate in the half year as the growth in this book is not required until our loans book starts building up again. At 31 December 2020, the balance comprised $99,300,000 in the Tyro bank account, up from $49,600,000 at June And $4,700,000 in term deposit, up from $900,000 at June. Tayo has continued to capitalize projects as appropriate. At reporting date, dollars 5,200,000 was carried on the balance sheet from internally developed assets. These assets relate to developing our capabilities Tyros, cash flows are provided on the next slide.
Notable cash items other than our EBITDA included $53,000,000 in inflows from our retail deposits net $8,000,000 in retenance from our loan product Investments in associates and the Bendigo Alliance of $4,900,000 purchase of $3,700,000 of terminals. Our CapEx will ramp up significantly for terminals in the second half as we complete the Bendigo transaction. Those are the key financial call outs for the half year. In summary, payments was a predominant business for Cairo and the main driver for its results. While COVID impacted our top line growth, The underlying business performed strongly with improved unit margins.
Gross profit growth of 22% in the half year, combined with expenses growth of 8%, Returned a positive record EBITDA of $8,500,000 The banking business was small in the half year. Deposits Grew strongly, however, loans were deliberately paused and are expected to provide an ancillary income stream as it grows in line with economic recovery. Expenses were tightly controlled, and the results show strong operating leverage achieved earlier than expected. Most importantly, Our capital position remains strong. It allowed us to continue investing in our people, our customers and our products despite the challenges of 2020.
Finally, in considering our second half FY 'twenty one performance for your modeling, you should consider potential changes from the first half, for example, Any remuneration reviews and removal of hiring freezes, no contribution from JobKeeper, Any costs associated with the terminal connectivity issue, CapEx and costs associated with the Bendigo Alliance commercial completion. That is the financial update for the year for the half year. I will now pass back to Robbie for a trading update. Thanks, Robbie.
Thanks, Raj. And look, maybe just starting The terminal connectivity issue, so clearly, our ambitions for the second half of the year were interrupted by this event, which we experienced on the 5th January. This has been an impact of approximately 30% of our merchants, either fully or partially. And I've got to say, it did not sit comfortably with me nor the team at Cairo. Notwithstanding 18 years of operation with no similar issues, we are now building a failover solution.
This will see us provide all our agents with a dongle device in combination with their standard terminals as an extra level of redundancy. This is an industry first move. But whilst we continue at pace with our planned initiatives To drive growth and to build our payments ecosystem, our key priority over the next 6 months is to do all that we can to rebuild trust with those of our merchants who are impacted. To this end, we have proactively contacted and requested all impacted merchants with suffered financial loss to leverage the service. We are also closely monitoring merchant terminations, and to date, we've not seen any material changes to our normal termination rates.
We paused on boarding of new merchants during the course of the incident to ensure all our efforts were deployed on reestablishing normal operations Pleasingly, we've now seen new merchant application rates return to near normal levels With the last 3 weeks delivering 224 merchants and the week ending the 7th February, the week ending the 14th February, we Our transaction value for the second half commenced with a growth rate of 3% for the 1st 2 weeks of January, impacted by the terminal connectivity issue. Growth rates returned to between 14% 18% for the remainder of January and into early February. The 3rd week of February fell for an 8% growth rate as a result of Victoria reinstating lockdowns. Our financial year to date growth rate is sitting at about 10%. In terms of outlook, whilst we're not providing specific profit guidance for the full year.
We do take this opportunity to discuss some early trading indicators beyond what I've mentioned for the second half As mentioned, our transaction value in 2019 February grew 10.1% on the prior corresponding period to $15,400,000,000 And our payments gross profit for January was 8 point $1,000,000 down 0.7 percent on January 2020. So with that, I'll end the formal presentation, and we'll now move
Your first question comes from Ash Chandra with Goldman Sachs. Please go ahead.
Good morning, gentlemen. Thanks Just a couple of quick ones from me. The normalization that you referred to or some degree of normalization in net gross profit margin the Due to more normalizing, I guess, card mix, is there anything in that by way of assumed repricing or anything you might need to do by way of the PR or remediation for merchants? Or is this a reference purely to mix shift of card volumes?
It's Robbie here. Look, that's it, the mix shift. It's got there's no factoring in there of remediation or anything of that
Okay. Terrific. Thank you. And with the churn that you've indicated in January being 10.3%, Is it fair to assume that, that skews to the smaller end of your merchants, I. E, the merchants that would be perhaps most effective and Susceptible to churn of those that might have been just sort of 1 terminal operator?
Yes. Look, the terminations we're seeing Today, it has been very consistent with what we saw before the event. And typically, that is, yes, the smaller merchants, so not at the bigger end of town. But look, I think I'll just call out and make it clear. Yes.
I think we've got a we're in a good position. We haven't seen any dramatic changes. But on the cautious side of things, I think we need to wait for the 2 or 3 months of just stepping down. How we actually handle this next phase with merchants who have been financially impacted will be very important. So I do think it's one of those things where we just need to spend a little bit more time just seeing how everything settles down.
Okay. Terrific. And sorry, I'll just squeeze
in one last question before I jump
in the queue. The Bendigo commercial completion that's expected by the end of the second half of fiscal 'twenty one, Does that mean like just to be clear, we shouldn't be assuming anything or much by way of transaction volume Coming through from this and that, that really becomes the full fiscal 'twenty two.
Yes, depending on when that completion happens relative to the end of the half. I mean, there is a on completion, the transaction Value to move to us. There's obviously costs associated with that whilst we locate star terminals in and the Bendigo terminals out. But I would be working on the basis that it's later in the half, but the impact would not be particularly material.
Your next question comes from Bob Chen with JPMorgan. Please go ahead.
Hey, morning, guys. Just a few questions from me. Just in terms of that NSF prices coming off pretty strongly over the first half, I mean, aside from the Was there any sort of pricing or competition sort of impacting that as well?
Yes. Bob, it's Krav here. The So it's a double whammy. Probably just also to announce it to Ash as well. So it is an increase in the card mix, which went from 56% to 1%.
But also, as I mentioned, with the schemes coming out competitively in the debit card space, you'd see the underlying costs I've actually gone down. So our portfolio being 53% blended or normalized, that's added to our unit profit margin.
Okay, great. That makes sense. And then just in terms of the outlook on sort of cost investment for the business going forward now that Yes. You're still trying to hire again. Like how should we think about that given that you said that 8% over the first half?
Yes. Look, Bob, on that front, and as we've said before on pre COVID, I mean, the things that we did in the period as we called out In the body of the call, we've put in place hiring freezes. But we have said in the past, we do have the bench So we need to do the key initiatives we've got in place. But there are some areas, and we've talked about this before, such as e commerce, where we do want to Investor, so they are areas where we will bring more headcount on board. But that will typically be involved in a project which It would more likely to not be capitalized.
So there will be some increase in headcount, but how that actually gets treated from a financial point of view will depend on the projects The other thing, as I think Faas mentioned or did mention, is with Bendigo, there will be additional headcount brought on as part of that project In terms of customer
servicing. Okay. Great. And then just from a new merchant application perspective, Can you talk a little bit about the channel mix you've seen the merchants coming through from and also the types of merchants that are skewing towards the larger to file The merchant sort of a bit smaller. How does that sort of compare?
Yes. Look, Bob, the channels that The applications are coming through our pivotal channels, so through our direct through our online channels, through our I call the independent sales organizations and through our cost partners, so there hasn't been any particular change in the mix. And as is normally the case, the line share of applications coming through, tend to be in the SME space. We obviously still have live conversations going on with Larger merchants, which have key accounts being typically sourced. So no real change in the application mix.
And just a final one for me. Just for me and you, you sort of mentioned earlier that some of those volumes or those volumes are coming on to This is Tyler on platform. I think can you provide an estimate of how material those Boeing would be?
Yes. Look, we haven't put any numbers out there yet, Bob, but it's a significant channel. The me and you team have been Successful in deploying their solutions, particularly with the advent of COVID. That solution has been particularly attractive the In the hospital lease space. So it will be a meaningful client, if
I put it that way, in
the terms of our book. It would be in our top 20.
Your next question comes from Brendan Carrig with Macquarie. Please go ahead.
Just a couple from me. Just In terms of
the CapEx of $1,000,000 do
you think this might be a
little conservative just given the terminal issues? And is there potentially a need to Maybe refresh a larger proportion of the terminal network. And in the absence of the Bendigo transaction, Would you have been more proactive in maybe directing more CapEx towards your terminal fleet?
Brandon, the issue we had, the Sonic 50 issue actually Nothing to do with the hardware. It actually had to do with the source code on the device. So there's no issue with needing to As we have called out in the past, there were in the fleet A limited number of very old terminals, which we've been attempting to encourage some of our merchants to fight a lot. The thing with those units, and they've had ages between 7 to 10 years old, in fact, we're talking about 1,000 odd units. They were owned by those vessels, so they weren't under our typical rental model.
And so we've been trying over the years to get those from the fleet. So they're the ones we actually have to replace as a result of the incident because they were not capable of actually having a software a new software injection put into them. So otherwise, there's no issue with the The hardware, the fleet is run out in the field.
Okay. That's clear. Next question was just in terms of the Estimated financial impacts from the connectivity issue, the $3,000,000 of costs and the $15,000,000 of claims. So is there costs to review claims incorporated in that $3,000,000 And then the $15,000,000 It's just more remediation for lost revenues of merchants or something along those lines.
So what we've called out there, Brendan, in the know, we've called out the We've incurred this is about £3,000,000 line item, which significant portion relates to harvesting in from the We feel the impact of terminals, so that was a significant portion of that cost. The $15,000,000 approximation is put there as an indicator of where we think Things may land in terms of claims. But those they do not include Just the processing cost of handling any kinds of come in, but we're doing that internally with existing resources.
Okay. And then I might touch on mix later because you've already asked a few questions, but I might take that offline. My last question is just in terms of the current merchant numbers of 36 1720. How many inactive merchants are included in that given that
there was 3,200 or so
The number we've called out, Brendan, is our active merchants.
Yes. So sorry, can you provide what the inactive number is, just given that it's Quite important, just given you're talking about merchant growth in active. And so
I guess there's a redirection of
I would assume some inactive merchants have
switched to active during the period.
So we don't normally pull out the inactives, Brendan. So we've given you the star. And you can compare that active number with the same, the PCP. We always have a number of inactive merchants on the books. I mean, it's just normal.
It wouldn't depend on our That's not unusual. So I suggest you just focus on the active merchants because they're the ones that are generating revenue. Okay. I'll leave it
there. Thank you. Your next question comes from Michael Aspinall with Jefferies. Please go ahead.
Good morning, Ravi and Prab. Just some for me. Just starting on the financial impact of the connectivity issue. The The Jan gross profit number was impacted by waivers on terminal rental. Can you give us just some context of how many of your customers that's over and for how long that will continue?
We can probably give you the amount that we waived in January. I think we're working through the remediation process as we speak, so probably wouldn't give any guidance other than the total number that was included in the pack. But in January, if you look at the total number of merchants impacted, we provided rental relief rental waivers, rather, of $1,800,000 and that's included in the $3,000,000 that we I've already called it as the cost of the incident so far.
Okay. So that $15,000,000 that you've called out is effectively terminal rental relief and potentially some NSF reduction for some
impacted customers. Is that right? No. The €15,000,000 is an integrated number that we And it could be a combination of however that comes through. I'm just calling out the actual cost that we incurred in January, Where we waived $800,000 in fee waivers to merchants.
Yes. Okay. So just that $15,000,000 would include something like terminal rental?
Michael, the 15 will depend on what actions we take in relation to the next wave in terms of Remediation. And that could be deployed in a number of different ways.
Okay. Great. And so on You mentioned you reduced regeneration reviews after 18 months. Does that mean there hasn't been any reviews in the last 18 months? And then with wage at 75% of OpEx, what drove the 8% increase?
So a couple of things. So as We have frozen any salary increases, so it is correct that none of the team has had an increase for 18 months. Increase has been driven by the annualization of headcount that we onboarded during the course of the year. So we hired somebody the Midyear, yes, you get the full annual impact in the following year. So that's where that increase has come from.
Okay. Great.
And you headcount, I think, is it better than you headcount might have come in part year to prior year. You get the full impact in the 20 1 period.
Yes. Okay. And you showed Tyra Connect. Do you charge for that product? Or is it being pitched as kind of another part of your offering 3 customers.
Yes, no charge for that product and no foreseeable charges being deployed for that product. We're very much looking at it and have looked at it the It's a value add proposition. It cements people in our ecosystem, and it provides just another reason why No, as a merchant, the queue start up.
Okay, great. And then just one. In Prab, in your comments, you mentioned that You're well placed to adjust to any upcoming structural changes in cost. Can you just provide us with a bit more color on what you might have been referring to there?
Yes, sure. So I think I've spoken about this previously. So our payments business, we manage as a portfolio. So in the last 6 months, There was an example of where costs dropped significantly. So we were able to actually benefit from that given, say, roughly half of our portfolio is on a cost basis, which gets passed through.
The other half is on a normalized basis, so it improves the gross profit margin. If it was a converse, We manage the whole portfolio pricing in an aggregate, and we do pricing reviews at least once a year to make sure that the costs are in line with what we're incurring and what we're passing on to our merchants. So I think an increase in costs, we would be looking at Overall, with changes in cost structures and any pricing reviews that we might have to do.
Okay, great. And I mean, just while we're on that, Can you quantify what the impact to the region's change in scheme fees were then from that structural cost you mentioned versus debit cards?
Yes. Probably not in too much detail because the scheme fees are quite confidential. I think on a weighted average basis, Our margin actually improved by 4 basis points. Now a higher amount of that was skewed towards the debit card. So you have to probably do the multiplier effect of 4 average, together with the mix of the value changing from international to debit cards as well.
Okay, great. Thanks for that guys. Thanks very much.
Thank you. Your next question comes from Elijah Meyer with CLFA. Please go ahead.
Good morning, guys. Thanks for taking my questions. Just firstly, I just wanted to switch on the different performance of the verticals, just specifically on the other vertical up 9%. Could you just sort of maybe just talk to specifically what was driving that Sort of going into the trades and the accommodating sort of side of things and maybe just talking about your prospects for that going forward.
Hi, Elijah. You look that the other includes a quite a mix of industries. And It's sort of hard to draw out any particular theme. It does pick up some accommodation venues. It picks up transportation.
So in there, for example, Yes. Cath there, one of our big clients, sits in that area. So it's actually hard to draw any particular segments because it is quite a diverse Group of merchants.
But there's a single sort of area that's larger than the others?
No. Look, No, the transportation one is significant in there, but it would get muted out with other Industry remains, as I said, that's a bit hard to do anything.
Yes, understand. And then just on the churn, I guess, Specifically, the churns are going to come from, I guess, merchants going to competitors or sort of going out of business. Have you sort of seen any change in that mix all that composition of churn, I guess, through the start of this year with the trading update or through the first half 'twenty one?
No. Look, definitely not in the start of this half. I mean, it's sort of too short to draw any real conclusions. But Look, in the 6 months for the reporting period, it's no real change in the dynamic there. As we said in the past, the biggest component of that churn rate is businesses going out of business.
Unfortunately, it is just the nature of the SME space. There's no losses of any major clients in that mix. So it really comes down to the Larger portion of this business is going out of business, and then there is always and has always been the case that we do on a basis lose some merchants to Other competitors.
Great. Thanks for the question.
Thank you. Your next question comes from Gary Dersma, Private Investor. Please go ahead.
Hello, Robbie. Can you hear me? Gary, can you hear me?
Good stuff. I understand that the business now has Direct cost recovery surcharging solution where the actual cost of the card is surcharge directly with a cardholder, Which I suspect that it is essentially a zero cost acquiring solution to the merchant. Could you comment on that? What percent of the base is using that? And how does the margin look for that
Yes. So look, it's absolutely true. We do offer an ability for our merchants to surcharge, and that is a merchant by merchant proposition. So it's up to the merchant to make the decision whether they want to offer that product. And It is a product which for more and more merchants, they've seen that as they it's something that they wish to do, and we provide a really convenient way for that surcharge And be done in a compliant way, which is important.
In terms of the split out, it's a portion of merchants I'm surcharging, not surcharging. Gary, it's not something we put out in the public domain. We've obviously got those facts, but it's just not one we put out there. Can you comment on the profitability of that part of the
portfolio, like Mitch and said, do choose to invoke that feature versus those that choose not to?
From our point of view, it really doesn't make any difference. I mean, it's just whether they recover that cost or not. So it's an attractive feature in merchant acquisitions, so having that product in market is a good feature and there's others that are pushing That offering quite aggressively, Margaret. So us having that feature is important. So it works very well from a merchant acquisition point of view.
The profitability the There's no differential
there. Thank you.
Thank you. Your next question comes from Andrew Anagnosteles from New Guinea Investments. Please go ahead.
Thanks for taking the question guys. Look, I just wanted to go back to Firstly, just to say congratulations on the disclosures, very timely and comprehensive. My question really goes to your initial point where you said you were very concerned about the issue itself for the first time in many years. You think the concern here that it sort of seems to have crept up on Cairo on Note 7th January, the The disclosure talked about 15% impact. The next week, of course, 30% impact.
Isn't it a concern that The outage seems to be much more serious and much quicker. And is it something, looking back on it, that Should have been attended to Quick or where the company's existing procedures and policies in place and you're comfortable that this. This was probably handled in accordance with the disaster recovery plans you would have had in place. Thank you.
Yes. Thanks for the question, Andrew. Now look, just trying to answer that in an overall way. The disclosures, the first disclosure we made related to the number of terminals which were impacted at that point in time. There were more terminals The lost connectivity over the 1st series of days.
So we've reported as events Unfolded and reflected what the impact was. As I called out, it was circa 30% of our merchants, of which 19% at the peak were fully impacted and 11% were partially impacted. In terms of the event itself, as we've sort of or as we have disclosed in the release that we made In the past, this was something that arose from an issue sitting on the terminal. It was not something that was able to be foreseen. When the incident happened on the evening of 5th January at 10 that evening, a major incident event was called All our emergency response and disaster recovery initiatives kicked in at that point.
And I can tell you everything humanly possible was done to mitigate the impact on our merchant. So I'm very comfortable that all due process and procedures were implemented and everything that was possible to be done As I call out, though, this is something that has never happened in our history. This has happened with other institutions, though, In the past, what Cairo is doing, which is quite different to anybody else, we are not comfortable sitting here today, and I'm not comfortable Sitting here today without a fall over solution, a failover solution, which is why we are developing our dongle, which will be issued to every merchant starlight. Now that's something no other institution has done, notwithstanding the fact others have had incidences like this occur. So we are taking this.
We recognize it could happen. I'm not the best of it here and ignore it going forward. I don't think it will ever happen again Due to the root cause of this issue, however, I'm not prepared to ask people just to trust us. We will actually have an alternate path for people to transact with us.
There are no further questions at this time. I'll now hand back to Mr. Cook.
Thank you very much. Look, I'd just like to thank everybody for their time. Appreciate attending the call and have a great day.