Karooooo Ltd

NASDAQ:KARO

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Carmen Calisto, executive]

Hello, and welcome to Karooooo's Financial Year 2024 Q2 Earnings Call. On behalf of Karooooo, we'd like to thank you for joining us today. I'm Carmen, the group's Chief Strategy and Marketing Officer; and together with Hoe Shin, our Group Chief Financial Officer, we'll be taking you through our strong business updates and financials. All investors are advised to read through the disclaimer.

We will be reviewing all 3 of Karooooo's business units in today's webinar, namely Cartrack, Carzuka, and Karooooo logistics. Karooooo continues to believe in our mission to be the leading operations cloud, and we see how we are helping to set the path for tomorrow for operational businesses with our platform. Industry-leading customers consult with us on how to improve their operations and tackle their day-to-day challenges and our ability to think beyond connected vehicles and equipment has been pivotal in delivering a cloud that connects an entire operation in one place to achieve real business impact. Despite the varying macro environments we encountered; digitalization, ESG and compliance continue to be strong drivers for demand of our platform. Our platform offers the flexibility customers need to digitalize their operation at their own pace and in a way that makes sense for them, whether it is digital forms that facilitate workers and drivers to complete their workflows effectively via mobile app, coaching solutions that generate success and provide accountability, risk management tools that enable quick resolutions and full audit trails, automated carbon emission reporting and progress tracking or detailed productivity reporting for optimized operations, our platform fits into an operation for success. Additionally, customers integrate with their existing tools, such as fuel card providers and ERPs to further curate insights that suit their needs. By partnering with our customers to understand their operation and help tackle their challenges, we get deep insider knowledge to continue adding innovative features to our platform to further increase the value customers get and the importance we play in optimizing their operation. Our platform brings both operational and nonoperational teams together and helps companies remain compliant, competitive in their industries and most importantly, forward thinking.

To illustrate how our platform impacts the customers' operation, we can take a look into an existing customer. A large furniture manufacturer that delivers their own goods needed a way to alleviate their administrative burden whilst improving their operations. With delivery fees often impacting a customers' decision to buy, offering competitive rates was critical to their operation. After 10 days of implementing our delivery management tool, our customers saw returns at large. With our easy-to-use solution that optimizes all jobs across drivers and provides optimal roots as well as a practical mobile app for drivers to receive everything they need to excel at their job, our customers successfully saved 4 liters of diesel per vehicle per day. With this reduction, they're on track to exceeding their sustainability goals and reducing their carbon emissions by over 2,800 kilograms per vehicle per year. The payback period of our solution is under 3 days and the ROI is over 700%, and this is purely looking at the fuel cost savings. If we were to account for the manpower costs saved on dispatching and managing drivers as well as communicating with customers and collecting payment after delivery with our electronic proof of delivery, ROI would further increase. This goes to highlight Karooooo's strong value proposition and the impact our cloud platform has in streamlining operations, lowering environmental impact and helping businesses thrive in a more robust and competitive business landscape. The same way reaching for a phone has become second nature to society. Many drivers are unaware of their actions as well as the risks these actions have on their safety. What feels like half a second of screen time is actually 5 or [ harness yawn ] is actually the first sign of falling asleep at the wheel. Beyond harsh driving behavior detected by telemetry, AI cameras have given a new dimension to both managers and drivers to overcome high-risk driving behavior. Real-time audible alerts have proven critical in enabling drivers to correct their behavior in real time to avoid collisions and accidents, whilst with total visibility of events that previously went undetected, managers are now equipped to establish effective training programs and monitor the progress of drivers towards a safety-first working environment. AI cameras allow for a preventative and proactive approach to safety.

A customer that transports fuel has seen a 46% decrease in high-risk driver events detected by our AI after 3 calendar months of implementation. These events include fatigue, mobile phone usage, other distracted driving and tailgating. An accident with the vehicle carrying such sensitive cargo, is not only detrimental to driver's lives, but also can cause vast negative public relations that can have long-lasting negative effects on our business. Avoiding these high-risk events reduces accidents and implementing this technique has enhanced our customers' reputation for strong service delivery, which has led to increased business growth. The benefits of increased safety are far reaching. Not only does this lead to safer communities and better working environments, but it reduces costs substantially through reduced accident repairs, maintenance fees and insurance premiums. Drivers feel more loyal to companies as they feel the fruits of the investment and end customers feel more confident in the ability of our customers to exceed expectations. We encourage companies to work with their drivers by investing in their coaching and education and as the benefits and success of the solutions gain traction, we believe we will continue to see increased government mandates around the implementation of this technology as a means to increase safety for communities.

Our robust customer growth across industries is testament to our proven business model, competitive differentiators and strong financial position, and we continue to see no customer or industry concentration risk. With over a decade of insights into operations and how our customers work, we are able to pinpoint what will drive business value and are incorporating AI and machine learning into our platform to enhance our solution. From accident and fuel fraud detection to industry insights and benchmarks, our customers are reaping the benefits from our vast data scale and network effects, and we will continuously enhance our platform to further increase these benefits. Our progress remains aligned with our ethos and long-term strategy to drive unparalleled value to the day-to-day operations of our customers. There is ample runway for growth, and our team is motivated to deliver on it. The investor community at large has continued to ask many questions around our culture and teams. We understand that running an operation, the way we do is no small feat and we believe that our culture empowers us to deliver on key market differentiators that are difficult to replicate. We are open and transparent, and we zero in on execution, not politics. Our solution-orientated mindset continuously focuses on better solving customer pain points. We attract top talent that does not step away from a challenge and is not afraid to try something new. People that believe in hard work, less frills and more action. It is not easy to take ownership of work. But for our entrepreneurial and customer-centric teams, this is a key result of the innovation and creativity they continuously demonstrate.

As with most things, talking is easy, but our teams lead by example. We have had team members work their way from infield technicians to key decision makers. From analysts to leading country managers. Not only does it show our teams the progression and reward they can achieve in their career, but it also creates a team with a diverse set of experience, skill, and knowledge that is able to emphasize with the challenges faced by our diverse customers to solve them. We have a loyal team with a deep business and industry understanding required to build scalable tools that unleash the potential of operational businesses. Our culture is not for everybody, but the people that fit our DNA are resourceful, ingenious and have a strong desire and ability to solve complex problems efficiently. They collaborate and combine their knowledge from diverse industries and geographies to deliver on easy-to-use solutions in a quick and efficient way. Our staff are motivated by the success we see in our customers, and this places us in the privileged position of working with the team that has a long-term mindset that is designed to win. I will now hand over to Hoe Shin, who will take us through our financial performance.

[Hoeshin Goy, executive]

Thank you, Carmen. I will now talk to Karooooo's financial performance for quarter 2 FY '24. Please note that all comparisons are against quarter 2 FY '23, unless otherwise stated. Our quarter 2 performance has gained momentum building from our solid start of the year and demonstrating growth across various financial metrics. As expected, after substantial investment for future growth in quarter 2, Karooooo's total subscription revenue increased by 17% to ZAR 860 million. Operating profit increased by 13% to ZAR 247 million and earnings per share increased 14% to ZAR 5.61. Our profitable SaaS business model continue to bolster our cash flow generation ability.

Net cash from operating activity increased by 26% to ZAR 304 million. This healthy cash generation will continue to support our future cash outflow required for investment and future growth. All segments continue to see strong traction with the benefits of our strategic investment beginning to show. Our consistent results extend our track record of growth at scale, profitability and cash generation ability. After paying a dividend of USD 26.3 million and investing ZAR 87 million in the development of the South African Central office, our net cash on hand stood at ZAR 651 million. That does then improving to 29 days, alongside with prudent provisioning to weather off strong economic headwinds in some of the markets we are operating. We have strong unit economics, robust operating margins and leveraged balance sheet and a strong cash conversion. We remain confident that our track record of success, especially our ability to generate healthy cash flow is sustainable.

Our earnings per share increased by 14% to ZAR 5.61, and the increase is the result of positive revenue growth and improved profitability despite our prudent strategic investment for growth.

We will now focus on Cartrack, the underlying assets to Karooooo's success. Cartrack continue to prove its ability to scale in varying macroeconomic conditions and consistently beaten the rule of 40. Overall subscriber grew at scale by 14% to over 1.83 million. And in this quarter, subscription revenue grew at 17% to ZAR 858 million, while operating profit stood at ZAR 252 million.

Our solid start in quarter 1 continued as we gained momentum in quarter 2 with a record net subscriber additions of over 75,000 in this quarter. This was largely supported by the increasing demand of small to large enterprise, emphasizing the necessity to enhance compliance functions and digitally transform their businesses to become more efficient and competitive. Cartrack continue to build on a solid track record of growing at scale and an experienced strong customer acquisition in this quarter. Cartrack's total subscription revenue grew 17% in to ZAR 858 million and represent 97% of total revenue, which is in line with our SaaS business model. Total revenue grew 17% to ZAR 884 million. Our SaaS ARR grew 17% to ZAR 3,475 million. Cartrack's operating profit grew 13% to ZAR 252 million and adjusted EBITDA grew 9% to ZAR 417 million.

Over the years, Cartrack has maintained a steady ARPU and average upfront cost of acquiring a subscriber. ARPU for the quarter was ZAR 159. Cartrack's average lifetime revenue per subscriber in this quarter stood at ZAR 9,556. The average upfront cost of adding a subscriber to our cloud in this quarter was ZAR 2,293. These costs mainly relates to sales commission and telematic device, which are capitalized and sales and marketing expense that are expensed off. The headroom derived from the average lifetime revenue per subscriber after subtracting the average upfront cost of adding a subscriber was ZAR 7,263 per subscriber. From the ZAR 7,263, we incurred the cost to service a subscriber over the contract life cycle of [ 60 ] months. The cost to service a subscriber decrease as we grow our subscriber base. Our unit economics has been steady allowing us strong operating profits. Cartrack continued to grow its subscriber base and ARR to expand in all geographies. The South African economy remains under pressure. As a result of continuing strain on the National Power Grid Group. Despite the challenging trading conditions, our subscriber grew by 14%. In Asia, the Middle East and U.S. subscriber grew by 26% as the traction in Southeast Asia has been encouraging. Southeast Asia remained as the second largest contributor to the group's revenue, and we believe our value proposition will continue to find favor in this region and present the most compelling growth opportunity and deliver increasing and sustainable income to the group in medium to long term.

Europe saw a healthy growth of 14% and remain a region we are focusing our resources on. With our recent partnership with leading OEMs, we are poised to leverage our extensive offering to further develop the connected vehicle ecosystem and expect this partnership to contribute to our results in medium term. In addition, we are experiencing encouraging demand for our proprietary compliance technology in the region.

Africa, others maintains its growth with 8% increase in subscribers. At the end of quarter 2, our ARR increased 17% to ZAR 3,475 million. This is at a good trending as we continue to see the momentum of growth in our subscriber and ARR. Cartrack continue to have robust operating margins and our trends are in line with the long-term financial goals set upon our listing in 2021. In this quarter, our subscription revenue gross profit margin stood at 72%, which is consistent with our expectations. Research and development expense as a percentage of subscription revenue are 6% as we focus on driving substantial benefit from our R&D capital allocation. Our planned investment in improving and reaching and expanding our operation cloud and internal management system is to enhance our value proposition to our customer. Sales and marketing expense as a percentage of subscription revenue increased to 14%. We believe the strategic investment for customer acquisition position us well for continued growth, and we expect to see future benefit from this investment. General and admin expenses as a percentage of subscription revenue are at 22%. This planned increase reflects management's commitment to build a strong support infrastructure to meet our future growth plan. Operating profit as a percentage of subscription revenue are 29% and and our adjusted EBITDA as a percentage of subscription revenue is at 49%. We have had a solid start, and we are happy with the progress we have made in quarter 2.

Our guidance for Cartrack's outlook remain unchanged with number of subscribers between 1.9 million to 2.1 million. Cartrack subscription revenue between ZAR 3.4 million to ZAR 3.6 million and Cartrack's operating profit margin between 28% to 31%.

Carzuka delivered ZAR 85 million in revenue in this quarter and an operating loss of ZAR 13 million. Subsequent to the quarter 2 end, despite the growth experienced by Carzuka in South Africa, a decision was made to cease buying secondhand vehicles in South Africa. This decision follows considerable interaction with motor dealership over the last 12 months. Over the years, Cartrack has been partnering with dealership as part of its customer acquisition strategy to acquire customers through the introduction of this dealership. However, some dealership has perceived the Carzuka business interest to be conflicting with their business interest in buying vehicles from customers. We maintain that the Carzuka business model is robust, but we do not want to reach the long-standing strategic relationship that Cartrack has forged with motor dealership across South Africa.

Karooooo Logistics delivered significant growth, generating ZAR 72 million in revenue and an encouraging operating profit of ZAR 8 million in this quarter. It's focus on delivery as a service through selected third-party crop source drivers and logistic companies have been highly scalable and is delivering substantial growth. While we continue to integrate into Cartrack's platform to expand its customer base, the Karooooo logistics stack is expected to deliver a long-term revenue stream to the group. We believe the benefits of our strategic investment in this segment are beginning to show. I would like to thank everybody for joining us today, and we will now open the floor to Q&A with our Group CEO and Founder, Mr. Zak Calisto.

[Isaias Jose Calisto, executive]

Hi. good morning, good afternoon, good evening, depending where you are. Thanks very much for joining the presentation. I'll open up to questions. And the first question comes from [indiscernible] When will Cartrack start monetizing Data-as-a-Service, what percentage of Cartrack's annual revenues will come from Data-as-a-Service in 3 years' time?

[ Miles, ] sometimes these words are a bit of jargon. So Data-as-a-Service is currently what we do do, the way I understand it. And we basically take raw data, push the data through the IoT devices into our cloud. We obviously then work the data and keep intelligent business reports to our customers.

So in our opinion, a great portion of our subscription revenue model is a really Data-as-a-Service, which we obviously offer it as a Software as a Service. And so I think either I'm not understanding your question or that's my answer. The next question comes from Sebastian [indiscernible]. I'm not certain if I'm pronouncing the surname correctly. So apologies, Sebastian if that's wrong. Can you expand further on the decision should -- shut down Carzuka in South Africa? Will there be any costs associated to close in this division.

So basically, we have one lease that it comes to closure during this financial year. So there is no real material costs we've got in Cartrack at this point in time. About 500 vacancies open and the majority of the Carzuka staff, we will transition into Cartrack. So there is no major costs. Clearly, these costs could have a slight impact on Cartrack initially, but that has been planned, and it will be phased. So I think by the time we get to FY '25, these costs won't be wearing us down. So I think the reality is we've been loosing losses -- operating losses of approximately ZAR 50 million a year. And we see this loss disappearing and it will reflect positively in our earnings next year although I do believe that had we spent enough effort in the last 12 months to really put our shoulders behind Carzuka would have been much further. But we've been in long discussions with our partners, which is basically the motor dealers, where a few of them are saying that we've got conflict of interest with them. And we've decided to save these long-standing relationships and rather continue keeping our relationships with the motor dealers dealers healthy.

The next question comes from [ Matthew from Confluence Impact Fund. ]

Thank you for the presentation, congratulations on presenting these results. Despite the growth experienced by consequence [ decision of mostly seized by ] What does this mean for -- because would you be buying selling vehicles [indiscernible] on what different source are they [indiscernible]?

So we have got the platform. We have developed a software for Carzuka. We will still utilize the software for the benefit of our dealers. So currently, quite a lot of our dealers advertise their secondhand vehicles on the Carzuka platform. Within -- a system within selling the pre-owned vehicles. And we don't see this in any way conflicting, so we will still be able to anyone that wants to advertise on our platform. We're more than willing to do it, but we will not be taking inventory and buy and selling secondhand vehicles, but we will certainly allow our partners the dealerships to still get the benefit that they read until now.

[ Alex Sklar. ] Carzuka operating margin is up nicely this quarter. Can you talk about the operating margin expectation [indiscernible] before given you are absorbing Carzuka's employees?

It would certainly have a negative impact on Cartrack, but it's really a planned impact that we would have done anyway because we need to employ the staff. But I don't believe this impact is material. The staff moving over to Cartrack is strategic. We know the people. So we already know their strengths and weaknesses and where to put them and into which departments. So it's all really just helping us fall about 500 vacancies that we currently have at the moment.

Matthew from William Blair. Has the net subscriber mainly in the second quarter continuing into the third quarter?

Matthew, yes, it has. So in the first 40 days of Q3, our net and net subscriber additions were actually 40,000. So we are expecting to probably be over 80,000 net subscribers during Q3. That is our expectation for the Q3, given that we're halfway through Q3.

Another question from Matthew from William Blair. Can you provide an update on the OEM relationships, when could they start to contribute to subscriber additions?

We have done a lot of integrations already with the European OEMs. We should be able to start seeing fruits from these relationships in FY '25.

Matthew from [ Confluence. ] Please, can you comment on the proposed merger between Mix Telematics and Powerfleet, which geographies do you overlap in?

I must say, Matthew, I'm not very family with Powefleet.

Mix, I'm relatively familiar with them. So, if my understanding is correct, Powerfleet is very much American-based. So I prefer not to comment because I don't really know. I haven't [indiscernible] into this information. I don't know.

Do you focus on different customers or routes to market. If we compare ourselves to mix, I do not believe that we focus on different customers or different routes to market. What differentiates your offer from Mix and Powerfleet?

I think there's multiple vendors with our types of solutions. I think our route to market, although at a high level, it looks similar. But fundamentally, when you get into the detail, we're quite different. Mix operating about 100 geographies. We are only operating 23. We're a great believer that we need to have staff on the ground in all the countries. We do not distribute in countries where we don't have presence -- physical presence and I think that makes quite a big difference. And then, obviously, we're very much focused on owning the customer and that could also be a little bit of a difference between us and Mix potentially, but I'm speaking under correction.

Next question from [indiscernible]. Cartrack's EBITDA margin has reached 47%, what have we reached the bottom at this level? Can you allow margin to trend below 47 marks? We've traditionally had our EBITDA margins between about 45% or 44% and about 52%. We believe that that will continue. It depends how much capital we've allocated into back office into sales, and it's a timing thing. We envisage that we will remain in these sort of margins for quite a few years to come.

Secondly, in terms of South Africa subscriber base, at which level do you expect growth rates in subscribers to peak, given that 30% growth achieved in Q2?

In South Africa, we've got about 1.4 million vehicles on our cloud. We believe we can drive that to about 3 million vehicles. Obviously, we'll try and do that as quickly as possible. Currently, we're growing, we're starting to see better momentum in growth in Q2 compared to Q1, and Q3 we will continue with that momentum.

Thirdly, the plan is to integrate Carzuka software, what is the estimated impact introduction?

I think I've covered that.

Fourth question, where do you see Cartrack return on common equity peaking over the coming years?

Well, there's many ways of calculating that. So we've got quite a lot of cash. So if you give out the cash as a dividend, then obviously you'll be in a situation that your return on equity is spikes.

You're certainly making better returns for us than any other of your earnings in a form of dividends. At what phase of growth cycle of the business, would it make sense for you to [ battle ] with the dividend given that the naturally high cash flow version rate, especially investments in organic growth and peak.

I'd rather stay away from that question simply because we're quite pragmatic in the way we run the business. We've got sufficient cash to accelerate growth, and we intend keeping a solid cash base on our balance sheet, that's what we've been doing and we're generating quite a lot of the free cash flow. And at this point in time, we can't deploy as much cash as we actually generate [indiscernible].

Next question from [ Miles Free. ]

Why does [indiscernible] Southeast Asia is the group's most compelling growth opportunity in the medium to long term? And when is it the TAM, as you have been Cartrack at a 500 OEMs in Europe.

Well, we certainly believe Southeast Asia is the largest. It certainly is. In terms of the economy growth Southeast Asia is probably one of the most fastest-growing economies in the world in the region. It's also a huge large addressable market. We've come in as outside as we're making good progress. We're starting to get good big momentum. And I think we've still got a very long way to go before we reach the full TAM. And I will answer the OEMs as well.

Is so that Cartrack have to double their number of subscribers every 4 years? Do you see this continue at this pace or faster pace?

Currently, we're growing slightly slower than we did in those years. I think when COVID came and then the one year post COVID, it sort of [ cramped our star ] , but we certainly are getting momentum. And our intention is to grow to more than double our subscriber base in less than 4 years. So it's just a question of us getting our momentum back, which you certainly aren't getting it post-COVID. Alexandra. Can you talk about the new [indiscernible] of subscriber growth from June [ 3 ] through to September? Did you see improvements every month or was it fairly ratable? Any change in vehicles [indiscernible] in terms of what you added this quarter.

So our customer base in terms of our SMEs, large enterprise customers and consumers remains quite constant over the years. And then our growth has been quite -- it's been quite consistent on a daily basis. We really measure our growth on working days, Alex. So quite frankly, we've got very steady growth. We can see it. We measure that growth on a daily basis. And the more working days we have, the better we do, and we certainly are picking up momentum.

Adding to that, Alex, typically, our Q3 is normally our best quarter, given that there's less holidays in Q3.

[indiscernible] what will the financial impact of ceasing Carzuka in South Africa? What percentage is coming from refurbishing.

So I think I've answered that too.

Andrew. Do you compete to a [ Discard ] group.

Andrew, I apologize, but I do not know the [ Discard ] group.

And then Chris Logan. Well done on sinking momentum since already seeing a lot of strength in non-vehicle applications. What do they call equipment monitoring? Is this an [ AE ] as we say is potentially.

Fundamentally, Chris, we're doing a lot of -- there's a lot of demand from our customers as well -- just IoT devices for equipment. So it depends what you call equipment, but we've got a lot of the yellow machinery, forklifts -- we deal with a lot of machinery already. So when we say subscribers, some of it includes that type of equipment that's been used in warehouses, and so my answer to that is clearly as long as it IoT device, and we can collect raw data and push that data into our cloud and help our customers run their businesses. That's what we do.

Then a final question from [indiscernible] Carzuka will be closing down altogether. We have got the technology. So the company will remain open, but we will not be buying and selling vehicles and only -- owning inventory.

I want to thank everybody for asking -- there's one more question that just came through.

[indiscernible] [ Georgia ] , ARPU has been stable for quite some time. Given all the inflation around the world, what is the reason you haven't increased prices.

[indiscernible] our ARPU today is the same that it was 15 years ago. And we've got great operating profit margins, EBITDA margins, great gross profit margins. We continue to grow our customer base. And quite frankly, the way we've always beaten inflation is just through economies of scale. And as we feel these expenses, clearly, we feel them over the years, but we've always been able to beat them through the economies of scale.

I want to thank everybody for joining us today and look forward to talking to you again in 3 months' time. Okay. Bye-bye