Karooooo Ltd. Q4 FY2022 Earnings Call

Good day. Thank you for joining us today. I'm Zak Calisto, the Founder and CEO of Karooooo. During this presentation, we will be making forward-looking statements, including statements regarding our financial outlook for FY '23. Please read the disclaimer before you make any decisions. All reconciliations to non-IFRS metrics are in our earnings announcement, the 6-K published on our website. Before we talk about our results of FY '22, we want to demonstrate to you the way we think about our business. As we charge an average of 50 billion per month per vehicle for what we do, the large impact that our solution has on businesses is often misunderstood or underestimated. Our platform helps our customers transform their businesses. We allow them to be extremely efficient and competitive as they digitalize their on-the-ground operations. Fundamentally, our customers are able to do much more with less by using our platform. We have been building our platform for over a decade and it has evolved far beyond monitoring vehicles. Specifically, in the last few years, we have allocated a large amount of capital into R&D, and we will continue to do so. We have built our platform for the future, so we can be long-term partners of our customers. We understand that many of these developments will not yield immediate results, and we will see the benefits in the medium to long term. As we all know, mobility is core to all the on-the-ground operations of any business. We think beyond connected vehicles and equipment. Hopefully, the video that we've all watched has helped everybody better understand our business. Fundamentally, our mission is to establish the leading on-the-ground operations cloud that will allow us to partner with our customers for the long term. We're now going to watch another video that will show what one of our customers' day-to-day operations looks like. After watching that video, I believe you can now better contextualize all the value that we bring to businesses. The businesses that we serve range from small SME customers to very large enterprises. Clearly, the larger the enterprise, the more complex its operations are, and the more value we can bring to help them digitalize their operations. We strive to enable different departments to communicate with each other, allowing them to mitigate risk and increase productivity by gaining greater visibility of their operations. We're proud of our continual development of our platform to assist our customers in better digitalizing their operations. We know that digital transformation does not happen overnight. So we partner with our customers at various stages of building their business. One of the things we pride ourselves on is the ROI our customers receive. They see the ROI benefits right in the first or second month. But, more importantly, they see the real benefits over time as they use our technology, which allows them to improve their businesses every day, one day at a time. We have a diverse customer base, ranging from consumers to small and medium to large enterprises. We understand that these businesses are very different, given that they operate in different industries with distinct types of active vehicles and different operations. Our ability to localize is very important for our success. Given the vast data we collect across different industries, there are billions of data points we collect monthly. This allows us to provide business intelligence reports and use learnings from one country or industry to assist others. It’s about understanding that every customer has unique challenges, and knitting this all together is really what we do to help our customers digitally transform their operations. With the contextualized data we provide our customers, they can optimize their day-to-day operations and also improve the long-term strategy of their business, including staff training and organizational structuring. Many of the insights our customers derive from using our platform allow them to be competitive, efficient, and drive real value for their businesses. Some decisions may not yield immediate gratification because they help define how they should be improving their businesses. We are a vital part of the much-needed related services, given our large data pool. We understand the untapped network effect of our platform. The sale of data on our cloud is vast and growing. We collect over 90 billion valuable data points monthly. We are at the early stage of a large and long-term growth opportunity. Mobility is certainly core to the on-the-ground operations of all businesses around the world. To understand the full opportunity better, we must look at the number of vehicles in each geography we operate in. We understand that among these vehicles, some are for consumers while others are for businesses, and in certain geographies, we currently do not engage in consumer business. For example, in South Africa, there are over 10 million vehicles, and roughly 11 million in the region. Currently, 10% of all vehicles on the road are on our platform. In Southeast Asia, with over 100 million vehicles, we have a relatively small footprint, which we see as our biggest opportunity. At the end of February, we had 145,000 vehicles on our platform, growing at 22% despite COVID, and with Asia now starting to reopen, we’ve noticed significant easing. We expect continued easing over the next six months, and by Q3, we anticipate increased momentum in our growth. Europe has over 100 million vehicles as well, where we have 127,000 vehicles. We are certainly going to allocate more capital to Europe and aim for growth above historical rates. Africa has a similar number of vehicles to South Africa, excluding South Africa itself, where we currently have 68,000 vehicles. We intend to put efforts into growing that market as well. Another important way of looking at the contributing factors of on-the-ground operations in terms of global GDP is that it's been documented to account for well over 40%. As the world evolves, and as data and technology evolve, it certainly aids businesses in growing. It helps them be competitive and efficient. We believe IoT data is key to enhancing operations. Our ARR was at USD 177 million as of February, which is ZAR 2.737 billion. This allows us a compounded annual growth rate of 18% over the last few years. Why do we win? We believe these are key reasons for our success: we are vertically integrated; we provide an end-to-end, comprehensive IoT cloud software platform which we continuously improve and allocate R&D resources to. We have a well-established infrastructure, particularly in some of the countries where we've been operating for longer. In other countries, we will certainly build a very strong infrastructure in the coming years. We have an expanding distribution network, integrated into our well-established infrastructure. Our ability to execute and achieve has been proven over the last decade, and we continue to scale our business effectively. Our operational technology partnership, a customer-centric culture, and a focus on customer ROI are critical aspects of why we succeed. We drive our staff to be innovative, fostering an innovative culture. We encourage our staff to experiment, with the understanding that they must remedy quickly. These fundamental aspects of our culture are the core reasons we finished the year with over 88,000 commercial customers, and we will continue to pursue growth into FY '22. We will now review the 2022 financial results of Karooooo. As you all know, we started the financial year where I was the sole shareholder of Karooooo, which owned 68% of Cartrack, a listed entity on the Johannesburg Stock Exchange. On the 21st of April, we successfully delisted Cartrack from the Johannesburg Stock Exchange. Karooooo took ownership of 100% of the shares and in April completed a listing on NASDAQ with an inward listing to the JSE. Cartrack was founded in South Africa, and Karooooo is now headquartered in Singapore, owning 100% of Cartrack. We are pleased with our performance during this financial year, as we have met our outlook for 2022. We achieved the projected number of subscribers, the contract subscription revenue on a constant currency basis, and the contract-adjusted EBITDA margin at 1,526,000 subscribers. Subscription revenue was ZAR 2.65 billion, and the contract-adjusted EBITDA margin was 47%. The trends we experienced in '22 align with our long-term financial goals and what we had planned for the year. The last two financial years have been challenging, but despite that, we have consistently grown our subscription revenue and customer acquisition metrics. Our subscribers grew by 17%, with net subscriber additions growing by 23% compared to last year. Our subscription revenue growth on a constant currency basis increased by 19%. Revenue growth on a constant currency basis was up by 23%, and our subscription revenue constituted 97% of total revenues. We are also excited that we now have over 88,000 commercial customers on our platform. Karooooo is continuing to grow at scale in 2022. Total revenue for 2022 was ZAR 2.746 billion, up 20% compared to FY '21, with adjusted EBITDA at ZAR 1.212 billion, up 8% compared to FY '21. We boast strong unit economics, robust operating margins, and our performance has consistently exceeded the Rule of 40. We are in a very strong cash position with a solid balance sheet. The strong growth is supported by a high customer retention rate. We ended FY '22 with a very strong cash position, comprising net cash on hand up 845% at ZAR 718 million. This included ZAR 349 million from net proceeds of our IPO in April. We spent ZAR 70 million on the acquisition of Picup, positioning us well for future growth, though we don’t believe we need the ZAR 718 million for the next 18 months. We also appreciate having additional funding that remains largely untouched. Our debtor's days for Cartrack were 34 days, down one day compared to FY '21. After significant investment into R&D and customer acquisition during the financial year, we ended up with ZAR 379 million in free cash flow. The cash raised through operating activities was relatively flat at ZAR 932 million. We invested 16% more than the prior year into customer acquisition, primarily for PPE. This PPE investment also included the increase in inventory due to component shortages, requiring us to increase our inventory levels to meet demand. In FY '22, we did not face any stock shortages and were able to fulfill demand. Similarly, we do not foresee stock shortages in FY '23 either. We pride ourselves on our discipline with capital allocation over the years, with a 16-year track record. Our earnings per share this year was ZAR 15.24, and our EBITDA margin growth was up 8%. We generated free cash flow of ZAR 379 million. This year, we decided to declare a dividend of USD 0.60, because Karooooo's filings in Singapore are in U.S. dollars. This amounts to an equivalent of $19 million that we will pay out in dividends. We have sufficient cash; we generated enough cash during FY '22. We believe our ongoing cash generation during FY '23, coupled with projected growth for FY '23, will ensure we maintain sufficient cash levels. We’re also happy to use our bank facility when needed. Thus, we feel confident about FY '23. Our business model, as you all know, is a strong generator of cash. If we achieve accelerated growth levels, we can always tap into our bank facility. Cartrack has a long history of consistent execution. We've been growing our business for 16 years now. We now have over 1.5 million subscribers. Our subscription revenue at year-end was close to ZAR 2.6 billion, with operating profit reaching ZAR 715 million after a ZAR 15 million adjustment made in February. We have taken all necessary steps to ensure this issue does not arise again. We backtested these measures and are confident that this will not happen again. Moreover, in Q4, all the customers for whom we had extended leniency are now settled. We are satisfied with our operating profit results declared for 2022 amid the challenges faced over the past two years. Our record in net subscriber additions stood at 220,000, compared to 180,000 last year, indicating a 23% increase. This is a strong achievement considering the challenges posed by COVID in the last two years. Importantly, we have over 88,000 commercial customers, representing a 17% increase over the previous financial year. We are well-positioned to significantly increase our investment in growth owing to our attractive unit economics. Our lifetime value for our customers is over nine times our customer acquisition cost, driven by our internal systems, go-to-market strategy, the quality of our staff, and the quality of our product, alongside our customer retention ability. This is key to our competitive edge in the market. Our average cost of adding a subscriber to our cloud decreased from ZAR 2,093 to ZAR 2,070. There are two components to the cost of acquiring subscribers: the capitalized portion and the portion that is expensed. The expensed portion increased from ZAR 660 to ZAR 718, affecting our income statement negatively. Regarding what we capitalized, we acknowledged a difference of ZAR 1,433 in FY '21 compared to ZAR 1,352 in FY '22. Our ARPU in FY '22 was ZAR 151, down from ZAR 154. Timing effects and exchange rates could have impacted this. Additionally, our subscription revenue gross growth margin fell from 73% to 70%, primarily due to the write-offs we made for customers affected, predominantly by COVID. We believe margin expansion will occur in 2023. Overall, our contract-adjusted EBITDA margin remained at 47%, consistent with our expectations for FY '22. We grew our subscriber bases across various segments despite COVID, with South Africa growing by 17%, Asia by 22%, Europe by 15%, and Africa by 9%. In 2022, we increased our R&D expenditure significantly by 41%, from ZAR 100 million to ZAR 141 million. Sales and marketing saw a 35% increase from EUR 238 million to EUR 322 million. Our net subscription additions stand at 23%. There is typically a lag between spending on sales and marketing and realizing actual benefits. G&A jumped by 10%, up from ZAR 477 million to ZAR 523 million, excluding the ZAR 15 million write-off encountered in December 2021. We are strategic in how we allocate our capital, adhering closely to our long-term goals. Our long-term operating metric targets include maintaining R&D spending between 4% and 6%, and it was 6% in FY '22. Sales and marketing as a percentage of subscription revenue aims to be between 17% and 19%, though it was 13% in FY '22. We aim to increase our sales and marketing spend by an additional 50%. General administration, as a percentage of subscription revenue, stands at 20%, and we plan to reduce this to between 12% and 16%. Our adjusted EBITDA margin as a percentage of subscription revenue is 48%, while our long-term target is between 50% and 55%. Looking ahead, Kartrack's outlook for FY '23 shows we are well-equipped to scale the business. We plan to see subscriber numbers between 1.7 and 1.9 million. Our subscription revenue for Cartrack is projected between ZAR 2.95 billion and ZAR 3.1 billion. Our adjusted EBITDA margin is also forecasted to be between 45% and 50%. As of the end of February, our SaaS ARR stood at USD 711 million, translating to ZAR 2.727 billion. I would like to thank everyone who joined us for the presentation, and I'd like to open up the floor for questions. Thank you very much. As you look to accelerate sales and marketing investment in FY '23, what should we expect the typical ramp-up of your new sales reps to look like? Do you expect sales efficiencies to remain stable throughout the year? The recruitment process is always a bit slower than one anticipates. We've already begun recruiting in Q4. Clearly, this does take time to get the right mix of people and to train them properly. When ramping up your sales force, especially, you want to execute a strong onboarding. You must bear some inefficiencies during the initial stages, if that makes sense. Hence, we are expecting some weakening in our unit economics as we ramp up. In terms of recent commercial customer wins, are the majority of these situations greenfield opportunities, or are you replacing various competitive solutions? Generally, we target untapped markets, which is quite significant. Most of our customer acquisitions tend to be greenfield opportunities. As we start engaging medium-sized and large enterprise customers, we come equipped with a more sophisticated offering that addresses their operations, not just their vehicles. However, we anticipate that we will start competing with other service providers targeting these customers, particularly if those competitors are not offering comprehensive solutions and have not kept pace. Regarding market presence in Southeast Asia, which specific countries are you operating in? Does the ARPU of ZAR 100 million indicate performance across the region, or is it concentrated in a few places? Our predominant markets are Indonesia, the Philippines, Thailand, and Malaysia. The only Southeast Asian country where we currently do not operate is Vietnam. I am unsure if the 100 million vehicles statistic includes Vietnam, but that is potential expansion territory for us. On the differences between EBITDA margins for Cartrack and Karooooo, the reason is that we have Picup and Carzuka, which are both currently loss-making entities, in their early startup stages. These two together have generated a negative EBITDA of ZAR 19 million, whereas the operational expenses under G&A number you mentioned amounts to ZAR 50 million. My apologies for any confusion. Referring to your interest in increasing the percentage of revenue for sales and marketing costs, where do you plan to allocate this additional investment? We intend to increase spending on product adoption, and improve the effectiveness of our salesforce for face-to-face engagements and call center operations. Overall, our intention is to strengthen customer experience across the board and drive both customer acquisition and retention. It's a comprehensive approach to drive business growth. As for the wide range of subscriber growth compared to subscription revenue growth for FY '23 guidance, the discrepancy is due largely to timing in financial modeling. Many customers onboarded in Q4 significantly impact those figures, so subscriber growth may lag behind subscription income growth. To estimate subscription revenue growth, we typically take the subscriber growth from the current year plus that from the previous year, averaging the two to get a fair expectation moving forward. I wanted to address a question regarding Cartrack's gross profit margins in Q4, which were only 65% despite a higher subscription mix that quarter. You mentioned write-offs—can you quantify that impact? While I don't have exact figures, I can confirm that write-offs in Q4 were substantially higher than in both Q1 and Q2. As previously stated, we communicated the anticipated write-offs in Q4. These have undeniably impacted our gross operating profit, but we confidently expect margin and gross profit expansion in FY '23. Looking at key investment areas for fiscal year 2023, your main directives? I would emphasize sales and marketing expansion, training, enhancing G&A functions, and continuing the development and improvement of our product offerings. Our goal is to invest wisely across all environments, be it G&A, sales and marketing, or R&D. Yet the primary focus will clearly be on sales and marketing and R&D. Addressing Mike Walkley's inquiry regarding GM and operating expenses for FY '23—what are the assumptions for trends? I'm unsure what GM refers to and regretfully must skip that question. I'll clarify later. In light of your increased sales and marketing spend in the guidance, do you foresee an upgrade in your long-term revenue growth guidance? We strive to be conservative in our outlook and do not wish to raise false expectations. However, we would certainly like to exceed our guidance now that we are moving beyond COVID. Addressing Istra’s question: Are you expecting significant impacts from inflation on your business? Yes, we are feeling inflation on the ground, particularly with rising fuel and food prices due to geopolitical tensions in Europe. How this will specifically impact our operations remains to be seen, and we must adapt accordingly. We have to assess whether we can reprice our services or leverage our economies of scale without adjustment. A question from Lesedi: What insights are being yielded from the U.S.A. office? Does management perceive challenges or opportunities for expansion in the market? We don’t specifically see difficulties in the U.S. market; rather, we view it as a significant opportunity. Our team is sufficiently staffed to target the U.S. market, and we prefer to focus on our current segments where untapped opportunities abound. We also take valuable insights on trends in software development from the U.S. market, which informs our operational strategy. Question from David from Saltine Capital: What excites you about Carzuka and why do you see potential for a differentiated offering against larger competitors? Our insight into the vehicle market in South Africa is quite deep, with 1.1 million vehicles currently on the road. Each customer typically changes vehicles roughly every 60 months, which presents ample opportunity. Using our knowledge, we intend to assist our customers in selling their vehicles at better prices based on conditions we assess, which also facilitates onboarding new Cartrack customers. Our software has been developed, and we have launched the first version, enabling us to scale this business. We believe this expansion provides complementary services and adds great value. Florian from LGM Investments raised the question concerning retail fuel prices reaching record highs—how is commercial activity affected by rising oil prices? What impact do changes in oil prices have on Cartrack’s customer ROI? Our value proposition for customers transcends mere fuel savings—most have already optimized this aspect. However, the current increase in oil prices will likely encourage more customers to seek our solutions. I can't quantify the exact correlation, but I do assert that the ROI calculations show immediate benefits for customers when they reduce idling, detect fuel fraud, and optimize routing—all benefits that tend to emerge within the first two months of our services. In the long term, do you plan to expand Carzuka to other regions? Our primary focus must be on perfecting operations in South Africa initially, which I believe we are heading toward successfully. Once that is achieved, we can look toward expanding into additional countries. As it stands, we only just entered the market with our software offering in April, which necessitates a careful, phased approach for building a viable business. Addressing Sandile’s point regarding the sustainability of dividends amidst ongoing investment into growth: Prospective investors should not look to Karooooo for dividends. Our growth trajectory has been slower than desired over the past two years, but we've consequently accumulated a significant cash reserve of approximately ZAR 700 million at the end of February. Much of this capital is held in U.S. dollars in Singapore since our statutory filings are rated in that currency. We are announcing this dividend payout as a reflection of our strong cash generation forecast for FY '23 and the cash we currently have available. Regarding the significant reduction in loans to related parties on the balance sheet—will this line item materialize in the foreseeable future? With the disposal of the real estate where Cartrack operated, now under Karooooo, we expect this transaction to cease any related party transactions moving forward. Therefore, this should logically bring down associated transactions to negligible levels. Thank you to everyone for your questions. We appreciate your engagement and participation. Thank you very much once again for attending our presentation. Goodbye.