Karooooo Ltd. Q2 FY2024 Earnings Call

Hello, and welcome to Karooooo's Fiscal 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 Hoeshin, our Group Chief Financial Officer, we will be taking you through our strong business updates and financials. All investors are advised to read through the disclaimer. We will be reviewing all three 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 macroeconomic environments we encountered, digitalization, ESG, and compliance continue to be strong drivers for demand for 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 can 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 insight and 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 non-operational teams together and helps companies remain compliant, competitive in their industries, and most importantly, forward-thinking. To illustrate how our platform impacts a customer's 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 customer's 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 routes, as well as a practical mobile app for drivers to receive everything they need to excel at their job, our customers successfully saved four liters of diesel per vehicle per day. With this reduction, they are on track to exceed their sustainability goals and reduce their carbon emissions by over 2,800 kilograms per vehicle per year. The payback period of our solution is under three 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 cost saved on dispatching and managing drivers, as well as communicating with customers and collecting payment after delivery with our electronic proof of delivery, the 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 impacts, 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 five, or a harmless 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 three calendar months of implementation. These events include fatigue, mobile phone usage, other distracted driving, and tailgating. And accidents with a vehicle carrying such sensitive cargo are not only detrimental to drivers' lives but can also cause vast negative public relations that can have long-lasting negative effects on a business. Avoiding these high-risk events reduces accidents, and implementing this technology 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 also substantially reduces costs through reduced accident repairs, maintenance fees, and insurance premiums. Drivers feel more loyal to companies as they feel the fruits of the investments, 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 these solutions gain traction, we believe we will continue to see increased government mandates around the implementation of this technology as a means to enhance safety for communities. Our robust customer growth across industries is a 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 can 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-oriented mindset continuously focuses on better solving customer pain points. We attract top talent that does not shy 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 this 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 empathize 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 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 a team that has a long-term mindset designed to win. I will now hand over to Hoeshin, who will take us through our financial performance.

Thank you, Carmen. I will now talk through Karooooo's financial performance for quarter two FY '24. Please note that all comparisons are against quarter two FY '23 unless otherwise stated. Our quarter two 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 two, Karooooo's total subscription revenue increased by 17% to ZAR860 million. Operating profit increased by 13% to ZAR247 million and earnings per share increased 14% to ZAR5.61. Our profitable SaaS business model continues to bolster our cash flow generation ability. Net cash from operating activity increased by 26% to ZAR304 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 $26.3 million and investing ZAR87 million in the development of the South African Central Office, our net cash on hand stood at ZAR651 million. Debtor's turnover days improved to 29 days alongside prudent provisioning to weather off strong economic headwinds in some of the markets we are operating. We have strong unit economics, robust operating margins, an unleveraged balance sheet, and 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 ZAR5.61. The increase is the result of positive revenue growth and improved profitability despite our prudent and strategic investment for growth. We will now focus on Cartrack, the underlying asset to Karooooo's success. Cartrack continued to prove its ability to scale in varying macroeconomic conditions and consistently beat the Rule of 40. Overall, subscribers grew at scale by 14% to over 1.83 million. In this quarter, subscription revenue grew by 17% to ZAR858 million, while operating profit stood at ZAR252 million. Our solid start from quarter one continued as we gained momentum in quarter two 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 enterprises, emphasizing the necessity to enhance compliance functions and digitally transform their businesses to become more efficient and competitive. Cartrack continued to build on its solid track record of growing at scale and experienced strong customer acquisition in this quarter. Cartrack's total subscription revenue grew 17% to ZAR858 million and represents 97% of total revenue, which is in line with our SaaS business model. Total revenue grew 17% to ZAR884 million. Our SaaS ARR grew 17% to ZAR3,475 million. Cartrack's operating profit grew 13% to ZAR252 million and adjusted EBITDA grew 9% to ZAR417 million. Over the years, Cartrack has maintained a steady ARPU and average upfront cost of acquiring a subscriber. ARPU for the quarter was ZAR159. Cartrack's average lifetime revenue per subscriber in this quarter stood at ZAR9,556. The average upfront cost of adding a subscriber to our cloud in this quarter was ZAR2,293. These costs mainly relate to sales commission and telematic devices that are capitalized and sales and marketing expenses 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 ZAR7,263 per subscriber. From the ZAR7,263, we incurred a cost to service a subscriber over the contract lifecycle of 60 months. The cost to service a subscriber decreases as we grow our subscriber base. Our unit economics have been steady, allowing us strong operating profits. Cartrack continues 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. Despite the challenging trading conditions, our subscriber base grew by 14%. In Asia, the Middle East, and USA, subscribers grew by 26% as the traction in Southeast Asia has been encouraging. Southeast Asia remains 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, delivering increasing and sustainable income to the Group in the medium to long term. Europe saw healthy growth of 14% and remains 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 the medium term. Additionally, we are experiencing encouraging demand for our proprietary compliance technology in the region. Africa continues to maintain its growth with an 8% increase in subscribers. At the end of quarter two, our ARR increased by 17% to ZAR3,475 million. This is trending well as we continue to see the momentum of growth in our subscribers and ARR. Cartrack has continued 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 expectation. Research and development expenses, as a percentage of subscription revenue, are at 6%, as we focus on driving substantial benefits from our R&D capital allocation. Our planned investment in improving and expanding our operation cloud and internal management systems is to enhance our value proposition to our customers. Sales and marketing expenses, as a percentage of subscription revenue, increased to 14%. We believe the strategic investment for customer acquisition positions us well for continued growth and we expect to see future benefits 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 plans. Operating profit as a percentage of subscription revenue is at 29%, 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 two. Our guidance for Cartrack's outlook remains unchanged with the number of subscribers between 1.9 million to 2.1 million, Cartrack's subscription revenue between ZAR3.4 million to ZAR3.6 million, and Cartrack's operating profit margin between 28% to 31%. Carzuka delivered ZAR85 million in revenue in this quarter and an operating loss of ZAR13 million. Subsequent to the quarter two end, despite the growth experienced by Carzuka in South Africa, a decision was made to cease buying second-hand vehicles in South Africa. This decision follows considerable interaction with motor dealerships over the last 12 months. Over the years, Cartrack has been partnering with dealerships as part of its customer acquisition strategy to acquire customers through the introduction of this dealership. However, some dealerships have perceived the Carzuka business interests 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 jeopardize the long-standing strategic relationships that Cartrack has forged with motor dealerships across South Africa. Karooooo Logistics delivered significant growth, generating ZAR72 million in revenue and an encouraging operating profit of ZAR8 million in this quarter. This focus on delivery as a service through selected third-party crowdsourced drivers and logistics companies has 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.

Myles, I understand that the term data-as-a-service can be a bit jargon-like. Essentially, that's what we do; we take raw data, process it through our IoT devices into our cloud, and create intelligent business reports for our customers. A significant part of our subscription revenue model is already structured as data-as-a-service, which we also provide as software-as-a-service. I may not fully grasp your question, or that may be the complete answer. The next question comes from Sebastian. Could you elaborate on the decision to close Carzuka in South Africa? What costs will be associated with this closure? We have one lease ending this financial year, resulting in minimal costs. Currently, we have around 500 vacancies, and most Carzuka staff will transition to Cartrack, so there are no major costs involved. While there may be a slight initial impact on Cartrack due to these changes, it's been planned and will be phased out. By FY '25, these costs shouldn't be an issue. We've been experiencing operating losses of about ZAR50 million annually, but we expect this loss to disappear, positively impacting our earnings next year. Had we dedicated more effort to Carzuka in the last year, we might have made more progress, but we've decided to maintain our longstanding relationships with motor dealers despite some conflicting interests. The next question is from Matthew at Confluence Impact Fund. Thank you for the presentation and congratulations on the progress shown in these results. Given the growth Carzuka has experienced, why is the decision made to stop purchasing second-hand vehicles? What will this mean for Carzuka? We have developed a platform and software for Carzuka that we will still leverage for the benefit of our dealers. Many dealers currently advertise their second-hand vehicles on the Carzuka platform, and we assist with selling pre-owned vehicles. This does not compete with our model. We won't be taking inventory to buy or sell second-hand vehicles, but we will continue to support our dealership partners. Alex Sklar asks about Cartrack's operating margin for Q3 and Q4, especially considering the integration of Carzuka employees. We anticipate that the integration will have a planned negative impact on Cartrack but not a material one. This transition is strategic as we already know the strengths and weaknesses of the staff moving over, which will help fill about 500 current vacancies. Matthew from William Blair inquires whether the net subscriber growth seen in Q2 has continued into Q3. Yes, it has. In the first 40 days of Q3, we added 40,000 net subscribers, and we project to exceed 80,000 by the end of Q3. Matthew from William Blair also asks for an update on OEM relationships and when we can expect them to contribute to subscriber growth. We've made significant progress integrating with European OEMs and expect to see results from these relationships in FY '25. Matthew from Confluence asks about the proposed merger between MiX Telematics and PowerFleet and if we overlap in any geographic areas. I'm not very familiar with PowerFleet but know that MiX is American-based. Therefore, it's hard for me to comment accurately. On comparing our customer focus and market routes with MiX, I believe we serve similar customers but have different operational specifics. MiX operates in about 100 countries, whereas we are present in 23. We believe in having on-the-ground staff in all our operating countries, affecting our distribution approach. Additionally, our focus on customer ownership may distinguish us from MiX. Sandile Magagula asks why Cartrack's EBITDA margin is at 47% and if we can expect it to go below this level. Historically, we see our EBITDA margins fluctuate between 44% and 52%. While future margins will depend on capital allocation, we expect to maintain this range for several years. Regarding subscriber growth in South Africa, we aim to expand from 1.4 million vehicles on our cloud to about 3 million, and we are witnessing better growth momentum in Q2 and this quarter. A question relates to integrating Carzuka software and its expected impact. I've covered that earlier. On the projected return on equity for Cartrack, we can calculate it in several ways. With ample cash reserves, choosing to distribute cash as dividends could lead to a spike in return on equity. However, we prefer to maintain substantial cash to facilitate growth, considering our strong cash flow. Myles Fourie asks why Karooooo views Southeast Asia as its most promising growth opportunity. We believe Southeast Asia is substantial due to its rapidly growing economies and large addressable market. Our entry as outsiders has allowed us to make progress and gain momentum, but we have much more potential to reach the total addressable market. Historically, Cartrack has doubled its subscriber base every four years. Although growth has been slightly slower recently due to COVID-19, our goal is to exceed doubling our subscribers in less than four years as we regain momentum. Alexander inquires about subscriber growth linearity from June to September. Our SME and enterprise customer base has remained consistent, and our growth has been steady, especially benefiting from working days. Typically, Q3 is our strongest quarter due to fewer holidays. Al Salman asks about the financial impact of ceasing Carzuka in South Africa. I believe I've addressed that already. Andrew Ng questions our competition with Descartes Group. I must apologize, but I'm not familiar with them either. Chris Logan mentions strength and momentum in non-vehicle applications, particularly equipment monitoring. There's significant demand for IoT devices across various equipment, including yellow machinery and forklifts. As long as it’s an IoT device we can integrate, we can assist customers effectively in their operations. Finally, Carzuka will have its technology and remain open but will not engage in buying or selling vehicles or holding inventory. Regarding ARPU, it has remained stable for 15 years due to strong operating profit margins. We have consistently managed to combat inflation through economies of scale, thereby avoiding the need for price increases. And I want to thank everybody for joining us today, and look forward to talking to you again in three months' time. Okay, bye-bye.