Karooooo Ltd. Q3 FY2024 Earnings Call

Hello, and welcome to Karooooo’s FY 2024 Q3 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 remains committed to our mission of being the leading operations cloud. Our focus is to simplify the lives of operators and maximize the scale and efficiency of their operation. Our innovative platform goes far beyond connected vehicles and equipment to centralize and unify an entire operation into one single place. We are helping to pave the benchmark and future of efficiency, safety and impact for operational businesses. Fundamentally, every operation wants to achieve safety targets and compliance targets and well-being targets, but historically these have come at the compromise of the core survival and success targets of a business, productivity and efficiency. Having a tool that solves complex problems in simple ways is no small feat, and this is a constant driver for our strong growth at scale. Everything is embedded together. The tool that automatically flags potential fuel fraud to save thousands is the same tool that automates carbon emission tracking. The tool that optimizes routes to slash mileage and fuel consumption also makes drivers' lives easier and puts them at ease to ensure they get paid for every minute they worked. When burdens like maintenance are well managed, they become strong differentiators for operators and this is easily done through our automation and integrations. Karooooo's platform allows operators to prioritize safety and compliance with heightened productivity. Karooooo's AI-powered cameras are redefining the boundaries of visibility. These cameras stand as safety pioneers, revealing hidden risks and enabling proactive responses. From slashing accidents to exonerating innocent drivers, their profound impact transcends industries. A key factor contributing to the success of our platform is its smooth integration into our customers' various operational workflows. In challenging environments like mines, traditional methods such as sit-down discussions on driving styles may not be feasible. Recognizing the significance of training, our innovative approach involves utilizing our risk management control room tool and two-way in-cab communication tools for on-the-spot training and immediate action. The generated alerts ensure prompt intervention and risk mitigation, such as directing drivers to rest when fatigued. The outcome has been transformative, with a remarkable 59% reduction in fatigued or distracted driving in just four months, resulting in an overall decrease in accidents. In other industries, establishing formal training is feasible and driver incentives are based on safety scores. A leading mass bus company transporting around 1 million passengers daily has revolutionized an industry and made significant impact on community safety with a 41% decrease in fatigue and distracted driving in just three months. Not only has this led to positive branding as commuters see the change and feel safer, but it has also boosted operational efficiencies by reducing accidents and minimizing the associated downtime. Accidents involving company vehicles often result in substantial maintenance and insurance expenses, protracted legal disputes, and employee disgruntlement. Our cloud-based footage has revolutionized the way companies address accidents, providing a straightforward means to investigate incidents and exonerate their teams. This approach enables companies to establish clear mandates around liabilities, streamlining compliance and boosting employee morale. Workers appreciate a tool that prevents unwarranted blame, leading to increased employee retention, whilst businesses benefit by avoiding unwarranted bills that often rack up to tens of thousands of dollars. In an era where safety is taking center stage, our cameras are reshaping how we approach risk management, worker well-being, community safety, and operational efficiency. Our operations cloud drives digital transformation for over 113,000 commercial customers with a 95% retention rate across businesses of varying sizes in diverse markets and industries. We continue to empower the day-to-day operations of our customers with our Data Enhance platform, enabling them to make informed decisions with actionable intelligence about their own fleet, as well as others in their industries. The continuous evolution of our platform ensures ongoing enhancements, driving increased returns for our customers, whilst we keep our ARPU stable. The value proposition of our platform is massive and we have a huge runway for growth. Our culture, founded on customer centricity, transparency and solution-oriented thinking, sets us apart. We attract top talent that thrives on challenges and values hard work over frills, fostering a team that leads by example. From infield technicians to decision-makers, our team's curiosity, ingenuity and diverse experience result in a powerhouse of innovation and successful execution. Our unique culture, while not for everyone, cultivates resourceful individuals driven to efficiently solve complex problems. 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 Q3 FY 2024. Please note that all comparisons are against Q3 FY 2023, unless otherwise stated. Quarter three has proven to be an exciting period for us. Our well-established and profitable SaaS business model and robust financial position provide us with multiple levels for growth. And our primary focus remains on growing our subscription revenue. Our subscription revenue grew 17% to ZAR904 million and our ARR demonstrated an increase of 20% to ZAR3,711 million. Operating profit increased by 31% to ZAR275 million and our earnings per share grew 35% to ZAR6.34 despite our prudent provision made in the quarter relating to Carzuka's reduced operations. All segments continue to see strong traction with the benefits of our strategic investment beginning to show. Earnings in this quarter stood at ZAR199 million and our free cash flow is at ZAR162 million. Our free cash flow has remained positive over the last eight quarters despite our investment in the development of our new South Africa Central office. Up to this quarter, we had invested ZAR231 million in this development. Our high cash conversion is demonstrated through our strong financial discipline as we continue to invest for our future growth. Our net cash on hand stood at ZAR782 million this quarter. Debtor's turnover days improved to 30 days alongside prudent provisioning to weather off strong economic headwinds in some of the markets we are operating in. We have strong unit economics, robust operating margins, an unleveraged 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. Despite our provision in the quarter for Carzuka, our earnings per share increased by 35% to ZAR6.34. The increase is the result of positive revenue growth and improved profitability, notwithstanding our prudent and strategic investment for growth. Carzuka has negatively impacted our earnings per share by ZAR0.75, in line with the provision we made in the quarter as Carzuka reduces its operations. Based on our estimates, we believe we have made adequate provision, and going forward we do not expect Carzuka to have significant impact on our earnings per share. We will now focus on Cartrack, the underlying asset to Karooooo's success. Our momentum continued in this quarter as Cartrack extended its decade-plus track record of growth at scale, profitability, and cash generation ability. Overall, subscribers grew at scale by 14% to over 1.9 million. Subscription revenue grew 17% to ZAR900 million, while operating profit grew to ZAR295 million. Cartrack consistently proves its ability to scale in diverse macroeconomic conditions and consistently beats the Rule of 40. In this quarter, Cartrack saw a 34% growth in earnings per share, reaching ZAR6.96. Our earnings are benefiting from our robust economy soft skills. The expansion of Cartrack subscribers by 14% to 1.9 million reflects our highly successful rate of implementation and strong customer retention across various businesses. The demand from small to large enterprises looking to enhance compliance functions and embark on a digital transformation journey for increased efficiency and competitiveness in their operations remains high. Cartrack’s total subscription revenue grew 17% to ZAR900 million and represents 98% of total revenue. Total revenue grew 14% to ZAR990 million. Our SaaS ARR grew 20% to ZAR3,695 million, showcasing the strength and growth potential of our SaaS business model. As Cartrack continues to have strong visibility of its future SaaS revenue, our realization of economies of scale continues to demonstrate our ability to expand margins. In this quarter, gross profit grew 19% to ZAR672 million and gross profit margin grew 3% to 73%. Despite the investment for growth, Cartrack's operating profit grew 33% to ZAR295 million and operating profit margin grew 4% to 32%. Our adjusted EBITDA grew 29% to ZAR447 million and adjusted EBITDA margin is at 49%. Cartrack's low cost of acquiring a customer, high customer lifetime value and retention rate, as well as strong benefits from economies of scale result in our leading unit economics. Our LTV to CAC is over 9. We have strong profit margins with our gross profit margin on subscription revenue at 75% and commercial customer retention rate of 95%. With our track record, we are well-positioned to continue to increase our market share. Over the years, Cartrack has maintained a steady ARPU, an average upfront cost of acquiring a subscriber. ARPU for the quarter was ZAR160. Cartrack's average lifetime revenue per subscriber in this quarter stood at ZAR9,629. The average upfront cost of adding a subscriber to our cloud in this quarter was ZAR2,160. These costs mainly relate to sales commission and telematics device, which 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 ZAR7,469 per subscriber. From the ZAR7,469, we incurred a cost to service the subscriber over the contract lifecycle of 60 months. The cost to service a subscriber decreased as we grow our subscriber base. Our unit economics has remained steady, allowing us a strong operating profit. Cartrack continued to grow its subscriber base and ARR to expand in all geographies. Our subscribers in South Africa grew by 12% despite the challenging trading conditions. Given that we continuously pass on additional benefits to our customers and have a rich data pool, we believe we will continue to see strong customer demand in this region. In Asia, the Middle East and USA subscriber grew by 26% as the traction in Southeast Asia has been encouraging. Southeast Asia remains the second largest contributor to the Group's revenue, presenting the most compelling growth opportunity and delivering increasing and sustainable income to the group in the medium to long term. Europe saw a healthy growth of 15% and remains a region we are focusing our resources on. With our recent partnership with leading OEMs, we are poised to leverage our extensive offerings to further develop the connected vehicle ecosystem and expect these partnerships to contribute to our results in the medium term. In addition, we are experiencing encouraging demand for our proprietary compliance technology in the region. Africa also maintained its growth with an 8% increase in subscribers. At the end of quarter three, our ARR increased 20% to ZAR3,695 million. This is a good trend as we continue to see the momentum of growth in our subscriber and ARR. Cartrack continues to have robust operating margins, and our trends are in line with the long-term financial goals set out upon our listing in 2021. Our subscription revenue gross profit margin stood at 72%, which is consistent with our expectation. Research and development expense as a percentage of subscription revenue is 6% as we focus on driving substantial benefit from our R&D capital allocation. Our planned investment in improving, enriching, and expanding our operation cloud and internal management system is to enhance our value proposition to our customers. Sales and marketing expense 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 administrative expenses as a percentage of subscription revenue are at 21%. The expenses have been relatively stable to reflect our commitment to build a strong support infrastructure to meet our future growth plans, yet being pragmatic in our spending. Operating profit as a percentage of subscription revenue is 30% and adjusted EBITDA as a percentage of subscription revenue is at 48%. As we continue with our momentum in quarter three, we are pleased with our progress so far. Our outlook for Cartrack remains and we maintain our guidance with number of subscribers between 1.9 million to 2.1 million, Cartrack subscription revenue between 3.4 million to 3.6 million rand and Cartrack's operating profit margin between 28% to 31%. Karooooo Logistics delivered significant growth generating ZAR91 million in revenue and a commendable operating profit of ZAR7 million in this quarter. Its focus on delivery as a service through selected third-party crowd-source 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 starting to manifest.

We utilize some of Carzuka's intellectual property within the broader Cartrack business. At this moment, we plan to keep using the Carzuka IP, although we are aware that we could potentially sell part of it. We're cautious about making a sale, as it could lead to having another competitor that might disrupt our relationships with OEMs and dealerships. Therefore, we need to proceed with caution regarding any sale outside South Africa. In terms of Cartrack’s performance in Southeast Asia and Europe relative to our expectations, we believe we are on track with our budgets. We aim to accelerate growth, which is part of our plans moving forward. In the upcoming quarter, we will provide clearer guidance regarding our outlook for FY 2025. The progress with OEMs has been gradual, but we are optimistic that once we achieve significant progress, it will positively impact business attraction and customer acquisition. We are currently aligning with our forecasts and taking many actions to boost our activity, and we plan to offer more concrete guidance for FY 2025 in the next few months. Regarding debtor days as we enter FY 2025, I believe a range of 29 to 31 days remains healthy, and we've consistently maintained a strong debtors book historically. As for our free cash flow, it has benefited from prior investments, and we expect this trend to continue. Over the last two years, our earnings have virtually matched our free cash flow, particularly as we invest in our new South African head office in Rosebank. Once this building is completed, we expect earnings and free cash flow to align closely. However, if we accelerate growth, free cash flow may decline due to increased customer acquisition investments, whereas slower growth could result in higher free cash flow than earnings. We believe that our provisions regarding Carzuka losses are adequate, and we do not anticipate any significant losses in Q4. Overall earnings will primarily come from Karooooo Logistics and Cartrack. There was a small amount of credit affecting our gross margin in Q3, but this is not out of the ordinary for us, and we aim for a gross profit margin target of 72% to 73%. Currently, we are at 72%, which is healthy and in line with our projections. Sales and marketing expenses declined slightly quarter-over-quarter; however, we are actively recruiting to enhance our capabilities over the next 24 months and believe this investment will yield future benefits. While we do not provide specific subscriber growth details by country, our strongest markets in the region include Singapore, Thailand, Philippines, and Indonesia. Though Karooooo Logistics is growing, its operating profit will likely remain insignificant to the group's overall financials in the medium term. What we are building on the Cartrack platform holds more potential for meaningful contributions to the group. I believe there are still significant opportunities for growth in South Africa, and while consolidation might seem appealing, it could be premature—especially given the potential for growth in greenfield opportunities. Regarding the new headquarters in South Africa, we are set to move into the building by the end of May, slightly ahead of our original timeline. As previously answered, our debtor days have indeed trended down recently. Thank you all for your questions today. If anyone has further inquiries, please feel free to reach out to Lauren via email. Thank you very much. Goodbye.