Karooooo Ltd. Q4 FY2024 Earnings Call

Hello and welcome to Karooooo's Financial Year 2024 Q4 and Full Year Earnings Call. On behalf of Karooooo, we would 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's Chief Financial Officer, we will be taking you through our key business updates and robust financial performance. 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. Please note this is the last earnings call in which we will report on Carzuka as a standalone segment as its remaining operations are integrated in supporting the Cartrack operations. 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 continue to help customers conquer complex challenges around safety, compliance, productivity, service delivery, cost management, fuel, maintenance, routing, resource allocation, driver and worker retention, and more. Our platform leverages our large data scale, AI and data analytics to offer customers pragmatic insights that simplify problem-solving to ensure successful implementation. We are helping to pave the benchmark and future of efficiency, safety and impact for operational businesses and continue to believe we have a large runway for growth. We have comfortably met our financial year outlook targets in all categories and continue on our over 10-year track record of strong growth and financial performance. We ended the financial year with over 1,972,000 subscribers, Cartrack subscription revenue of ZAR3,523 million and an operating profit margin of 30%. We continue to focus on proving our ability to execute as we show strong growth whilst maintaining strong discipline in our capital allocation. We continue to see that our hard-to-replicate culture stands as a true game changer for our ability to execute. Guided by our Founder-led ethos, our management team embodies an entrepreneurial spirit and fosters an owner-orientated mindset throughout teams in our entire business. At the core of our culture lies transparency, a principle we uphold unapologetically. This is not for everyone, but it is how we continue to build loyal teams that achieve. We reject the idea of closed-door meetings and instead choose open floor plans and candid communication. We are open about individual and team weaknesses so that we know what to expect from each other and how to work together to empower each other through our strengths in order to maximize our collective impact. Pragmatism defines our approach, emphasizing implementation and execution. We prioritize ease of use and practicality in everything we do to ensure seamless integration into our customers' workflows. Our focus remains on tangible outcomes. We are impact-orientated, not fanciful and idea-orientated. We also remain agile. We adapt, innovate and refine our processes with a sense of urgency. This mindset empowers us to break barriers, drive innovation and continuously enhance our platform and value proposition for customers. In embracing these principles, we continue to grow at scale with strong efficiencies. We continue to execute in different markets under varying macroeconomic environments. We continue to innovate and evolve our platform, embracing new technologies in practical ways and we continue to do so whilst remaining disciplined with our capital allocation. Our commitment to product innovation and development remains and we continue to invest in our AI capabilities. We have witnessed the profound impact that our data-enabled AI platform has on operational efficiency by empowering operators to address complex challenges head-on. The key to our success with AI has been our unique ability to derive simple-to-use tools that harness AI to deliver tangible insights and practical applications for customers. Through the combination of our AI-enabled cameras and easy-to-use and fully digitalized driver coaching tools, we have delivered an end-to-end solution to customers that ensures they conduct effective coaching that focuses on the right things and ensures change happens. A prime example of our solutions' efficacy is showcased by a leading mine in South Africa who has flipped their standing on safety. Within just one month, they have achieved a dramatic improvement in critical high-risk driver behavior that often leads to accidents and fatalities. Fatigue driving incidents have decreased by 32%, mobile phone usage by 13%, seatbelt non-compliance by 35%, and camera coverage, which is indicative of non-compliance with safety or other protocols, has plummeted by 40%. These transformative outcomes prove the power of our end-to-end solution in revolutionizing safety standards and operational efficiency. As we continue to innovate, we remain dedicated to driving positive change and fostering safer work environments globally. Karooooo's leading operations cloud now drives the digital transformation of over 121,000 commercial customers. We consistently demonstrate high implementation success and maintain a 95% commercial customer retention rate across businesses of various sizes in all industries, from logistics to construction and from emergency services to tourism. We continue to have low industry and customer concentration risk. We also continue to leverage our vast data set to empower our customers with full visibility and control of their operation by offering them meaningful insights and practical tools for simplified decision-making. Our platform offers customers an undeniable value proposition with a high ROI within weeks. Karooooo is positioned for growth. We have continued to strategically invest in infrastructure for customer acquisition, high customer service delivery and strong product innovation. We continue to believe that Southeast Asia will be our largest driver of growth in the medium to long term. We have added new members to our leadership team who are all focused on execution and growth and have continued to build out our sales and support infrastructure and have successfully increased our presence in new provinces. Our internal systems play a large role in our ability to deliver such strong customer service at scale and we continue to improve on them to ensure we can adhere to our standards as we continue to grow. Our team is excited to move into our new head office building in South Africa in Q2 of FY '25, which will allow us to further unlock the impact of our culture. We have established innovative partnerships to leverage our data scale and AI enabled platform which we will continue to nurture and we have a strong cash position and strong cash generation to fuel our growth. 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 four FY '24. Please note that all comparisons are against quarter-four FY '23 unless otherwise stated. Financial year '24 has been an exciting year for us. We delivered record subscription revenue and earnings while maintaining our momentum of growth and demonstrating our financial discipline. Our consistent strong result further extends our long-standing track record of scalable growth, providing us with multiple levels for continued expansion. In this quarter, our subscription revenue was up 18% to ZAR935 million and on a year-to-date basis up by 17% to ZAR3,536 million. Operating profit was up by 25% to ZAR296 million and on a year-to-date basis up by 18% to ZAR1,043 million. Earnings per share were up by 45% to ZAR6.81 and on a year-to-date basis up by 24% to ZAR23.85. We will maintain our robust business model with our focus remaining on growing our subscription revenue as we continue our investment to scale the business. Earnings for this quarter were ZAR215 million and our free cash flow was ZAR161 million. Our free cash flow has remained positive despite our investment in the development of our new South African central office. Up to this quarter, we have invested ZAR263 million in this development. Our results were achieved through strong financial discipline as we continue to make strategic investments for sustainable long-term growth. Our high cash conversion demonstrates our focused capital allocation and we will remain focused on this approach. Our earnings are benefiting from our robust economies of scale. Karooooo's earnings per share in this quarter grew by 45% to ZAR6.81. The increase is the result of positive revenue growth and improved profitability despite our prudent and strategic investment for growth. On a year-to-date basis, our earnings per share accelerates to ZAR23.85. Karooooo Logistics started to see its traction contributing ZAR0.48 of positive earnings per share to the group. Our year-to-date earnings per share was impacted by ZAR1.40 for the provision we made for Carzuka's reduced operations. Going forward, we will see reporting Carzuka as the standalone segment as it integrates into Cartrack's border business operations. Our financial performance in this quarter showcased a strong cash position with net cash on hand plus cash in bank fixed deposit reaching ZAR922 million. Debtors' turnover days improving to 29 days alongside prudent provisioning to weather off strong economic headwinds in some of the markets we are operating. Given our strong cash position and cash generation, currently, we expect to declare a dividend in quarter two FY '25, a testament to our confidence in our robust business model that is backed by a strong and clean balance sheet. We will now focus on Cartrack, the underlying assets 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 15% to 1,972,000. Subscription revenue grew by 17% to ZAR930 million, while operating profit grew to ZAR289 million. Cartrack has consistently proved its ability to scale in varying macroeconomic conditions and consistently beaten the Rule of 40. Our compounded annual growth rate has proven to be strong and consistent over the past 10 years. Specifically, our subscriber CAGR stood at 19% and subscription revenue CAGR at 22%, gross profit CAGR at 18% and operating profit CAGR at 15%. These results underscore our robust business model and strategic execution. Our commitment to disciplined financial management and strategic investment positions us well for continued success and sustainable long-term growth. Cartrack’s strong subscriber drove its overall sales revenue growth. Total revenue growth in this quarter grew by 20% to ZAR958 million. On a year-to-date basis, total revenue grew 17% to ZAR3,614 million. Cartrack's total subscription revenue grew 17% to ZAR930 million. On a year-to-date basis, Cartrack's total subscription revenue grew 17% to ZAR3,523 million. Cartrack's total subscription revenue represents 97% of total revenue, in line with our SaaS business model. The strong performance of Cartrack was largely supported by demand of small enterprise to large enterprise to improve compliance function and to digitally transform their business to become more efficient and competitive. As Cartrack continues to have strong visibility of its future SaaS revenue, our realization of economies of scale continued to expand our earnings and maintain our high margin. In due quarter, earnings per share stood at ZAR6.52, up 27% compared to previous quarter. Gross profit for quarter four up by 21% to ZAR686 million and on a year-to-date basis gross profit up by 18% to ZAR2,589 million. Gross profit margin has remained consistent at 72%. Operating profit for quarter four up by 17% to ZAR289 million, and on a year-to-date basis, operating profit up by 17% to ZAR1,069 million. Operating profit margin has remained consistent at 30%. Adjusted EBITDA up by 22% to ZAR454 million, and on a year-to-date basis, adjusted EBITDA up by 17% to ZAR1,710 million. Adjusted EBITDA margin has remained consistent at 47%. These results prove Cartrack's ability to maintain high margins and bolster our winning capability to be a leading operations cloud service provider in the market. Cartrack 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 nine. We have strong profit margins with our gross profit margin on subscription revenue at 72% and a commercial customer retention rate of 95%. Given our track record, we are well-positioned to continue scaling our business. Over the years, Cartrack has maintained a steady ARPU and 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 ZAR9,593. The average upfront cost of adding a subscriber to our cloud in this quarter was ZAR2,281. 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 ZAR7,312 per subscriber. From the ZAR7,312, we incur the cost to service a subscriber over the contract life cycle of 60 months. The cost to service a subscriber decreased as we grew our subscriber base. Our unit economics have remained steady allowing us strong operating profits. Cartrack continues to grow its subscriber base and ARR to expand in all geographies. Our subscribers in South Africa grew by 14% despite challenging trading conditions. Given that we continuously pass on additional benefits to our customer 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, subscribers grew by 24% 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 16% and remains a key focus area for our resource allocation. Leading OEMs have partnered with us, providing their customers access to our platform and driving our growth. We are poised to leverage our extensive offerings to further develop the connected vehicle ecosystem and expect this partnership 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-others maintained its growth with a 12% increase in subscriber. At the end of Q4, our ARR increased 16% to ZAR3,749 million. This encouraging trend reflects our continued momentum in our subscriber growth 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 operational cloud and internal management systems aim to enhance our value proposition to our customers. Sales and marketing expense as a percentage of subscription revenue stood at 13%. 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 strong support infrastructure to meet our future growth plan, 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 49%. Karooooo Logistics delivered significant growth generating ZAR93 million in revenue, up by 65% and a commendable operating profit of ZAR7 million, up by 201% in this quarter. Its focus on delivery as a service through selected third-party crowd-sourced drivers and logistics companies has been highly scalable and is delivering substantial growth. While it continues to integrate into Cartrack 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 given its strong quarter-to-quarter SaaS revenue growth. We are pleased to have comfortably met our 2024 outlook and are satisfied with our performance. We are committed to maintaining this momentum and driving further growth in 2025. Our mission is to be a leading operation cloud service provider and we believe Karooooo is well-positioned for growth. We operate in a growing and largely underpenetrated market with strong demand coming from customers needing to differentiate and digitalize themselves. We expect our continuous investment in our AI products, platform and customer experience to continue to generate robust results in the future. Our outlook for FY 2025 is: number of subscribers between 2.2 million to 2.4 million, Cartrack subscription revenue between ZAR3.9 million to ZAR4.15 million, Cartrack's operating profit margin between 27% to 31%, and Karooooo's earnings per share between ZAR27.5 to ZAR31.

A question from David Eborall. Congrats on the results, Zak. You announced in February that you would be buying back 1 million shares, but only 50,000 were purchased this quarter. David, the first thing is we said up to 1 million, not 1 million. But I understand your point. Are you planning to buy the 1 million shares? David, we continue to plan to buy shares, so we will definitely do that. The reason we only bought about 50,000 shares was due to the strict SEC rules governing open market purchases, which impose significant limitations given our low liquidity. We heavily rely on the ability to buy blocks, and our broker has reached out to our investor base, resulting in the purchase of two very small blocks, but we weren't able to acquire any shares from other investors willing to sell. Next question from Alex from Stifel. Can you comment on whether anything changed in fiscal Q4 in terms of subscriber additions and how those additions have tracked thus far in the fiscal first quarter? We are observing a very encouraging Q1 at this point. It is public knowledge that we have surpassed 2 million subscribers now, and we are expecting a strong performance in Q1 this quarter. The results from last year align well with our outlook, and we believe we will meet the expectations set for this year based on the promising trend in the first two months. Another question from Alex from Stifel. It seems the subscriber count guidance suggests a rise in quarterly additions from about 60,000 this year to 80,000 throughout fiscal year 2025. What gives you confidence in that acceleration? Over the past two financial years, especially last year, we've dedicated substantial capital to enhancing the way we guide and educate our internal staff and sales teams. We believe those improvements will yield positive results in FY '25 and beyond. Question from Sandile. You are buying back 10% of your outstanding shares. Who is selling? Any shareholders willing to sell are participants in the market from whom we are buying. Regarding current investments in growth and free cash flow, what needs to happen under your control to double non-affiliates' free cash flow to over a billion, similar to how you have doubled EBIT over the past four years? We do monitor our free cash flow, but our primary focus is on business growth. If we expand our business significantly faster than our current pace, it could negatively impact our free cash flow. While free cash flow is an important metric for us, we prioritize other metrics in our capital allocation. Why is the share repurchase program more appealing to you than dividends? We view share buybacks as a form of dividend for all shareholders. We believe our shares are undervalued, which is why we've opted for share buybacks. Another question from David Eborall. In your guidance, if we consider this incremental revenue and subscriptions under the highest scenario, the projected ARPU is set to drop from 160 to 120. David, I don’t have the precise numbers at hand as I’m reading the questions in real-time. I’ll need to double-check that to understand your calculations better. At first glance, something appears off, and I don't believe this scenario would occur. I'll review it and respond via email after verifying your arithmetic. Gokul Raj. How much can Karooooo Logistics grow in the next three to four years? I believe the profit margins we are now generating are quite optimized. While they could improve, we don’t foresee our long-term growth projections featuring higher margins than what we currently have. I expect growth of no less than 25% year-over-year over the next four years, though that’s a conservative view on my part. Then, Sebastian. What trends is Cartrack observing in the South African competitive landscape? We are operating in the market for a decade less than some of our competitors, and we continue to grow our business, not just in subscriber numbers but also in subscription revenue. We do not depend on OEM low subscription revenue models for subscriber growth, nor do we focus on white labeling. While one of our competitors is gaining subscribers, I question who they are taking market share from. Your mentioned competitor seems to be focused on white labeling instead of promoting their own brand. Rudi Van Niekerk. Can you confirm if the company will proceed with the recently announced share buyback program? Rudi, yes, we will. Sebastian. Is Cartrack observing an increase in fleet size in South Africa due to the rail network's failure? It's still early to say, and the transport industry faces challenges in South Africa. However, we do see courier companies expanding, while we aren’t seeing much growth in long-haul companies. Another question from Rudi Van Niekerk. What is the potential for scaling career logistics? I believe I addressed that one, Rudi. I’m going through the questions one by one. Patrick O'Leary. Europe makes up 16% of your subscriber base. In which countries have you gained a foothold, given the multitude of telematics suppliers in Europe? Have any European OEMs signed contracts that mirror what transpired in South Africa? Patrick, we’ve engaged with nearly all the major OEMs in Europe, and they have chosen to utilize our platform. However, we are still in the early stages of this development, and we expect it to become a significant part of our business in the medium term. Then, a question from Dylan Becker. As you venture into new regions, can you specify new provinces from this quarter? Dylan, when we refer to geography, we’re talking about countries, and when we discuss provinces, we refer to large nations like Indonesia, where we only have a presence in two or three provinces. There are still many large cities where we lack presence, and that’s what we mean by provinces. With your quick ROI, are early customer acquisitions serving as references that are driving additional market acquisitions as brand awareness expands? Absolutely. As our brand strengthens, we gain more traction in the business. In many of these markets, we’re starting to see increased brand recognition, but we still feel we are not yet a dominant brand. In certain countries, we are already a strong brand, but in others, we are still in the process of building our identity. Chris Logan. Can you provide insight into what factors are necessary for significantly boosting subscriber acquisitions in Southeast Asia from the current 24% back towards the pre-COVID growth levels of 55% to 58%? Chris, the key is genuinely us building our distribution network, which I believe we’ve made substantial progress on in FY '24. This momentum should serve us well in FY '25 and beyond. We are also expanding our reach into additional provinces in the countries we operate. As we enhance our distribution capabilities, we expect to regain much higher growth levels. Another question from Rudi Van Niekerk. How does the gradual adoption of EVs affect Cartrack's business? Our platform accommodates EVs, and we have integrated with several EV manufacturers. In fact, two OEMs are supplying us with their EV vehicles. We are quite advanced with our EV technology. I want to thank everyone for joining. There’s another question from Miles Ferrie. Are there any acquisitions on the horizon? No, Miles. Not at this time. I want to thank everybody for attending, and I'll speak again at our Q1 results. Thank you. Bye-bye.