Karooooo Ltd. (KARO) Earnings Call Transcript & Summary

All right. Welcome, everyone. We're approaching the end of day 3. I hope you've been enjoying the conference. I'm Claire Gerdes. I'm one of the analysts on our software team. And with me today from Karooooo are Richard Schubert, the COO; and Paul Bieber, the Vice President of Investor Relations and Strategic Finance. So thank you both for being here.

Thanks for having us.

Thank you.

Of course. Well, maybe to start, for those in the audience who are a little less familiar with Karooooo, maybe you can give just a brief introduction on the company.

Okay. Thank you, Claire. Thanks for hosting us. So we operate Cartrack, which is a software SaaS platform, really focusing on the telematics, fleet management, AI, vision and various logistics industries. At this point in time, we have 2.5 million subscribers across 24 countries. Within the last quarter, we had a very good healthy 20% subscription revenue growth, revenue of a 29% operating profit. We're a founder-led company with a strong track record of execution, specifically with very disciplined capital allocation as well as good free cash flow generation.

Great. And since many investors might be familiar with Samsara in the U.S., maybe you can give us just kind of some of the similarities and differences between you and them because you do similar things in South Africa, Europe and Southeast Asia. So you're going to go ahead and maybe share some cruise competitors as well.

Okay. So Samsara is very close, and we operate in a very simple market. However, Samsara's business is really North American focused, which is a very high ARPU region. We don't see Samsara directly in any of the areas we compete in. But we're offering similar solutions. The solutions are enhancing safety, improving efficiency and saving our customers' costs. If we look at the geographic areas we operate, South Africa is still our largest area with approximately 70% of our revenue generated in there. The competitors there are companies like Geotab, Powerfleet and local companies like Netstar and Ctrack. So it's sophisticated competitors within this region. We came to the market approximately 10 years after all our competitors. But at this point, we've got a 40% market share within South Africa. One of our other benefits is we've fully vertically integrated. We have a lot of our competitors outsource various parts of their businesses in those specifically industries. We also have a strong founder-led culture. If we look at other regions, for example, Asia. Asia is our fastest-growing segment. However, we compete a little bit differently in Asia. Most of our competition is smaller companies that have less feature-rich platforms. However, we provide one of the only regional providers there, providing a much more sophisticated next-generation platform. Then if we have a look at Europe. Europe, we've got our entities operating in Portugal, Poland and Spain. And there, we also compete against geotab and power fleet and a couple of smaller local telematics companies that were typically bought by the tire industries.

Great. Well, you mentioned the majority of your revenue, over 70%, is in South Africa. And 1.85 million subscribers are there as well. So one of the key questions is just kind of what runway remains for growth there, especially in the recent quarter that did decelerate a little bit, right, by 150 basis points-or-so. So yes, I guess, how would you respond to that? And what the maturity is there?

So we still see South Africa has significant runway. At this point in time, we've got 1.9 million subscribers out of a vehicle car pool of approximately 13 million, okay? So there's still plenty of runway. But in recent times, Cartrack has launched 1 of our new products called the Cartrack Tag. The Cartrack Tag is an asset monitoring system that we install on generators and trailers and any other fixed equipment. And that has really helped us grow within that market. So one important thing is, historically, we've provided guidance on both subscriber growth and revenue growth. However, in recent times, we've only provided guidance on the revenue. This is because we spent time cementing our leadership position within South Africa. And we've really taken these new products, firstly, the Tag and the AI video, and we're selling it into the current customer base. So you will see there's a good -- there's been a good upsell opportunity to really look after our current customers and make sure that we've got that long customer adoption of our products. So if we look at the sales team and especially within the last quarter, we're very happy with the performance of the sales team. They have been delivering, but we also continue to expand the sales team because there's still lots of benefits within the region. So we do expect within quarter 3 that our subscription -- our subscriber numbers will lag the revenue slightly, but we believe firmly that within the next financial year, '27, that we'll really reap the benefits. So I think the most important thing for me is that we have had a very good quarter 2, we had a very healthy growth of 15% within our subscriber numbers and 18% on the revenue. So we're going to continue to accelerate and really focus on South Africa and make sure we continue to be #1 in the region.

Great. And yes, maybe we can turn to some of the other regions. Those are more -- a couple of hundred thousand subscribers there, a bit newer, but you've been spending a lot of time investing in sales resources, so could you share an update on the progress you're making in those 2 regions and particularly regarding the pace of customer adoption?

So we communicated to the market that we're going to increase our sales headcount by about 70% within Asia. We've had very good progress on that. We were at approximately 38% at the end of quarter 2. So our target of the 70% means that if we can achieve the 70% increase in sales revenue, we're expecting our subscription revenue to increase into the mid to high 20s, that's really the focus on the additional sales. One of the important challenges that we must take into consideration specifically in Asia is it's a mixed ARPU region. We've got certain countries that are generating relatively high ARPUs in certain countries, especially the larger, faster growing ones that are generating a smaller ARPU. So over time, we expect that ARPU to decrease within the region and become more in line with what we see in South Africa because South Africa is also a much more scaled entity. And within the other regions, for example, Europe, we're continuing to build that sales muscle to increase that sales adoption throughout the region.

Yes. And maybe just if you can provide just additional like range of subscriber growth for those. I know you don't officially guide to them, but for Southeast Asia and Europe, would you be able to bracket any of that?

I think as you think about the growth in the region, if we grow our head count by 70%, that 70% as of February versus February of last year, that should drive an acceleration of subscription revenue growth into kind of the high -- mid- to high 20s, I think, on a constant currency basis, it's around mid-20s last quarter. So we're very optimistic that the investments in headcount will drive an accelerating growth in the region.

Great. And as we come to the close of the calendar year, how do you characterize the demand environment, probably differs between each region, right? But any headwinds or tailwinds that you might see?

I'll take that one. I mean, we don't have anything really new to share in terms of the demand environment. What I will say is we're not seeing any macro headwinds in the business. And as you know, we guided to 16% to 21% subscription revenue growth for FY '26, and we actually printed 20% in Q2. So we're on track to deliver against the guidance, we're on track to deliver against acceleration. And I think it's important just to note that, that 20% growth rate, it's a material acceleration year-over-year. For context, the FY '25 subscription revenue growth was 15%, so through Q2, our growth rate has accelerated by 500 basis points year-over-year.

Yes. Great. I want to go back to something you mentioned earlier, which is just the newer offerings with Tag and the Video solutions. Well, maybe if you want to just provide some context on what Tag is, but you've had an increased focus on cross-selling opportunities, right? So can you just elaborate on the significance of the cross-sell initiatives? And what kind of uplift that might add to the average Cartrack deal?

Sure. So what I would say is we've been very focused on growing our sales teams to drive both subscriber growth and sell Tag and Video to our existing customers. But right now, we're people constrained, and we're still building the necessary muscle to drive both accelerating subscriber growth and to sell Tag and Video to our existing customers in South Africa. Over -- and kind of the near term and the last 2 quarters-or-so, we've been really focused on leaning into selling Tag and Video to our existing customers in South Africa, where we think it's very important in terms of just the long-term health of the business to cement our leadership position in South Africa by selling these products, especially given the demand tailwinds in the market with Video. So you may have asked about uplift, did you...

Yes.

So in terms of the uplift, for Video, it's about a 2x to 4x uplift at a similar operating profit margin to the core business. Again, I think it's important to note that similar margins of the core business is a misconception that Video and Tag are dilutive to operating profit margin, and that's not the case. For Cartrack-Tag, it really depends if we're selling it to an existing customer, or if we're selling stand-alone. So that one depends. But it might be helpful. Do you want to just talk about what Cartrack-Tag actually is because...

So the Cartrack-Tag is an asset-tracking device. So in a typical application, for example, a customer might have a vehicle but a construction customer would have generators, they would have trailers, they would have other equipment. And managing and looking after this equipment has been a challenge over time. Firstly, it's about is it being used? And secondly, it's about where it is. So these devices are attached to the generator or the various equipment and it allows a customer to really understand where their nonvehicle assets that they're using on a construction site or a building site are and how they're being used.

Yes, perfect. And you mentioned you're selling right now into the existing customer base. So what portion of that base would you see as like the addressable market?

I mean we just started really focusing on Tag and Video early this year. We've had a video product in the market for many years, but the cost of hardware and data have come down, so it's become a lot more addressable to a larger part of the customer base. So it's been a strategic focus for the last 2 or 3 quarters. The penetration rates are low single digits right now. I think it's too early for us to tell where that may land. But obviously, we're very excited about the potential for us to drive those penetration rates higher from low single digits. There's lots of runway for us to grow by selling those products to our existing customers.

Great. Maybe switching to ARPU and ARR growth. So ARR growth accelerated last quarter, your 2Q, due to the improvement in ARPU. You have shifted some resources, as you mentioned, from the new logo sales to cross-sell opportunities. So maybe do you want to just start by sharing why this trade-off makes sense for the business in the medium term?

Yes. I'll take that question. First, let me just level set for everyone in the room in terms of some of the numbers. So subscriber -- subscription revenue growth increased 20% in Q2. ARR increased 20% in Q2. Subscriber growth was 15% and ARPU growth was about 4%. So 15% subscriber growth, that still has a -- is a big impact on the overall growth trajectory of the company. So I just want to give that context with people. But as I mentioned, we're kind of in the early stages of selling Tag and Video to our existing customers in South Africa. We think that's very important for the long-term health of the business. Why is that? Well, if we don't do it, it could leave us competitively exposed as other potential competitors may start selling those products. So we think it's essential that we continuously deliver innovation to our customers. We have to continuously solve for the operational problems and right now, we see a big opportunity with Tag and Video. And as I mentioned, there are just a lot of demand tailwinds in the market with video.

Yes. And are there any like data points or ways that you could help us just quantify the magnitude of the opportunity and how it could be impactful to growth over time?

It's a good question. I mean it's too early for us to tell. We're low single-digit penetration rate currently and that will go over -- that will increase over time, obviously. Whether we'll land at 10% or 20%, we've only been doing it for a few quarters, so it's really too early for us to tell. But obviously, it's having a positive impact on the business given the uplift in ARPU.

Yes. Well, sticking with ARPU. The guidance that you've given, is that -- it's up 4% now, as you mentioned, but it could end the year exiting around 6% or 7% in South Africa, specifically up to 10% year-over-year. So this seems doable, but what is it going to take to get there?

Yes. Just to level set with everyone, we put out a goal of 10% ARPU growth exiting the year in South Africa that would translate to 6% on a consolidated basis for the company. In Q1, we were probably running behind. We were about 2%-or-so. In Q2, we made a lot of progress. We landed around 4% ARPU growth. And at 4%, we're really on track to deliver on that 6%. So what needs to happen? We need to continue to hire people, train them, really just focus on building teams and sales execution. So I think it's really about sales execution, but we feel good that we're kind of on target to hit that goal that we put forth early in the year.

Yes. You've been making those sales investments like you said. And there was a slight deterioration in margin last quarter that may be garnered some scrutiny. So maybe we can unpack that a little. So as mentioned, there's the investment in sales capacity, but also a shift to the lower margin hardware business with Tag and Video. But maybe you can just provide a bit more color on the impact that those had?

Yes. I'll take that one. And again, I'm going to level set some numbers. We reported 20% subscription revenue growth in Q2. That was a 500 basis points year-over-year acceleration for Cartrack. Cartrack operating profit margin was around 29%. The margin deteriorated by 50 basis points year-over-year. So essentially, we're trading off 500 basis points of acceleration for a pretty modest impact on the Cartrack margin, and we think most companies would take that trade-off. But to your question, as you kind of look at the P&L, there are a few things in the consolidated P&L. Sales and marketing increased by, I think it was 34% in Q2. That really reflects our investments in sales capacity, customer acquisitions. So obviously, on a consolidated basis, that shows that we're investing in our sales capacity and reflect some of the acceleration in terms of customer acquisition. Also on the gross margin line, gross margins were down on a consolidated basis year-over-year. I think that reflects some incremental depreciation costs, sales commission costs. You also get the impact of the growth of crew logistics, which we haven't really touched on, but it's another business segment, a business that we operate that drives a lower gross margin profile. So there are a few different moving parts in the P&L, but essentially, we were very happy with the acceleration in the 29% margin. And to your question about the margin on Video and Cartrack-Tag, it's actually a similar margin to the conventional business. It's not lower margin. So we kind of approach pricing for that in a similar way to our conventional business. We look at the hardware cost, the installation cost, the data cost and then the service delivery costs over the lifetime of the customer, which is about 60 months. And then we actually try to drive a 40% operating profit margin from that customer, but you don't see that in our -- right now IFRS financial statements because of the misalignment with some of the expenses in the period versus the kind of lifetime value of the revenue. So they're not lower margin. And just another point, if we actually stop growing tomorrow, our gross margin -- operating profit margins will go from about 30% to close to 40% as some of those investments are not reflected in the P&L.

Yes. No, it's helpful context. So just to kind of round it out. So if Tag and Video becomes a bigger portion of the revenue, that shouldn't really have a large impact on margins.

It shouldn't have a large impact on the margins, but it all kind of depends if we're still accelerating growth. Because if we're accelerating growth, there is some trade-off, you can kind of see the range of outcomes we guided to 16% to 21% subscription revenue growth for the year, and then we guided to 26% to 31% operating profit margin. The first couple of quarters were kind of at the high end of the range. But theoretically, if we continue to accelerate, there is a modest impact to operating profit margin. Once you kind of normalize at the new growth rate, the margin should kind of return to historical 30-ish percentage range.

Yes. Makes sense. Maybe going back to your hiring efforts, you gave the update earlier of where you are now. But what geos are you specifically still leaning into? And when do you expect productivity to really begin to ramp?

So I mean we're hiring in all geographies. All the geographies that we operate in, we believe that all of them have great potential. And our focus is to increase staff in all regions, especially the sales headcount. If you have a look at South Africa, there's really aggressive push within South Africa to increase the headcount there. As we've already discussed, the potential upsell versus greenfields opportunity in South Africa is great. And we're really short of staff there. That's our challenge there, sales staff specifically. And by increasing them, we'll also be able to carry on with our greenfield subscriber growth and include the upsell opportunities. Within Asia, as we've mentioned, we had a target of about 70% to increase throughout the year from February to February. And on quarter 2, we're at 38%, so we see that as very positive. And as Asia is our greatest trading -- it's in our fastest-growing area, we can see the benefit that it's really having there. And then lastly, in Europe, we still continue to build the sales muscle in that area. It's also a very profitable area. And as we grow, all of the areas should see that expansion over time.

I'll just add that we've obviously been investing in sales capacity, and we feel good that the investments in sales capacity will have a positive impact on overall subscriber growth.

Yes. Is there a like timeline to where OpEx might stabilize? I know you've got the February to February goal, but just as we think about that.

I mean, we have guidance out there, and you can see the range of outcomes depending on the acceleration. And I would say it just really depends going forward the extent to which we kind of grow at the current rate or if we continue to accelerate.

Maybe just one quick one on...

And on that point, really, there is a misalignment in terms of in-period expenses or customer acquisition and the benefit we get over the lifetime of the revenue stream from the customers. So the faster you grow, there is an impact on margins over the short term. But as I said, as you normalize at a new normal growth rate, we should see leverage over time.

Yes, it's a good clarification. Maybe just a quick one on cash flow. You don't disclose the full financials on the quarterly basis, but 2Q was a bit lighter than 1Q, though it was still up year-over-year. So just anything you would want to note there?

Yes. I'll say 2 points. One is we've heard the investor feedback and the analyst feedback, and we're looking to publishing quarterly cash flows with our financial results in FY '27. So we've heard the feedback. I would say the -- on free cash flow, there's working capital fluctuations that impact free cash flow. I think the best way to look at it is on a year-to-date basis. On a year-to-date basis, free cash flow, I think it was up 44%, 45% on a year-to-date basis. And we actually feel very good about the -- our ability to generate very strong free cash flows while investing in the business and accelerating the overall growth rate. So yes, I think the best way to look at it is on a year-to-date basis.

Got it. I appreciate the feedback too on potentially in the future. But this seems a bit broader and maybe a little bit further out, but how should we think about the potential impact to Karooooo's business with autonomous vehicles? Do you view that more as disruptive and a risk or a potential opportunity?

So I mean, we don't really see autonomous vehicles as disruptive. We believe it will have -- give us tailwinds at that point in time. So with autonomous vehicles, you still need monitoring tools. You still need to integrate to different partners to use these -- this equipment correctly at the end of the day. So we're going to focus on innovating, providing features and solving our customers' needs. However, our platform, we see our platform changing continuously. And in the next 5 to 10 years as the autonomous vehicle fleets and solutions become more available, we'll provide those solutions and integrate them with our platform and give our customers the benefit of these kinds of technology.

Okay. Great. Going back to the last quarter, you reported solid results, accelerating growth. The stock has faced some volatility since then, which could, in part be due to some investor scrutiny over the slower subscriber growth. So obviously, the higher revenue growth as we talked about. So just are there any areas you want to provide further clarity on or areas you think that investors are missing?

Yes. I'll highlight 2 points. One, the subscriber growth to decelerate, I think it's like 150 basis points quarter-over-quarter. And I think some investors read into that, that as a reflection of the macro environment or intensifying competitive landscape. And we don't see that. We're not seeing macro headwinds. We're not seeing a more intense competitive landscape in South Africa. That modest acceleration is purely a reflection of our allocating resources to sell Tag and Video to our existing customers in South Africa. So I think that's important. And as I mentioned, we're obviously hiring a lot of people. So we're optimistic that our investments in sales capacity will have a positive impact in the number going forward. And then the second thing I'd just like to highlight is a couple of times, you've mentioned that the hardware -- the Tag and Video is margin dilutive. And I just want to reiterate that it is not margin dilutive, it's actually a similar operating margin to our existing platform or offering.

Yes. No, helpful clarification. Maybe just going back to cross-sell. There's Tag and there's Video solutions. But are there any other cross-sell opportunities that Karooooo is considering?

I don't think we have anything really new to share there. I think it's important to just note that our strategy is a little bit different than most SaaS companies in the U.S. We don't lead with landing and expanding. We -- when it comes to new features on the platform, we actually have different pricing tiers and then we give those features to our customers so they derive more value for the product at the same subscription cost that helps drive -- we're solving their operational problems. It helps drive retention. We have very strong retention. So we think that's the right thing to do for our business right now. The Tag and Video are a little bit of exceptions because they're new hardware devices, and you actually have to install them. So they have to be a sales process associated with it. So I think for now -- and there's no real change to our strategy in terms of giving new features to customers and then when it comes to hardware because it does require installation, we are working to sell that to our existing customers.

Yes. Makes sense. Well, maybe in our last minute-or-so, we could end with a fun one. Karooooo is spelled with five Os, is there a reason for the #5?

So Zak, our Founder and CEO, has a love for the -- an area in South Africa called the Karooooo, it's a desert area that's quite famous. When Cartrack moved from the Johannesburg Stock Exchange and we listed on NASDAQ, we had to have a name change due to various regulatory requirements. And he really got set on the Karooooo name. However, at that point in time, we needed to purchase the domain, the [ Karooooo2.0.com ] domain and the person who owned at that time wanted ridiculous amounts of hundreds of thousands of dollars for us to buy it. And after some haggling, it became a -- let's be something a little bit disruptive. Let's be different. Let's find something that's new and unique and it became Karooooo with 5 Os. But it didn't just become 5 Os. You can now go to Karooooo with 5 Os, 4 Os, 6 Os, 7 Os, 8 Os, 9 Os, 10 Os, just to make sure that no one ever has to count as long as you get a rough number, you're going to go to the right place. And that's where the Karooooo name originated.

And I think it's interesting because it kind of speaks to the culture. I mean, Zak bootstrapped the company because there's always this focus on profitable growth and disciplined expense management that kind of just that speaks to that.

Well, great. I appreciate it. Well, thank you both for being here. Thanks for sharing.

Thank you very much.

Thanks, Claire.