Karooooo Ltd. (KARO) Q2 2022 Earnings Call Transcript

Karooooo Ltd. (KARO)
Q2 2022 Earnings Call
Oct 15, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day. Welcome to Karooooo Limited results presentation for the second quarter of 2022. Hosting you today is Mr. Zak Calisto, CEO and founder of Karooooo Limited.

Zak Calisto -- Chief Executive Officer and Founder

Thank you very much, operator. Firstly, I would like to thank everybody for joining us on today's call. And good morning, good afternoon, and good evening wherever you find yourself. We have the disclaimer that shareholders can read through their own leisure.

Karooooo is the owner of 100% of Cartrack. Cartrack was founded in South Africa. Karooooo is a Singaporean entity, and we headquartered in Singapore. In our view, all vehicles will be connected and that will drive all aspects of mobility in the future.

Our mission, to build the leading mobility SaaS platform that maximizes the value of data. What we do? We contextualize billions of data points and drive connectivity for our customers. We collect data through our proprietary in-vehicle smart devices. We also collect data through third-party and OEM in-vehicle smart devices.

We have APIs into third-party systems, pushing and collecting data. And we have our artificial intelligence, video telematics devices that will also collect and stream data through and from. Our telematics devices that we use, as I've said, it's via traditional telematics fleet management devices and our digital telematics devices, and we also connect data and stream data through the third parties through our fleet platform, which is an administrative portion of our platform that collects data that's not necessarily in-vehicle data. We contextualize the data by doing the data analytics.

We also use AI, and that's all driven through our SaaS platform. And with that, we allow our customers to monetize and get the value of the data that we have processed by operation. As they get operational improvements, predictive analytics, delivering, they are able to do their deliveries, they manage their deliveries, are able to manage their field service, the people out in the field, working in the field and the workflows thereof. We create business intelligence reports that allows our customers to contextualize their operations, their vehicles, their drivers.

It allows our customers to know the drivers and we also have the Carzuka which, as you know, go live in the fourth quarter. We are in a beta phase at this point in time. And with our insurance that we create best value for our customers for their insurance needs. Fundamentally, what we do is we solve mobility problems for our customers.

We add value to the day-to-day operations with our customers. We build and assist our customers with the high operating costs, fragmented, and inefficient workflows, unproductive use of resources. We assist our customers with the safety and eco-compliance. We assist customers with logistics operations.

We also, especially in today's world where e-commerce is getting a bigger part of most of our customers' businesses, we assist them with their delivery operations. And as I've said before, we also assist with our customers managing the field workers whether they're plumbers, maintenance or air conditioning. Whatever they're doing, they can do that on one single platform. We do -- then we have the Carzuka, which is our secured buying and selling, and we do competitive price insurance quotes.

We are well aware of the network effect of our platform and of the much-needed related services, and we envisage to create this value for our customers in the near future and we have already started this journey. We operate in a large underpenetrated market. This slide shows you that -- what we perceive the market size -- the total market is in different segments that we operate in. In South Africa, we have close to 1.1 million subscribers.

There's over 10 million vehicles in South Africa. It's about 12 million vehicles. So at this point in time, we've got about 8% of all vehicles on the road in South Africa. They're using our platform.

In Southeast Asia, there's over 100 million vehicles. We've currently got over 150,000 vehicles, so we really have got very little of the total market. The last two years, we haven't been able to execute on our plans but we believe that very soon, we will be. And that is a large market.

Europe, very similar. We want to start investing to Europe in the beginning of next year, and we've got in the region of about 120,000 vehicles. These numbers are as at end of August and we also believe the market is well over 100 million vehicles. Africa, outside of Africa, not our primary focus at this point in time.

We've got in the region of 65,000 vehicles, and we also hope to grow that market. We'll go to our financial performance and our performance during the quarter in this half year. So we've had very good, in our opinion, a healthy subscription revenue growth. And we've had strong customer acquisition given the current headwinds that exist in the market.

Our subscriber growth has grown by 20% and 97% of the business coming from Cartrack is subscription revenue. Our subscription revenue growth on a constant currency basis grew by 21% and our total revenue on a constant currency basis grew by 24%. On -- in actuals, the subscription revenue grew 16% and total revenue 20%, and this is primarily as the rand has strengthened substantially in this financial year compared to the last financial year. We've got a strong history of consistently growing.

As you can see on these graphs, we've -- our subscribers, we continuously scaled over many years since inception and we've grown every single quarter thereof. Our subscription revenue, you can see consistent growth and whereas, our subscription revenue was actually for this quarter in constant currency was actually ZAR 655 million but actual was ZAR 628 million. That's obviously the stronger rand affecting us. When we look at our profitability, last year was a year where, with COVID, with so much uncertainty, we focused on protecting our business.

We did not invest for growth in the last financial year. In this financial year, we believe that COVID will soon be -- or countries will know how to deal with COVID, and so we have started to invest for growth -- into a strong growth. And that's why our operating profit dropped. But as you can see, in this quarter, it's already gone up by ZAR 10 million compared to the previous quarter.

So we're certainly on the increase again despite all the headwinds, both by currency and the increased investment for long-term growth. In our net subscriber additions, we did in this quarter, we did 42,000. And year to date, for half year, we have done 102,000 substantially more than last year where we did 48,000. And in the region of about 51% more than half year 2020, which sometimes it's easier to compare to pre-COVID.

And during COVID, we still did 102,000, which we can live with. Talking about Q2, we were negatively impacted. Our subscriber growth, net subscriber growth was 42,000, full 1% more than last year, also under COVID. We were negatively impacted in July.

Our biggest segment, there was unrest in South Africa, which meant lower sales in July. Also, what we did see is a lot of our customers refitted and refitted vehicles in this quarter, this last quarter, which also caused a little bit of noise in terms of our customer acquisition costs. Our low cost of acquiring a subscriber, if you look at our ARPU, last year it was ZAR 156. Now it's ZAR 151.

That's largely driven -- its unit economics are influenced by the fluctuation in currency. And because we report in rand, we see a decline in ARPU that's predominantly got to do with the currency fluctuation. And the same thing can go to the subscription revenue gross profit margin. A lot of this has got to do with the currency fluctuations.

Nevertheless, we certainly believe our business economics are good, and this will allow us to continue growing our business and puts us in a very competitive position to be able to grow our business. In this last half year, if we take this half year, we have grown our subscriber base in South Africa by 21%; Asia, we grew it by 20%; Europe by 16%; and South Africa -- and Africa -- outside South Africa, 7%. We are investing for the future. And as one can see, if we compare this quarter compared to the quarter of last year, our sales and marketing has gone up by 51%.

That's predominantly on the back of headcount. We've increased our headcount substantially in sales. A lot of this headcount is still not very productive, but they will become productive over the near term. We've increased R&D by 34%.

We believe that R&D now will -- it won't increase that much for the next 12 months. There might be a bit of an increase but we've reached the level that we believe we've got sufficient people or close to sufficient people to deliver what we set out to do now. And as you can see, G&A went up by 11%, which is lower than our subscriber base increase, which means that we can drive some economies of scale. We've got robust operating metrics.

So in terms of research and development this quarter, which was 6% of our subscription revenue against 5% last year. Sales and marketing, 14% against 10% last year. G&A, it's dropped from 22% to 21%. We intend to drop that even further over time.

And our adjusted EBITDA margin is -- if we exclude the Carzuka business, is 47%, and it's very much in line with what we promised the market in terms of our outlook for the year and we continue to beat the rule of 40. Our cash flow, at the end of half year last year, we had ZAR 233 million in the bank. At the end of half year this year, we had ZAR 664 million. Sorry, just give me one moment.

It's -- about ZAR 350 million was the proceeds of our IPO. But in this period, we also paid in the region of ZAR 250 million as a dividend while we were still listed on the JSE as Cartrack. And overall, we've increased the cash in the bank, I believe, quite well given our operating profit and our capital allocation and financial discipline. Our operating activities, our operating activities, we saw it drop from ZAR 516 million to ZAR 442 million.

That's predominantly because as we planned for our scaling of the business, a lot of this is movement in working capital and investment in the salaries of salespeople in this department, ZAR 516 million to the ZAR 442 million. Our investment into PPE has gone from ZAR 228 million to ZAR 271 million. There's a large portion of that which has got to do with our investment into infrastructure for the growth that we foresee into the future. And at the same time, that's obviously the increased sales compared to last year that's driven that increased ZAR 271 million.

Our free cash flow is down 41% with ZAR 171 million for the half year, which we believe is very healthy free cash flow. Our outlook remains unchanged. And I think this is quite important for us because given that it's sometimes very difficult specifically with COVID to forecast and to give an outlook, we remain confident that we will meet what we promised shareholders. Our number of subscribers at this point in time is 1,409,000.

We believe we will exceed the 1.5 million subscribers. Subscription revenue was ZAR 1.2 million at half year, ZAR 1.234 million. We believe we will get over the ZAR 2.5 billion. And our adjusted EBITDA, excluding Carzuka, for the half year was at 45% and that is already in line with our outlook for the year.

Our ARR as of August 31, 2021, differs between the rand and dollars. That's obviously got do with the change in the currency -- the exchange rate between South African rand and the U.S. dollar. South African rand was ZAR 2.540 billion, and I have to read the 2.5 -- which is 15% up.

And in U.S. dollars, it's just over USD 175 million, which is up 34% compared to last year. I would now like to open up and to take questions from you.

Unknown speaker

And Matt from William Blair.

Questions & Answers:

Operator

[Operator instructions]

Zak Calisto -- Chief Executive Officer and Founder

Hi, Matt, I'm happy to take your question.

Unknown speaker

Hey, Zak. Can you hear me?

Zak Calisto -- Chief Executive Officer and Founder

Yes, I can, Matt.

Unknown speaker

OK. Great. Yes, thanks for taking the questions and nice results, guys. I wanted to dig into the impact that you're seeing from COVID on your business.

Is it primarily isolated to the Asia region at this time or are you continuing to see impacts in South Africa and Europe as well?

Zak Calisto -- Chief Executive Officer and Founder

So I think COVID is clearly impacting us in all our segments. And it impacts us from, one, our ability to manage our business; and two, from the actual marketplace itself. Clearly, Asia is the most impacted. Europe is not as impacted as Asia.

And South Africa is the least impacted at this stage. We, up to now, have really struggled in Asia. But the good news is that this week, we've already -- we received permits to take in some of our senior staff into the Philippines, into Indonesia, and Thailand. So they all came through all in the same week, which is quite encouraging.

And despite us growing at 20% in Asia, we believe that in the short term or near term, we can start accelerating that growth. So we're quite excited about the markets starting to open up and we believe that the markets within six to nine months, hopefully, the countries will learn to live with COVID. I'm not sure if I'm answering your question, Matt.

Unknown speaker

You did. That's helpful. And then in terms of the impact of the social unrest in South Africa in July, maybe can you just sort of help frame that magnitude? Because even with that impact, that region still grew really well.

Zak Calisto -- Chief Executive Officer and Founder

So what it did for us, it basically really impacted our sales in July. And in our business, every buck counts. It's how many sales can you do in a day? We don't even measure it in a month. And clearly, in July it was for -- the biggest province in South Africa is Gauteng, the second biggest province is KwaZulu-Natal.

We closed down all our operations in KwaZulu-Natal and we closed some operations in Gauteng and some in Mpumalanga. I think all of that impacted our sales substantially. But what also impacted us negatively was customers that were already struggling with COVID and then that were looted and that left them in total financial ruin. So we did see that's basically how we got impacted in July.

But despite that, like you rightly said, we still grew at 20%, and our financial metrics in South Africa remained intact.

Unknown speaker

That's great. And just one more for me. In terms of the supply chain and your ability to source components for your in-vehicle devices, how are you feeling about that? Are you able to get enough product to meet demand?

Zak Calisto -- Chief Executive Officer and Founder

So clearly, there's delays in components. We, at this point in time, feel comfortable that we're not going to have problems for the next 12 months. And we believe in our suppliers, believe that they will be able to supply us. What we are doing is we're purchasing more than what we normally would be, and that is obviously affecting our free cash flow and our operational -- the cash we generate from operations because of the working capital that we're requiring at the moment is a bit higher to be able to carry the inventories necessary for growth.

Unknown speaker

Perfect. Thanks, Zak. Appreciate you taking my questions.

Zak Calisto -- Chief Executive Officer and Founder

Thank you, Matt. The next question is from Mike from Canaccord.

Unknown speaker

Great. Thanks, Zak, can you hear me?

Zak Calisto -- Chief Executive Officer and Founder

Yes, I can, Mike.

Unknown speaker

OK. Great. Yes, congrats on the strong first half results despite all the challenges in your targeted regions. First question for you, just on the sales hiring, do you -- do we expect sales and marketing to continue to ramp in the second half of the year or is it more of a steady growth that's more about getting the current sales force more efficient?

Zak Calisto -- Chief Executive Officer and Founder

So in South Africa, we will do very little hiring more for sales staff. We've got enough headcount. We need to focus in the next six to nine months on getting the headcount efficient. In Asia, we're certainly going to start hiring now.

So in Asia, I believe our sales force is relatively efficient but we need to really ramp that up. So in South Africa, no increase. And then we intend in the beginning of the next financial year, where we start getting a lot of focus to Europe, and to ramp up our sales efforts in Europe. So overall, South Africa, we just -- at this point in time, it's -- we're going to go through a little bit of consolidation to get the efficiencies right.

But on the -- and so that in Asia, we're going to go on a very strong hiring -- we're going to start hiring now that we've got people -- getting senior managers into these countries. The managers are only moving in at the end of November, and we'll start hiring -- we've actually started hiring already this month and we aligned it before the senior manager is get in his place.

Unknown speaker

Great. Thanks. And then just my follow-up question. Just great to see you reiterate the full-year guidance.

South Africa, after the unrest, are things more efficient on a daily sales basis? And anything embedded in there and how efficient the sales needs to be by the end of the year in terms of continuing to grow that region?

Zak Calisto -- Chief Executive Officer and Founder

So our best month-to-date in the history of South Africa was actually last month, September. We had a record month in September. We believe that we'll just grow from strength to sustain. But as we said that we need to focus now on efficiency and on our strategy.

And we have a lot to improve in order to execute on our plans.

Unknown speaker

Great. Thanks for taking my questions and great to hear South Africa had a great month of September.

Zak Calisto -- Chief Executive Officer and Founder

Thank you. The next question is from Alex from Raymond James.

Unknown speaker

Hi, Zak. The prepared remarks alluded to the significant monetization opportunity from data. I know you've launched Carzuka. You've got the insurance product.

I'm just curious, how do you stack rank some of those big buckets on Slide 5 in terms of the biggest opportunity you're hoping to unlock in terms of addressable market on that data?

Zak Calisto -- Chief Executive Officer and Founder

Just can you get to Slide 5? One moment, please. OK. This is Slide 5? OK. So I think we've invested a lot in our technology platform.

The Carzuka platform is not ready yet. We -- I mean, envisage the platform to be ready in Q4. However, we have started in better place and that's very encouraging. We can already see that in the month of October, we can do more revenue than we did in Q2 in a better place.

So we believe we can exponentially grow that business. The insurance, we're basically redoing the way it works.I think there was a bit of a misunderstanding of the legislation around insurance and what we [Inaudible]. We're adjusting that to be able to fit a more optimal way of executing on our plan. But nevertheless, we're doing over 1,000 policies a month.

So it really is just a question of us having the right people in place, which I believe we have got right now, and slowly building this business. These businesses that fit right well with what we do.We're also being aware that these things aren't done overnight. It will take us a bit of time but I'm feeling very confident that we're going to do well as we -- out of these verticals in our business.

Unknown speaker

OK. Great. And then I wanted to ask about ESG and from -- kind of more from a customer acquisition standpoint, particularly in Europe, where there's kind of a reporting directive coming into place. You added a new board member with ESG experience.

I'm just curious, is that coming up in your conversations at all in terms of customers needing to better track their data, and that's actually being somewhere you can lead with from a sales standpoint? Thanks.

Zak Calisto -- Chief Executive Officer and Founder

So we've got all departments hitting us compliance. And we've done a lot of work. We're GDPR compliant in Europe. Also, our lead independent director, Siew Koon, is very familiar with the ESG and what is required.

We feel comfortable that we're able to deliver all those requirements.

Unknown speaker

OK. Great. Thank you.

Zak Calisto -- Chief Executive Officer and Founder

Thank you. So the next question from Bryan from Cueveco [ph].

Unknown speaker

Hi. This -- thanks for taking my question. I noticed this quarter in the presentation that you didn't break down sort of customers added by types. So like small, medium or large enterprises.

Just curious where the net adds in this quarter came from mostly.

Zak Calisto -- Chief Executive Officer and Founder

It was pretty much a mix in the past. So it's I would say that overall about 65% of our business came from commercial and about 35% came from consumer.

Unknown speaker

OK. Got it. And then just looking at the next quarter coming up, because it looks like it will be maybe a tougher comparable year on year. You said you had a good month in October.

How do you think that's tracking so far and what do you think will be the greatest drivers of subscriber growth in the second half of this year?

Zak Calisto -- Chief Executive Officer and Founder

I think the second half is just we've invested a lot into sales. It's getting the people efficient. But like I said, September was already our best month. And we're just hoping that every month, we can improve on the previous month, and we've got all the reasons to believe that we can do that.

But having said that, we've got to execute. We've got to do it before -- I'm not very good at saying, I prefer to talk about the past and what we've done. And we've given an outlook, and we believe we will deliver on that outlook.

Unknown speaker

OK. OK. Last question, sorry. Thanks.

If you could talk a little bit about the acquisition made. I think it was Picup, I think it was the name, maybe the rationale behind that and the amount spent and all that?

Zak Calisto -- Chief Executive Officer and Founder

So we have a lot of large corporates. And what we see is a huge pickup in e-commerce. And what that means is we've got a delivery platform on -- so a lot of our small, medium enterprise customers, now what they can do is they can do deliveries and they can monitor these deliveries, improve delivery and give tasks to their drivers and assign different parcels. However, what Picup does is they go a step further.

They're able to do that as well, but they're integrating to the customers' warehouses and into the payment systems. And then the companies are able to use their own vehicles, use outsourced drivers and also use third-party carrier companies or delivery companies, and all big trucks depending on what they want to do. So it's bringing the old logistics where a customer doesn't necessarily have to rely on his own fleet and can get the elasticity with other vehicles. And we believe that's a very important part to have on our platform, one, and it's a very important service, especially if we look at in 10 years' time where we believe the way mobility will work.

So it's really about us doing things today for five to 10 years' time. And we feel very comfortable with that acquisition. We've seen the monthly revenue since we bought them grow on month on month, so they continuously have grown, and we believe that business has got legs for granted.

Unknown speaker

OK. And is that -- I imagine you keep that kind of financials separate or is this maybe like a module you can charge additional for your existing Cartrack customers? Right now, my understanding is that all the modules are in one. There's no like price differential, sort of one flat b.

Zak Calisto -- Chief Executive Officer and Founder

So at this point in time, we've got everything in one with the Cartrack platform. Clearly, with this coming on year, we will report the financials separately. It's a small business at this point in time. The reason why we will keep this financial different is otherwise, it will be a bit of spaghetti and difficult to understand our numbers.

Also, once Carzuka gets a bit of momentum, which we believe by next year it will be, then we also can -- to split out the numbers of Carzuka, of the Picup and certainly of Cartrack. We are strategically thinking how we incorporate Picup into Cartrack's platform. And the two R&D teams are talking, and we will make that decision in the near term, how exactly we're going to deal with that. It's something we haven't quite crystallized yet.

There's different routes and we're going to see which is the best route. And in different markets, it might have a different route.

Unknown speaker

Got it. Thanks so much for taking my questions.

Zak Calisto -- Chief Executive Officer and Founder

Thanks. Thank you. There is a question from Santili. An increase in the expense associated with growth, starting with results, the increase in net subscriber growth rests on the success and the effectiveness of the investment strategy.

Will you be pleased at year end if adjusted EBITDA margin contracts below the lower bound of guidance 45% to 50% for FY '22? Are you looking to keep the same rate of expenses growth for Q3 and Q4 this financial year? Well, it's quite a long question. So the first thing is, we believe that our adjusted EBITDA margin will be between 45% and 50%. And we certainly will be pleased with that because that's what we budgeted for. Will we -- the same growth in expenses? There will be growth in expenses, like I said earlier on.

On sales, it will be more in Asia, at this point in time. And we will also be building up some operational capabilities for our expansion into Asia. So there will be a continued increase in the continued investment but we certainly believe that we will still be in that EBITDA margin that we've given guidance on. Next question? Next question.

Hello, Zak. How is the chip shortage affecting telematics devices? Do you expect this to have an impact on the planned growth going forward? I've spoken a little bit about it. We don't believe that's going to have an impact on our growth in terms of subscriber growth. From Raymond, how has the competitive environment evolved over the past 12 to 18 months across the various regions? Are the OEMs and sales becoming more serious competitors to the service? So the competitive environment in the last 12, 18 months has been under COVID.

I believe there hasn't been much of a change in the competitive environment. In terms of the OEMs, I do not see them as competitors. We're able to collect that data from the OEMs. We've actually signed deals with OEMs, specifically in the last 12 months and we can collect data from the OEMs.

We're in a very different space to OEMs. OEMs play in telematic devices mostly to get vehicle diagnostics for maintenance and driver safety. We're able to do the same but we go more into the efficiencies and throughout our customers with other aspects that OEMs don't necessarily want to play in or have the infrastructure or in turn building the infrastructure as it comes with quite a level of complexity, what we actually do. A question from Howard.

Zak, congrats on your assessment results. Question about investment for growth. Approximately, how many salespeople outside of Singapore do you have in Asia on the ground drop? We -- was that a year ago, 24 months ago? Howard, I haven't got the numbers in front of me. I can always get these numbers for you.

But in terms of what I can tell you is that our growth in salespeople today in 24 months is very much the same. We didn't really invest in headcount. So it's marginally increased, but we do intend starting to increase specifically now that we've been given the go ahead to bring in management into Thailand, Philippines, and Indonesia. The next question is from Ren Tamu.

Hello, Zak. From effective capital, I want to ask if there's any plans to increase the liquid shares in the JSE. Thank you for taking my question. We certainly have plans to increase the free float, myself and Xuan.

Jointly, we own 77%. Xuan sold some shares, 309,000 shares, to pay a portion of his tax liability during the restructure. I still haven't sold any of my shares to cover that tax restructuring. And we do think, both myself and Xuan to sell down our shares.

And I think over time, we do not need to own 67% of the business. And we certainly want to jointly own 50% of the business, and we believe it's better for us to have a more liquid share. Then a question from David Everoth. Zak, it's great to see additional investment in sales in Asia.

Any color on which countries you're investing in? I think I've answered that question. So revenue is an obvious -- sorry I've got to read this, revenue is obviously a lagging indicator for incremental investment. Yes, I agree with that and that is in keeping with what we promised to the market. Hence, the decline in our margins, in adjusted EBITDA.

So it is something that is not coming as any surprise to us or to the market. It's in keeping with our plan, strategic plan.

And that's all the questions. I thank everybody for tuning in, and I look forward to talking to you in three months' time. Thank you very much. Bye, bye.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Zak Calisto -- Chief Executive Officer and Founder

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