Q3 2023 Karooooo Ltd Earnings Call

I have to read this disclaimer.

Speaker 1: Today we will review the three entities within Karoo, namely Karzuka, CarTrack and Karoo Logistics.

Speaker 2: At Kourou, we understand that mobility is core to all on-the-ground operations. We are not only thinking about connected vehicles and equipment, but also on how to improve the overall mobility ecosystems. We are constantly exploring new ways to use data to optimize operations and make them more efficient. We are establishing the leading connected cloud platform, enabling customers to develop effective controls and workflows while digitizing their daily operations in one enterprise-grade platform.

Speaker 3: Our cloud platform seamlessly embeds into the day-to-day activities of our customers.

Speaker 4: and offers unprecedented visibility of varying aspects of their operations.

Speaker 5: covering driver, vehicle, cargo, worksite and more.

Speaker 6: Our platform contextualized these data points to offer actionable insights for their challenges.

Speaker 7: This helps customers understand and ultimately streamline their operations.

Speaker 8: enabling them to deliver on their service offering to a higher level and remain competitive within their industries.

Speaker 9: We are committed to providing our customers with the best possible service and support, and we are constantly looking for new ways to improve our platform and our service offering.

Speaker 10: Karoo's cloud platform is well positioned to successfully service customers across diverse industries.

Speaker 11: We support over 100,000 small to large businesses.

Speaker 12: in optimizing their on-the-ground operations.

Speaker 13: including global multinationals like Coca-Cola and Cogill.

Speaker 14: This is a 15% increase compared to the previous quarter.

Speaker 15: Our success across our diverse customer base continues.

Speaker 16: ensuring our low customer and industry concentration risk.

Speaker 17: I'll answer with a Karoo investment.

Speaker 18: innovating through an entrepreneurial approach that prioritizes customer needs.

Speaker 19: utilises hands-on experience and skills and being adaptable in both planning and execution.

Speaker 20: offering a strong value proposition, proven track record of delivering value enhanced solutions and passing on cost savings to customers.

Speaker 21: through successful execution while maintaining proven capital allocation.

Speaker 22: Having a strong financial foundation, the ability to control prices and maintain high operating profit margins.

Speaker 23: solid unit economics and a history of sustained growth at scale.

Speaker 24: Our strong management, entrepreneurial culture and vertically integrated business model puts us at a significant advantage by inspiring ownership and practically creative thinking throughout the business.

Speaker 25: This has been a leading contributor to our proven track record of growth and profitability in varying macroeconomic headwinds across multiple regions.

Speaker 26: Peru is using data to improve operations and we are at an early stage of a large growing opportunity.

Speaker 27: with over 40% of global GDP based on on-the-ground operations.

Speaker 28: Mobility is the key to solving customer challenges and Karoo is leading the way in this area.

Speaker 29: The platform is well positioned to leverage this opportunity as it continues to grow. In South Africa, over 10% of all vehicles are connected to the Karoo platform.

Speaker 30: Karoo has a large untapped network effect generated from its platform.

Speaker 31: with over 120 billion valuable data points generated monthly.

Speaker 32: Customers are benefiting by personalizing their experiences and provided with tools to improve decision-making and increase their efficiencies.

Predictive analytics of hysterical data are not only leading to improved customer loyalty, but allow us to develop new products and services.

I will now hand over to Carmen to present the Kourou financial results for Q3. Thank you Richard. I will now talk through Kourou's financial performance for Q3 FY23. Please note that all comparisons are against Q3 FY22 unless otherwise stated.

As expected, after substantial investment for future growth in all segments, earnings per share for the period was 4.70R. Year-to-date earnings per share increased 20% to 14.59R. Our cash generation continues to bolster our quality balance sheet.

Free cash flow increased by 27% in this quarter and by 42% to R434 million on a year-to-date basis.

These robust earnings were achieved despite the group's strategic investment for expansion, brand building and customer acquisition, a testament to our resilient business model that is highly cash generative.

Supported by a high customer retention rate, Kuru continues to grow at scale with a 14% growth in subscribers to 1,678,606 and 29% growth in revenue to 930 million rand. Our growth remains organic and we continue to be prudent with capital allocations.

through our end-to-end all-inclusive IoT operations cloud. Even with our large scale, our vertically integrated business model empowers us to remain agile and adaptable with full control over infrastructure, advanced internal systems, and our expanding distribution network.

We have a proven ability to execute and achieve strong growth at scale. Our profitable SaaS business model continues to bolster our cash flow generation, with net cash on hand up by 2% at the end of November 22 at 819 million rand, despite paying a cash dividend of 18.6 million US dollars in the past year.

key business segments, contract, kazuka, and career logistics.

Karoo's total revenue increased by 29% to 930 million rand at the end of Q3 and 2.6 billion rand on a year-to-date basis. Cartrack Group's revenue by 19% to 804 million rand and operating profit by 7% to 222 million rand in the quarter.

Car tracks suggested EBITDA was comparably unaltered in this quarter.

Cartrack's year-to-date operating profit grew by 19%, EBITDA grew by 17% and EBITDA margin is at 48%. This is in line with Careers' planned investment for future growth and management's guidance for 2023.

Kazuka's steady expansion justifies our belief in the sustainability of its agile, data-enhanced and highly scalable business model. Kazuka's revenue grew to $72 million from $24 million in the prior year. We continue to invest in infrastructure, brand building and improving our processes.

Similarly, we are mindful of the losses and are being pragmatic in our spending to ensure a good return on investment.

Karoo Logistics delivered strong growth, generating R54 million in revenue and an encouraging operating profit of R2 million in this quarter. Its focus on delivery as a service continues to gain momentum.

We will now focus on Cartrec, the largest underlying asset of KARU.

Cartrack's low cost of acquiring a customer, high customer retention rate, strong cost benefits derived from economies of scale, and healthy ARPU result in attractive unit economics and a high customer lifetime value. Our lifetime value to cost of acquiring a customer is over 9.

Our gross profit margin on subscription revenue is a healthy 72% and our operating profit margin is 28%. Whilst we remain prudent with our capital allocation, we are well positioned to materially increase investment for growth.

We saw record net subscriber editions of over 78,000 this quarter as compared to any other historical quarter. This was largely supported by demand from small to large enterprises, reflecting the demand for customers to digitalize their businesses as to become more efficient, compliant and competitive.

Cartrack continues to have great visibility of future revenue with SaaS subscription revenue up 16% to 771 million rand and total revenue up 19% to 804 million rand in the quarter. On a year-to-date basis, total subscription revenue remains 97% of total revenue.

Our track record of execution extends over a decade and we have a proven ability to scale in varying market conditions.

Total subscribers grew by 14% to 1,678,606 and our operating profit grew 6% to 222 million rand despite significant investment for growth.

Cartrack continued to expand in all geographies. In South Africa, despite adverse economic factors, subscribers still grew by 13%. In Asia, the Middle East and USA, subscribers grew by 27% as the pace of Cartrack's expansion into Southeast Asia moved ahead.

Southeast Asia presents the greatest opportunity in the medium to long term as we continue to focus to grow the region.

Europe saw a healthy growth of 14% and we aim to allocate more resources to the region in FY24. Africa Other is gaining some traction and increased subscribers by 9%.

In this quarter, Cartrack's ARPU was 157 Rand. We are focused on offering a strong value proposition to our customers while retaining pricing power.

Cartrac has robust operating margins and our current trends are in line with the long-term financial goals set out upon our listing in NASDAQ in 2021. Research and development as a percentage of subscription revenue remains at 6% in line with our long-term targets of 4-6%.

We expect to increase capital allocation into sales and marketing to drive growth, whereby we expect sales and marketing as a percentage of subscription revenue to increase from the current 14% to be within our long-term target of 17-19%.

Despite our continued investment in GNA, we expect that as a percentage of subscription revenue, GNA will drop to 12-16% in the long term.

As expected, our adjusted EBITDA as a percentage of subscription revenue was at 45% in the quarter. Our target for the long term of 50 to 55.

We are content with the progress we have made year to date and we will retain Cartract's outlook for FY23. Number of subscribers between 1.7 and 1.9 million, Cartract subscription revenue between 2.95 and 3.1 billion rand, and Cartract's adjusted EBITDA margin between 45 and 50%.

In combination with its intuitive e-commerce platform, in this quarter, Kazuka has made significant progress by expanding into its second physical showroom and continuing to grow the brand presence. We will continue to steadily add strategic hubs across South Africa and build Kazuka's brand.

Karoo Logistics continues to integrate into Cartrack's platform to support Cartrack customers.

Karoo's year-to-date earnings per share grew 20% to 14,59 despite being impacted negatively by Kazuka. We remain focused on managing Kazuka's losses while pragmatically investing in this market. We are content with the results so far.

I would like to thank everybody for joining us today and will now open the floor to Q&A to tell Group CEO and founder, Zach.

Thank you very much. The first question is from Parker Lane. What are the long term growth margin and adjusted overtime margin targets for COSUCA and career logistics?

We're looking at the gross profit margin for Karzuka in a region of 10 to 12%. We're not quite there yet. We've got quite a few store processes that we need to iron out. And we're expecting over the long term that we'll get probably in a region of 12%.

fast to 8% at the overtime margin or operating profit margins. There will be very little depreciation in Coming April care system

On career logistics, we expect gross profit margins in the region of about 25% and we expect operating profits which would be similar to EBITDA as there is very little depreciation as well.

was noticeably down quarter and quarter but operating income was down as well.

Can you relay OpEx line items to a higher degree of cash investment if this is occurring? I think there was quite a lot of OpEx that we've experienced during this year.

And one of it was foreign exchange losses. We don't see this as recurring, but clearly it could happen. And substantial amounts of that was actually increasing in headcount. One in Southeast Asia, given the growth that we want to drive.

and in existing more mature markets like South Africa as well, as we continue to drive higher growth into the future. We are looking at containing this spring as we grow south.

Second question, pre-cash flow conversion is very strong. Should we think about the working capital improvements and lower capital intensity as recurring, more time related? I think it's more timing related as we see stronger growth. In other words, we only had a 14% subscriber growth.

And clearly when the subscriber growth is lower than it's been in the last two or three years, then obviously free cash flow becomes substantially stronger. So if we start growing faster than the 20% or 25%, 30%, then the free cash flow will obviously be...

Why? Solid.

We did see, especially in Q3, a better retention rate than we had seen in the first two quarters, but I also believe the first two quarters were still suffering from the impact of COVID. So we certainly saw a better retention rate, in other words,

less customers churning. So I expect it to be plateau at these levels.

A question from Matthew from William Blake. Does the subscriber's main link from the third continuing to the same day in January ? Matthew, traditionally our fourth quarter, which is the same day in January , is quite a weak quarter. It's one of our weakest quarters because...

If you take our biggest geography in the segment, which is South Africa, I would say that three quarters and probably half of January , the business activity is very low. And that obviously causes traditionally for the fourth quarter to be weaker than the third quarter.

but I think if we test that into it, we continue to see the same strength into the fourth quarter.

Which areas in Europe do you plan to invest in? Matthew, we came in Poland, Spain and Portugal as you know. I'm off to with Richard to Europe next week in Anglia.

And we certainly believe that there's still a long way to go in the current three countries we're in, but we certainly can now start the expansion and we would like to go into France as our next country. But fundamentally we need to...

We've got a lot of work to do to get a real momentum in the countries we actually currently operating.

Next question from Col.

Can Peru make any comment on the degree which load shading affecting demand, either positively or negatively? In addition, any effect on traffic patterns generally that you are able to shade, either in terms of accidents or increased traffic patterns.

Sorry.

We are here now.

or increased transit times.

What we're seeing, obviously, we're not an island. Our business in South Africa continues to be very strong. Clearly, the load sharing is affecting us on our cost structure. The ability to run the business is become more expensive. It also, in many respects, is a very important part of our business.

We've become at times less efficient. But fundamentally, I think it's affected more our customers than it's affected us. And we see a very negative impact in the economy.

I think we're very lucky that our business, there's always demand irrespective whether there's a negative economic environment or positive revolution. See that in for a long, there is a catastrophe. We believe we are continuing to see momentum. In terms of traffic patterns generally.

we haven't seen the ESCOM or the load shedding affect the traffic. Except obviously when the traffic lights are out, that obviously affects a lot of congestion.

So I would have to go look at it closely to answer this question. But I think in terms of kilometres driven, I think that people are doing the same kilometres. But clearly we probably find that our customers are using more fuel.

given how many traffic lights are out for a long period of the day.

A question from Roy Campbell. Can you talk through what you see in terms of inflation through the regions? Also, can you update on your access to inventory given recent supply chain challenges? We clearly are seeing inflation rise through all the region, whether it's Europe . I think Europe probably being the...

the region that we see highest inflation. Asia, we also see inflation and clearly we also see it in South Africa and in Africa. Can you update us on access to inventory? We keep quite a large portion of inventory and that as part of our PPE.

we've redesigned our telematics devices to be able to deal with parts that were short in the market and that we do have the advantage to be able to acquire more customers. We are not out of invention.

A question from Mupu. Isaac. He's actually saying it's from Korta from Coronation. Have you experienced any direct or indirect impact from the recent load shedding? I think I've answered that.

I think that's all for the day. I want to thank everybody for attending the presentation. And should anybody have any questions, you're welcome to email us. Thank you very much.

So.