Karooooo Ltd. (KARO) Q3 2023 Earnings Report, Transcript and Summary

Welcome to the Karooooo 2023 results webinar. I am Richard, the group’s COO and we are pleased to present the Q3 results to our shareholders and investors. We are excited to share our performance, growth, and future plans. Our team led by our CEO and Founder, Zak, is committed to delivering on our strategic goals and creating long-term value for all of our stakeholders. With Hoeshin, our Chief Financial Officer and the rest of the team, we are confident in our abilities to continue driving growth and innovation in the future. All shareholders and investors are advised to read this disclaimer. Today, we will review the three entities within Karooooo, mainly Carzuka, Cartrack, and Karooooo Logistics. At Karooooo, we understand that mobility is core to all underground 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. Our cloud platforms seamlessly embeds into the day to day activities of our customers and offers unprecedented visibility of varying aspects of their operations covering driver, vehicle, cargo, worksite and more. Our platform contextualize these data points to offer actionable insights for their challenges. This helps customers understand and ultimately streamline their operations, enabling them to deliver on their service offering to a higher level and remain competitive within their industries. 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. Karooooo's cloud platform is well-positioned to successfully service customers across diverse industries. We support over 100,000 small to large businesses in optimizing their underground operations, including global multinationals like Coca Cola and Cargill. This is a 15% increase, compared to the previous quarter. Our success across our diverse customer base continues, ensuring our low customer and industry concentration risk. [Highlights of the] Karooooo Investment. Innovating through an entrepreneurial approach that prioritize customer needs, utilizes hands on experience and skills, and being adaptable in both planning and execution, offering a strong value proposition, proven track record of delivering value enhanced solutions and passing on cost savings to customers through successful execution while maintaining prudent capital allocation. Having a strong financial foundation, the ability to control prices and maintain higher operating profit margins, solid unit economics and a history of sustained growth at scale, our strong management, intraperitoneal culture, and vertically integrated business model puts us at a significant advantage by inspiring ownership and practically creative thinking throughout the business. This has been a leading contributor to our proven track record of growth and profitability in varying macroeconomic headwinds across multiple regions. Karooooo is using data to improve operations, and we are at an early stage of a large growing opportunity with over 40% of global GDP based on the underground operations. Mobility is the key to solving customer challenges, and crew is leading the way in this area. 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 Karooooo platform. Karooooo has a large untapped network effect generated from its platform with over 120 billion valuable data points generated monthly. Customers are benefiting by personalizing their experiences and provided with tools to improve decision making and increase their efficiencies. Predictive analytics of historical data are not only leading to improve customer loyalty, but allow us to develop new products and services. I will now hand over to Carmen to present the Karooooo financial results for Q3.

Thank you, Richard. I will now talk through Karooooo's financial performance for Q3 FY 2023. Please note that all comparisons are against Q3 FY 2022 unless otherwise stated. As expected, after substantial investment for future growth in all segments, earnings per share for the period was ZAR4.70. Year-to-date earnings per share increased 20% to ZAR14.59. Our cash generation continues to bolster our quality balance sheet. Free cash flow increased by 27% in this quarter and by 42% to ZAR434 million on a year-to-date basis. These robust earnings were achieved despite the group's strategic investment for expansion, brand building, and custom acquisition, a testament to our resilient business model that is highly cash generative. Supported by a high customer retention rate, Karooooo continues to grow at scale with a 14% growth in subscribers to 1,678,606 and 29% growth in revenue to ZAR930 million. Our growth remains organic and we continue to be prudent with capital allocation, focusing on deploying capital in key opportunities that will drive short and long-term value. Karooooo’s success is largely attributable to our innovative and customer centric culture, which has led us to become an operational technology partner that offers high customer return on investment 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 cash flow generation with net cash on hand up by 2% at the end of November 2022 at ZAR819 million, despite paying a cash dividend of US$18.6 million in the period. Debtor’s turnover days improved to 31 days. We have strong unit economics, robust operating margins, a quality balance sheet, and strong cash position and have consistently beaten the Rule of 40. We report performance by our three key business segments: Cartrack, Carzuka, and Karooooo Logistics. Karooooo's total revenue increased by 29% to ZAR930 million at the end of Q3 and ZAR2.6 billion on a year-to-date basis. Cartrack grew its revenue by 19% to ZAR804 million, and operating profit by 7% to ZAR222 million in the quarter. Cartrack's adjusted EBITA was comparably unaltered in this quarter. Cartrack's year-to-date operating profit grew by 19%, EBITA grew by 17%, and EBITA margin is at 48%. This is in-line with Karooooo’s planned investment for future growth and management's guidance for 2023. Carzuka’s steady expansion justifies our belief in the sustainability of its agile, data enhanced, and highly scalable business model. Carzuka’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 good return on investment. Karooooo Logistics delivered strong growth generating ZAR54 million in revenue and an encouraging operating profit of ZAR2 million in this quarter. Its focus on delivery as a service continues to gain momentum. We will now focus on Cartrack, the largest underlying asset of Karooooo. 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 additions 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 revenue up 16% to ZAR771 million and total revenue up 19% to ZAR804 million 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 ZAR222 million, 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 moves ahead. Southeast Asia presents the greatest opportunity in the medium to long-term as we continue to focus to grow the region. Europe saw healthy growth of 14% and we aim to allocate more resources to the region in FY 2024. Africa, although is gaining some traction and increased subscribers by 9%. In this quarter, Cartrack’s ARPU was a ZAR157. We are focused on offering a strong value proposition to our customers, while retaining pricing power. Cartrack 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% to 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% to 19%. Despite our continued investments in G&A, we expect that as a percentage of subscription revenue, G&A will drop to 12% to 16% in the long-term. As expected, our adjusted EBITDA as a percentage of subscription revenue was at 45% in the quarter. Our targets for the long-term are 50% to 55%. We are content with the progress we have made year-to-date and we will retain Cartrack’s outlook for FY 2023. Number of subscribers between 1.7 million and 1.9 million. Cartrack’s subscription revenue between ZAR2.95 billion and ZAR3.1 billion and Cartrack’s adjusted EBITDA margin between 45% and 50%. Carzuka and Karooooo Logistics continue to scale and positively impact Karooooo’s revenue growth. Both segments showed good progress with strong quarter-on-quarter growth of 11% and 32%, respectively. In combination with its intuitive e-commerce platform, in this quarter, Carzuka 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 Carzuka’s brand. Karooooo Logistics continues to integrate into Cartrack’s platform to support Cartrack customers. Karooooo’s year-to-date earnings per share grew 20% to ZAR14.59, despite being impacted negatively by Carzuka. We remain focused on managing Carzuka’s losses, while pragmatically investing in this segment. We are content with the results so far. I would like to thank everybody for joining us today and we'll now open the floor to Q&A with our Group CEO and Founder, Zak.