Karooooo Ltd.

Good day and thank you for standing by. Welcome to the KORU first quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference has been recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to speaker today, Mr. Zach Callister, CEO, founder. Thank you. Please go ahead, sir. Thank you very much, AJ. I want to thank everybody that's made time for our presentation, the Q1 FY22 results. I will go through the presentation and clearly at the end I will answer as many questions as I possibly can. I founded the company in 2001. We launched in South Africa in 2004. And during April this year, we moved our headquarters to Singapore. And the holding company is Karoo, and it now owns 100% of CardTrack as from April in this first quarter. Since we set out in the business in 2004, we were always of the view that all vehicles will be connected and data will drive all aspects of mobility in the future. This has taken much longer than I anticipated, but our mission is certainly to build the leading mobility SaaS platform that maximizes the value of data. With over 76,000 commercial customers and approximately sole proprietors and consumers of 500,000 customers, we've got a data set and collect over 58 billion data points on a monthly basis, a comprehensive data from customers in different industries and different geographies using different types of vehicles, different fleet sizes, and all of this data allows us to contextualize a lot of different businesses, a lot of different business processes, and that allows us to give comprehensive business intelligence report and predictive analytics to our customers, whether they're just fleet management in the insurance industry, and that's fundamentally what we do. We collect data from proprietary in-vehicle smart devices. We also collect data from third-party AM devices in vehicles, We store the data and fundamentally we then process the data to create the value. We have APIs into third party systems where we push and receive data from. We've got a relatively consistent history where we've year on year consistently or quarter even or quarter on quarter consistently have increased our customer base, our subscribers, We've grown our revenue on a consistently and our operating profit is also growing consistently. However, from time to time, it does go, you know, a little bit up or down, but over time, the correlation, the linear, the line is certainly a trend upwards. Um, one of the things we tell ourselves is the way we allocate capital. We've got a strong financial discipline and, um, we're continuously monitoring our process on a daily basis. We're quite fortunate that our business is annuity-based business. We've got a very healthy subscription revenue growth. 97% of our revenue comes from annuity, and that obviously gives us quite a bit of quite a bit of confidence into the months to come of what our revenue line would look like. Our subscriber growth, if we compare it this quarter compared to the previous last year's quarter, we grew by 21%. Revenue growth grew by 17%. On a constant currency, we grew by 22%. I think it's important to note that on a constant currency, Our subscription revenue grew by 20%. We now, ARR, as of May, is $2.5 billion, which is up 18%. We did have quite a bit of play in terms of currencies over this last year. We saw the RAND depreciate substantially against the basket of currencies that we operate in. And if you then look at our in U.S. dollars, you will see a 51% increase to $181 million. A lot of that is led by appreciating South African grains. We've had a relatively good Q1. We grew compared to Q1 last year in terms of net subscription additions, 760%. That could be a little bit out of context given that in Q1 last year, it was really the beginning of COVID. It was a very difficult time. The times are still difficult for us at this point in time, but we've got a bit more used to trading in this current environment. But irrespective of that, if you look back to Q1 of FY20, our net quarterly subscriber additions is still more than 100%. And I would say that the last three quarters have been very good quarters in adding net subscribers. And typically our Q1 is not normally our strongest quarter given quite a lot of the Jewish and Christian holidays and also the Asian holidays. So we're quite content with the results and our achievement in Q1. We continue to see growth of our customer base. What we are experiencing with COVID is more than normally what we're seeing is the different sizing of customers where you'll have a customer that has 30 vehicles now with 20 vehicles. Or, you know, there is a bit of more movement in the downsizing or increasing of vehicles throughout our customers. Our commercial customer retention has remained strong at 95%. And we have very low industry and customer concentration risk. The car industry, which is considered to be quite risky given COVID, it's less than 1.1% of our base, and our largest customer is less than 1.7% of our revenue. And also, I must add that the largest customer, the 1.7% in terms of bottom line, due to the discounts, it's substantially less than 1%. In terms of cash flow, our operating activities, we're actually up 19% compared to Q1 of FY21. Clearly, with the growth, we've invested more into PPE, so we've seen a 77% growth in PPE, and our free cash flow is down 12%, primarily on the back of our growth and investing in our growth of our businesses. We believe one of our advantages over and above our internal systems and our platform is over years we're improving substantially in our ability to acquire customers, to acquire subscribers, subscriber being the vehicle that belongs to customers. I always tell, you know, we have a certain element of control on retaining customers. But the vehicles or the subscribers, that's really by default. We can prescribe to our customers how long they retain their vehicle on our platform. So we do see customers selling their vehicles after they've been in the platform for 12 months, others after 18 months. But all of these unit economics we take into consideration to build out our models. So what we saw in Q1 this year compared to Q1 of last year, we saw an ARPU drop from 155 South African grand to 151 grand. Predominantly, that drop has actually got to do with currency, where the strong rent had a negative impact on our ARPU. And it's also got to do with quite a lot of customers In some Asian countries and in Africa, outside South Africa, where they're getting holidays where they're not actually using their vehicles. So that's had a negative impact. But I think overall on the constant currency, our actual ARPU is actually increased compared to last year. But it's still trading in the range that we find the helping range, which is between 150 and 160 rand. Our subscriber contract life cycle remains very consistent just over 60 months. we depreciate any capitalization of customer acquisition or subscriber acquisition over 60 months. It's more subscriber acquisition. What you do see is a huge decline in our cost of acquiring a subscriber from R2,636 to R2,005. There's a little bit of noise in that in the sense that in Q1 last year, we had substantially less overheads in terms of sales people but there was substantially much less uh the productivity is substantially less because of of covert at this point in time our productivity is still not where we want it because we on board as a substantial amount of sales and marketing stuff but nevertheless we've seen that improvement of from 2636 south african grand to 2005. In terms of what we capitalise, that's dropped from $1,624 to $1,489 and that's got predominantly to do with our new generation telematics hardware. Subscription revenue gross profit margin, that dropped to 72% as opposed to 74%. But once again, that is also driven by the ARPU, the revenue in ARPU, which is lowered because of the currency, predominantly the exchange rate against the rent. It's important to note on the slide that the portion that we expense up front is normally related strongly to customers that we've onboarded And these customers, when they have the second cycle of vehicles coming, when they de-fleet the vehicles and bring in more vehicles, that would normally, we wouldn't be incurring the sales salaries again, nor the marketing costs. So over time, it would stand to reason that your cost of acquiring a subscriber will decline. However, we see that that could change with 5G units that will have in the air probably within the next year or two and that could also have an impact on the unit economics we operate in a large under penetrated market South Africa is just a it's our estimates and sometimes it's very difficult to get numbers with a huge amount of accuracy and it's just over 10 million vehicles it's you know some people talk about 12 million vehicles we've got you know, just under 1.1 million Jekyll. So we add at this point in time, we believe about 8% of the market. Uh, we believe that allows us to grow at very good rates, specifically still for another five years, uh, before we have slowed down growth. Um, in Africa, we believe we've got 63,000, so we can really grow, uh, Africa. It hasn't been one of our priorities. We will focus on that priority probably in four years' time once we believe South Africa has reached a certain level where we've moved that one million customers to a few million, and then we can use our stronghold in South Africa and the human capital we've got in South Africa to move into Africa. In Southeast Asia, it's a huge opportunity with well over 100 million vehicles. It's substantially more than 100 million vehicles. We've only got 124,000 vehicles, and We, approximately two years ago, were feeling very positive about growing Asia, and we are at our best. Then COVID came, which is basically now 15 months ago, 16 months ago, and that's really made it very difficult for us to be able to move around Asia, to be able to onboard people. We were hoping, you know, if you asked me five months ago, six months ago, how would Asia look like, I would have thought by middle of this year, the markets would have opened up much more. The reality is they're actually closing up more. So Southeast Asia is we see Singapore is going to relatively, you know, they're closing. Most people working from home, they're closing all the restaurants from tomorrow. So the trading conditions don't seem to be very favorable, but we're very well positioned to grow in Asia once the market opens up. We have employed about 150 people in this last quarter in Asia in the hope of the market opening up, and we are moving some of our staff that are sitting in Europe, in America, and in South Africa that were meant to go into Asian countries. We are bringing them to Singapore, and hopefully with the Singapore team, we will start gathering momentum hopefully in the near future in Asia, because we certainly believe that's our biggest opportunity. Europe, also a massive opportunity for us. Europe is what we're waiting for. We certainly want to start really investing for growth in Europe. What we do see in Europe is, you know, they go from lockdown to open up the market and it's quite, it fluctuates. The policies seem to change quite frequently. And we would like to see Europe through this next winter and then after that start investing substantially in Europe, just the same way as we've invested in South Africa in the last six months or seven months where we've actually employed in the region of about 700 people, 650 people. And we look forward to the opportunity. We believe it's huge. We will focus on customer acquisitions. And as the markets become more penetrated, then at that point in time, we can focus on increasing our ARPU by charging for the value-added services that we continuously add onto our platform that at this point in time, we're giving to our loyal customers just for customer retention and to create customer stickiness and to make our proposition very attractive. If we look at our subscribers in this quarter, quarter and quarter, South Africa grew by 23%, Africa by 5%, Europe by 14%, and Asia by 17%. During this quarter, in actual fact, I would say actually for the last six to seven months, we've been investing quite heavily for growth. And if you look at the amount of capital that we've allocated to sales and marketing, that's gone up by 71%, R&D by 44%, and G&A approximately 21%. We did experience growth in the G&A, but there's also expansion costs for Asia and even for South Africa there. So we believe we will reap the rewards of this investment in months to come. We've onboarded a lot of people. They'll probably take a few months to become totally productive. And given COVID, which obviously slows down the process of the transfer of knowledge, We believe that by Q4 of this year, we'll get the results that we desired out of all the staff that we've onboarded, and we're very excited about the future that holds for us. Our operating metrics, our subscription revenue grew from $526 million to $606 million. dropped from 155 to 151. Our gross profit margin dropped from 73 to 71%. Most of this is really due to the carbon exchange on the output. It brings those margins down. Then research and development, that we increased from 4% as a percentage of subscription that we need to 5%. Sales and marketing, that's been increased from 10% to 15%, all in line with our plans. And G&A, that's increased from 20% to 21%. Our adjusted EBITDA margin last year was 50%. This year it's 44%. It's very much in keeping with our expectations. And we believe that the adjusted EBITDA margin will increase about 45% by the financial year end. Our outlook that we gave at the end of FY21, we maintained the same outlook, and that is to get subscribers to be between 1.5 and 1.6 million, our subscription revenue between 2.5 and 2.7 billion, and our adjusted avatar margin between 45 and 50%. It's just important to note that our ARR is actually at 2.5 billion as of May. On that note, I'd like to thank everybody for taking the time to listen to us, and I will open up for questions. Question number one from Rebo Malotsi. Good day, Zach. What do you honestly think of our prospects so far about expanding into mature markets like Europe and the U.S.? ? Don't you think it's too risky, or do you think the competitive advantage we have is strong enough to compete in such markets? And if yes, what makes you think so? So it's quite a long question. So we've got a very small office in the U.S. I think the U.S. market is a very exciting market, full of opportunity. But we just haven't got the human – we haven't got enough – we're spread too thin to go tackle the U.S. We in Europe, we compete very favorably with our competitors there. In actual fact, we win a lot of the business over them. And we believe that that's definitely an area where we want to certainly invest in Europe. And I think the U.S., over time to come, we've got enough on our plate that probably the best solution for us would be an acquisition or a merger in the U.S. at a later time to come. I don't think right now. Right now, I think we've got enough on our plate and a lot to do. The next question from . What was the impact of COVID restrictions during the pairs? How do you think your net ads would compare if we had zero COVID restrictions in your operating regions? Really, obviously, I haven't got a crystal ball, but my gut feel is, and the way we've prepared, is to obviously be growing much faster than what we're growing at. I think under the circumstances, we had to focus on the market that we believe was the easiest to trade under COVID. South Africa had a very open market, just like the U.S. Europe was half open. Asia was a very closed market. So we focused where we could do best. And this is the results we achieved. Obviously, under COVID, we believe and our targets for our management would certainly be to be doing better than we're currently doing. Anthony Geert, Isaac, great subscriber growth. Can you provide more color on the geographic split of sales and marketing spend, please? Where are you spending the extra money and when do you think the fruit of this investment will be evident? Also, the travel restrictions, I'm sure most are out of the way now. Is your team able to travel in the region? Yes. The travel restrictions, if anything, they've intensified. It's still very difficult to travel in the region. And I think, Anthony, quite frankly, I thought by now things would look very different. But I would say it's even tougher now than it was three months ago. Where did we spend most of our allocation of sales and marketing? It was predominantly South Africa and a bit of Asia. we want to then spend the growth in europe just i would say in about two quarters time we just want to see after the summer holidays of europe what that would look like and um but the minute we see asia will open up that's where we really want to allocate a lot of capital to we see asia as a big opportunity but at the moment very tough to do business there especially if you haven't got the strong presence on the ground and you're busy growing the business It's quite difficult. Daniel Bartis. Okay, okay. Daniel says he'll ask the question while I have it that way. Okay, I'll do it after this. Roy Campbell, could you talk through the seasonality embedded in your four quarters in a normalized environment? So our business is not very seasonal, although our two weakest quarters is Q4 and Q1. And those quarters are normally quite, uh, quite three quarters be given all the holidays, um, specifically in South Africa in December. And then obviously with the Easter and the Jewish holidays, uh, and some Asian holidays around the first quarter, those makes, makes traditionally awkward because for us, it's all about trading days. You know, the less trading days we have, that's how it impacts us. It's not really the weather. It's more the trading days if one had to take it directly. I'm not sure if I've answered Troy's question, but I think I have. AJ, can you ask the questions from Mike from Canaccord? Perfect. Mike, your line is open now.

You can ask your question. Great. Thank you. Zach, congratulations on the strong start to fiscal 22, despite probably some of these markets more locked down than you anticipated when you gave the initial guidance. Can you just talk longer term? Should some of these regions, such as Southeast Asia, start to reopen? How do you think the business might re-accelerate in terms of longer-term growth, particularly with the sales and marketing headcount additions you've made over the past year?

Most of the sales, it sounds like the increase was actually in South Africa, although we did have about 157 people in total in the last few months in Asia in anticipation of the market opening. We believe we will do really well in Asia. We feel very confident in it. Our management feels very confident. And we will have to build our expansion in terms of distribution. Our distribution is quite limited given the of Asia. So we certainly can allocate capital and we believe we'll do well. So where we have got traction, we believe we're winning on the ground. I certainly believe that our platform is superior for superior and our solution is very comprehensive. So I believe we'll do really well in it.