Karooooo Ltd.

Hello and welcome to Karoo's FY2024 Q3 Earnings Call. On behalf of Karoo, we'd like to thank you for joining us today. I'm Carmen, the Group's Chief Strategy and Marketing Officer, and together with Hu Xin, our Group Chief Financial Officer, we'll be taking you through our strong business updates and financials. All investors are advised to read through the disclaimer. We will be reviewing all three of Carew's business units in today's webinar, namely CarTrack, Carzuca and Carew Logistics. Carew remains committed to our mission of being the leading operations cloud. Our focus is to simplify the lives of operators and maximize the scale and efficiency of their operation. Our innovative platform goes far beyond connected vehicles and equipment to centralize and unify an entire operation into one single place. We are helping to pave the benchmark and future of efficiency, safety and impact for operational businesses. Fundamentally, every operation wants to achieve safety targets and compliance targets and well-being targets. But historically, these have come at the compromise of the core survival and success targets of a business, productivity and efficiency. Having a tool that solves complex problems in simple ways is no small feat. And this is a constant driver for our strong growth at scale. Everything is embedded together. The tool that automatically flags potential fuel fraud to save thousands is the same tool that automates carbon emission tracking. The tool that optimizes routes to slash mileage and fuel consumption also makes driver's lives easier and puts them at ease to ensure they get paid for every minute they worked. When burdens like maintenance are well managed, they become strong differentiators for operators, and this is easily done through our automation and integrations. Karoo's platform allows operators to prioritize safety and compliance with heightened productivity. Karoo's AI-powered cameras are redefining the boundaries of visibility. These cameras stand as safety pioneers, revealing hidden risks and enabling proactive responses. From slashing accidents to exonerating innocent drivers, their profound impact transcends industries. A key factor contributing to the success of our platform is its smooth integration into our customers' various operational workflows. In challenging environments like mines, traditional methods such as sit-down discussions on driving styles may not be feasible. Recognizing the significance of training, our innovative approach involves utilizing our risk management control room tool and two-way in-cab communication tools for on-the-spot training and immediate action. The generated alerts ensure prompt intervention and risk mitigation, such as directing drivers to rest when fatigued. The outcome has been transformative with a remarkable 59% reduction in fatigued or distracted driving in just four months, resulting in an overall decrease in accidents. In other industries, establishing formal training is feasible and driver incentives are based on safety scores. A leading mass bus company transporting around 1 million passengers daily has revolutionized an industry and made significant impact on community safety with a 41% decrease in fatigue and distracted driving in just three months. Not only has this led to positive branding as commuters see the change and feel safer, but it has also boosted operational efficiencies by reducing accidents and minimizing the associated downtime. Accidents involving company vehicles often result in substantial maintenance and insurance expenses, protracted legal disputes and employee disgruntlement. Our cloud-based footage has revolutionized the way companies address accidents, providing a straightforward means to investigate incidents and exonerate their teams. This approach enables companies to establish clear mandates around liabilities, streamlining compliance and boosting employee morale. Workers appreciate a tool that prevents unwarranted blame, leading to increased employee retention, whilst businesses benefit by avoiding unwarranted bills that often rack up to tens of thousands of dollars. In an era where safety is taking center stage, our cameras are reshaping how we approach risk management, worker well-being, community safety, and operational efficiency. Our operations cloud drives digital transformation for over 113,000 commercial customers with a 95% retention rate across businesses of varying sizes in diverse markets and industries. We continue to empower the day-to-day operations of our customers with our data-enhanced platform, enabling them to make informed decisions with actionable intelligence about their own fleet as well as others in their industries. The continuous evolution of our platform ensures ongoing enhancements, driving increased returns for our customers whilst we keep our ARPU stable. The value proposition of our platform is massive and we have a huge runway for growth. Our culture, founded on customer centricity, transparency and solution-orientated thinking, sets us apart. We attract top talent that thrives on challenges and values hard work over frills, fostering a team that leads by example. From infield technicians to decision makers, Our team's curiosity, ingenuity, and diverse experience results in a powerhouse of innovation and successful execution. Our unique culture, while not for everyone, cultivates resourceful individuals driven to efficiently solve complex problems. I will now hand over to Hu Xin, who will take us through our financial performance.

Thank you, Carmen. I will now talk through Karu's financial performance for Q3 FY24. Please note that all comparisons are against Q3 FY23 unless otherwise stated. Q3 has proven to be an exciting period for us. Our well-established and profitable SaaS business model and robust financial position provide us with multiple levels for growth, and our primary focus remains on growing our subscription revenue. Our subscription revenue grew 17% to R904 million and our ARR demonstrated an increase of 20% to RM3,711 million. Operating profit increased by 31% to RM275 million and our earnings per share grew 35% to RM6.34 despite our prudent provision made in a quarter relating to Kazuka's reduced operations. All segments continue to see strong tractions with the benefits of our strategic investment beginning to show. Earnings in this quarter stood at R199 million and our free cash flow are at R162 million. Our free cash flow has remained positive over the last eight quarters, despite our investment in the development of our new South Africa central office. Up to this quarter, we had invested R231 million in this development. Our high cash conversions are demonstrated through our strong financial discipline as we continue to invest for our future growth. Our net cash on hand stood at R782 million in this quarter. That does turn over days improving to 30 days alongside with prudent provisioning to weather off strong economic headwinds in some of the markets we are operating. We have strong unit economics robust operating margins, unleveraged balance sheet and a strong cash conversion. We remain confident that our track records of success, especially our ability to generate healthy cash flow, is sustainable. Despite our provision in a quarter for Kazooka, our earnings per share increased by 35% to R6.34. The increase is the result of positive revenue growth and improved profitability not withstanding with our prudent and strategic investment for growth. Kazuka has negatively impacted our earnings per share by $0.75, in line with the provision we make in a quarter as Kazuka reduces its operations. Based on our estimates, we believe we have made adequate provision, and going forwardly, we do not expect Kazuka to have significant impact on our earnings per share. We will now focus on CarTrack, the underlying assets to Karoo's success. Our momentum continued in this quarter as CarTrack extends its decade-plus track record of growth at scale, profitability and cash generation ability.

Overall, subscribers grew at scale by 14% to over 1.9 million.

Subscription revenue grew 17% to R900 million, while operating profit grew to R295 million. CarTrax consistently proves its ability to scale in diverse macroeconomic conditions and consistently beaten the Rule of 40. And in this quarter, CarTrax saw a 34% growth in earnings per share, reaching R6.96. Our earnings are benefiting from our robust economic soft skills. The expansion of CarTrack subscriber base by 14% to 1.9 million reflects our highly successful rate of implementation and strong customer retention across various businesses. The demand from small to large enterprise looking to enhance compliance function and embark on a digital transformation journey for increased efficiency and competitiveness in their operations remain high. CarTrack's total subscription revenue grew 17% to R900 million and represents 98% of total revenue. Total revenue grew 14% to R990 million.

Our SaaS ARR grew 20% to R3,695 million, showcasing the strength and growth potential of our SaaS business model.

As CarTrack continued to have strong visibility of its future sales revenue, our realization of economy of scale continued to demonstrate our ability to expand margins. In this quarter, gross profit grew 19% to RM672 million and gross profit margin grew 3% to 73%. Despite the investment, CarTrack's operating profit grew 33% to RM295 million and operating profit margin grew 4% to 32%. Our adjusted EBITDA grew 29% to RM447 million and adjusted EBITDA margin are at 49%. CarTrack's low cost of acquiring a customer, high customer lifetime value and retention rate, as well as strong benefits from economies of scale result in our leading unit economics. Our LTV to CAC is over 9. We have strong profit margins with our gross profit margin on subscription revenue at 75% and commercial customer retention rate of 95%. With our track record, we are well-precision to continue to increase our market share. Over the years, CarTrack has maintained a steady ARPU and averaged upfront cost of acquiring a subscriber. ARPU for the quarter was RM160. CarTrack's average lifetime revenue per subscriber in this quarter stood at R9,629. The average upfront cost of adding a subscriber to our cloud in this quarter was R2,106. This cost mainly relates to sales commission and telematic device, which are capitalized, and sales and marketing expenses that The headroom derived from the average lifetime revenue per subscriber, after subtracting the average upfront cost of adding a subscriber, R7,469 per subscriber. From the R7,469, we incur the cost to service the subscriber over the contract life cycle of 60 months. The cost to service a subscriber decrease as we grow our subscriber base. Trade economics has remained steady, allowing us strong operating profits. CarTrack continues to grow with subscriber base and ARR to expand in all geographies. Our subscribers in South Africa grew by 12% despite the challenging trading conditions. Given that we continuously pass on additional benefits to our customers and have a rich data pool, we believe we will continue to see strong customer demand in this region. In Asia, the Middle East and USA, Subscriber grew by 26% as the traction in Southeast Asia has been encouraging. Southeast Asia remained as the second largest contributor to the group's revenue, presenting the most compelling growth opportunity and deliver increasing and sustainable income to the group in medium to long term. Europe saw a healthy growth of 15% and remains a region we are focusing on our resource on. With our recent partnership with leading OEMs, we are poised to leverage our extensive offering to future develop the connected vehicle ecosystem and expect these partnerships to contribute to our results in medium term. In addition, we are experiencing encouraging demand for our proprietary compliance technology in the region. Africa Others maintained its growth with 8% increase in subscriber. At the end of Q3, our ARR increased 20% to RM3,695 million. This is a good trending as we continue to see the momentum of growth in our subscriber and ARR. CarTracks continue to have robust operating margins and our trends are in line with the long-term financial goals set out upon our listing in 2021. Our subscription revenue gross profit margin stood at 72%, which is consistent with our expectation. Research and development expense as a percentage of subscription revenue are 6% as we focus on driving substantial benefit from our R&D capital allocation. Our planned investment in improving, enriching and expanding our operation cloud and enhance our value proposition to our customers. Sales and marketing expense as a percentage of subscription revenue increased to 14%. We believe the strategic investment for customer acquisition positioned us well for continued growth and we expect to see future benefits from this investment. General and admin expenses as a percentage of subscription revenue are at 21%. The expenses has been relatively stable to reflect our commitment to build a strong supply chain to meet our future growth plan, yet being pragmatic in our spending. Operating profit as a percentage of subscription revenue are 30% and adjusted EBITDA as a percentage of subscription revenue is at 48%. As we continue with our momentum in Q3, we are pleased with our progress so far. Our outlook for CarTrax remain and we maintain our guidance with number of subscriber between 1.9 to 2.1 million, CarTrax subscription revenue between 3.4 to 3.6 million rand and CarTrax operating profit margin between 28 to 31%. Keru Logistics significant growth generating 91 million rand in revenue and a commendable operating profit of RM7 million in this quarter. Its focus on delivery as a service through selected third-party crowdsourced driver and logistic companies has been highly scalable and is delivering substantial growth.

While it continues to integrate its platform to expand its customer base, the Karoo Logistics stack will deliver a long-term revenue stream to the group.

We believe the benefits of our strategic investments in this segment are starting to manifest. I would like to thank everyone for joining us today. And we will now open the floor to Q&A with our group CEO and founder, Mr. Zach Callisto.

Good morning or good evening to everyone. Thanks for joining us today. I'm going to start off with the first question from Miles Ferry. What does Carew plan to do with Carzuca's IP? um we do use part of the kazuka's ip for the broader uh spectrum of car track business so we intend at this point in time to continue using the kazuka ip although we be aware that we could sell part of it If we wanted to, we're not certain at this point in time if we sold it and we made another, whether that wouldn't just create another competitor that would upset the OEMs and the dealerships. So we've sort of got to tread carefully and decide if we do sell it to be outside South Africa. On a scale of 1 to 10, how does Cardtracks perform in Southeast Asia and Europe relative to your expectations? I think, Miles, we're definitely on target with our budgets. Clearly, what we would like to do is start growing faster, and that's exactly what we plan to do. Do you see growth in Southeast Asia and Europe scaling faster than FY25 than in the current financial year? I think in the results of the next quarter we're certainly going to give the outlook and there will be more firm in what we believe we can deliver. The next question coming from Matt from William Blair. Can you update us on the progress of the OEMs? I think the progress has been slow. But we certainly believe that once that progress starts, it's definitely going to be a kicker for attracting business and for customer acquisition. So we remain very hopeful that our integrations with our OEMs and our current collaboration with them is going to yield good results. Another question from Matt from William Blair. How is Asia performing relative to expectations? Matt, it's in accordance with our forecasts and our budgets for the year, and we certainly are doing a lot in the background to really increase our activity. Like I said earlier, I think within the next three months or so, we'll be giving better guidance for FY25. A question from Sandhili. Can you maintain debtors days at 30 going into FY25? I certainly believe that, you know, whether you got your debtors at 30 or 35, it's not much of a difference. And I think whether we're going to maintain it at 29, 31, it's all very healthy. So we've traditionally always had a very healthy debtors book. um historically we've had a very healthy data as well you say that free cash flow continues to benefit from prior investment efforts can you expect this trend to continue from this point um if you look at the slide that we presented our conversion over the last 24 months has actually been earnings as practically equaled our free cash flow obviously that is if you take into account that we are deploying capital into building the building to in rosebank which is going to be our south african head office uh which is a very important investment so once that building is built then you know and if we continue growing at this pace earnings and free cash flow equals However, if we start growing much faster, then free cash flow will start coming down simply because of our investment in customer acquisition. And similarly, if our growth slows down further, then our free cash flow will be higher than our earnings. Can you provide guidance for Karzuka Q4 loss? Well, that's all been already provided and we believe, given our estimates, that we are now fully provided for the Karzuka losses and we expect Q4 not to have any losses in Karzuka. And if there are, it will be minimally insignificant. So we expect really our earnings just to be career logistics and car tracks, the addition of those two. Question from Alex Scholar. Was there anything one time benefit in the strong 73% gross margin result? There was a little bit of a credit note on certain costs that came through in Q3, but then they're not significant. And we're quite used to historically seeing these type of gross profit margins. So there's nothing untowards it. So I think a good gross profit target is 72% to 73%. I think that region is where we feel very comfortable. And at this point in time, if you look at year to date, we're at 72%. So I think that's very healthy and very much in accordance with our estimates. Sales and marketing was down slightly. Can you talk about the capacity for gross ads you have in the current seller base? How are you thinking about sales hiring plans for the next 12 months? Alex, we are very busy with the recruitment process to hire for actually the next 24 months. And we certainly believe that our investment, we really going to invest quite a lot in that whole process. And I believe we're going to get the benefits out of that going forward. A question from Matthew from Confluence Impact Fund. Good subscriber for culture growth in Asia. Please could you give details of the split of supply and growth by country? What is the outlet for future growth? I haven't got the subscriber by country and we don't really give that, but obviously our strong countries in the region are Singapore, Thailand, Philippines, and Indonesia. A question from Riddhi Phanikerk. Can you logistics grain strongly? What is the scope for growth? How meaningful could operating profit contribute in the medium term? Really, I imagine that operating profit in the medium term will still be relatively insignificant to the group. However, it's really what we're building on a contract platform that can be very meaningful to the group. So we'll, we'll, over the next 12 months, get better visibility out that will actually increase our R degrees in car track. Question from Chris Logan. uh given the under penetrated market and scale in southeast asia and possibly europe would it not make sense for consolidation to occur in a slow growing and mature south african market um i think uh chris my personal view is that south africa has got still a lot of room for greenfield opportunity and it's also got room you know to take market share from our competitors Clearly, we're very focused at this point in time from clean field opportunity. Consolidation could be tricky, and quite frankly, I'm not certain it would be healthy for consolidation at this point in time, but maybe in four or five years' time, it could be a good thing to consolidate. Another question from . When will the new headquarters in South Africa be in operation? And will you hold the Q4 results in the premises? We will start according to our plans. It was the handover was planned for July this year. for us to get the building. We're now looking at moving into the building at the end of May this year. So we're probably two months or so before the planned date. How have debtor days trended down over the last year? Is 30 days the norm? I think I've answered that in a previous question. Thank you, everybody. That's the questions for today. Thank you. Should anybody have any questions, please reach out to Lauren and send an email. Thank you very much. Bye-bye.