Karooooo Ltd (KARO) 2022 Q3 法說會逐字稿

Welcome to Karooooo Ltd. Earnings Presentation for the Third Quarter of Karooooo's 2022 Financial Year. Today, Zak Calisto, CEO and Founder, will be presenting to you. Zak would take questions from participants after the presentation. Over to Zak to commence the presentation.

Good day to everybody that's taken the time to listen to our Q3 results. For any potential investors and investors that are not familiar with our structure, Karooooo is the [entity], and Cartrack was where we originally started, which was founded in South Africa and now headquartered in Singapore.

We have a track record of being the potential (inaudible). And as we go, we've evolved over time. We certainly are investing a lot into R&D to accomplish our vision and our mission. We see mobility as core to on-the-ground operations. What we also see is the customer needs are quickly evolving at a relatively fast pace, and it's going far beyond connected vehicles and equipment, driven primarily by the technology where we come from, GPRS to 3G to 4G to 5G. And the speed of technology has evolved us to be able to see a much larger opportunity to drive much stronger value for our customers. Our mission is to establish the leading on-the-ground operations cloud.

What we do is we solve problems by digitally transforming on-the-ground operations for our customers. We add value to the day-to-day operations of our customers. In depth, we do the fleet and equipment management, the logistics and delivery operations management. We assist our customers [working for] -- field worker and management thereof. We do video-based safety. We certainly -- I mean today (inaudible) with more and more demand for ESG compliance and reporting. We play an important role in that. We do risk mitigation, and we do integrations into the back office of customer systems and warehouses. We -- recently (inaudible), and we'll be launching actually towards end Q4, early Q1, which is our buying-selling platform of vehicles despite us launching in beta phase at this point in time. And we are certainly growing our insurance platform to (inaudible) to our customers.

Can everybody hear me? Is it loud? Sorry. Okay.

We fundamentally have open operations cloud with seamless integrations into our customer systems. We can (inaudible) data from proprietary in-vehicle smart devices. We also collect data from third-party and OEM in-vehicle smart devices, AI video telematics. And we certainly also do collect data and push data through APIs, through third-party system or systems.

We take the data, and on our cloud, we do the data analytics. We do artificial intelligence. We do understand that we're in the very early stages of the potential of artificial intelligence. And with that then we drive the whole fleet of verticals that exist on our one platform. And further, we help monetize. How we monetize the data is by having a fundamental value to our customers. We do not sell data to third-parties. And we see the real value of data is really how do we assist our customers and our future customers.

We (inaudible) will also be aware of the (inaudible) network effect of our platform. We are starting to invest in R&D to be able to unlock all this value. And at this point in time, we collect over 70 billion data points, and we consider them as valuable data points because there are other data points that we disregard as not being valuable.

We certainly believe and as technology evolves, the opportunity seems to be getting bigger. And we're in a very early stage of this large and long-term growth opportunity. IoT is certainly key to improving operations for our customers. If we look at customers, our customers' operations, fundamentally, a majority of it is driven around their fleets, their vehicles. So any customer (inaudible) that haven't got any on-the-ground operations, you will find that vehicles are key to those operations.

If we look at the market size, South Africa has got about 10 million vehicles. At this point in time, we've got about 10% of all vehicles in South Africa on our platform. Southeast Asia, we estimated to be over 100 million vehicles. We've got 138,000 vehicles, so it's really a very small percentage. We've got a huge growth opportunity in Southeast Asia. Europe flat, the same as Southeast Asia, a large opportunity as well. We believe in South Africa, we can grow relatively fast for maybe another 4 to 6 years, but I think in Southeast Asia and Europe, we've really got a long runway for growth.

And in Africa, it's got about 10 million vehicles. It's not our major focus at this point in time, and we've got 67,000 [GM] vehicles in Africa. It is estimated that over 40% of global GDP actually is all about the on-the-ground operations and fleet and what really gets spent to be able to generate economical value on the ground.

For the last fiscal years, we've had a robust and consistently profitable business model. If you look at our SaaS ARR growth over the last few years, we've averaged around 20%. We need to bear in mind that -- our currency fluctuations as of November 2021, the 30th of November, the exchange rate of ZAR 16 to the dollar. That is equated to USD 172.5 million. We have just over 78,000 commercial customers on our platform. We have a vertically integrated business model, end-to-end all-inclusive IoT cloud software platform, well-established infrastructure, expanding distribution network, and we certainly have proven over time that we have the ability to execute and to scale.

If we just take the highlights of Q3. We grew our subscriber base by 18% to 1.47 million subscribers. We are quite proud to that -- to announce that we've actually gone, at this point in time, over 1.5 million subscribers. It's public information. Our subscription revenue on constant currency grew by 19%. 98% of our revenue comes from subscription revenue, and our total revenue on a constant currency grew by 25%.

If you look at our historical data in terms of scaling, you can see consistently that with every quarter, we've gone up in the amount of vehicles on our platform. Our subscription revenue has also consistently gone up over all the quarters. We're now at ZAR 664 million in Q3. The previous quarter was at ZAR 628 million. So it was a healthy increase in Q3. In terms of profitability, we -- our operating profit for the quarter was ZAR 205 million compared to the previous quarter of ZAR 178 million. And that's primarily because in Q4, Q1, we invested substantially in sales and marketing.

And with COVID, we saw that we had to become a little bit more prudent with our capital allocation. So we cut back a little bit on the sales and marketing costs, and we've seen the increase in operating profit. Clearly, our intention is to grow subscription revenue and subscribers, and we want to do it in a financial disciplined manner.

If you look at our total revenue, our best quarter ever, we're at ZAR 720 million for the quarter. We've consistently grown our revenue every quarter historically. And in terms of earnings per share, we had ZAR 4.72 for quarter 3. In terms of strong -- in terms of unit economics, we believe we've got very strong unit economics. We've got robust operating margins, and we've consistently beaten the rule of 40. Our balance sheet is unleveraged, and we sit in a very strong cash position at this point in time.

I think the most important takeaway for us and strategically what's important for us is that we have ample capacity to increase our investment in sales and marketing and still remain profitable. And I think that for us is very good, and we have the balance sheet to back us up.

Our net subscribers addition. If you look for the 9 months, we had 164,000 net subscriber additions. Compared to last year, the first 9 months, it was 119,000. In the prior year, it was 128,000. If we look at Q3, we had 61,000 net subscribers, while last year, the same quarter, we had 71,000. The difference is around 9,000 subscribers. In terms of gross sales, it was -- we had a better quarter than last quarter. However, we add to that more churn in this quarter as we come to the tail end of customers that we hadn't been billing, so we didn't recognize any revenue, and they had gone into a financial difficulty because of COVID, and we've churned these customers in Q3.

We have very strong unit economics. Our lifetime value customer relationships is very healthy. Here, we're sitting with an LTV to CAC of over 9x, and that really puts us in a very a good position to be able to increase our investment for growth. It is often confused, the lifetime value of a customer and the lifetime value of a subscriber, and I would just try to make, for clarity, the differentiator between the 2. The customer, you onboard a customer, but a customer will keep vehicles on our platform, but they'll churn the vehicles and buy new vehicles over time. So one customer could remain with you for a few couple of years, but it is expected, given our historical data, that customers keep their vehicles on our platform for 61 months. We do the amortization over 60 months.

What we do give (inaudible) is what does it cost us to acquire a subscriber and put them onto our platform and that we take into account the average of a new customer and an existing customer. Clearly, a new customer is more expensive than an existing customer, but we've bundled them together to give one -- just one number. And in Q3 of FY '22, it was 1,981, of which 697 gets expensed upfront and 1,284 gets capitalized and depreciated over 60 months. Our lifetime value of a subscriber is, for Q3 of FY '22, 6,334 comparable to 6,739. There is a bit of noise because of currency, but it is also because we've increased our sales and marketing and we haven't actually derived the necessary value at this point in time, given the headwinds of COVID. But nevertheless, still very healthy.

And our Cartrack's operating profit margin for the quarter was 31%. We have ample profit margin to really increase and ramp up ourselves.

In terms of our growth per region, South Africa saw a 19% increase in subscribers. Asia saw 20%; Europe, 15%; and Africa, 8%. I think, overall, we continued given the headwinds and given that we've remained very -- we've remained with a tremendous amount of financial discipline over the quarter.

We certainly are investing for the long term of the business as -- and for building our platform and building our customer base for the future. If you see sales and marketing spend, we have increased that by 23%. Our real increase is has come in R&D. That's -- we've increased our R&D spend by 80%. And a lot of that investment that we're doing today we'll only reap benefits of that in the medium to long term. In terms of G&A, we've kept good and a tight discipline on that, and that's gone up by 10%.

Our operating margins for the quarter was research and development, 6%, very much in keeping with our long-term targets that we gave when we IPOed in April on the Nasdaq. Our sales and marketing subscription is at 12% and keeping with the same quarter of last year. We certainly want to increase that to 17% to 19%, and we believe that will yield good results and substantially faster growth than the current 20%. General and administration as a percentage of subscription revenue, that's at 20%, down from 21%, and ideally, we want to see that at 12% to 16% over the long term. Our adjusted EBITDA margin as a percentage of subscription revenue for the quarter was 52%, down from the 53% of last year, and we believe long-term targets would be between 50% and 55%. So fundamentally, the trends are in line with our long-term financial goals set up upon our listing.

In terms of free cash flow, this (inaudible) strategic investment in customer acquisition and in R&D and our capital allocation during this -- the pandemic. We still had what we believe is good free cash flow of ZAR 306 million. Our operating activities, we generated ZAR 750 million. We invested into PPE ZAR 445 million. And we believe, given our strong revenue generation, strong earning growth and strong cash flow, we see and we believe that our balance sheet is -- we feel very comfortable with it and with an ample capacity to fund prices.

Cash on hand. We were sitting with ZAR 799 million at the end of Q3 compared to ZAR 67 million in the same period in the previous year. Our debtor's days is 34 days, which I believe is very healthy. And that's been quite consistent for several years. We've traditionally been in that -- in the early 30 to 35 days. This is clearly supported by internal proprietary systems that we manage our internal systems, including our collection management of debtors.

Our outlook for the year remains unchanged despite the pandemic. The number of subscribers that our initial outlook that we gave at the beginning of the financial year was 1.5 million to 1.6 million. We've already surpassed the 1.5 million, so we feel very comfortable that reaching a subscription revenue of between ZAR 2.5 million and ZAR 2.7 million. So that should be easily accomplished. And our adjusted EBITDA margin, our outlook was between 45% and 50%. And the year-to-date, we're sitting at 47%. So we also feel comfortable that we'll be able to meet our outlook. Our ARR at the end of November was ZAR 2.76 billion, and that's also showing good growth.

I want to thank you for listening to this short presentation, and I'll be taking questions.

The first question I'll take is from Mike from Canaccord.

Great. Just, Zak, I want to get your thoughts of Samsara's recent IPO in the U.S. market getting a premium valuation. How do you compete with them? Do you compete with them? And if you do, how do you fare head-to-head? And maybe you can talk about how their strategy is either similar or different from your strategy.

The first thing that I would like -- I haven't really studied Samsara huge (inaudible). But from the literature that I've read, I think they very much play in the same market as us, and other competitors in America, like Geotab. These are a few competitors that we have. But we haven't really come across them in the market. But from what I read, I think they are worthy competitor.

They certainly appear to be doing a really good job in terms of growing their business. I see their growth at 68%. They're allocating a tremendous amount of cash. They're not profitable, but they're set for growing at 68%. They're allocating a lot of cash into sales and marketing, which I think is quite a good strategy in America because I think America and South Africa got similarities in the sense that COVID hasn't quite affected America the way it affected Asia.

Overall, I think they're doing a good job. In terms of valuation, let's be honest, I'm not really an expert on valuating company. And we also (inaudible) what you're doing. And hopefully, we'll be out of COVID in Asia, and then we can start growing faster.

Okay. And then a follow-up question, just on the sales and marketing and investment. How is the hiring opportunity? And how should we think about modeling sales and marketing as it ramps towards your longer-term target of 17% to 19% target?

At this point in time, we've actually ramped up. If you go and you look at Q1, I got it drawn, so I thought at the end of 3 to 6 months, we -- so even when we look at our outlook, my view on that was that you will have COVID for 6 months. And the last 6 months of the year, we'll probably be sitting with no COVID or a little COVID. I've got it drawn. It seems like we're going to have 12 months of full COVID effects. [At this point], we're still going to meet our outlook.

In terms of sales and marketing, we went in because I've got it drawn, and we started spending quite a lot of money on sales and marketing and realized that we were allocating capital not to the same financial discipline that we have had in the past. So if you look at Q2 and Q3, we cut back on the sales and marketing spend. We're still getting the growth. But clearly, if we want to stop growing at over 30% or 40%, we're going to have to increase that. But we've got to do it when the market is downwards, once we're able to travel, we're able to deploy the people, we're able to execute. At this point in time, the fact that we're executing a 30% in the markets we are, I think that we feel comfortable that we're doing a relatively okay job while still keeping the unit economics.

I think there is an argument for us to weaken our unit economics and start growing cost of this market in the pandemic. But this is something management team is continuously evaluating whether we should just compromise on our unit economics so that we can get better growth. And hopefully, in the short term, we will see the pandemic being less restrictive.

Okay. Congrats on keeping your full year guidance and the results despite the COVID restrictions more than you thought. I'll pass along to the next caller.

Thanks very much, Mark. The next caller, Alex from Raymond James.

Zak, last quarter, you talked about the record adds in September. Curious about if you can talk about how many already quit out at the rest of the quarter. And with that, you called out some of the retention from some of the early customers that you kind of subsidized during the pandemic. Any update on how much of that is left?

That's basically (inaudible) customers, it's really at the tail end. So even in this last Q3, we churned in the region of about (inaudible) between -- I haven't got the exact number, but we churned between 11,000 and 16,000 vehicles that was really vehicle that we have been subsidizing. We hadn't been invoicing for the good 6 months that we've actually switched them off. We probably have another 20,000 or so of those vehicles that you'll probably do in Q4. And then of that, I think it's business as normal, and we want to have any of those where we still are having the cost of sales while we're doing no revenue on the back of COVID. Despite that, we still got a good net adds in the quarter.

Got it. Okay. And then on the messaging evolution now just kind of the on-the-ground operation cloud, what can you tell us in terms of where you're investing today? And what's kind of going into core telematics offering versus kind of everything else in the platform? And then with that longer term, how do you think about monetization of that broader platform?

So we've got a great idea for this. There is way to looking at this. So the first thing is we've got great operating margins. We've got great unit economics. We are investing substantially more in R&D, as you could see compared to a year ago. We've increased R&D spend by 80%. That's quite material.

And a lot of that investment is for the medium and the long term. Having said that, where are we spending the money? A lot of it is going to the video safety. It's going into the integrations into customer systems. It's going into software to help our customers in terms of last mile delivery in terms of consigning -- consignment centers with different customers can [see] consignments to one thing, and then we can distribute it for them using third-party couriers or using outsourced drivers. We're driving all of that integrations into the stores of large retailers into the warehouses, in terms of the management of fleets that are on the ground, in terms of the administration where we had lots of customers doing things on various systems or manually, on Excel. We've been helping them in digitalizing the whole process of all the vehicles, the equipment that they use in their operations.

So we've [been] a tremendous amount of work over and above the fleet management that we have traditionally done in the past. What's allowing us to do this is clearly technology. When we first started out in the business, there was only SMS, sometimes GPRS, in 3G, 4G, and what we can is, as I said today, substantially more than what we could do years ago. So approximately 18 months ago, that's when we started developing all these extra boost goes onto our platform. We launched our latest platform towards the end of last year. And we believe we've got a long way to go to improve on our platform to improve in our offering, and we see us investing for quite a long time into the future to be able to deliver a low-cost product for our customers.

Next, Matt from William Blair.

Zak, I want to first ask about impact of Omicron and what you've seen so far from that in the fourth quarter.

I think to be in South Africa at the time that omicron sort of surfaced and what we saw at that point in time, Asia just started opening up their borders approximately for 2 weeks into the neighboring countries like Thailand, Malaysia, Philippines, Indonesia. They were opening it up. Then omicron surfaced, and then every -- all their borders closed again. I had to go into -- all the flights got cancelled from South Africa. It was a nightmare getting back into Singapore. My family is supposed to come out to South Africa. We couldn't do that. So I think that's on the one night where all the immediate reaction by different governments and different policies.

On the ground, what we saw in South Africa is that the hospitals -- the hospital beds, there's nobody in hospital. The hospital -- I speak to doctors that it doesn't seem to be a huge problem, omicron. And I think that makes me feel that it's just a question of time where the markets will open up again, and I'm hopeful of that. But clearly, it certainly -- I was getting very hopeful, and everything went into lockdown again. I'm not sure if I've answered quite your question.

Yes, I think that does. And you mentioned ramping up sales and marketing and investments into next fiscal year. Maybe you can just give us some idea about what the priorities are in terms of where you're going to allocate some of those investments.

So I think we've got to do it in a bit of a prudent way, and we certainly -- first, our biggest priority is Asia. But we've got to be able to execute. Otherwise, we're just burning money, if that makes sense. So we certainly -- Asia is our top priority and certainly Europe as well. So we want to get investing in -- because I think that the real opportunity -- the biggest opportunity for us with the longest runway is clearly Asia and Europe. South Africa, we've already got 11% of the vehicles on the road or 10%. We believe we could grow really well for maybe another 5, 6, 7 years.

And after that, it's the only way we're going to generate growth is -- revenue growth is by starting to charge for the additional verticals on our platform. It's something that we can start looking at that probably in South Africa in about 2 years' time, 3 years' time to increase revenue and ARPU once we've got -- once we believe we've got a lion's share of the customer -- the potential market. But I think Asia and Europe is still very early stages with a lot of opportunities, specifically Asia.

Roy from Morgan Stanley.

Zak, just a quick question on your -- the other growth opportunities. So if you could maybe focus just a little bit on Carzuka. So we've recognized a little bit of revenue over this. Perhaps, how profitable is that revenue recognition? And from here, what would you expect the growth and the opportunity to be with the likes of that Carzuka? And maybe you can touch on the insurance and the acquisition of logistics acquisition as well.

Carzuka is in beta phase. In Q2, I think we did about ZAR 9 million revenue. In Q3, we did about ZAR 24 million. And I'm estimating that we'll probably do over ZAR 40 million in Q4. We're hoping to go live towards the end of Q4. We might be a little bit later. I mean it might be in Q1. And then we'll have a tax on where we can release or what's scaling the business. At this point in time, it's more about getting our [tech] ready, and it's more about us getting the model in terms of processes and procedures. I feel comfortable we'll be able to execute and have a very good business within the next 2 to 3 years. I'm feeling very comfortable about that. We're driving a lot of value to our customers.

And that opportunity -- in terms of insurance, we've been over 1,000 policies a month. That still quite fast for the last 2, 3 years -- 2, 3 quarters, rather. We're hoping to start cutting that also in any of the next financial year.

And in terms of Picup, we have been working with Picup for over 2 years, and we -- a lot of the subscription revenue that we're generating came through the Cartrack platform already, and they were more focused on the integrations into the warehouses and into the retail stores of customers and into doing the crowdsourced drivers and courier -- the professional couriers. We're now, at this point in time, merging their side of the technology to our technology and then you're going to bring all of it into one single platform, which is our platform. At that point in time, then we're obviously going to spend time and money investing in scaling that business. And I believe that is an important part for the long-term driver of what we do in terms of assisting our customers with their operations.

Next question, Parker Lane from Stifel.

I wanted to talk about the unit economics of the business, obviously very strong today at 9x LTV to CAC. What does that look like when you enter some of these newer markets in Southeast Asia and Europe? Is that typically a fair bit lower than scales over time? Or do you really see those unit economics hold true regardless of location you're trying to acquire customers in?

So at the moment, it's 9x. I certainly believe that we could certainly drop that when we initially start scaling. But I believe if we're able to keep our unit economics once, we've taken any factor away from with what we find is when you start scaling, there's always a bit of fact and a bit of spillage. But once you're able to work out the spillage, then I think provided the pricing remains where it is today, I certainly believe we can keep very similar LTVs to CAC.

Got it. And then just thinking about the broader strategy here of on-the-ground operations. How much will tuck-in acquisitions play a role in expanding the platform going forward, obviously, the Picup deal? But could we expect that to be a normal cadence of a deal or 2 each year going forward as you widen the scope of the platform?

So the reality, this is the first acquisition that we've done. Traditionally, we're very much a vertically integrated business. So even if you look at our internal systems, the way we run the business internally, that's all propriety software. What led to this acquisition was that we have been working with Picup for over 3 years. We know the management very well. We know what they're building, and we realize the value on bringing that to one single platform like ours, the real value that, that can generate over time.

So we -- that's what made us buy this asset and then to integrate it into one single platform. I don't believe we all want to go grow by acquisition. We're not against it, but we're certainly not on the trail to do acquisitions in order to grow. I believe we've got enough tailwinds to be able to get the growth that we want organically.

I'm just reading out the question here from Gregory. What do you see as the largest challenge to your growth? Is it internal, external capacity, competition, exposure or something else?

I think always, Gregory, I only say the biggest challenge is normally what you don't know and because you don't know what to do about it. So at this point in time, the real challenge is human capital. I think all businesses face the same challenge. It's the human capital, whether it's for sales and marketing, G&A, R&D. It's never easy. It's always difficult.

And obviously, there are challenges that will come. And what we do find is being in business is it's always -- there's always something that you couldn't think of that's just around the corner. But I think what's important is, over time, we're very agile team, and we're able to address the challenges as they come.

Then we've got (inaudible). Given the strong and underleveraged balance sheet and healthy cash and cash equivalents, can you give an indication of the company's inorganic growth strategy? Are there M&A opportunities you're pursuing currently, bolt-on acquisition partnerships, diversify the business? And if so, what sort of business are on the radar?

So I think fundamentally, we're not -- like I said earlier, looking for businesses to acquire, to bolt on or to do M&A. But clearly, we're very pragmatic. And being so -- and we're very realistic. There will certainly be, I believe, a great opportunity to do an M&A at some time or another given -- and I believe that I think the market is large enough to be -- for there to be multiple winners. So there could certainly be an opportunity for M&A. And if we were to acquire any business, it would have to be very strategic, if that makes any sense.

Then we've got another question from Gregory. What does the ideal customer look like? And what services do they subscribe into? And what is the opportunity in (inaudible) in there?

I think fundamentally, we don't have an ideal customer. If you look at our customer portfolio at this point in time, we've got customers ranging from consumer to large enterprises. Our smallest customer has got one vehicle. Our largest customer has got 37,000 vehicles. Then the type of vehicles they've got, it goes from motorcycles to large trucks in mines that weigh 600 -- 500, 600 tonnes. In terms of industries, we've got a range of industries from tourism to logistics to oil and gas, mining, retailers, wholesalers. You name it, we've got the customer.

So we don't have an ideal customer, and we don't have that. And each customer has got their very own unique needs, and at this point in time, I believe we can take it for 99% of most customers' needs in terms of fleet management. And we certainly are now investing far beyond fleet management to be able to assist the customers in getting more value and integrating all the data that we collect into their data operations.

Thank you, everybody, for attending. And we will see you in 3 months' time. Thank you very much. Bye-bye.

Well, that does conclude our conference for today. Thank you for participating. You may all disconnect.