Karooooo Ltd. Ordinary Shares 2027 Q2 Earnings Call

Hello, and welcome to Karooooo's Q2 FY 2027 financial results presentation. On behalf of Karooooo, we would like to thank you for joining us today. I'm Paul Bieber, VP of Investor Relations and Strategic Finance. We are joined today by Zak Calisto, Founder and Group CEO, Hoe Shin Goy, Chief Financial Officer, and Carmen Calisto, Chief Strategy and Marketing Officer. I would like to remind everyone that some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions. They are subject to several risks and uncertainties. Our actual results could differ materially. Please refer to the safe harbor statement in our Form 20-F, including the risk factors in the 6-K that we filed yesterday. We undertake no obligation to update any forward-looking statements.

During this call, we will present both IFRS and non-IFRS financial measures. A reconciliation of non-IFRS to IFRS measures is included in the 6-K that we filed with the SEC yesterday. Our comments may refer to year-over-year comparisons unless we state otherwise. I will now pass the call over to Carmen.

Thanks, Paul. Q2 was another quarter of acceleration. Cartrack subscription revenue accelerated to 20% from 19% in the prior quarter, despite FX headwinds. Importantly, Cartrack's constant currency subscription revenue growth increased 23% in Q2 compared to 21% in Q1, with constant currency growth acceleration across all regions. Notably, South Africa's subscription revenue growth accelerated to 25% compared to 24% in Q1, and Asia constant currency subscription revenue growth also accelerated to 25% compared to 17% in Q1. The acceleration demonstrates that our investments in sales capacity continue to drive tangible results as we balance new customer acquisition with building our cross-sell capabilities. ARR increased 22% in constant currency. Reported ARR growth was 19%, reflecting a strengthening ZAR, and 30% in US dollars.

In Q2, subscriber growth increased 18% as net subscriber additions increased 34%, a record for the second quarter, as we continue to realize the benefits of our recent investments in sales capacity and capitalize on sales momentum with video solutions and Cartrack Tag. Our strong execution once again translated into record quarterly Karooooo operating profit of ZAR 422 million despite foreign exchange headwinds, reflecting our ability to accelerate revenue growth while maintaining healthy profitability. Earnings per share also increased 18% in Q2. As we look forward to the rest of the fiscal year, we reiterate our FY 2027 outlook. Before diving into the details, here is a quick introduction to Karooooo. We provide an operational intelligence platform for connected vehicles and mobile assets, helping businesses simplify decision-making and optimize their physical operations.

We serve an expanding, largely underpenetrated physical AI market driven by digital transformation and the need for greater efficiency, safety, and compliance. We are a founder-led business with a two-decade track record of disciplined execution and capital allocation. Our platform supports approximately 2.9 million subscribers across more than 125,000 businesses in diverse industries. Our financial model is anchored by accelerating high-margin subscription revenue, which was 98% of Cartrack revenue in Q2. Commercial customer ARR retention remained at 95%, and lifetime value to CAC remains above nine times. We also now process more than 345 billion valuable data points monthly, a proprietary data asset that continues to scale and enables us to deliver value to our customers. During today's presentation, we will review both of Karooooo's operating segments, Cartrack and Karooooo Logistics. Cartrack is our operational intelligence platform. Cartrack operates at scale and has a very attractive financial profile.

Cartrack's operating momentum is the primary driver of Karooooo's growth and strong financial performance. Cartrack delivered exceptional Q2 results with acceleration across regions that reflect the returns from the strategic investments we have made in expanding our sales capacity and selling video and Cartrack Tag to existing and new customers. In Q2, Cartrack delivered approximately ZAR 1.42 billion in subscription revenue, an increase of 20%, or 31% on a US dollar basis. The 20% growth reflects an acceleration compared to 19% in Q1, despite a strengthening ZAR that negatively impacted reported Cartrack subscription revenue in Q2. Cartrack constant currency subscription revenue growth accelerated to 23% in Q2 compared to 21% in the prior quarter. Cartrack's operating profit margin was a healthy 28% in Q2. Karooooo Logistics is our rapidly growing delivery-as-a-service offering, which helps large enterprise customers scale their Q-commerce or quick commerce operations.

We report it separately because its financial profile differs from Cartrack's subscription model. It is strategically important for us because it enables customers to grow with a capital-light model and deepens their relationship with us, supporting higher retention. In Q2, Karooooo Logistics' delivery-as-a-service revenue was ZAR 189 million, an increase of 36%, or 49% on a US dollar basis. Karooooo Logistics' operating margin was 6% and reflects investments to ensure driver availability and expansion into our network. In Q2, Karooooo delivered strong consolidated financial results. Total revenue increased 22% to ZAR 1,640 million, subscription revenue increased 20% to ZAR 1,418 million, operating profit increased 19% to a record ZAR 422 million, and subscriber growth increased 18% to approximately 2.9 million subscribers. Cartrack's 20% subscription revenue growth and 28% operating profit margin were the primary drivers of Karooooo's strong financial performance in Q2.

Q2 continued our track record of profitable growth at scale. In Q2, Cartrack's 20% subscription revenue growth and 46% adjusted EBITDA margin made us a rule of 60 company with no stock-based compensation add back. It is important to underscore just how differentiated our financial model has become. We believe we are among a select few companies operating at a rule of 50+ based on calendar year 2027 FactSet Street estimates. Within a universe of approximately 170 companies, Karooooo is the only small to mid-cap company operating at this combined level of growth and profitability. With an essentially unchanged share count and no stock-based compensation, growth in free cash flow translates directly into higher per-share value. Our rare financial profile reflects our unwavering commitment to profitable growth. Now, let's discuss our Q2 financial and operational highlights.

In Q2, ARR increased 19% despite foreign exchange headwinds, and constant currency ARR increased 22%. ARR in US dollars increased 30%, reaching $354 million. Cartrack subscription revenue growth accelerated to 20% despite FX headwinds. Constant currency growth accelerated across regions, highlighted by South Africa's subscription revenue growth accelerating to 25% and Asia constant currency subscription revenue growth also accelerating to 25%. Cartrack subscription revenue growth increased 31% in US dollars and 23% in constant currency. Cartrack total subscribers increased 18%, reaching approximately 2.9 million. Cartrack net subscriber additions increased 34% to 94,516, a record for the second quarter. Despite FX headwinds, Karooooo delivered record quarterly operating profit of ZAR 422 million. Growth-oriented investments moderated in Q2 as consolidated sales and marketing expenses increased 16% compared to 33% in Q1.

We were a rule of 60 company in Q2 with subscription revenue growth of 20% and an adjusted EBITDA margin of 46%. Our balance sheet remains strong and unleveraged and reflects a $1.50 per share dividend payment in July and the investments in inventory classified as PPE, including memory to support our current accelerated subscription revenue growth. Our healthy subscription gross margin, efficient customer acquisition, and attractive commercial customer ARR retention rate continue to drive our healthy unit economics. In Q2, our subscription gross margin was 71%, our LTV to CAC ratio remained above nine times, and our commercial customer ARR retention rate was 95%. Our unit economics remain healthy, and we remain committed to profitable growth as we pursue the expansive physical AI growth opportunity ahead. Q2 subscriber growth increased 18% and reached approximately 2.2 million subscribers in South Africa.

South Africa net subscriber additions increased 20% to 65,997 as we realized the benefits of our recent investments in sales capacity and capitalized on strong demand for the Cartrack Tag and video solutions. Importantly, South Africa subscription revenue growth accelerated to 25%. This represents the seventh consecutive quarter of subscription revenue growth acceleration in South Africa. The pace of growth reflects our deliberate strategy to cement our leadership position in South Africa through a balanced combination of subscriber additions and selling video and Cartrack Tag to our existing and new customers in South Africa. Despite some macroeconomic stress in the South African economy, we continue to see a compelling market opportunity in South Africa and are excited about the potential ahead. Q2 subscriber growth increased 21% and reached 367,000 subscribers in Southeast Asia and the Middle East, with most of the subscribers in Southeast Asia.

Q2 subscription revenue growth accelerated to 12% compared to 6% in Q1 and increased 25% on a constant currency basis. The pace of reported subscription revenue growth in the region reflects foreign exchange headwinds. As the second largest contributor to group revenue, Southeast Asia continues to present the most compelling growth opportunity for the group in the medium to long term. We plan to continue with a strong yet prudent drive to increase sales and marketing in Southeast Asia, and we anticipate our investments to have a positive impact on subscriber growth in the region. Southeast Asia is a vast, under-penetrated market for sophisticated fleet management and video-based solutions, and we are well-positioned to capitalize on the physical AI opportunity in Southeast Asia. Q2 subscriber growth increased 13% and reached 245,000 in Europe. Q2 subscription revenue growth was 4% and 14% on a constant currency basis.

The pace of reported subscription revenue growth in the region reflects foreign exchange headwinds. We continue to expand our customer base and drive our distribution capabilities in the region. In Q2, Karooooo Logistics continued to build scale and delivered revenue of ZAR 189 million, an increase of 36% and a 6% operating profit margin. Q-commerce or quick commerce orders, a type of e-commerce focused on ultra-fast delivery, drove the exceptional performance. Q2 operating profit margin reflects costs associated with ensuring driver availability and network expansion. Karooooo Logistics supports our strong financial performance by immersing our platform into large customers' operations, contributing to strong customer retention. Karooooo Logistics also enables us to learn about the operational and logistics challenges confronting our customers. In Q2, we continued to make progress with our FY 2027 priorities.

First, we made progress cementing our leadership position in South Africa, our largest market, as evidenced by our 25% subscription revenue growth in the region. Our accelerating growth reflects the planned subscriber growth and the adoption of Cartrack Tag and video solutions. Second, we moderated our investments in sales and marketing in Q2, as evidenced by the 16% increase in sales and marketing expenses in Q2 compared to 33% in Q1 and 37% in FY 2026. Despite this moderation and foreign exchange headwinds, subscription revenue growth accelerated once again in Q2. We remain committed to optimizing our recent investments in sales capacity and growing our distribution footprint at a more moderate pace in FY 2027. Third, we are embracing AI across the organization to enhance our platform, improve efficiency, and accelerate the pace of execution.