Good day. Welcome to Karooooo Ltd results presentation for the second quarter of 2022. Hosting you today is Mr. Zak Calisto, CEO and Founder of Karooooo Ltd.
Thank you very much, operator. Firstly, I would like to thank everybody for joining us on today's call. Good morning, good afternoon, and good evening, wherever you find yourself. Sorry about this. See how we do that. We have the disclaimer that shareholders can read through their own leisure. Karooooo is the owner of 100% of Cartrack. Cartrack was founded in South Africa. Karooooo is a Singaporean entity, and we are headquartered in Singapore. In our view, all vehicles will be connected, and data will drive all aspects of mobility in the future. Our mission, to build the leading mobility SaaS platform that maximizes the value of data. What we do, we contextualize billions of data points and drive connectivity for our customers. We collect data through our proprietary in-vehicle smart devices. We also collect data through third-party and OEM in-vehicle smart devices.
We have APIs into third-party systems, pushing and collecting data. We have our artificial intelligence video telematics devices that we also collect and stream data to and from. Our telematics devices that we use, as I've said, it's your traditional telematics fleet management devices and our video telematics devices. We also collect data and stream data to third parties through our MiFleet platform, which is an administrative portion of our platform that collects data that's not necessarily in-vehicle data. We contextualize the data by doing the data analytics. We also use AI. That's all driven through our SaaS platform. With that, we allow our customers to monetize and get the value of the data that we have processed via operation.
As they get operational improvements, predictive analytics, they are able to do their deliveries and manage their deliveries, able to manage their field service, the people out in the field, work in the field, and the workflows thereof. We create business intelligence reports that allows our customers to contextualize their operations, their vehicles, their drivers. It allows our customers to know the drivers. We also have the Carzuka, which will go live in the fourth quarter. We are in the beta phase at this point in time. With our insurance that we create best value for our customers for their insurance needs. Fundamentally, what we do is we solve mobility problems for our customers. We add value to the day-to-day operations of our customers. We deal and assist our customers with their high operating costs, fragmented and inefficient workflows, unproductive use of resources.
We assist our customers with the safety and eco-compliance. We assist customers with logistics operations. We also, especially in today's world, where e-commerce is getting a bigger part of most of our customers' businesses, we assist them with their delivery operations. As I said before, we also assist with our customers managing their field workers, whether they're plumbers, maintenance, or air conditionings. Whatever they're doing, we can do that on one single platform. We have the Carzuka, which does secure buying and selling, and we do competitive price insurance quotes. We are well aware of the mobility aspect of our platform and of the much-needed related services. We envisage to create this value for our customers in the near future, and we have already started this journey. We operate in a large underpenetrated market.
This slide shows you what we perceive the market size, the total market size to be in different segments that we operate in. In South Africa, we have close to 1.1 million subscribers. There's over 10 million vehicles in South Africa. It's about 12 million vehicles. At this point in time, we've got about 8% of all vehicles on the road in South Africa. They're using our platform. In Southeast Asia, there's over 100 million vehicles. We've currently got over 150,000 vehicles, so we really have got very little of the total market. The last two years, we haven't been able to execute on our plans, but we believe that very soon we will be, and that is a large market. Europe, very similar. We want to start investing into Europe in the beginning of next year, and we've got in the region of about 120,000 vehicles.
These numbers are as at end of August. We also believe the market's well over 100 million vehicles. Africa, outside South Africa, not our primary focus area at this point in time. We've got it in the region of 65,000 vehicles. We are also out to grow that market. We'll go through our financial performance and our performance during the quarter, this half year. We've had very good, in our opinion, and healthy subscription revenue growth. We've had strong customer acquisition, given the current headwinds that exist in the market. Our subscriber growth has grown by 20%. 97% of the business coming from Cartrack is subscription revenue. Our subscription revenue growth on a constant currency basis grew by 21%. Our total revenue on a constant currency basis grew by 24%.
In actuals, the actual subscription revenue grew 16% and total revenue 20%. This is primarily as the rand has strengthened substantially in this financial year compared to the last financial year. We've got a strong history of consistently growing. As you can see on these graphs, our subscribers, we continuously scaled over many years since inception, and we've grown every single quarter thereof. Our subscription revenue, you can see consistent growth. Our subscription revenue was actually for this quarter, in constant currency, was actually ZAR 655 million, but actuals were ZAR 628 million. That is, obviously, the stronger rand affecting us. When we look at our profitability, last year was a year where, with COVID, with so much uncertainty, we focused on protecting our business. We did not invest for growth in the last financial year.
In this financial year, we believe that countries will know how to deal with COVID. We have started to invest for growth, and for strong growth. That's why our operating profit dropped. As you can see, in this quarter, it's already gone up by ZAR 10 million compared to the previous quarter. We're certainly on the increase again, despite all the headwinds, both by currency and the increased investment for long-term growth. Our net subscribers additions, in this quarter, we did 42,000. Year to date for half year, we have done 102,000. Substantially more than last year, where we did 48,000. In the region of about 31% more than half year 2020, which sometimes is easier to compare to pre-COVID. During COVID, we still did 102,000, which we can live with. Talking about Q2, we were negatively impacted.
Our subscriber net grower growth was 42,000. Still 1% more than last year, also under COVID. We were negatively impacted in July. Our biggest segment, there was unrest in South Africa, which meant lower sales in July. What we did see is a lot of our customers defleeted and re-fleeted vehicles in this quarter, this last quarter, which also caused a little bit of noise in terms of our customer acquisition costs. Our low cost of acquiring a subscriber. If you look at our ARPU, last year it was ZAR 156, now it's ZAR 151. That's largely driven as unit economics are, and influenced by the fluctuation in currency. Because we report in ZAR, we see a decline in ARPU that's predominantly got to do with the currency fluctuation. We can go through the subscription revenue gross profit margin.
A lot of this has got to do with the currency fluctuations. Nevertheless, we certainly believe our unit economics are good, and this will allow us to continue growing our business and puts us in a very competitive position to be able to grow our business. In this last half year, if we take this half year, we have grown our subscriber base in South Africa by 21%. Asia, we grew it by 20%, Europe by 16%, and Africa, outside South Africa, 7%. We are investing for the future. As one can see, if we compare this quarter compared to the quarter of last year, our sales and marketing has gone up by 51%. That's predominantly on the back of headcount. We've increased our headcount substantially in sales. A lot of this headcount is still not very productive, but they will become productive over the near term.
We've increased R&D by 34%. We believe that R&D now, it won't increase that much for the next 12 months. There might be a bit of an increase, but we've reached the level that we believe we've got sufficient people, or close to sufficient people, to deliver to what we set out to do now. As you can see, G&A went up by 11%, which is lower than our subscriber base increase, which means that we can drive some economies of scale. We've got a robust operating metric. In terms of research and development this quarter, which was 6% of our subscription revenue against 5% last year. Sales and marketing, 14% against 10% last year. G&A, it's dropped from 22% to 21%, and we intend to drop that even further over time.
Our adjusted EBITDA margin, if we exclude the Carzuka business, is 47%, and it's very much in line with what we promised the market in terms of our outlook for the year. We continue to beat the rule of 40. Our cash flow. At the end of half year last year, we had ZAR 233 million in the bank. At the end of half year this year, we had ZAR 664 million. Sorry, I'm just getting the number. It doesn't matter. About ZAR 350 million was proceeds of the IPO, but in this period, we also paid in the region of ZAR 250 million as a dividend while we were still listed on the JSE's Cartrack. Overall, we've increased the cash in the bank, I believe, quite well, given our operating profit and our capital allocation and financial discipline.
Our operating activities, we saw it drop from ZAR 560 million to ZAR 442 million. That's predominantly because as we plan for our scaling of the business, a lot of this is movement in working capital and investment in the salaries of salespeople in the ZAR 560 million to the ZAR 442 million. Our investment into PPE has gone from ZAR 228 million to ZAR 271 million. There is a large portion of that which has got to do with our investment into infrastructure for the growth that we foresee into the future. At the same time, that's obviously the increased sales compared to last year that's driven that increase to ZAR 271 million. Our free cash flow, it's down 41% with ZAR 171 million for the half year, which we believe is very healthy free cash flow.
Our outlook remains unchanged, and I think this is quite important for us because given that it's sometimes very difficult, specifically with COVID, to forecast and to give an outlook. We remain confident that we will meet what we promised shareholders. Our number of subscribers at this point in time is 1,409,000. We believe we will exceed the 1.5 million subscribers. Our subscription revenue was ZAR 1.2 million at half year, ZAR 1,334,000. We believe we will get over ZAR 2.5 billion. Our adjusted EBITDA, excluding Carzuka, for the half year was at 45%, and that is already in line with our outlook for the year. Our ARR as of August 31st, 2021, differs between the rand and dollars. That's obviously got to do with the change in the currency, the exchange rate between South African rand and the U.S. dollar. Our South African rand was ZAR 2.540 billion.
I don't know how to read that, ZAR 2.5 million, which is 15% up. In US dollars, it's just over $175 million, which is up 34% compared to last year. I will now like to open up and to take questions. Next from.
From Matt of William Blair. Ladies and gentlemen, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to withdraw your question, please press the pound or hash key. Please stand by while we compile the question and answer session.
Hi, Matt. I'm happy to take your question.
Hey, Zak, can you hear me?
Yes, I can, Matt.
Okay, great. Yeah, thanks for taking the questions, and nice results, guys. I wanted to dig into the impact that you're seeing from COVID on your business. Is it primarily isolated to the Asia region at this time, or are you continuing to see impacts in South Africa and Europe as well?
I think COVID is clearly impacting us in all our segments. It impacts us from, one, our ability to manage our business, and two, from the actual marketplace itself. Clearly, Asia is the most impacted. Europe is not as impacted as Asia, and South Africa is the least impacted at this stage. We up to now have really struggled in Asia. The good news is that this week we received permits to take in some of our senior staff into the Philippines, into Indonesia, and Thailand. They all came through all in the same week, which is quite encouraging. Despite us growing at 20% in Asia, we believe that in the short term or near term, we can start accelerating that growth. We're quite excited about the markets starting to open up.
We believe that the markets within six to nine months, hopefully the countries will learn to live with COVID. I'm not sure if I'm answering your question, Matt.
You did. That's helpful. In terms of the impact of the social unrest in South Africa in July, maybe you can just sort of help frame that magnitude, because even with that impact, that region still grew really well.
What it did for us, it basically really impacted our sales in July. In our business, every day counts. It's how many sales can you do in a day. We don't even measure it in a month. Clearly, in July, the biggest province in South Africa is Gauteng. The second biggest province is KwaZulu-Natal. We closed down all our operations in KwaZulu-Natal, and we closed some operations in Gauteng and some in Mpumalanga. I think all of that impacted our sales substantially. What it also impacted us negatively was customers that were already struggling with COVID, and then that were looted, and that left them in total financial ruin. We did see that's basically how we got impacted in July. Despite that, like you rightly said, we still grew at 20%, and our financial metrics in South Africa remained intact.
That's great. Just one more from me. In terms of the supply chain and your ability to source components for your in-vehicle devices, how are you feeling about that? Are you able to get enough product to meet demand?
Clearly, there's delays in components. We, at this point in time, feel comfortable that we're not going to have problems for the next 12 months. We believe in our suppliers, believe that they will be able to supply us. What we are doing is we're purchasing more than what we normally would be, and that is obviously affecting our free cash flow and the cash we generate from operations because of the working capital that we're requiring at the moment is a bit higher to be able to carry the inventory necessary for growth.
Perfect. Thanks, Zak. Appreciate you taking my questions.
Thank you, Matt. The next question is from Mike from Canaccord.
Great. Thanks, Zak. Can you hear me?
Yes, I can, Mike.
Okay, great. Yes, congrats on the strong first half results despite all the challenges in your targeted regions. First question for you, just on the sales hiring. Do we expect sales and marketing to continue to ramp in the second half of the year, or is it more of a steady growth and it's more about getting the current sales force more efficient?
In South Africa, we will do very little hiring more for sales staff. We've got enough headcount. We need to focus in the next six to nine months on getting the headcount efficient. In Asia, we're certainly going to start hiring now. In Asia, I believe our sales force is relatively efficient, but we need to really ramp that up. In South Africa, no increase, and then we intend in the beginning of the next financial year, where we start giving a lot of focus to Europe and to ramp up our sales efforts in Europe. Overall, South Africa, at this point in time, we're going to go through a little bit of consolidation to get the efficiencies right. Having said that, in Asia, we're going to go on a very strong hiring.
We're going to start hiring now that we've got people, getting senior managers into these countries. The managers are only moving in at the end of November, and we'll start hiring. We've actually started hiring already this month, and we are hired before the senior managers get in place.
Great, thanks. Just my follow-up question, just great to see you reiterate the full-year guidance. South Africa, after the unrest, are things more efficient on a daily sales basis? Anything embedded in there on how efficient the sales needs to be by the end of the year in terms of continuing to grow that region?
Our best month to date in the history of South Africa was actually last month, September. We had a record month in September. We believe that we'll just grow from strength to strength. Having said that, we need to focus now on efficiency and on our strategy, and we have a lot to improve in order to execute on our plans.
Great. Thanks for taking my questions and great to hear South Africa had a great month in September.
Thank you. The next question is from Alex, from Raymond James.
Hi, Zak. The prepared remarks alluded to the significant monetization opportunity from data. I know you've launched Karooooo, you've got the insurance product. I'm just curious, how do you stack rank some of those big buckets on slide five in terms of the biggest opportunity you're hoping to unlock in terms of addressable market on that data?
Just give me slide five. One moment please. Okay, this is slide five. Okay. I think we've invested a lot in our technology platform. The Carzuka platform is not ready yet. We only envisage the platform to be ready in Q4. However, we have started in Beta phase, and that's very encouraging. We can already see that in the month of October, we can do more revenue than we did in Q2 in a Beta phase. We believe we can exponentially grow that business. The insurance, we're basically redoing the way it works. I think there was a bit of a misunderstanding of the legislation around insurance and what we did and the tech we delivered, and we are adjusting that to be able to fit a more optimal way of executing on our plan. Nevertheless, we're doing over 1,000 policies a month.
It really is just a question of us having the right people in place, which I believe we have got right now, and slowly building this business, these businesses that fit in right well with what we do. We're also very aware that these things aren't done overnight. It will take us a bit of time, but I'm feeling very confident that we're gonna do well out of these verticals in our business.
Okay, great. I want to ask about ESG and more from a customer acquisition standpoint, particularly in Europe, where there's kind of a reporting directive coming into place. You added a new board member with ESG experience. I'm just curious, is that coming up in your conversations at all in terms of customers needing to better track their data, and that's actually being somewhere you can lead with from a sales standpoint? Thanks.
We've got a whole department dealing with compliance, and we've done a lot of work. We're GDPR compliant in Europe. Our lead independent director, Siew Koon , is very familiar with the ESG and what is required. We feel comfortable that we're able to deliver all those requirements.
Okay, great. Thank you.
Thank you. The next question from Brian from Robeco.
Hi. Thanks for taking my question. I noticed this quarter in the presentation that you didn't break down sort of customers added by type, so like small, medium, or large enterprises. Just curious where the net adds in this quarter came from mostly.
It was very much a mix as in the past. I would say that overall, about 65% of our business came from commercial and about 35% came from consumer.
Okay, got it. Just looking at the next quarter coming up, because it looks like it'll be maybe a tougher comparable year-on-year. You said you had a good month in October. How do you think that's tracking so far, and what do you think will be the greatest drivers of subscriber growth in the second half of this year?
I think the second half is just we've invested a lot into sales. It's getting the people efficient. Like I said, September was already our best month, and we're just hoping that every month we can improve on the previous month, and we've got all the reason to believe that we can do that. Having said that, we've got to execute, we've got to do it. I'm not very good at saying I prefer to talk about the past and what we've done. We've given an outlook, and we believe we will deliver on that outlook.
Okay. Last question. Sorry. Thanks. If you could talk a little bit about the acquisition made, I think it was Picup, I think was the name. Maybe the rationale behind that and the amount spent and all that.
We have a lot of our large corporates, and what we see is a huge tick-up in e-commerce. What that means is we've got a delivery platform on, so a lot of our small, medium enterprise customers, what they can do is they can do deliveries, and they can monitor their deliveries and proof of delivery and give tasks to their drivers and assign different parcels. However, what Picup does is they go a step further. They're able to do that as well, but they integrate into the customer's warehouses and into the payment systems. Then the companies are able to use their own vehicles, use outsourced drivers, and also use third-party courier companies or delivery companies or big trucks, depending what they want to do.
It's bringing the whole logistics where a customer doesn't necessarily have to rely on his own fleet and can get the elasticity with other vehicles. We believe that's a very important part to have on our platform, one, and it's a very important service, especially if we look at in 10 years time, where we believe the way mobility will work. It's really about us doing things today for 5 - 10 years' time. We feel very comfortable with that acquisition. We've seen their monthly revenue since we bought them climb month on month, so they continuously took on, and we believe that business has got legs for growth.
Okay. I imagine you keep the financials separate, or is this maybe like a module you can charge additional for your existing Cartrack customers?
So.
As of right now, my understanding is that all the modules are in one. There's no price differential. It's worth one flat fee.
At this point in time, we've got everything in one, the Cartrack platform. Clearly, with this coming on, we report the financials separately. It's a small business at this point in time. The reason why we'll keep these financials different is, otherwise it will be a bit of spaghetti and difficult to understand our numbers. Once Carzuka gets a bit of momentum, which we believe by next year it will be, then we also intended to split out the numbers of Carzuka, of the Picup, and certainly of Cartrack. We are strategically thinking, how do we incorporate Picup into Cartrack's platform, and the two R&D teams are talking, and we will make that decision in the near term, how exactly we're going to deal with that. It's something we haven't quite crystallized yet.
There's different routes, and we're going to see which is the best route, and in different markets, it might have a different route.
Got it. Thanks so much for taking my questions.
We thank you. There's a question from Sandile. An increase in the expense associated with growth strategy and resulting increase in net subscriber growth reflects on the success and the effectiveness of the investment strategy. Would you be pleased at year-end if adjusted EBITDA margin contracts below the lower bound of guidance 45%-50% for FY 2022? Are you looking to keep the same rate of expenses growth for Q3 and Q4 this financial year? That's quite a long question. The first thing is, we believe that our adjusted EBITDA margin will be between 45% and 50%, and we certainly will be pleased with that because that's what we budgeted for. Will we, the same growth in expenses? There will be growth in expenses, like I said earlier on.
On sales, it will be more in Asia at this point in time. We'll also be building up some operational capabilities for our expansion into Asia. There will be a continued increase and a continued investment, but we certainly believe that we will still be in that EBITDA margin that we've given guidance on. Next question.
A question from Amy.
Next question. Hello, Zak. How is the chip shortage affecting telematics devices? Do you expect this to have an impact on the planned growth going forward? I've spoken a little bit about it. We don't believe that's going to have an impact on our growth in terms of subscriber growth. From Roman, how has the competitive environment evolved over the past 12- 18 months across the various regions? Are the OEMs themselves becoming more serious competitors to the service?
The competitive environment in the last 12, 18 months, it's been under COVID. I believe there hasn't been much of a change in the competitive environment. In terms of the OEMs, I do not see them as competitors. We are able to collect data from the OEMs. We've actually signed deals with OEMs, specifically in the last 12 months, and we can collect data from the OEMs. We in a very different space to OEMs. OEMs put in telematic devices mostly to get vehicle diagnostics for maintenance and driver safety. We are able to do the same, but we go more into the efficiencies and to help our customers with other aspects that OEMs don't necessarily want to play in or have the infrastructure or intend building the infrastructure. As it comes with quite a level of complexity, what we actually do. A question from Howard.
Zak, congratulations on the results. Question about investment for growth. Approximately how many salespeople outside of seniors was there in Asia on the ground right now, and where was that year ago, 24 months ago? Howard, I haven't got the numbers in front of me. I can always get these numbers for you. In terms of what I can tell you is that our growth in salespeople today in 24 months, it's very much the same. We didn't really invest in headcount. It's marginally increased, but we do intend starting to increase specifically now that we've been given the go-ahead to bring in management into Thailand, Philippines, and Indonesia. Okay. Next question from Brent Dami. Hello, Zak from Effectus Capital. I want to ask if there are any plans to increase the liquid shares in the JSE. Thank you for taking my question.
We certainly have plans to increase the free float. Myself and Juan jointly, we own 77%. Juan sold some shares, 309,000 shares, to pay a portion of his tax liability during the restructuring. I still haven't sold any of my shares to cover that tax restructuring. We do intend, both myself and Juan, to sell down our shares. I think over time, we do not need to own 67% of the business, and we certainly want to jointly own 50% of the business. We believe it's better for us to have more liquid shares. A question from David Everall. Let me see. "Zak, it's great to see additional investment in sales in Asia. Any color on which countries you're investing in?" I think I've answered that. Sorry, I've got to read this. "Revenue is obviously a lagging indicator to incremental investment." Yes, I agree with that.
That is in keeping with what we promised to the market, hence the decline in our margins in adjusted EBITDA. It is something that is not coming as any surprise to us or to the market. It's in keeping with our strategic plans. That's all the questions. I thank everybody for attending, and I look forward to talking to you in three months' time. Thank you very much. Bye-bye.
Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may all disconnect.