Earnings Call: Q2 2022

Oct 15, 2021

Good day. Welcome to Karoo Limited Results Presentation for the Q2 of 2022. Hosting you today is Mr. Zai Kebristow, CEO and Founder of Karoo Limited. Thank you very much, operator. Firstly, I would like to thank everybody for joining us on today's call. And good morning, good afternoon and good evening wherever you find yourself. We have the disclaimer that shareholders can read through their own leisure. Karoo is the owner of 100 percent of Karoo. It's where Karoo was founded in South Africa. Kalu is a Singaporean entity and we're headquartered in Singapore. In our view, all vehicles will be connected and data will drive all aspects of mobility in the future. Our mission 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 3rd party and OEM in vehicle smart devices. We have APIs into 3rd party systems pushing and collecting data and we have our artificial Intelligent's digital telematics devices that we also collect and stream data to and from. Our telematics devices that we use, as I've said, it's our traditional telematics fleet management devices And our VJIT telematics devices. And we also connect data and stream data to third parties We are MyFleet 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 and that's all driven through our SaaS platform. And with that, we allow our customers to monetize and get the value of the data that we have processed by operation as they get operational improvements, predictive analytics, delivering They're 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 that are, we create business intelligence reports that allows our customers to Next July is the operations, the vehicles, the drivers. It allows our customers to know the drivers. And we also have With the Carzrica, which is we will go live on the Q4. We are in a better phase at this point in time. And with our insurance, it will create Best value for our customers for the 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 the 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 were especially in today's world where e commerce is getting a bigger part of most of our customers' businesses, We're assisting with the delivery operations. And as I said before, we also assist with our customers managing The field workers, whether they're plumbers, maintenance of air conditionings, whatever they're doing, we can do that on one single platform. We do then we have the Kozuke, which is a secured buying and selling, and we do competitive price insurance quotes. We are well aware of the most recent effect of our platform and of the mass media related services and we envisage to create this value for our customers We operate in a large underpenetrated market. This slide shows you what we perceive the market size, the In different segments that we operate in, in South Africa, we have close to 1,100,000 subscribers. There's Over 10,000,000 vehicles in South Africa, it's about 12,000,000 vehicles. So at this point in time, we've got about 8% of all vehicles on the road in South Africa. They are using our platform. In Southeast Asia, there's over 100,000,000 vehicles. We've currently got over 100 and The 2000 vehicles, so we really have got very little of the total market. The last 2 years, we haven't We've been able to execute on our plans, but we believe that very soon we will be in 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 at end of August and yields to beat the market well over 100,000,000 vehicles. Africa and South South Africa, Not our primary focus area at this point in time. We've got it in the region of 65,000 vehicles, and we are also to grow that market. We'll go Through our financial performance and our performance during the quarter in this half year. So we've had Very good in our opinion and healthy subscription revenue growth and we've had strong customer acquisition given The current headwinds that exist in the market. Our subscriber growth has grown by 20% and 97% Of the business coming from Kartrak is subscription revenue. Our subscription revenue growth on a constant currency basis grew by 21%, and our total revenue on a constant currency basis grew by 24%. In actuals, it's actually subscription revenue is 16% and total revenue 20% And this is primarily as the brand 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 this graph, With 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 and we as our subscription revenue was actually for this quarter in constant currency was actually $655,000,000 but actuals were $628,000,000 That's 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 COVID will soon The countries will know how to deal with COVID, and so we have started to invest for growth and for strong growth, and that saw our operating profit drop. But as you can see, in this quarter, it's already gone up by ZAR10 1,000,000 compared to the previous quarter. So we're certainly on the increase again Our net subscribers additions, we did in this quarter, we did 42,000 And year to date for half year, we had done $102,000 substantially more than last year where we did 48 And in the region of about 51% more than after 2020, which sometimes it's easier to compare to pre COVID. And given COVID, we still have 102,000, 102,000, which we can live with. Talking about Q2, We would negatively impact our subscriber growth. Net subscriber growth was 42,000, full 1% more than Last year, also under COVID, we were negatively impacted in July. Our biggest segment, there was undress in South Africa, which meant lower sales in July. Also what we did see is a lot of our customers retreated and vehicle 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 R156 ZARANG? No, it's ZAR151. That's largely driven as Unity Economics are and influenced by The fluctuation in currency and the goods we report in rand, we see a decline in ARPU that's Predominantly, it's got to do with the currency fluctuation. In the sense you can go through the existing revenue gross profit margin, A lot of this has started to with 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 by 20%, Europe by 16% and South Africa and Africa, other outside South Africa, 7%. We are investing for the future. And 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 is still not very productive, but they will become productive over the near term. We've increased R and D by 34%. We believe that R and D now will it won't increase that much for the next 12 months. There might be a bit of an increase, 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. And as you can see, G and A went up by 11%, which is lower than our subscriber base increase, Which means that we can drive some economy discount. We've got a robust operating metrics. So in terms of research and development this quarter, we took 6% subscription revenue against 5% last year sales and marketing 14% against 10% last year G and A has dropped from 22% to 21%. We intend to drop that even further at the time. And our adjusted EBITDA margin is 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. And we continue to beat the rule of fortune. Our cash flow, At the end of last year, we had ZAR232,000,000 in the bank. At the end of our Q1, we had ZAR 654,000,000. It's about ZAR350 1,000,000 was proceeds of the IPO. But in this bid, we also paid In the region of ZAR250 1,000,000 is a dividend while we were still listed on the JCS car track. And 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 $516,000,000 to $442,000,000 and 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 Salespeople, in the €560,000,000 to the €442,000,000 Our investment into PPE has gone from €228,000,000 271. 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. And at the same time, that's obviously the increased sales compared to last year That's driven that increase R271,000,000 Our free cash flow, it's down 41 With ZAR171 1,000,000 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'll exceed the 1,500,000 Our subscription revenue was €1,200,000 at half year, €1,034,000,000 We believe we'll get over the €2,500,000,000 And 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 31, 2021, The first 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, South African rand was ZAR 2.5 ZAR4 1,000,000,000, I don't know how to read that, which is 15% up. And in U. S. Dollars, it's just over $175,000,000 which is up 34% compared to last year. I would now like to open up and to take questions from Hi, Matt. I'm happy to take your question. Hey, Zach. Can you hear me? Yes, I can, Matt. Okay, great. Yes, thanks for taking the questions and nice results guys. 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? So I think COVID is clearly impacting us in all our segments. It impacts us From 1, our ability to manage our business and 2, from the actual marketplace itself. Clearly, Asia is the most impacted. Europe is the least it's not as impacted as Asia and South Africa is the least impacted at this stage. We up to now have really struggled in Asia, but the good news is that this week we've already we received Perverts to take in some of our senior staff into the Philippines, into Indonesia and Thailand. So they all came through all in the same week, which is Quite encouraging. And despite us growing at 20% in Asia, we believe that in the short term or near term, we can start So we're quite excited about the market starting to open up. And we believe that the markets within 6 to 9 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. And then in terms of the impact of the social unrest in South Africa in July, maybe Can you just sort of help frame that magnitude because even with that impact that region still grew really well? So what it did for us, it basically really impacted our sales in July. And 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. And clearly, in July, it was 4. The biggest province in South Africa is Gauteng. The 2nd 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 ourselves Substantially, but it also impacted us negatively was customers that were already struggling with COVID And then that diluted and that left them in total financial ruin. So we did see that's basically how we got impacted in July. But despite that, like you rightly said, we still grew at 20% and our financial metrics in South Africa remained Thanks. That's great. And just one more for 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 We're not going to have problems for the next 12 months. And we believe and our suppliers believe that they will be able to supply us. So what we are doing Is repurchasing more than what we normally would be and that is obviously affecting our free cash flow And our operational 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 inventories in necessary for growth. Perfect. Thanks Zach. Appreciate you taking my questions. Thank you, Matt. The next question is from Mike from Canaccord. Great. Thanks, Zach. Can you hear me? Yes, I can, Mark. 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 It's more about getting the current sales force more efficient. So 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 6 to 9 months on getting the headcount efficient. In Asia, We're certainly going to start hiring now. So in Asia, I believe our sales force is relatively efficient, but we need to really ramp that up. So 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. So overall, South Africa, we just at this point in time, We're going to go through a little bit of consolidation to get the efficiencies right. But on the adding feedback, in Asia, we're going to go On a very strong hiring, it's 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 realign it before the senior managers get in place. Okay, thanks. And then 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 and anything embedded in there and how efficient the sales needs to be by the end of the year in terms of continuing to grow that region? So 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. But as we 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 at a great month in September. Thank you. The next question is from Alex from Raymond James. Hi, Zach. The prepared remarks alluded to the significant monetization opportunity from data. I know you've launched Carzuca, you've got the insurance product. I'm just curious, How do you stack rank some of those big buckets on Slide 5 in terms of the biggest opportunities you're hoping to unlock in terms of addressable market on that data? Just give me the slide for one moment please. Okay. So I think we've invested a lot in our technology The Carlsica platform is not ready yet. We only envisage the platform to be ready in Q4. However, we have started in better pace 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 better sense. So 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 in the tech we delivered in OEPI, we are adjusting that to be able to fit A more optimal way of executing on our plan, but nevertheless, we're doing over 1,000 policies a month. So it really is just a question of us having the right people in place, which I believe we have got right now And slowly holding this business, these businesses that fit in quite 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 going to do well out of these verticals in our business. Okay, great. And then, I want to ask about ESG and from kind of 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. So we've got a whole department getting us compliance and we've done a lot of work with GDPR compliant in Europe. Also our lead Independent Director, Stew Kun, is very familiar with the ESG 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 in the past. So I would say that overall about 65% of our business came from commercial and about 35% came from consumer. Okay. Got it. And just looking at the next quarter coming up, It looks like it will 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. But 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 All the reason to believe that we can do that. But having said that, we've got to execute. We've got to do it before we I'm not very good at saying I prefer to talk about the past and what we've done. And we've given an outlook and we believe we will deliver on that outlook. Okay. Okay. Last question, sorry. Thanks. If you could talk a little bit about the acquisition made, I think it was Pickup, I think was the name, maybe the rationale behind that and the amount spent and all that. So we have a lot of our large corporates. And what we see is a huge tick up in e commerce. And 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 be drivers and assign different parcels. However, what the pickup does is they go a step further. They're able to do that As well, that they integrate into the customers' warehouses and into the payment systems and then the companies are able That use their own vehicles, use outsourced drivers and also use third party Coulier companies or delivery companies and all big trucks, depending on what they want to do. So it's bringing the whole logistics where a customer doesn't They'll have to rely on his own fleet and can get the elasticity with other vehicles. And we believe that's a very important Part to add on our platform. 1, and it's a very important service, especially if we look at in 10 years time where we believe The way mobility will work. So it's really about us doing things today for 5 to 10 years' time. And we feel very comfortable with that acquisition. We've seen the monthly revenue since we bought them, climb month on month. So they continue to climb and we believe that business It's got legs for growth. Okay. And is that I mean, I imagine you keep the financials Separate or is this maybe like a module you can charge additional for your existing Kartrak customers? So Right now, my understanding is that all the modules are in 1. So there's no like price differential. So we're 1.5b. So at this point in time, we've got everything in one with the Cartag 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 Also once Kozuka gets a bit of momentum, which we believe by next year it will be, then we also intended To split out the numbers of Kazucca of the pickup and certainly of Kartrak, we are strategically thinking How do we incorporate pickup into Cartrack's platform and the 2 R and 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 Sandeli. An increase in the expense associated with growth strategy and result, the increase Net subscriber growth reflects on the success and the effectiveness of the investment strategy. Will you be pleased at year end if adjusted EBITDA margin contracts Below the lower bound of guidance, 45% to 50% for FY 2022, are you looking to keep the same rate of expense For Q3 and Q4 of this financial year. Well, that's quite a long question. So the first thing is we believe that Our adjusted EBITDA margin will be between 45% 50%, and we certainly will be pleased with that because that's what we budgeted for. 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, and we'll also be building up some operational capabilities for our expansion into Asia. So there will be a continued increase in the continued investment, but we certainly believe that we will For the net EBITDA margin that we've given guidance on. Next question. Next question. Hello, Zach. How is the chip shortage affecting telematics devices? Do you This has 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 to 18 months across The various regions are the OEMs themselves becoming more serious competitors to the service. So 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 We're 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. OEM is putting telematics devices mostly to get vehicle diagnostics for maintenance and driver safety. We're Able to do the same, but we go more into the efficiencies and throughout our customers With other aspects that OEMs, Darnell said they want to play in or have the infrastructure or in team building the infrastructure It comes with quite a level of complexity what we actually do. A question from Howard. Congrats on the set of results. Question about investing for growth. Approximately, how many salespeople outside of Singapore do you have in Asia on the ground right now? And where was that year ago, 24 months ago? I haven't got the numbers in front of me. I can always get these numbers for you. But 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. So 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. The next question from Rangbami Alazak from Effectus Capital. I want to ask Any plans to increase the liquidity shares in the JFC? Thank you for taking my question. We certainly have plans To increase the free float, myself and Johan jointly, we own 77%. Zhu Yuan sold some shares, 309,000 shares to pay a portion of this tax liability during the restructuring. I still haven't sold any of my shares to cover that tax restructuring. And we do intend both myself and Juan To sell down our shares and 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, and we believe it's better for us to have more liquid shares. Then a question from David Everol. Zach, it's great to see additional investment in sales in Asia. Any color on which countries you're investing in? And I think I'll answer that. Yes. So, revenue is an obvious sale of our rebid. Revenue is obviously a lag. You indicated the incremental investment. Yes, I agree with that. And that is in keeping with what we promised to the market, hence the decline in our margins In adjusted EBITDA. So it is something that is not coming at any surprise to us or to the market. It's in keeping with our plans, strategic plans. And that's all the questions. I thank everybody for attending, and I look forward to talking to you in 3 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.