All right. Welcome everyone. We're approaching the end of day three. I hope you've been enjoying the conference. I'm Claire Gerdes. I'm one of the analysts on our software team. And with me today from Karooooo are Richard Schubert, the COO, and Paul Bieber, the Vice President of Investor Relations and Strategic Finance. So thank you both for being here.
Thanks for having us.
Thank you.
Of course. Well, maybe to start, for those in the audience who are, you know, a little less familiar with Karoooo, maybe you can give just a brief introduction on the company.
Okay. Thank you, Claire. Thanks for hosting us. So we operate Cartrack, which is a software SaaS platform, really focusing on the telematics, fleet management, AI, vision, and various logistics industries. At this point in time, we have 2.5 million subscribers across 24 countries. Within the last quarter, we had a very good, healthy 20% subscription revenue growth, growth revenue of a 29% operating profit. We're a founder-led company with a strong track record of execution, specifically with very disciplined capital allocation, as well as good free cash flow generation.
Great. And, you know, since many investors might be familiar with Samsara in the U.S., maybe you can give us just kind of some of the similarities and differences between you and them, because you do, you know, similar things in South Africa, Europe, and Southeast Asia. So do you want to go ahead and maybe share some of Karooooo's competitors as well?
Okay. So Samsara is very close, and we operate in a very similar market. However, Samsara's business is really North American focused, which is a very high ARPU region. We don't see Samsara directly in any of the areas we compete in, but we're offering similar solutions. The solutions are enhancing safety, improving efficiency, and saving our customers' costs. If we look at the geographic areas we operate, South Africa is still our largest area with approximately 70% of our revenue generated in there. The competitors there are companies like Geotab, Powerfleet, and local companies like Netstar and Ctrack. So it's sophisticated competitors within this region. We came to the market approximately 10 years after all our competitors, but at this point, we've got a 40% market share within South Africa.
One of our other benefits is we've fully vertically integrated, where a lot of our competitors outsource various parts of their businesses, in those specifically industries. We also have a strong founder-led culture. If we look at other regions, for example, Asia, Asia is our fastest growing segment. However, we compete a little bit differently in Asia. Most of our competition is smaller companies that have less feature-rich platforms. However, we provide one of the only regional providers there providing a much more sophisticated next-generation platform. Then if we have a look at Europe, Europe, we've got our entities operating in Portugal, Poland, and Spain, and there we also compete against Geotab and Powerfleet and a couple of smaller local telematics companies that were typically bought by the tire industries.
Great. Well, you mentioned, you know, the majority of your revenue, over 70%, is in South Africa, and 1.85 million subscribers are there as well. So one of the key questions is just kind of what runway remains for growth there, especially in the recent quarter that did decelerate a little bit, right, by 150 basis points or so. So yeah, how, I guess, how would you respond to that and what the maturity is there? Yeah.
We still see South Africa has significant runway. At this point in time, we've got 1.9 million subscribers out of a vehicle car pool of approximately 13 million. Okay? There's still plenty of runway, but in recent times, Cartrack has launched one of our new products called the Cartrack- Tag. The Cartrack- Tag is an asset monitoring system that we install on generators and trailers and any other fixed equipment. That has really helped us grow within that market. One important thing is historically we've provided guidance on both subscriber growth and revenue growth. However, in recent times, we've only provided guidance on the revenue. This is because we've spent time cementing our leadership position within South Africa, and we've really taken these new products, firstly the Tag and the AI video, and we're selling it into the current customer base.
So you will see there's been a good upsell opportunity to really look after our current customers and make sure that we've got that long customer adoption of our products. So if we look at the sales team, and especially within the last quarter, we're very happy with the performance of the sales team. They have been delivering, but we also continue to expand the sales team because there's still lots of benefits within the region. So we do expect within quarter three that our subscription, our subscriber numbers will lag the revenue slightly, but we believe firmly that within the next financial year, 2027, that we'll really reap the benefits. So I think the most important thing for me is that we have had a very good quarter two.
We had a very healthy growth of 15% within our subscriber numbers and 18% on the revenue, so we're going to continue to accelerate and really focus on South Africa and make sure we continue to be number one in the region.
Great. And yeah, maybe we can turn to some of the other regions. Those are, you know, more, a couple hundred thousand subscribers there, a bit newer, but you've been spending a lot of time investing in sales resources, so could you share an update on the progress you're making in those two regions, and particularly regarding the pace of customer adoption?
We communicated to the market that we're going to increase our sales headcount by about 70% within Asia. We've had very good progress on that. We were at approximately 38% at the end of quarter two. Our target of the 70% means that if we can achieve the 70% increase in sales revenue, we're expecting our subscription revenue to increase into the mid- to high 20s. That's really the focus on the adoption, the additional sales. One of the important challenges that we must take into consideration, specifically in Asia, is that it's a mixed ARPU region. We've got certain countries that are generating relatively high ARPU and certain countries, especially the larger, faster-growing ones, that are generating a smaller ARPU.
So over time, we expect that ARPU to decrease within the region and become more in line with what we see in South Africa, because South Africa is also a much more scaled entity. And within the other regions, for example, Europe, we're continuing to build that sales muscle to increase that sales adoption throughout the region.
Yeah. And maybe just if you can provide just additional, like, range of subscriber growth for those. I know you don't officially guide to them, but for, you know, Southeast Asia and Europe, would you be able to bracket any of that?
I think as you think about the growth in the region, if we grow our headcount by 70%, that 70% as of February versus February of last year, that should drive an acceleration of subscription revenue growth into kind of the high, mid to high 20s. I think on a constant currency basis, there's around mid 20s, last quarter. So, you know, we're very optimistic that the investments in headcount will drive an accelerating growth in the region.
Great. And, you know, as we come to the close of the calendar year, how would you characterize the demand environment? Probably differs between each region, right? But any headwinds or tailwinds that you might see?
No, I'll take that one. I mean, we don't have anything really new to share in terms of the demand environment. What I will say is we're not seeing any macro headwinds in the business, and as you know, we guided to 16%-21% subscription revenue growth for FY 2026, and we actually printed 20% in Q2. So we're on track to deliver against the guidance. We're on track to deliver against acceleration, and I think it's important just to note that that 20% growth rate, it's a material acceleration year- over- year. For context, the FY 2025 subscription revenue growth was 15%. So, you know, through Q2, our growth rate has accelerated by five basis points year- over- year.
Yeah. Yeah. Great. I want to go back to something you mentioned earlier, which is just the newer offerings of Tag and the video solutions, well, maybe if you want to just provide some context on what Tag is, but you've had an increased focus on cross-selling opportunities, right? So, can you just elaborate on the significance of the cross-sell initiatives and what kind of uplift that might add to the average Cartrack deal?
Sure. So, you know, what I would say is, we've been very focused on growing our sales teams, to drive both subscriber growth and sell Tag and video to our existing customers. But right now, we're people constrained, and we're still building the necessary muscle to drive both accelerating subscriber growth and to sell Tag and video to our existing customers in South Africa. Over kind of the near term and the last, you know, two quarters or so, we've been really focused and leaning into selling Tag and video to our existing customers in South Africa, where we think it's very important in terms of just the long-term health of the business, to cement our leadership position in South Africa by selling these products, especially given the demand tailwinds in the market with video.
So, you may have asked about uplift. Did you?
Yeah.
So in terms of the uplift, you know, for video, it's about a 2x-4x uplift at a similar operating profit margin to the core business. Again, I think it's important to note the similar margin to the core business is a misconception that video and Tag are dilutive to operating profit margin, and that's not the case. For Cartrack- Tag, it really depends if we're selling it to an existing customer or if we're selling it standalone. So that one depends, but it might be helpful. Do you want to just talk about what Cartrack- Tag actually is? Because they're out there.
The Cartrack- Tag is an asset tracking device. In a typical application, for example, a customer might have a vehicle, but a construction customer would have generators. They would have trailers. They would have other equipment. And managing and looking after this equipment has been a challenge over time. Firstly, it's about is it being used, and secondly, it's about where it is. These devices are attached to the generator or the various equipment and allows a customer to really understand where their non-vehicle assets that they're using on a construction site or a building site are and how they're being used.
Yeah. Perfect. And you mentioned you're selling right now into the existing customer base. So, what portion of that base would you see as like the addressable market?
I mean, we just started really focusing on Tag and video earlier this year. We've had a video product in the market for many years, but the cost of hardware and data have come down, so it's become a lot more addressable to a larger part of the customer base. So it's been a strategic focus for the last two or three quarters. The penetration rates are low single digits right now. I think it's too early for us to tell where that may land, but obviously we're very excited about the potential for us to drive those penetration rates higher from low single digits. There's lots of runway for us to grow by selling those products to our existing customers.
Great. Maybe switching to ARPU and ARR growth. So, ARR growth accelerated last quarter, year 2Q, due to the improvement in ARPU. You have shifted some resources, as you mentioned, from the new logo sales to cross-sell opportunities. So maybe do you want to just start by sharing why this trade-off makes sense for the business in the medium term?
Yeah. I'll take that question. And first, let me just level set for everyone in the room, in terms of some of the numbers. So subscriber subscription revenue growth increased 20% in Q2. ARR increased 20% in Q2. Subscriber growth is 15%, and ARPU growth is about 4%. So 15% subscriber growth, that still has a, you know, big impact on the overall growth trajectory of the company. So I just want to give that context for people. But, as I mentioned, we were kind of in the early stages of selling Tag and video to our existing customers in South Africa. We think that's very important for the long-term health of the business. Why is that? Well, if we don't do it, it could leave us competitively exposed, as other potential competitors may start selling those products.
So we think it's essential that we continuously deliver innovation to our customers. We have to continuously solve for the operational problems. And right now, we see a big opportunity with Tag and video. And as I mentioned, there are just a lot of demand tailwinds in the market with video.
Yeah. And are there any, like, data points or ways that you could help us just quantify the magnitude of the opportunity and how it could be impactful to growth over time?
It's a good question. I mean, it's too early for us to tell. We're low single-digit penetration rate currently, and that will go over, that will increase over time, obviously, whether we'll land at 10% or 20%. We've only been doing it for a few quarters. So, it's really too early for us to tell. But, obviously, it's having a positive impact on the business given the uplift in ARPU.
Yeah. Well, sticking with ARPU, the guidance that you've given is that, it's at 4% now, as you mentioned, but it could end the year, exiting around 6 or 7% with, in South Africa specifically up to 10% year- over- year. So, this seems doable, but what is it going to take to, to get there?
Yeah. Just to level set with everyone, we, we put out a goal of 10% ARPU growth, exiting the year in South Africa. That would translate to 6% on a consolidated basis for the company. In Q1, we were probably running behind. We were, you know, about 2% or so. In Q2, we made a lot of progress. We, we landed around 4% ARPU growth. And at 4%, we're really on track to deliver on that 6%. So what needs to happen? We, we need to continue to hire people, train them, really just focus on building teams and sales execution. So I think it's really about sales execution, but we feel good that we're kind of on target to, to, to hit that goal that we put forth early in the year.
Yeah. You've been, you know, making those sales investments, like you said, and there was slight deterioration in margin last quarter that, you know, maybe garnered some scrutiny. So maybe we can unpack that a little. So, as mentioned, there's the investment in sales capacity, but also a shift to, you know, the lower margin hardware business with Tag and video. But maybe you can just provide a bit more color on the impact that those had.
Yeah. I'll take that one. And again, I'm going to level set some numbers. We reported 20% subscription revenue growth in Q2. That was a 500 basis points year- over- year acceleration. Then, for Cartrack, Cartrack operating profit margin was around 29%. The margin deteriorated by 50 basis points year- over- year. So essentially, we were trading off 500 basis points of acceleration for a pretty modest impact on the Cartrack margin. And, you know, we think most companies would take that trade-off. But to your question, as you kind of look at the P&L, there are a few things in the consolidated P&L. The sales and marketing increased by, I think it was 34% in Q2. That really reflects our investments in sales capacity, customer acquisition.
So obviously, on a consolidated basis, that shows that we're investing in our sales capacity and reflects some of the acceleration in terms of customer acquisition. Also on the gross margin line, gross margins are down on a consolidated basis year- over- year. I think that reflects some incremental depreciation costs, sales commissions costs. You also get the impact of the growth of Karooooo Logistics, which we haven't really touched on, but it's another business segment that business that we operate that drives a lower gross margin profile. So there are a few different moving parts in the P&L, but you know, essentially, we were very happy with the acceleration and the 29% margin. And to your question about the margin on video and Cartrack- Tag, it's actually a similar margin to the conventional business.
It's not lower margin. So we kind of approach pricing for that, in a similar way to our conventional business. We look at the hardware costs, the installation costs, the data costs, and then the service delivery costs over the lifetime of the customer, which is about 60 months. And then we actually try to drive a 40% operating profit margin from that customer. But you don't see that in our right now IFRS financial statements because of the misalignment with some of the expenses in the period versus the kind of lifetime value of the revenue. So they're not lower margin. And just another point, if we actually stop growing tomorrow, you know, our gross margin operating profit margins will go from about 30% to close to 40% as some of those investments are not reflected in the P&L.
Yeah. No, it's helpful context. So just to kind of round it out, so if, you know, Tag and video become a bigger portion of the revenue, that shouldn't really have a large impact on margins.
It shouldn't have a large impact on margins, but it all kind of depends if we're still accelerating growth. Because if we're accelerating growth, there is some trade-off. You can kind of see in the range of outcomes. We guided to 16%-21% subscription revenue growth for the year, and then we guided to 26%-31% operating profit margin. The first couple quarters were kind of at the high end of the range, but theoretically, if we continue to accelerate, you know, there is a modest impact to operating profit margin. Once you kind of normalize at the new growth rate, the margins should kind of return to historical 30-ish% range.
Yeah. Makes sense. Maybe going back to your hiring efforts, you know, you gave the update earlier of where you are now, but what geos are you specifically still leaning into, and when do you expect productivity to really begin to ramp?
I mean, we're hiring in all geographies. All the geographies that we operate in, we believe that all of them have great potential, and our focus is to increase staff in all regions, especially the sales headcount. If you have a look at South Africa, there's really aggressive push within South Africa to increase the headcount there. As we've already discussed, the potential upsell versus greenfield opportunity in South Africa is great. We're really short of staff there. That's our challenge there, sales staff specifically. By increasing them, we'll also be able to carry on with our greenfield subscriber growth and include the upsell opportunities. Within Asia, as we've mentioned, we had a target of about 70% to increase throughout the year from February to February. On quarter two, we had 38%. We see that as very positive.
And as Asia is our greatest trading, it's in our fastest growing area, we can see the benefit that it's already having there. And then lastly, in Europe, we still continue to build the sales muscle in that area. It's also a very profitable area. And as we grow, all of the areas should see that expansion over time.
I'll just add that, you know, we've obviously been investing in sales capacity, and we feel good that the investments in sales capacity will have a positive impact on overall subscriber growth.
Yeah. Is there a, like, timeline to where OpEx might stabilize? I know you've got the February to February goal, but just as we think about that.
I mean, we have guidance out there, and you can see the range of outcomes depending on the acceleration, and I would say it just really depends, going forward, the extent to which we kind of grow at the current rate or if we continue to accelerate.
Maybe just one quick one on.
On that point, really, there is a misalignment in terms of impaired expenses or customer acquisition and the benefit we get.
Yeah.
Over the lifetime of the revenue stream from the customer. So, you know, the faster you grow, you know, there is a impact on margins over the short term. But as I said, as you normalize at a new normal growth rate, you know, we should see leverage over time.
Yeah. It's a good clarification. Maybe just a quick one on cash flow. You don't disclose the full financials on a quarterly basis, but 2Q was a bit lighter than 1Q, though it was still up, you know, year- over- year. So just anything you would want to note there.
Yeah. I'll say two points. One is we've heard the investor feedback and the analyst feedback, and, you know, we're looking into publishing quarterly cash flows with our financial results in FY 2027. So we've heard the feedback. I would say, you know, the on free cash flow, you know, there's working capital fluctuations that impact free cash flow. I think the best way to look at it is on a year-to-date basis. On a year-to-date basis, free cash flow, I think it was at 44%-45% on a year-to-date basis. And we actually feel very good about our ability to generate very strong free cash flows while investing in the business and accelerating the overall growth rate. So, yeah, I think the best way to look at it is on a year-to-date basis.
Got it. And appreciate the feedback too on potentially in the future. But this one's a bit broader and maybe a little bit further out, but how should we think about the potential impact to Karooooo's business with autonomous vehicles? Do you view that more as disruptive and a risk or a potential opportunity?
So, I mean, we don't really see autonomous vehicles as disruptive. We believe it will have, give us tailwinds at that point in time. So with autonomous vehicles, you still need monitoring tools. You still need to integrate different partners to use these, this equipment correctly at the end of the day. So we're going to focus on innovating, providing features, and solving our customers' needs. However, our platform, we see our platform changing continuously. And in the next five to 10 years, as the autonomous vehicle fleets and solutions become more available, we'll provide those solutions and integrate them with our platform and give our customers the benefit of these kinds of technology.
Okay. Great. Going back to the last quarter, you reported solid results, accelerating growth. The stock has faced some volatility since then, which could in part, you know, be due to some investor scrutiny over, you know, the slower subscriber growth, though, you know, obviously the higher revenue growth as we talked about. So just, are there any areas you want to provide further clarity on or areas you think that investors are missing?
Yeah. I'll highlight two points. One, the subscriber growth did decelerate. I think it's like 150 basis points, quarter over quarter. And I think some investors read into that that it's a reflection of the macro environment or intensifying competitive landscape. And we don't see that. We're not seeing macro headwinds. We're not seeing a more intense competitive landscape in South Africa. That modest acceleration is purely a reflection of our allocating resources to sell Tag and video to our existing customers in South Africa. So I think that's important. And as I mentioned, we're obviously hiring a lot of people. So we're optimistic that our investments in sales capacity will have a positive impact in the number, you know, going forward.
Then, the second thing I'd just like to highlight is, you know, a couple times you've mentioned that the hardware, the Tag and video is margin dilutive. I just want to reiterate that it is not margin dilutive. It's actually a similar operating margin to our existing customer, to our existing platform or offering.
Yeah. No, helpful clarification. Maybe just going back to cross-sell, there's Tag and there's video solutions, but are there any other cross-sell opportunities that Karooooo is considering?
I don't think we have anything really new to share there. I think it's, you know, it's important to just note that our strategy is a little bit different to most SaaS companies in the U.S. We don't lead with landing and expanding. We, when it comes to new features on the platform, we actually have different pricing tiers, and then we give those features to our customers so they derive more value for the product at the same subscription cost. That helps drive, you know, we're solving their operational problems. It helps drive retention. We have very strong retention. So we think that's the right thing to do for our business right now. The Tag and video are a little bit of exceptions because they're new hardware devices, and you actually have to install them.
So there has to be a sales process associated with it. So, you know, I think for now, there's no real change to our strategy in terms of giving new features to customers. And then when it comes to hardware, because it does require installation, you know, we are working to sell that to our existing customers.
Yeah. Makes sense. Well, maybe in our last minute or so, we could end with a fun one. Karooooo is spelled with five O's. Is there a reason for the number five?
Zak Calisto, our founder and CEO, has a love for an area in South Africa called the Karoo. It's a desert area that's quite famous. When our contract moved from the Johannesburg Stock Exchange and we listed on Nasdaq, we had to have a name change due to various regulatory requirements, and he really got set on the Karoo name. However, at that point in time, we needed to purchase the domain, the Karoo.com domain. The person who owned it at that time wanted ridiculous amounts of hundreds of thousands of dollars for us to buy it. After some haggling, it became a, let's be something a little bit disruptive, let's be different, let's find something that's new and unique. It became Karooooo with five O's. But it didn't just become five O's.
You can now go to Karooooo with five O's, four O's, six O's, seven O's, eight O's, nine O's, 10 O's, just to make sure that no one ever has to count you. As long as you get a rough number, you're going to go to the right place. And that's where the Karooooo name originated.
I think it's interesting because it kind of speaks to the culture. I mean, Zak bootstrapped the company because there's always those folks on profitable growth and disciplined expense management. So it kind of just speaks to that.
Great. Appreciate it. Thank you both for being here. Thanks for sharing. Yeah. Thank you.
Thank you very much.
Thanks, Claire.