Karooooo Q2 2027 Earnings Call Transcript

Karooooo (NASDAQ:KARO) reported second-quarter financial results on Tuesday. The transcript from the company’s second-quarter earnings call has been provided below.

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Summary

Karooooo reported strong financial results for Q2 FY2027, with a 22% increase in total revenue to 1,640 million ZAR and a 20% rise in subscription revenue to 1,418 million ZAR, despite foreign exchange headwinds.

Subscriber growth was robust, with a 18% increase to approximately 2.9 million subscribers, driven by strong customer acquisition and record net subscriber additions.

The company maintained a healthy operating profit margin of 28% for Cartrack, and a consolidated operating profit of 422 million ZAR, representing a 19% increase.

Cartrack’s subscription revenue growth accelerated to 20%, with constant currency growth of 23%, highlighting the effectiveness of strategic investments in sales capacity and cross-selling capabilities.

Karooooo Logistics showed significant growth, with a 36% increase in delivery-as-a-service revenue, supporting the company’s strategy of scaling operations with a capital-light model.

The company reiterated its FY 2027 outlook, expecting continued revenue momentum, improved sales and marketing efficiencies, and healthy earnings per share growth.

Management highlighted the strategic importance of AI integration across operations and continued expansion in Southeast Asia as key drivers for future growth.

Despite macroeconomic challenges, such as high oil prices, the company remains confident in its ability to execute its growth strategy without significant negative impacts.

Full Transcript

Paul Bieber (VP of Investor Relations, Strategic Finance, and ESG)

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; Hoshin Goi, 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, and 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.

Zak Calisto (Founder and Chief Executive Officer)

Thanks, Paul. Q2 was another quarter of acceleration. Cartrack’s 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 422 million ZAR 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 9 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 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 1.42 billion ZAR 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 high retention. In Q2, Karooooo Logistics delivery-as-a-service revenue was 189 million ZAR, 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 1,640 million ZAR, subscription revenue increased 20% to 1,418 million ZAR, operating profit increased 19% to a record 422 million ZAR, 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 GAAP 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’s subscription revenue growth accelerated to 20% despite FX headwinds. Constant currency growth accelerated across regions, highlighted by South Africa 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 422 million ZAR. 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 the $1.50 per share dividend payment in July and the investments in inventory classified as PP&E, 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 9 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’s 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, underpenetrated 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 189 million ZAR, 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. Before handing the call over to Husien to discuss our financial results in more detail, we’d like to highlight the ROI our platform delivers to customers. Our success is built on delivering tangible value and ROI to customers. For one customer in Singapore’s construction sector, deploying our operational intelligence platform delivered a 25% improvement in on-time delivery, a 23% increase in fuel efficiency, and 100% driver accountability. The customer combined real-time fleet visibility and fuel intelligence with geofencing alerts to coordinate efficient loading, driver identification, and targeted coaching.

It then added Cartrack AI Vision for intelligent driver monitoring. Alongside these operational improvements, the customer reduced speeding by 43%, harsh driving events by 31%, phone usage by 65%, and driver fatigue by 33%. Our operational intelligence platform goes beyond vehicle tracking. It helps customers reduce costs, operate more efficiently, improve safety, and better serve customers. With that said, I will now pass the call over to Husien.

Thank you. Good afternoon or good morning to everybody. I will go through the questions that have been posted. I’ll start off with Dylan Becker from William Blair. Subscription revenue growth has picked up again and Q2 net adds were record. What is driving this and how lasting do you think it is heading into the second half and FY28? Dylan, I think what’s driving it is really our investment into product and into our distribution, and we are obviously executing and improving on that distribution.

We believe a similar momentum should continue for the remainder of FY27. And depending how things are by the end of FY27, by Q4, we’ll then have much better visibility on how we want to execute during FY28. Another question from Dylan. Project’s operating margin dipped slightly this quarter. How are you weighing reinvestment for growth against margin expansion? And what does this mean for profitability this year in terms of constant currency? I certainly believe the outlook we’ve given for the year we will meet, in terms of operating profit margin. We model our pricing on a unit economics model and, even if IFRS operating profit margin dips, it’s not necessarily a true reflection of the underlying business, given that so much of our customer acquisition costs are expensed up front and the revenue is over the next couple of years.

So that’s not aligned. All of these operating profit margins you really need to average out over a period of five or six years to get our real operating profit margin. And obviously to get the real operating profit margin, you’ve got to assume that we’re not growing, and then our operating profit margin goes all the way up to around 40%. So we are more focused on our unit economics than the IFRS reporting. Another question from Dylan. How is the competition in connected vehicles and fleet management changing as AI capabilities improve? I think the AI capabilities are improving at a very rapid rate. We’ve started strong adoption of our AI in terms of running our internal processes, the way we develop product, and also building AI into our platform. So we are investing in these three pillars of AI, and I think all our competitors are doing the same. Like any business, it progresses and it adapts to the new reality.

I feel very comfortable that we are able to compete going forward. A question now from Alex from Raymond James. You spoke to a continued increase in operating capacity in Southeast Asia. How much sales hiring is expected over the next year? What are you seeing in the region in terms of broader demand and ramping productivity in the salesforce that you’ve hired over the last 12 months? Alex, it’s always a very tough thing to keep your salesforce productive. Many people undermine the importance of salespeople, and it’s a long journey to get salespeople to where they’re supposed to be.

We certainly are improving in Asia and across all our other regions. We believe in the model that if you’ve got 80% of your staff doing the minimum or an acceptable amount of sales, then you can continue to hire. We very much believe in that 80/20 ratio. So depending how quickly we can get people and get them to where they’re supposed to be, that will determine the speed of our hiring process. We are getting quite a lot of higher productivity from the salesforce, but we will continue with the same business model, which is to increase our distribution.

Another question from Alex. Can you walk through the drivers of the sequential change in Cartrack gross margin? How much was tied to the hardware and other revenue, and how would you think about the impact of video and Tags to gross margins? Alex, the way we do our pricing is based on our unit economics model, and the cost of hardware has a direct relation to what we’re going to charge in terms of subscription revenue. So our margins are very consistent irrespective of the product.

For instance, if memory prices go up, like they are going up, then our prices increase to make sure that our unit economics are unchanged. Gross profit margin for us really has two factors that can change it. Typically, the one factor would be how much hardware did we sell to customers where it doesn’t form part of subscription revenue. The reality is that we’ve got absolutely no margin when you sell just product, because that’s not our business.

Our business is to sell the service. So if you sell hardware, your revenue and your cost of sales will be about the same. That gives you a zero gross profit, and that will impact you. Then the other very important thing is if you slow down sales, then you’ll have less of your customer base still in the depreciation part. Let’s say we depreciate over five years; it’s only customers in the last five years that form part of that cost of sales and depreciation of PPE.

As you scale that up, like we currently are, that puts pressure on your subscription revenue—although temporary pressure—because you’ve increased the percentage of your base that’s still depreciating PPE. So that puts pressure on your gross profit margin. But if you even it out over time, and if you could do the IFRS a bit different, our gross profit margin would be very, very constant over time. The next question comes from Scott from Roth. Can you provide a quick update on the adoption of video-based services and how this is trending by region? Scott, throughout all the regions we operate, we are seeing an uptick in the adoption, and we’re feeling very comfortable that we are in the very early days of this adoption. We also are bringing to the market more and more product in video as we realize the universe and how many different solutions and different customer needs there are.

So we are continuing to develop and bring product to the market, and we continue to develop our sales skills to be able to get that product adoption. I think we are making good progress. The next question is also from Scott. Are the Tags trending in the South African market? What is the growth outlook for the next two years? I certainly believe we are making huge momentum with the Tags. There’s very strong customer demand for it. During Q1 we actually ran out of inventory because of the demand, and we focused more on customer acquisition than cross-selling. In Q2 it was more a cross-selling environment, and we believe that uptake for both video and Tag is strong.

Another question from Scott. What is the impact of fuel costs? Is it driving a more rapid adoption given the cost benefits, or translating to a pause in decision-making? I don’t believe it’s translating to this pause in decision-making, and our platform allows our customers to deal with a lot of challenges, fuel being one of them. One would, in terms of common sense, think that it’s a tailwind, but I think it’s our efforts in increasing our distribution that’s driving the adoption, and I can’t attribute our growth to the fuel prices.

Another question from Scott. OpEx was well controlled in the quarter. Is this expected to continue and drive further operating leverage into the second half of FY27 and FY28? Scott, I don’t want to commit to this because we’ve got to be quite agile in our thinking. We’ve given outlook to the market, we believe we’re going to meet the outlook, and we’re going to keep ourselves quite agile. Over the long term, it’s obvious that OpEx needs to increase, and a lot of it has to do with sales and marketing.

As we optimize sales and marketing, that’s the biggest increase that we’re possibly going to have. Then I have another question. One moment, please. We have one more question from—sorry, I’ve dropped my glasses. Sorry. From Abli: Expected credit losses increased significantly this quarter. Is this mainly due to subscriber growth, or are you seeing changes in customer payment behavior? I think if you compare it to Q2 of last year, then I agree with you. But if you compare it historically, it’s very much our norm. What happened in Q2 last year is we had gone through a process where we received a lot of large payments, so it was a bit skewed last year.

And then when we run our calculations on the provisioning for debt, because a lot of the bad debt had paid, it skews the comparison. So you have to look at it in terms of what has been our normal rate over the years, and it’s in keeping. Are we seeing changes in the customer payment behavior? Because we’ve onboarded a lot of new customers, you normally find the first month or two is the difficult part in getting money from your customers because you need to find out how they pay, who’s the contact person, who’s the right person.

So we are having a little bit of that lag, but our collections still remain extremely healthy at 33 days. I think it’s got to do a little bit with our accelerated growth that you see the collections declining a little bit. Given the different margin profiles of Logistics and Cartrack, how do you balance scaling Logistics with maintaining the group’s long-term profitability? Abli, we look at these two businesses separately, and it’s actually all sitting on the Cartrack platform, but we report on it separately. The reason we report on it separately is it’s very difficult to actually evaluate each part of the business given its very different financial profiles. So we keep an eye on it in two different segments.

We understand that they’ve got very different operating profit margins, but we manage it as if it’s two different businesses, though actually it’s one business. The next question: I’m going to go over to Joshua Riley. It seems that your strong, sustained subscriber growth—the current macro of sustained high oil prices and the Iran war—is not seriously impacting your business. How is your differential-to-the-market service strategy aiding growth and market share gains? Joshua, we’re not an island, and I do believe the oil prices are impacting our customers, and it could be, in a way, a negative thing for us or positive.

But we’ve over time been able to deal with very, very tough macroeconomic environments. Quite frankly, at this point in time I don’t believe it has an impact on us. It could have an impact in the future, but I don’t see—and I don’t believe—our market share is related to petrol prices. I think our gain of market share really is about our ability to execute. Another question from Joshua. As interest rates remain elevated, you have a strong capital position and balance sheet. Are you seeing any of your competitors pull back on their resources in the field or investments for growth given the current macro challenges? Joshua, we are so focused on our own business and our own improvements that we need to do, and to be quite frank with you, I haven’t really looked at the competitive environment and what exactly they are doing.

So I cannot answer that. The next question: Is the Tag and Video attach rate trending relative to internal plan, and updated thoughts on countries for expansion in Tag? What I can say is that Tag and Video are exceeding our budget for the financial year. Another question from Joshua. In the current macro, are you seeing trends around customers hesitant to add vehicles to their fleet, or what specific things are you seeing with customers as they manage around macro headwinds? Joshua, I think it’s a bit early days. The petrol prices spike up and down; there’s a bit of uncertainty. But I think fundamentally, in the markets we operate in, everybody is more or less business as usual.

Then I’ve got two questions from Miles Faree. With AKA operating at an exceptional 98% subscription annuity base, how is the rise of embedded OEM telematics changing your long-term capital model? What we realized with the OEM telematics is they typically don’t give our customers what they actually require. They are very much focused on the safety and maintenance of the vehicle. So even when we are getting a lot of OEM business, at the end of the day we have to put in our own hardware solutions to be able to really address the customers’ challenges.

Okay, then another question. Secondly, as you scale Logistics, what operational guardrails are in place to ensure this asset-light, lower-margin segment does not dilute your premium? Logistics is not asset heavy, and yes, it is a lower-margin business—substantially lower-margin. But like I said earlier, we are reporting these two segments separately, and we are looking at the business and the margins. We don’t look at the consolidated; we look at each segment separately.

And with that, that’s all the questions for today. I thank everybody for joining us. Thank you.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.