Karooooo Ltd. ((KARO)) has held its Q1 earnings call. Read on for the main highlights of the call.
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Karooooo Ltd.’s recent earnings call painted a picture of robust growth tempered by some operational challenges. The sentiment was largely positive, with significant strides in subscription revenue, impressive customer retention, and successful market expansions. However, the company is still grappling with achieving its ARPU growth targets and managing operational costs effectively.
Strong Subscription Revenue Growth
Cartrack, a subsidiary of Karooooo Ltd., reported a remarkable increase in subscription revenue, which grew by 19% in ZAR and 24% in USD. Notably, subscription revenue makes up 98% of Cartrack’s total revenue, underscoring the company’s strong reliance on this revenue stream.
High Customer Retention
The company boasts a commercial customer ARR retention rate of 95%, supported by a subscription gross margin of 74% and an impressive LTV to CAC ratio exceeding 9x. This highlights Cartrack’s ability to retain customers and efficiently allocate capital.
Southeast Asia and European Expansion
Cartrack’s expansion into Southeast Asia and Europe is yielding positive results, with subscription revenue growth accelerating to 30% and 22%, respectively. This expansion is a key driver of the company’s overall growth strategy.
Record Net Subscriber Additions
In Q1, Cartrack achieved record net subscriber additions, with 84,000 new subscribers, marking an 11% increase. This growth reflects the company’s successful customer acquisition efforts.
Profitable Growth and Cash Flow
Operating profit saw a 17% increase, reaching ZAR 352 million, while free cash flow stood at ZAR 338 million. These figures demonstrate Karooooo’s commitment to maintaining profitable growth and strong cash flow management.
Rule of 60 Achievement
Cartrack achieved a Rule of 60, combining 19% subscription revenue growth with a 46% adjusted EBITDA margin. This achievement underscores the company’s efficient operational performance.
Challenges in Achieving ARPU Growth Target
Despite a 2% increase in ARPU in South Africa, reaching the target of 10% growth for FY ’26 may take longer than anticipated. This presents a challenge for the company’s future revenue growth.
Operational Cost Concerns
The company faces increased investments in sales capacity and infrastructure, which are impacting short-term margins. Managing these operational costs remains a critical focus for Karooooo.
Tax Rate Variability
The effective tax rate is currently low due to entities becoming profitable with previous tax losses. However, this creates uncertainty regarding future tax expenses, which the company needs to address.
Forward-Looking Guidance
Karooooo provided robust forward-looking guidance, highlighting strong financial performance metrics. The company reported an 18% increase in annual recurring revenue, with subscription revenue constituting 98% of Cartrack revenue. The operating profit margin stands at 30%, and the company maintains a Rule of 60 status with a 46% adjusted EBITDA margin. Karooooo’s strong balance sheet, with net cash and cash equivalents of ZAR 1.103 million, positions it well for continued profitable growth.
In summary, Karooooo Ltd.’s earnings call reflects a company on a strong growth trajectory, driven by subscription revenue and market expansion. While challenges in ARPU growth and operational costs remain, the company’s robust financial performance and strategic initiatives provide a solid foundation for future success.