Hello, and welcome to Karooooo's Q2 FY 2026 Earnings Call. 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; Hoeshin Goy, 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 in 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. Reconciliation of non-IFRS to IFRS measures is included in the 6-K that we filed with the SEC yesterday. Our comments will refer to year-over-year comparisons unless we state otherwise. I will now pass the call over to Carmen.
Thanks, Paul. Welcome to Karooooo's Q2 FY '26 Financial Results Presentation. For those new to Karooooo, we operate a SaaS platform for connected vehicles and mobile assets that enables businesses to enhance operational efficiency, reduce costs, improve safety and ensure compliance. We help businesses simplify decision-making to optimize their physical operations. We serve a large underpenetrated market with strong sustained demand driven by digital transformation, a constant need to improve operational efficiency and an increasing focus on safety and compliance. We are a founder-led business with a strong financial profile, a proven track record of execution excellence and a cultural focus on disciplined capital allocation and operational efficiency. Our platform supports approximately 2.5 million subscribers across more than 125,000 businesses in South Africa, Southeast Asia and Europe, spanning a diverse set of industries.
Importantly, our financial model is anchored by accelerating growth, high-margin subscription revenue, exceptional commercial ARR retention and powerful unit economics. Our Q2 FY '26 annual recurring revenue, or ARR, increased 20% to ZAR 4,806 million and on a U.S. dollar basis, increased 21% to USD 272 million. Our commercial customer retention rate remains at 95% and subscription revenue accounted for 98% of Cartrack revenue. We continue to scale our proprietary data assets, now generating more than 275 billion valuable data points monthly, which we leverage to deliver impactful insights and value to our customers. Finally, our LTV to CAC remains above 9x, enabled by strong retention, disciplined capital allocation and efficient distribution, which are embedded in our vertically integrated business model and company culture. During today's presentation, we will review both of Karooooo's operating segments, Cartrack and Karooooo Logistics.
Cartrack is our SaaS operations management 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. In Q2, Cartrack delivered strong results, highlighted by accelerating subscription revenue growth in South Africa and Europe and robust growth in Southeast Asia. These results reflect the early returns from the strategic investments we've made in expanding our sales capacity in recent quarters. In Q2, Cartrack generated approximately ZAR 1.2 billion in subscription revenue, an increase of 20% or 21% on a U.S. dollar basis. Notably, Cartrack subscription revenue accelerated again this quarter. Year-to-date, Cartrack subscription revenue has increased 19% compared to 15% in FY '25. Cartrack's operating profit margin was a healthy 29% in Q2. Karooooo Logistics is our rapidly growing delivery-as-a-service offering that empowers large enterprise customers to scale their e-commerce and logistics operations.
Karooooo Logistics continues to demonstrate strong growth and operating momentum, while delivering real value for our enterprise customers. We report Karooooo Logistics separately, as the delivery as a service financial profile differs from Cartrack SaaS financial profile. Karooooo Logistics is strategically important to us as it empowers our customers to scale their e-commerce and logistics operations through a capital-light model, while driving high Cartrack customer retention. We continue to profitably scale the Karooooo Logistics business. In Q2, Karooooo Logistics Delivery-as-a-Service revenue reached ZAR 139 million, an increase of 38% or 39% on a U.S. dollar basis. Karooooo Logistics revenue growth accelerated in Q2 due to an increase in e-commerce orders. Given Karooooo Logistics' robust revenue growth, we are very excited about the long-term growth opportunity. In Q2, Karooooo delivered strong consolidated financial results.
Total revenue of ZAR 1,344 million increased 21%, subscription revenue of ZAR 1,182 million increased 20%, operating profit of ZAR 356 million increased 18% and total subscribers of approximately 2.5 million increased 15%. Cartrack subscription revenue growth of 20% and operating profit margin of 29% underpinned our stellar financial performance in Q2. Q2 continued our track record of delivering profitable growth at scale. In Q2, we were a rule of 60 company, when adding our Cartrack subscription revenue growth of 20% and our Cartrack adjusted EBITDA margin of 46%. Before detailing our Q2 financial and operational accomplishments, we want to take a moment to underscore our distinctive financial profile, something that is exceptionally rare in the public markets, particularly among small-cap companies. We believe we are amongst a select few SaaS companies operating at a rule of 50 plus based on calendar year 2025 GAAP Street estimates.
Within a SaaS universe of approximately 150 companies, we believe we are the only small-cap company operating at this level. Being part of this elite group reflects our unwavering commitment to disciplined and profitable growth. In addition, with an essentially unchanged share count over the last few years and no stock-based compensation, growth in free cash flow translates to higher per share value given the lack of dilution. This is another important factor that distinguishes Karooooo's financial profile from many peers.
Thank you, Carmen. I will now discuss Karooooo's financial performance for quarter 2 FY 2026. Please note, my comments will refer to year-over-year comparisons unless we state otherwise. Our proven and profitable SaaS business model continued to deliver strong results in quarter 2. Karooooo's total subscription revenue increased 20% to ZAR 1,182 million, operating profit increased 18% to ZAR 356 million and adjusted earnings per share increased 13% to ZAR 8.28. In this quarter, our earnings were impacted by withholding tax from dividend payments made by the subsidiaries to the holding company and our continued investment in sales and marketing. We will now focus on Cartrack's financial performance, which is fueled by SaaS revenue momentum. In quarter 2, Cartrack revenue increased 20% to ZAR 1,204 million, and Cartrack subscription revenue increased 20% to ZAR 1,180 million. Subscription revenue comprised 98% of Cartrack's total revenue.
Quarter 2 ARR increased 20% in rand and 21% in U.S. dollar. As you can see from the trend of the charts, Cartrack has a proven track record of scaling in varying macroeconomic conditions given our consistent execution, resilient subscription revenue model and attractive historic retention rates. In quarter 2, Cartrack experienced healthy customer acquisition. Quarter 2 subscriber increased 15% to approximately 2.5 million. Subscription revenue increased 20% to ZAR 1,180 million, and operating profit increased 18% to ZAR 344 million. Quarter 2 SaaS ARR accelerated to 20% compared to 18% in quarter 1 FY 2026. We believe the acceleration in SaaS ARR reflects the underlying momentum in the business and signals that our strategic initiatives are gaining traction. Total subscriber growth also remained healthy at 15%. Cartrack experienced solid customer acquisition with healthy net subscriber addition of 70,740 in this quarter.
The pace of net subscriber additions reflects our focus on selling video and Cartrack tag to existing customers, while we also build our distribution capabilities to execute on the full market opportunities. Cartrack continued to grow its subscription revenue across geographies with growth acceleration in South Africa and Europe. South Africa subscription revenue growth accelerated to 18%. Europe subscription revenue growth accelerated to 27%. Asia and Middle East subscription revenue growth increased to 26%. This region was our fastest-growing region on a constant currency basis. The healthy growth across regions reflects our execution track records and provide a solid foundation for continued growth. Karooooo delivered strong operating profit growth of 18% in quarter 2 FY 2026. While earnings in this quarter include higher tax expense related to dividend withholding tax and our continued investment in sales and marketing, our adjusted earnings per share increased 13% to ZAR 8.28.
Cartrack increased its earnings per share contribution by 13% to ZAR 8.07. Karooooo Logistics earnings per share contribution increased 17% to ZAR 0.21. On a year-to-date basis, our adjusted free cash flow increased 44% to ZAR 358 million, underscoring the strength of our operating model. As we pursue accelerated growth, we expect free cash flow to reflect our upfront investment for growth. While quarterly fluctuations may occur due to working capital movements and growth-oriented investment, we remain confident in our ability to consistently generate meaningful free cash flow. Karooooo's consistent free cash flow generation show our disciplined capital allocation strategy and position us well for future growth. Our balance sheet reflects our track record of growth at scale, profitability, and cash generation. Our net cash on hand plus cash in bank fixed deposits was ZAR 393 million. Debtors collection days remain healthy at 31 days and are within our historical norms.
In August, we paid a total cash dividend of approximately $38.6 million to our shareholders, which equates to a dividend of $1.25 per share. We believe that our ability to generate healthy cash flow is sustainable given our annuity business model, coupled with our track record of consistent execution and success. We believe Karooooo remains strongly positioned for growth as we operate in an expanding and largely underpenetrated market, fueled by robust and sustained customer demand. This demand is driven by a heightened focus on digitalization, the need to improve operational efficiencies and reduce costs and increasing attention to safety in physical operations. So far, in FY 2026, we have accelerated Cartrack subscription revenue growth by expanding our distribution footprint in existing markets, driving broader platform adoption and capitalizing on growing demand for video solutions. We are encouraged by our positive performance as evidenced by Cartrack subscription revenue growth of 20% in quarter 2 and is in line with our guidance for the year.
On a year-to-date basis, Cartrack subscription revenue growth has accelerated to 19% and the business has delivered a 29% operating profit margin reflecting strong execution while investing in sales and marketing capacity to support future growth. With continued investment in sales, marketing and infrastructure, we believe we are well positioned to achieve our FY 2026 growth ambitions. Accordingly, excluding the cost of secondary offering, our FY 2026 outlook remains unchanged. In closing, the underlying acceleration in the business reflects the strength of our operating model and early traction from strategic investment in sales capacity and customer acquisition. We have made a deliberate choice to invest and enhance our distribution footprint, and we are beginning to see those efforts materialize. With continued execution, disciplined investment, and growing regional momentum, we believe that we are well positioned to deliver profitable long-term growth. With that, I will turn the presentation over to Zak Calisto for Q&A.
Hello, everyone. I have a bit of an issue with my platform here. Good morning and good afternoon to all. Thank you for being here. I'll address the questions now. The first question is from Dylan Becker from William Blair. You mentioned that safety adoption and expansion are contributing to growth. Subscriber additions are healthy, but can you discuss the tax rates you're seeing on some of your newer offerings? Are customers more willing to adopt multiple products upfront? How is this impacting the ARPU growth? Dylan, we've increased our ARPU by 4%, which encompasses all regions. Our original objective was to grow ARPU in South Africa by 10% this year, leading to around 6% growth for the group overall. By the end of Q1, we were slightly behind, but by the end of Q2, we were aligned with our goals. A key challenge in adoption is our capacity to onboard new customers and cross-sell products.
Overall, we're pleased with our progress. Next question from Dylan. While maintaining healthy unit economics and expanding capacity, how should we view the contributions of new sales reps and your assessment of current sales capacity versus demand? Dylan, this ties back to the previous question. We're facing significantly more demand than we can meet, mainly due to the need to build our teams for delivery. We're gaining momentum, but it's never quite enough. There's indeed room for faster team growth. Another question from Dylan. South African subscription revenue is strong, reflecting the business scale there. Can you share your insights on the market drivers and your confidence in subscription durability, particularly regarding cross-selling multiple products outside South Africa? Fundamentally, Dylan, we reached capacity before COVID and had plans for a new building to expand our teams.
However, COVID delayed that, and we only moved into the new facility last September. Over the past year, we've concentrated on recruitment and building teams in South Africa effectively. We've assembled a strong team, and we're making good progress, which is essential for acquiring new customers and cross-selling additional products. There's still much work ahead for these teams to mature. With our new initiatives in AI, we may be able to delegate many tasks to AI and alleviate the need for additional hires by reallocating current staff into new roles. The next question comes from Alex from Raymond James. What is the vision attach rate by geographical area, especially for new versus existing customers? Are you acquiring video services at a higher rate among new subscribers? It's still early days, Alex, and we have much to improve. Currently, most of our sales are from our existing customer base, with video sales accounting for only about 10% at this time.
We're still building the necessary teams, which relates back to my earlier response to Dylan. We're not yet at the level of distribution we desire, but our team building is progressing as planned. Regarding Cartrack gross margin, how is the shift towards video cross-selling impacting margins? Typically, our gross margin ranges from about 70% to 74%. In this quarter, our cost of sales rose higher than our subscription growth, resulting in a lower margin compared to last year’s 74%. This year's margin is at 72%, due to increased cost of sales, but it remains within our historical range. I hope I have addressed your question. Video sales are not affecting gross profit margins due to our pricing structure and unit economics. Any variation that affects the top line comes from expenses in either salaries or commissions, but the fundamental unit economics stay consistent. We've noticed an increase in payments and commissions impacting cost of sales, but the underlying unit economics are unchanged.
I hope this clarifies things, and I'm available to discuss further if needed. A question from Sinan from Amber Road. You spoke about improving sales force productivity in the earnings release. How do the new sales reps compare to the established ones, and how quickly are they improving? Fundamentally, Sinan, we're consistently bringing in new recruits, who typically don't perform as well as our seasoned sales team members. No changes here; newcomers usually have a learning curve. A question from Claire. Great performance; it's nice to see the improved Cartrack ARPU growth. However, the subscriber net additions were lower than last year. What caused this slowdown? Essentially, Claire, we are prioritizing subscription revenue growth over subscriber numbers due to cross-selling efforts. We don't have enough staff to handle both fronts simultaneously. Our sales team is focused on cross-selling new products to existing customers, and this really comes down to having the right number of people to seize the opportunities available, with our main bottleneck being personnel.
The next question from Ablee. How long do you anticipate the higher operating expenses related to geographical expansion and increased headcount to last before leveling off? The truth is, the concept of normalization doesn't really apply to our business at this point. We see significant TAM opportunities and will continue to invest in infrastructure, operational expenses, and sales. It's all about different levers where we will expense and invest based on our execution pace and spending needs. Nonetheless, we have a strong history of disciplined capital allocation and are prudent with expenditures while maintaining strong unit economics. Personally, I focus more on unit economics than IFRS at this stage. Fundamentally, our capital allocation approach has remained consistent over the past 20 years. The next question from Roy from Morgan Stanley. What is your estimated market penetration in each region?
In South Africa, it's roughly around 35%. For Europe, penetration could range from 20% to 25%. I'm unsure, Roy, so this is just my personal view and may not be entirely factual. In Asia, I suspect the penetration rate is low, likely under 10%. As for growth opportunities, we have three main levers: enhancing customer acquisition, selling new features on our SaaS platform—though we typically refrain from raising ARPU for that—and adding new products, which we are currently doing with the Cartrack tag and video services, involving new hardware with distinct costs. While these new products do increase ARPU for our customers, they also come with added costs, especially in sales and operational expenses, focusing primarily on sales costs. Another question from Sinan from Amber Road. If your bottleneck is staffing, can AI assist in scaling your go-to-market strategy? AI is a term that gets a lot of hype.
While it can be incredibly efficient, the challenges posed by AI failures could outweigh its benefits. We're exploring various tools and using a range of existing and upcoming market AI products. We've tested many options but had to retract some due to operational issues, which can lead to significant customer dissatisfaction. The markets we're in often have little tolerance for machine interactions. In some places like the U.S., people are accustomed to it, but in areas like South Africa or Europe, customers prefer human interaction. It's a process, but I believe we'll progress, and AI will eventually play a crucial role. That concludes our questions for today. Thank you all for attending. Goodbye.