Karooooo (KARO) Q2 2027 earnings review
Karooooo sales speed up, but its debt exceeds its cash
Karooooo, which owns vehicle tracker Cartrack, is selling faster in every region but has run out of spare cash. Chief executive Zak Calisto said subscription revenue grew 23% at constant exchange rates, faster in every region. Profit per share rose only 12%, excluding one-offs, as device costs, bad debts and interest ate the savings from slower hiring.
| Subscription revenue growth at constant exchange rates | 23% 21% last quarter; 20% as reported |
|---|---|
| Free cash flow, first half | ZAR100 million ZAR358 million a year ago |
| Cash minus overdrafts and term loans | −ZAR490 million, by our math +ZAR77 million a year ago |
| Full-year subscription revenue outlook | Unchanged middle of the range: 21% growth |
⚖️ Verdict: 🔴 Bearish
The story got worse because chip stockpiles and a dividend absorbed the cash, and the group now owes its banks more than it holds. The good news: growth sped up everywhere and sales costs grew slower than revenue. But by our math the unchanged plan needs profit per share to climb about 30% in the second half, and the strong rand keeps reported growth below that plan's figure.
The question now is whether the second half delivers that acceleration. Either last year's weak fourth quarter and slower hiring lift profit per share enough, or chip prices, bad debts and interest keep eating the savings. Third-quarter profit per share, due in January, will tell.
🐂 Bull Case
Subscription Growth Sped Up in Every Region
Cartrack, Karooooo's vehicle-tracking business, charges a monthly subscription for every vehicle it monitors. "We are pleased to report another quarter of acceleration," chief executive Zak Calisto said. At constant exchange rates subscription revenue rose 23%, from 21% last quarter, with "constant currency growth acceleration across all regions".
South Africa, about three quarters of subscription revenue, led at 25%, and Calisto said the group kept "building our cross-sell capabilities" while signing new customers.
- Asia Pacific and Middle East: 25% at constant rates, ahead of 21% subscriber growth
- Europe: 14% at constant rates, from 13% last quarter
- Net new subscribers: 94,516, a second-quarter record, from 70,740 a year ago
- Net new ARR, the yearly value of subscriptions added: ZAR276 million, from ZAR232 million a year ago
This matters because the full-year plan counts on growth speeding up as last year's sales hires become productive. By our math the middle of the range needs about 23% growth in the second half, a pace the quarter already reached.
What to watch: third-quarter subscription growth at constant exchange rates, due in January. Above 23% would mean the sales hires are still raising output and the top half of the range is within reach.
Each New Subscriber Now Brings More Revenue
Last quarter most new subscribers took Cartrack-Tag, a cheaper tracking product sold on its own, so each brought less revenue than the average customer. This quarter the company said growth came from "selling Video and the Cartrack-Tag to both new and existing customers"; Video is its in-vehicle camera product.
By our math each net new subscriber brought about ZAR2,900 of yearly revenue, up from about ZAR1,800 last quarter. That is more than the roughly ZAR1,980 a year an average subscriber pays, so existing customers must be buying extra products. Average revenue per subscriber in rand hardly moved, mostly because of the stronger currency.
What to watch: net new ARR per subscriber added in the third quarter. Another reading near ZAR3,000 would confirm the shift from winning accounts to selling more to the customers Karooooo already has.
Sales and Overhead Costs Grew Slower Than Revenue
In the first quarter spending on sales and marketing rose 33%, faster than revenue. Karooooo now says it is "driving further gains in new sales headcount productivity over the coming periods", and the second quarter shows it.
- Sales and marketing: 17% of subscription revenue, from 18% a year ago
- General and administration, the overhead of running the business: 19%, from 21%
- All Cartrack operating costs: up 15%, against subscription revenue up 20%
This is the leverage the full-year profit plan rests on, and it arrived a quarter after hiring slowed, so the new staff appear to be producing. But the savings stopped at the operating line, because device costs and bad debts rose faster.
What to watch: sales and marketing as a share of subscription revenue in the third quarter. At or below 17% would mean the sales force keeps raising output without matching cost.
🐻 Bear Case
Profit Per Share Lags the Full-Year Plan
Karooooo kept its full-year target of ZAR38.50 to ZAR40.00 of profit per share, and the outlook says scale and AI "will support strong EPS growth". Operating profit did rise 19% to a record, as the release headlines. Profit per share rose 12% once last year's share-offering costs are excluded, about the pace of the past year.
- Cost of sales, mostly depreciation of in-vehicle devices: 29.5% of Cartrack revenue, from 27.9%
- Provisions for customers who may not pay: up ZAR26 million from a year ago
- Finance costs: ZAR32 million, up 86%
- Tax rate: 27%, from 25% excluding one-offs
By our math the plan now needs about ZAR20.44 of profit per share in the second half. That is 30% more than a year earlier. Last year's fourth quarter carried one-off provisions, which eases the comparison, but even on an adjusted base the second half must grow about 18%. The first half managed 12%.
What to watch: third-quarter profit per share against ZAR8.54 a year ago. Growth below 15% would leave the fourth quarter carrying almost all of the plan and put the floor of the range in doubt.
Debt Now Exceeds Cash After the Dividend
Karooooo says its "cash generation remains strong". In July it paid ZAR752 million of dividends, seven times the first half's free cash flow by our math. Cash is now ZAR649 million. Overdrafts alone stand at ZAR715 million, with ZAR424 million of term loans on top.
- Cash minus overdrafts and term loans: about −ZAR490 million by our math, from +ZAR77 million a year ago
- Trade and other receivables: up 32% from a year ago, against revenue up 22%
- Days to collect from customers: 33, from 27 in February
- Provision for customers who may not pay: ZAR41 million, from ZAR15 million a year ago
The group attributes the receivables rise to "an acceleration in subscription sales" and ZAR57 million of prepayments for device parts. But a near-tripled bad-debt charge says some of that growth is slow to pay, and the release itself notes "some macro-economic stress in the South African economy". Chief executive and founder Zak Calisto holds most of the shares, and the company bore the costs of his share offering last year.
What to watch: the overdraft balance at the end of the third quarter, a period with no dividend to pay. If overdrafts do not fall while receivables keep outrunning revenue, bank money is funding customer credit and the chip stockpile.
Chip Prices Push Cash Into a Device Stockpile
Every Cartrack subscriber needs a device fitted in the vehicle, and Karooooo buys devices before it sells them. With memory-chip prices climbing, chief executive Zak Calisto said the group bought extra stock to "provide a buffer against ongoing significant increases in RAM and memory prices".
- Devices held for future use: ZAR694 million, up 92% since February
- Capital spending: 32% of revenue, from 18% a year ago
- Free cash flow: ZAR100 million for the half, from ZAR358 million a year ago
Karooooo says its "current PPE levels have now been adjusted for our accelerated growth and supply chain challenges", so it does not plan another step up. The stockpile only pays off if chip prices keep rising; if they fall, the group overpaid for devices it will depreciate for years, while Cartrack's gross margin already sits at the floor of its range.
What to watch: capital spending as a share of revenue in the third quarter. A return toward 20%, near last year's level, would confirm the stockpile is complete and free cash flow can recover.
Strong Rand Takes Three Points Off Growth
Karooooo reports in rand but earns about a quarter of subscription revenue abroad and keeps spare cash in dollars. Chief executive Zak Calisto said the stronger rand "continues to impact contributions from most of the countries in which we operate".
- Subscription revenue: up 20% as reported, 23% at constant exchange rates
- ARR: up 19% in rand, 30% in dollars
This matters because the full-year outlook "assumes constant foreign exchange rates" at last year's levels. On that basis the quarter sits in the upper half of the range, but if the rand holds, reported growth runs about three points lower and by our math the year lands near ZAR5,800 million, in the bottom half.
What to watch: the gap between reported and constant-currency subscription growth next quarter. Three points again would put the reported year in the bottom half of the range whatever the business does.
👓 Other Themes
Overdrafts Reclassified as Borrowing
Karooooo now treats its "bank overdrafts are now considered part of our financing arrangements rather than cash management", so from this quarter they sit in financing activities in the cash-flow statement, and ZAR408 million moved there. The group also raised its facilities with Capitec Bank and Standard Bank to ZAR900 million, from ZAR750 million in May. The change does not alter free cash flow, which the company measures before financing.
💲 Other KPIs
Karooooo Logistics, the group's delivery service that links large retailers to third-party drivers, grew revenue 36%, down from 46% last quarter. The unit spent more on keeping drivers available, so its operating margin fell to 5.9% from 8.4% a year ago. It remains a small contributor to group profit.
Deferred revenue, cash customers have paid for service not yet delivered, grew 12% from a year ago. That is slower than subscription revenue at 20%, as it was last quarter, and reflects more customers paying monthly rather than up front, so it does not signal weaker demand.
Money owed to suppliers rose 75% from a year ago and 60% since February, far faster than revenue. Karooooo has not yet paid for much of its device stockpile, which is why working capital added ZAR32 million of cash in the quarter despite rising receivables. Those bills fall due in the second half and will weigh on cash then.
🔮 Guidance
Unchanged. The plan still calls for 18% to 24% growth at last year's exchange rates. The second quarter ran at 23% on that basis. By our math the middle of the range leaves about ZAR3,085 million for the second half, or 23% growth. The floor needs only 17%, and last year the company landed near the floor of this line.
Unchanged. The plan keeps Cartrack's operating margin between 27% and 30%. The second quarter came in near the middle at 28.3%. Gross margin sits at the floor of its 70% to 72% range because device costs rose, so the operating margin now depends on sales and overhead costs growing slower than revenue, as they did this quarter.
Unchanged. The plan still has profit per share growing 18% to 23% for the year. The first half delivered 12%. By our math the second half must deliver about ZAR20.44, up 30% from a year earlier. Last year's fourth quarter carried one-off provisions, which eases the comparison, but the required pace is well above the first half. Last year profit per share landed at the floor of its range.
❓ Key Questions
How much of receivables is customer debt, not prepayments?
Receivables grew 32% against revenue up 22%, and bad-debt provisions nearly tripled. The release names only a ZAR57 million prepayment increase, so readers cannot tell how far customer credit is stretching.
What does a Cartrack-Tag subscriber pay, and how many upgrade?
Tag drove last quarter's record additions at a lower price, and this quarter's higher revenue per new subscriber points to upselling. Tag's price and its conversion rate to full telematics or Video would show whether that holds.
How will Karooooo fund second-half spending and the next dividend?
Overdrafts now exceed cash, term loans add ZAR424 million, and first-half free cash flow covered a seventh of the July dividend. The board has not said whether it sizes dividends against cash flow or cash balances.
Where does the second-half profit acceleration come from?
The plan needs about 30% profit-per-share growth in the second half after 12% in the first. Management has not said which line turns: gross margin, interest, tax, or lower bad-debt charges.
What exchange rate sits under the full-year outlook?
The outlook assumes last year's rates while the rand has strengthened. The company has not given the rate it uses or the revenue effect of each ZAR1 move against the dollar.