For software-as-a-service (SaaS) growth companies like Karooooo (previously known as Cartrack), investors don't just look at profitability. Other metrics are really important, like revenue growth and the cost of acquiring a customer (CAC).
The model revolves around understanding the value of a customer. A contract is taken out with a monthly fee and the company has loads of data to help it figure out how long those customers stick around for.
The average revenue per user (ARPU) is then compared to the CAC to see what the gross profit is on subscriptions sold to customers.
In this table, Karooooo refers to the cost of acquiring a subscriber rather than a customer, but the principle is the same:
The big news here is that the CAC has come down significantly, from R2,636 to R2,005. The ARPU on a monthly basis came down from R155 to R151, which means the company breaks-even at gross profit level when a customer sticks around for at least 14 months.
The average life cycle of a subscriber is 60 months, which drives gross profit of 72% for the lifetime of the subscriber. Each subscriber contributes R6,523 over a 60 month life-cycle.
The critical point to understand is that growth companies like Karooooo must invest in their growth in order to keep growing. That sounds silly, but consider that the alternative would be to switch off all marketing spend and just allow the subscription revenue to flow to the net profit line. Companies wouldn't usually do this, but it shows the value of the underlying subscriber base being built.
In the case of Karooooo, there are over 1.375m vehicles on the platform. This is expected to increase to between 1.5m and 1.6m by the end of the 2022 financial year.
Adjusted EBITDA margin is typically in a range of 45% to 50%. It dipped to 44% in the latest quarter as a direct result of the decision to invest in growth. Karooooo has increased its headcount by 761 employees in the last three quarters, focusing on customer acquisition in South Africa, general expansion in Asia and R&D activities.
With the benefit of those insights into the business model, you'll have a better appreciation of first quarter results that show revenue up 17% and adjusted EBITDA down 3%. Revenue in constant currency was up 22%, which splits out the impact of rand fluctuations vs. currencies in other countries in which the group operates.
Investors will hope that the CAC savings are here to stay and that Karooooo will grow into its enlarged back office. If that happens, adjusted EBITDA margin should improve back towards 50%, which would drive significant growth in profits.
Disclaimer: the author holds shares in Karooooo