Interview with Karooooo CEO Zak Calisto

0:05When I tried to get Karoo.com, there's someone in America that owns a warehouse and it's Karoo.com. So he wanted$10 million for the name and I said, okay, that's fine. You know, I'll keep the money, you keep the name and I'll just do it from three till nine hours. We own all those Karoo.com.

0:28that was Zach Callisto CEO and founder of Carew and yes that's Carew with five O's I'm Motley Full producer Matt Greer now Carew provides a software platform for connected vehicles it's a platform that helps with fleet management logistics and safety Motley Full co-founder and CEO Tom Gardner and Motley Full analyst Emily Flippen recently had a chance to talk with Zach Callisto about the business of Carew. Well, hello, Motley Fool investors. We're so excited to spend the next hour or so with Zach Callisto, the founder and CEO of Carew, which is probably how it's often introduced. And people are always, I'm sure, wondering about the name, which we'll get to in a second.

1:13It's a fun story, but I'd really love to just start. And Emily Flippin here as well, Tom Gardner, both of us have recommended the stock. It's been recommended a number of times now in The Motley Fool to our members, and we're so excited to get a chance to spend time with the CEO and hear your thoughts, Zach. And I'd love to just hear the origin story, if you would. What was the moment you realized you wanted to start this business, and how has it developed since inception? I had a vehicle stolen from me in around 1994. At that point in time someone I knew brought some technology to South Africa adopted it and they started the track and trace company to recover stolen vehicles that's how the business actually started I became one of the agents to sell on their behalf and I ended up selling about 80 % of their sales I rolled out quite a big network in 96-97 they asked me if I would help them open up the geographies in the neighboring country South Africa which I did and in 99 they asked me if I wanted to go to do a joint venture with them in Brazil I went to Brazil I said it's great market but you'd need to redevelop your technology because the unit economics won't make sense there they they decided that it was too expensive to develop the technology so I developed it myself and and entered negotiations still to go to Brazil with them.

2:43And then we didn't reach agreement, which then led me to sell all my interests in the previous agency business. And I then decided instead of going to Brazil, it's much easier just to start in the markets that I know. So I had the advantage of knowing what not to do in 2004. We went to the market to also a very simple solution of track and trace. and in 2007 we decided we've got a lot of corporate customers that need more than just track and trace we went into fleet management and it's been you know the a total building that the current platform from the ground up and today our platform is much more than just fleet management as well and if we look back to 20 years ago what we had and what we got now is really, we're in a very different space.

3:34You know, that's sort of my life story. I've always loved that story. In fact, when I first started researching Career After UN Public, just a handful of years ago, I went to one of the analysts here on our investing team who was actually from South Africa. And I said, have you heard of Car Track? Talk to me about this business. And he says, yes, you as Americans oftentimes don't understand just how pervasive car theft is and vehicle hijacking and geographies, including South Africa. So it's something that really appeal to consumers, but talk to me about how your business exists today, because making that transition from consumers to full telematics and fleet vehicle management has opened up a lot of opportunities for you from changing a business, from just sticking a device onto a car and saying, we're going to track that to you to being like, how can we be this vertically integrated solution that includes hardware and software?

4:23When you look at your business and how it breaks down in this moment, how much of that is consumer versus how much of that is enterprise and where do you see growth from here going like i said we started in south africa very much track and trace in 2007 we started enhancing our platform to be able to do with fleet management so that we could service our commercial our enterprise customers better today approximately 50 of our business in south Africa is commercial business, 50 % is consumer, and South Africa today constitutes 70 % of our subscription revenue of our group, and 30 % of the subscription revenue outside South Africa, that's enterprise business in Europe and in Asia.

5:09So in total, you're probably looking at At this point in time, about a third of our business is a consumer and about two thirds of our business is commercial customers. Clearly what we do today, we do, we do our, we got a tremendous amount of business intelligence reports, live alerts. We do, we push and pull data through APIs into our customer systems. We have very complex solutions for different customers depending on what industries they're in. They we service customers, whether they're in logistics, whether they're ambulances, whether they're doing cold storage, whether they're moving buyer waste.

5:52You know, it's just an endless amount of industries that we serve. And the reality is we continue to develop this platform because as we get closer to our customers, as we develop more, we realize it's just endless challenges that the customers face from being able to either transport goods or transport people. And from the whole supply chain, it's addressing all of that. So I believe we still have a very long way to do development as we get closer to our customers. And I would say the fleet management portion of the business, we probably had that done in about 2012 in a very comprehensive. Now it's everything that lies on top of that fleet management business.

6:35They say leadership isn't just about where you're going. It's about the conviction it takes to get there. For those who demand the world and possess the drive to claim it, there's a vehicle of equal distinction. Dynamic by design and engineered for pure impact, the Range Rover Sport rises to meet you the moment you take the lead. This is the most advanced Range Rover Sport yet, a master class in uncompromised performance and unbridled agility. Inside, the innovation is seamless. You'll find an elegant 13.1-inch touchscreen that puts total control of the vehicle's systems right at your fingertips, but it's the refinement that sets it apart.

7:11Sculpted 22-way heated seating with built-in massage function ensures every journey is defined by peerless comfort. Whether it's through unique interior finishes or custom wheel options, the ways to personalize your Range Rover Sport are nearly unlimited. Command attention and experience ultimate luxury in motion. Exclusive offers are available now. Explore further at RangeRover.com. We actually have built an AI-powered scoring system for public companies, mostly U.S. listed, but increasingly we will be moving to evaluate companies around the world. And you have one of the highest financial scores of any public company, certainly of any small cap public company.

7:48You also have a RAUNTA, which is an acronym for Return on Unlevered Net Tangible Assets, which is something that Warren Buffett has written about in past shareholder letters, essentially evaluating how much operating cash flow you can draw out of your physical asset base. and the round at Karoo is about 35%. Buffett says, you know, I like it when it's above 25%. So all of the financial metrics are outstanding. And I'd love you to, let's go to the rule of 60 because we've heard rule of 40. I'm even wondering when we'll get to rule of 90 at Karoo, but tell us what level you're at now and what that represents to any viewers today that aren't familiar with that concept.

8:26I haven't got exact maths with me. The reality is as I get older, pay less attention to the nitty-gritty of all these calculations and I'm more worried about the the welfare of the business but I believe it's just a combination of your you know your your growth margin your overtime margin and you add the two and you get to 60 percent so the reality is that we have got a very profitable business generating really good and operating cash flows and our growth rates are what I would consider very healthy. But given the cash that we generate, the free cash, which I would like to allocate that cash into the business to grow even faster, if that makes any sense.

9:13The reality of it is that we want to grow faster, but given the way we approach our capital and our exposure to risk, it sort of slows us down a bit at times. And perhaps it's given my age. If I was a younger lad, 30 years old with, you know, 20 good degrees, I'd probably throw cash at it. And if it didn't work, I'll just start a new venture next week. Just a quick follow up on that and actually taking it in a direction because I know, Emily, we want to ask a couple of financial questions. But just just to take it in a direction about you and your leadership rule rule of 40, generally revenue growth rate plus profit margin should be greater than 40 percent.

9:51your rule of 60, which is an indication of unbelievable levels of profitability, extremely high retention rates. But I just wanted to jump in on what you shared about, you're getting older, other people are in the nitty gritty, you're looking at the broader vision. Can you talk a little bit about your style as a leader? We run a basic sort of Myers-Briggs-like methodology at The Motley Fool called the Synergist Quiz, which distinguishes four different traits for each of us. And of course, we have capabilities in all four, but one of them is to have a lot of ideas. Another is to get things done on time.

10:24Another is to build systems. And another is to be a people sort of unifier. And so, I'm wondering where you, I'm assuming you have a high vision or idea generation score. I don't know. But how do you view yourself and work with your team? Because when you say you don't get in the nitty gritty details, having listened to your quarterly conference calls, your presentations are outstanding. You know, you obviously have a team that gets it to the nitty gritty very well and I enjoy them a lot. But can you talk about your leadership style relative to the team that you've built? This might sound like I'm contradicting myself.

10:53So I am a man of detail, but you've got to focus on the detail that really matters for the health of the business. So when it comes to working out the rule of 60, I don't think that's that important for me to determine whether the business is healthy or not. So I just wanted to clarify why that's detailed that might not be that important to me, if that makes sense. You know, this is detailed. It's a byproduct, actually. I think I'm quite detailed, but, you know, at the same time, in a healthy way. Otherwise, you could get lost in the analysis paralysis and, you know, everything matters. And at the end of the day, you're not making the decisions that's important.

11:37I think my forte is building teams, understanding people, understanding what people are good at, and understanding people that will not be a culture fit for us. And I think that's one of my strengths is building teams. I also think I'm quite pedantic at building products and to make sure they work and that the customer is getting the best service possible. and I'm also very pedantic about making sure we've got control about the full value chain of our operations which implies customer service. So it's very much about making sure we're vertically integrated, making sure we've got a great culture and making sure we're building the right teams because at the end of the day, we're in the business of building teams.

12:27If you can't build the teams, you're not going to have a good business. You might have a big business, but it might not be a good one, if that makes sense. So that's for my management style. Great teams, great product, and then pay attention to the way you spend money. It's beautifully said. And actually, I love your commentary around the details that do matter versus the details that don't matter. When you get into stock research and analysis, you can drown in facts and figures. And 99 % of the stuff you come across probably doesn't actually matter to the success of the business. The hard part is finding the little bit that does.

13:00And one of the things that has really mattered to me in my research for GRU, going back to your financial profile, has been the return on investment that you get from virtually everywhere that you put your capital. And in some ways, you run this business like an old business. You can tell it was built up in the 90s. You pay a dividend, and you're very disciplined when it comes to capital allocation. But at the same time, when I look at these return on investment metrics, I think to myself, I am 30 years old. I would love to be throwing capital everywhere I could in this business. but it's a pretty capex intensive company.

13:31So you haven't gone out and raised a lot of debt and raised a lot of capital in order to expand really aggressively. And do you intend to maybe change that moving forward as you get success in the new geographies or slow and steady really win the race here? I think the reality is this, Emily, if I could have it my way, I'd be growing at 300 % per annum. Does the market exist to grow at 300 % per annum? Yes, it does. It's all about the execution. And then it's all about execution and keeping your culture so it's sustainable. Because you can go out there, grow at 40, 50 percent, and then you say you're going to become profitable later and you might never ever become profitable because your customer retention might not be there.

14:14The minute you want to contain costs, then staff will leave you because they've been used to, you know, they've been used to not a disciplined environment. They've been used to earning too much money so it's always tricky to then cut back later so we stick into the way we're doing things but I'm not against raising cash and getting debt and issuing shares but we'll do that when we find that our free cash flow is not sufficient and I would love to be in a situation where we're raising cash so that we can grow faster, but not just raising cash so we can throw cash at it to grow faster. Get a concise daily market preview from Charles Schwab, including stock updates, U.S.

15:02and global economic news, monetary policy decisions, and key results and statistics that may impact your trading. Schwab Market Update is an original podcast from Charles Schwab. Join host Keith Lansford for this information-packed daily market preview delivered in 10 minutes or less. Listen today at schwab.com slash market update podcast or wherever you get your podcasts. That's schwab.com slash market update podcast. I'd like to hear about new technologies, the impact they're having in your category and how you're approaching them. Autonomous driving and AI, take them in any order you'd like to.

15:39What do those mean to you and to Karu? So AI, you know, it's a word that everybody's using now, as you well know. It's a word that can mean a lot of things to a lot of people, to different people. But in our space, AI is really about machine learning. It's the ability to get all that data and all those data points and stitch it together and do predictive analysis on that. So we've got AI on, for instance, we do a lot of AI for the banks where we can sort of predict potential customers that won't be paying their bill. And we have that sort of technology and we're onboarding more and more banks as they see how reliable our data is.

16:24We've got it on the video telemetry. We've also got it on the latest tag unit. There's quite a lot of algorithms there, a lot of data collecting points. which we can, at that point in time, also prevent fraud that's about to happen or bad behavior, other bad behavior that's about to happen. And that's just because of our experience and the amount of data that we have and the speed that we can process that data allows us to do all these type. I don't like to use the word AI because it's very generic and I'm not sure if it's to write the letter or we're more in the algorithms to see, you know, we're less in the arts.

17:08We're more in the mathematical space, in the scientific space. And that is really just about being able to have all these data points, bringing it together, making its entails out of it, and being able to predict potential, mitigate risk fundamentally. That's what it's all about. Mitigate risk and prevent costs for companies. And optimize things as well. You may have heard that in the last call, Tesla began to really emphasize autonomy for their entire business. We expect that some of the difficulties we're going through and all of the things that Elon Musk is involved in, the bet that they're making is autonomous vehicles and optimists, you know, autonomous robots in our daily lives.

17:50What does autonomous driving mean for Karu? It's a very good question. And I'm not certain that I have the wisdom to answer you. because, you know, in the time that I've been in the industry, I've been in the industry since 1994, there's been so many things that have come and gone and they didn't happen or they didn't happen the way we thought they were going to happen. But fundamentally, if I were to answer that question, I would say there's a few aspects. The first thing is, when will autonomous vehicles be, B, when will it all be autonomous vehicles in places like Southeast Asia, South Africa, Europe?

18:33How long will that take? That's the one part of the question. The second part to the question would be that autonomous vehicle only replaces the driver. It doesn't replace the chores, the jobs, the things that need to happen. to happen. So does it mean that if you now don't have a driver, you no longer need a management system, if that makes sense? And I think if you remove the driver, you've got less risk of bad behavior by a driver, but the whole management system is still relevant. And especially as we get closer and closer to our customers and we're more integrated with our customers into their daily operations, then I believe it really just is a replacement of the driver.

19:24But I don't want to oversimplify it because, you know, it's very difficult for me to know what the landscape is going to look like in 20 years time. But what I can say is we are agile in our thinking. There's a lot that's going to happen in the next 20 years. And, you know, we will work our way through all the different things that could happen. Can you tell us about the Karoo region in South Africa? Well, it's a semi-arid region, a bit like Arizona, but I thought the Karoo was the most beautiful place on earth until I went to Arizona. So it might have been Arizona with five A's on the end, dot com.

20:03Had you traveled to Arizona before? No, actually I started off Karoo because I really liked it, but the reality with the O's is that when I tried to get Karoo.com, there's someone in America that owns a warehouse and it's Karoo.com. So he wanted$10 million for the name. And I said, okay, that's fine. You know, I'll keep the money, you keep the name and I'll just do it from three till nine O's. We own all those Karoo.com. But you don't own 10 O's. You don't own 10 O's. I think we might actually, we might. We might. That was Karoo CEO and founder, Zach Callisto. The stock trades on the NASDAQ under the ticker K-A-R-O.

20:45As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertising. Advertisements are sponsored by you and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For the Motley Fool Money team, I'm Matt Greer. Thanks for listening and we'll see you tomorrow.