Karooooo, the vehicle-tracking group listed in New York and Johannesburg, is funding part of its expansion with bank debt after sharply increasing purchases of memory chips and other components used in the devices it fits to customers’ vehicles.

The company reported free cash flow — the cash left after running the business and paying for equipment — of ZAR41m (US$2.5m) in the three months to August 31, 2026, up from ZAR20m (US$1.2m) a year earlier but well below its profit. For the six months, free cash flow was ZAR100m (US$6.1m), against ZAR358m (US$21.8m) in the same period last year, even as operating profit rose 19 per cent to a record ZAR422m (US$25.7m).

Karooooo said the cash shortfall reflected “investment in capital expenditures to support accelerated subscription revenue growth and provide a buffer against ongoing significant increases in RAM and memory prices.” In plain terms, the company is buying more chips than it needs right now, and paying for them upfront, in case they become more expensive or harder to obtain later.

Note: rand amounts are converted at an assumed rate of 0.061 US dollars to the rand, broadly in line with the 2026 average of about 16.3 rand to the dollar.

Why memory prices matter to a tracking company

Karooooo does not simply sell software. It designs, manufactures and installs the black boxes that sit in customers’ vehicles and transmit location, driver-behaviour and video data to its cloud platform. Each unit contains a cellular modem, a satellite positioning chip and memory to store data before it is transmitted.

Those components have become dramatically more expensive. The artificial intelligence boom has triggered what the market research firm IDC calls “a crisis like no other” in memory supply. Technology giants are buying up DRAM and NAND chips at unprecedented scale to build data centres, paying premiums for multiyear contracts that guarantee supply. Data-centre demand for DRAM surged to around 50 per cent of global consumption in 2025, up from 32 per cent five years earlier, according to Bloomberg Intelligence. Chipmakers have redirected production toward these more profitable orders, leaving fewer components for cars, phones and industrial devices — and pushing prices sharply higher. In some cases, DRAM spot prices are now more than ten times their January 2025 levels, while NAND prices have risen by more than 300 per cent in a year, according to IDC.

The crunch is not expected to ease soon. Goldman Sachs projects global supply shortfalls in DRAM, NAND and high-bandwidth memory through at least the second half of 2027, the tightest market since 2011. Intel has said there will be “no relief until 2028,” while Micron has acknowledged it has no line of sight as to when supply will catch up with demand.

For a company like Karooooo, which capitalises each device and depreciates it over its useful life, higher component prices raise the cost per unit and feed through to cost of sales over time. Cartrack, the group’s core subscription business, reported a gross margin of 70 per cent in the quarter, down from 72 per cent a year earlier. The company has guided for a gross margin of 70 to 72 per cent for the full year.

Karooooo’s decision to buy ahead is a hedge: lock in supply and prices now, rather than risk higher costs or delivery delays later. The cost is visible on the balance sheet. Devices held for future use rose 92 per cent to ZAR694m (US$42.3m) since February, and uninstalled devices rose to ZAR457m (US$27.9m) from ZAR215m (US$13.1m) over the same period. The company also cited longer lead times from suppliers.

The strategy carries a risk. If demand for Karooooo’s services slows, it will be left holding more hardware than it needs, with cash tied up in boxes sitting in warehouses.

A balance sheet that has changed shape

To pay for the build-up, Karooooo has drawn on bank facilities. Cash fell to ZAR649m (US$39.6m) from ZAR1,154m (US$70.4m) at its February year-end, a decline the company attributed mainly to ZAR752m (US$45.9m) of dividends paid in July and to the effect of a stronger rand on reserves held in dollars. The rand has strengthened from about 17.9 to the dollar in 2025 to roughly 16.3 in 2026, reducing the rand value of Karooooo’s dollar-held cash. Its bank overdraft rose to ZAR715m (US$43.6m) from ZAR408m (US$24.9m), and short-term facilities with Capitec Bank and Standard Bank were increased to ZAR900m (US$54.9m).

The company also changed how it reports its overdraft, moving ZAR408m (US$24.9m) of it from day-to-day cash management into financing activities. Finance costs rose to ZAR32m (US$2.0m) in the quarter from ZAR17m (US$1.0m) a year earlier.

Taken together, the group moved from holding slightly more cash than debt at the end of February, with net cash of about ZAR298m (US$18.2m), to carrying roughly ZAR490m (US$29.9m) more debt than cash at the end of August. That is a modest shift for a company of its size, but a notable one given that it continues to pay a substantial dividend — US$1.50 a share, or ZAR752m (US$45.9m), in July. The payout represents a yield of about 2.3 per cent, and the company has grown its dividend at roughly 19 per cent a year over the past five years.

Management described the position as deliberate. “We continue to generate strong operating cash flow and remain committed to accelerating subscription revenue growth,” said chief executive Zak Calisto. Cash generated from operations rose 109 per cent to ZAR558m (US$34.0m) in the quarter, helped by favourable timing of working capital and a smaller tax payment than in the prior year.

The core business is accelerating

The financial engineering comes against a backdrop of stronger trading. Cartrack, the group’s main subscription business, grew revenue 20 per cent to ZAR1,415m (US$86.3m) in the quarter, or 23 per cent measured in local currencies. That is at the upper end of the company’s own full-year guidance range of 18 to 24 per cent, and up from 21 per cent in the previous quarter.

Subscribers rose 18 per cent to 2.90m. The company added 94,516 net new subscribers in the quarter, a record for a second quarter but below the 142,472 added in the first three months of the year.

Every region grew faster in local-currency terms than in the previous quarter. South Africa, which accounts for about three-quarters of subscribers and where Cartrack holds an estimated 41 per cent of the fleet-management market, grew subscription revenue 25 per cent. The company competes with Tracker, Altron’s Netstar and MiX Telematics, now part of Powerfleet. Asia Pacific grew 25 per cent, Europe 14 per cent and the rest of Africa 13 per cent in local currencies, though reported growth in those regions was in single digits because the rand strengthened against most other currencies.

Two warning signs

Alongside the strong growth, two figures deserve attention.

Provisions for customers expected to default rose to ZAR41m (US$2.5m) in the quarter from ZAR15m (US$0.9m) a year earlier, and the average time taken to collect payment lengthened to 33 days from 27 at the February year-end. The company referred to “some macro-economic stress” in South Africa — a reference to an economy that is barely growing. The IMF has cut its 2026 growth forecast to about 1 per cent, the central bank has raised its key interest rate to 7 per cent as inflation touched the top of its target band, and households are under pressure from higher fuel and transport costs. The Reserve Bank has warned that household distress has risen and that interest rate cuts anticipated at the start of the year are now unlikely to materialise. The increase in Karooooo’s credit provisions is not large in absolute terms, but it is the sharpest deterioration in credit quality the company has reported in recent quarters, and it sits alongside continued strong demand.

Second, Karooooo Logistics, the group’s delivery business, grew revenue 36 per cent to ZAR189m (US$11.5m) but reported operating profit down 4 per cent to ZAR11m (US$0.7m), with its margin falling to 6 per cent from 8 per cent. The company attributed the decline to the cost of ensuring drivers are available and expanding its network.

The unit, which connects retailers with independent couriers for fast deliveries, traces its origins to Picup Technologies, a South African start-up Karooooo acquired a 70.1 per cent stake in for R70m in September 2021. It has been the group’s fastest-growing division, riding a wave of demand for “quick commerce” — ultra-fast grocery and household delivery — but its profitability has become less predictable. The market is real but still modest: South Africa’s quick-commerce sector was valued at about US$86.6m in 2024 and is forecast to reach US$130.7m by 2029. Retailers including Shoprite’s Checkers Sixty60, Pick n Pay’s ASAP! and Woolworths’ Dash have expanded rapidly, with Shoprite’s digital commerce sales rising 34.5 per cent to R25.5bn in its 2026 financial year.

Karooooo raised its stake in the logistics business from 81 per cent to 91.5 per cent during the period and, in October, increased its holding in its Polish business from 90.9 per cent to 93.5 per cent through a share buyback.

Guidance unchanged, but the wording shifted

Karooooo left its full-year guidance unchanged for a third consecutive quarter: subscription revenue of ZAR5.7bn (US$347.7m) to ZAR6.0bn (US$366.0m), a gross margin of 70 to 72 per cent, an operating margin of 27 to 30 per cent and earnings per share of ZAR38.50 (US$2.35) to ZAR40.00 (US$2.44).

The company did, however, change the basis on which that guidance is set. It now assumes constant exchange rates, modelled on the prior year, rather than “current” rates as previously worded. The practical effect is that investors should judge the company against local-currency performance, not the rand-reported figures, which will undershoot if the South African currency remains strong.

The outlook also introduced new language, describing the market it serves as “an expanding and largely underpenetrated physical AI market.” The phrase reflects a broader industry shift: “physical AI” describes intelligent systems that sense and act in the real world — vehicles, assets and field workforces — rather than purely digital environments. For Karooooo, it is a way of framing its telematics and video business as part of the AI economy rather than as conventional fleet tracking. The company said it is adopting artificial intelligence across its engineering and product teams, with research and development spending up 12 per cent.

What to watch

The central question is whether the chip stockpile proves to be prudent insurance or an expensive bet. If subscriber growth holds near current levels, the buffer protects margins from further component inflation and allows Karooooo to keep installing devices without delay. If demand cools, the company will be carrying more inventory than it needs, with the associated costs still flowing through its accounts.

The second question is whether the borrowing is temporary. Karooooo has said its hardware investment levels have now been adjusted for both faster growth and supply-chain conditions, implying the cash drain should ease. Investors will want to see free cash flow recover in the second half, and the overdraft come down, before concluding that the debt is a passing feature of an investment cycle rather than a lasting change in how the company funds itself.