Xero subscriber growth slows

Xero has reported a revenue rise of 21 per cent for the six months to September 30 of $799.5 million, but subscriber growth has slowed, with the cloud accounting company adding 204,000 new subscribers for
the period.

For the same period in the 2022 financial year, Xero added 225,000 subscribers. It had 3.95m subscribers.

The Australian securities exchange-listed company reported on Thursday morning a 90 per cent increase in earnings before interest, taxes, depreciation and amortisation (Ebitda) of $206.1m and free cashflow of $106.7m.

Its free cashflow margin improved by 13.3 per cent, compared to 2.4 per cent in the prior period.

‘Sharpening our focus’

Xero’s net profit increased to $54.1m, compared to a net loss of $16.1m in the first half of the previous financial year.

It said its operating expense to operating revenue ratio was 79.1 per cent, down from 83.9 per cent in the first half of the 2023 financial year.

This was impacted by costs associated with Xerocon Sydney and support of the Fifa Women’s World Cup 2023, it said.

Chief executive Sukhinder Singh Cassidy said the company had demonstrated good momentum this half.

“As we look forward, we’re sharpening our focus on Xero’s key levers of growth as we aspire to become a higher-performing [software-as-a-service] company. We will continue to balance growth and profitability while delivering more value to our customers.”

Product design and development expenses increased by $25.7m from the same period in the previous financial year, but declined as a percentage of operating revenue from 35.0 per cent to 32.1 per cent, it said.

“This reflected the impact of Xero’s restructuring across H1 FY24 and disciplined cost management.”

Singh Cassidy joined the cloud computing company in February. In March, Xero announced it would cut 15 per cent of its workforce, or about 700 jobs.

It increased its operating income in the year to March 31 by 61 per cent to $57.2m, posting a net loss of $113.5m.

Xero lifted its operating revenue by 28 per cent for the year to March 31, 2023, reporting operating revenue of $1.39 billion.

In May, Xero said it had added 470,000 new subscribers, which meant an increase to more than 3.74m subscribers.

‘Sharply de-rate’

Analyst Morgan Stanley said in a research note published on November 5 that it was watching the impact of Xero’s job cuts and cuts to marketing and ad spend to see whether they would impact revenue growth.

It said if revenue growth fell to under 20 per cent, it expected shares could “sharply de-rate”.

However, it expected revenue growth of between 20 and 23 per cent, revenue of between $792m and $810m, and Ebidta of between $190m and $200m.

It flagged that most of Xero’s US software peers who had embarked on similar cost drives hadn’t stopped at one. They had commonly announced second, third and fourth “iterations”.

Morgan Stanley predicted “high share price volatility”.

It had a share-price target of between A$110 (NZ$119) to A$120 if Xero hit its expected result, where it ended up.

“With the significant cost cuts announced in [March], 2023, Xero is on a trajectory to substantially higher (and sooner) Ebitda and [free cashflow] generation. We like this, and it has been rewarded by the market. Xero shares are up 60 per cent year-to-date.”

Craigs Investment Partners head of institutional research, Stephen Ridgewell, told BusinessDesk before the result he was confident in the company’s US strategy.

Xero now offering inventory management meant it should be able to market to US retail businesses “through the accounting channel”.

“We think they’ve actually got the right strategy for the [US] market. It is a slow burn that may take them another 10 to 20 years to build a significant business in the US. They are continuing to invest selectively in that market and continue to grow the business,” Ridgewell said.

On Thursday, Xero reported North America headline revenue growth of 9 per cent, with $47.3m.

Total subscribers grew 12 per cent to 396,000 in the US, with net additions in the first half of 12,000.

Xero co-founder Rod Drury officially left the company’s board in August.