Shares of XERO FPO NZ (ASX: XRO) were trading up to 9.7% lower in early trade this morning, despite the cloud computing accounting software provider delivering a strong annual result for financial year 2015.
Whilst not yet profitable the $3 billion technology company reported subscription revenue of $121 million for the year ended 31 March 2015, up 81% year-over-year.
The company's net loss after tax widened to $69.5 million, increasing to 56% of revenue from 51% in 2014. This was largely a result of increased research and development, marketing and sales costs.
Paying customers grew to 475,000, up 67%, with high-double digit growth in all of its operating geographies.
Total Australian subscribers jumped 86% to 203,000, whilst those in the UK and North America jumped 77% and 94%, respectively, to 83,000 and 35,000.
Promisingly, the New Zealand-based Software-as-a-Service (SaaS) company grew its gross profit margin to 70%, hinting that its ability to scale profits could have further to run.
Commenting on the results, Xero CEO Rod Drury said, "We're delighted with our achievements this year." He said the group was a leader of cloud accounting in three countries and continues to experience positive momentum in the US market.
"Our platform now provides the most comprehensive small business accounting experience for customers, winning against desktop solutions while delivering the benefit of running a business anywhere, anytime, from any device…We are very excited about FY16 and expect strong growth to continue in all our core markets for the foreseeable future," Mr Drury added.
Cash burn (the amount of cash used by an an unprofitable business to fund growth) was $88.4 million during the year, compared to $48.4 million a year earlier. However at 31 March 2015, the company had $268.9 million of cash and short-term deposits.
Should you buy XERO shares?
Within minutes of morning trade today, Xero shares traded as much as 9.7% in the red, despite the promising result. It could be something to do with the departure of CFO Douglas Jeffries – (who was only in the job a few months) – or concerns over its large annual loss.
However, in this (capital-F) Fool's opinion, it appears to be a kneejerk reaction by myopic investors to an otherwise promising operational result, which bodes well for the business over the long term.
Cash burn could become a problem in a few years if revenues and subscriptions don't hit targets, but with such wide profit margins, network effects and a superior product offering, I'm not betting against Xero.
Think about it like this: For every $1 of revenue Xero receives 70 cents falls to gross profit – that's awesome.
Looking ahead, I also feel marketing, employee and sales costs will likely begin to plateau. Meaning free cash flows are also likely to grow exponentially as revenue climbs.
Keep an eye on this one.
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