New Zealand-based cloud accounting business XERO NZX (ASX: XRO) today announced that is has signed up 253,000 subscribers in the UK as at 30 September, 2017.
As at September 30 2016 the group had 161,000 UK subscribers which means it has grown 57% over the past year to follow up on subscriber growth of 61% in the UK for the year ending September 30, 2016. So while growth is marginally decelerating on a percentage basis it is accelerating on a nominal basis across the more important metric.
This is impressive and reflected by the stock adding 51% in value over the past year, while any regular traveller on London Underground's transport system will have seen the Kiwi company has plastered almost every square inch of some underground stations with its sky-blue advertising posters.
This kind of marketing blitz comes at a cost, but appears to be translating into heavy subscriber growth and Xero's recurring revenue model means it's a potential compound growth machine for investors prepared to look past its loss-making status.
This is because the initial cost of acquiring a customer is swallowed up as the customer pays Xero back over any number of years and marketing costs as a percentage of revenue continue to fall.
Xero's founder Rod Drury today said they were still "only getting started" in the company's bid to take accounting online in connecting small businesses to their customers and bankers via its accounting platform.
The fintech leader also reported it is "deepening its existing partnerships" with UK headquartered business banking giant HSBC as it bids to build a network effect that attracts and retains paying subscribers. The British Pound has also been appreciating recently with room to rise and its strength may feed through into Xero's results for the six months ending March 2018.
This November all eyes will be on how the company is tracking on its ambition to tip into cash flow break even when it hands in its financials for the six-month period ending September 30 2017.
Outlook
Despite the recent share price surge Xero could have a long growth runway ahead because many small businesses globally still do accounts via Excel spreadsheets for example, where the data is not stored online or connected to third party providers.
If Xero is able to fund its next leg of growth from existing cash flows the share price could run hard over the years ahead yet and as such I still rate the stock as a buy.
