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Xero delivers strong growth in FY 2020 but warns on COVID19 uncertainty

The Xero Limited (ASX: XRO) share price will be one to watch on Thursday after the release of its full year results.

How did Xero perform in FY 2020?

For the 12 months ending March 31, Xero delivered a 30% increase in operating revenue to NZ$718.2 million and a 29% lift in annualised monthly recurring revenue (AMRR) to NZ$820.6 million.

This was driven by a 2% increase in average revenue per user to NZ$29.93 and a 26% jump in subscribers to 2.285 million. Xero added 467,000 net subscribers during the 12 months, which was up 8% on FY 2019’s additions.

The company’s margins expanded once again thanks to the benefits of scale. Xero ended the period with a gross margin of 85.2%, up 1.6 percentage points year on year.

This ultimately led to Xero delivering a 52% increase in EBITDA to NZ$139.17 million. On the bottom line, the company recorded a profit after tax of NZ$3.34 million, compared to a loss of NZ$27.14 million a year earlier.

What were the drivers of its growth?

During the 12 months its Australia subscribers grew by 26% to reach 914,000. Management notes that it has continued to benefit from the opportunity represented by Single Touch Payroll.

In the UK its subscribers grew by 32% to 613,000. The strong subscriber additions of 150,000 were assisted in part by the Making Tax Digital initiative and Xero Tax now offering end-to-end integration with HMRC.

Over in New Zealand its subscribers grew by 12% to 392,000, with 41,000 subscribers joining in FY 2020.

North America subscribers grew by 24% during the 12 months to reach 241,000. Management notes that its subscriber growth is accelerating. It believes this is a strong indicator of the early progress from its renewed positioning in a key global market.

Finally, its Rest of World subscribers grew by 51% to 125,000. This maintained the momentum that this part of the business has reported in recent periods.

At the end of the period Xero’s total lifetime value of subscribers was up 27% to NZ$5.53 billion.

COVID-19 impact.

With Xero’s financial year ending on March 31, the company notes that the COVID-19 pandemic only had a modest impact on its operating and financial performance for the year.

However, it did result in some reduction in its AMRR progress during March and has continued doing so early in FY 2021. Management notes that it is a difficult time for many people in small business.

Xero’s CEO Steve Vamos commented: “Many of our customers and partners are having to adapt the way they operate, while investing enormous effort to survive at this difficult time. Helping them is our immediate priority.”

“While COVID-19 brings uncertainty, our long-term strategic ambitions are unchanged and we remain committed to our three strategic priorities: to drive cloud accounting around the world, grow the small business platform, and to continue to build for global scale and innovation. Now more than ever, small businesses are recognising the benefit of being able to use the cloud to run their businesses and manage their finances,” he added.

Management believes “it would be speculative for us to say anything more at this time on its potential impact on our expected performance for FY21.”

As a result, no guidance has been provided with today’s results release. Though, it has reiterated that its “ambition is to be a long-term oriented, high-growth business.”

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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