The big headline numbers showed continued growth in subscribers and revenue, as well as a huge lift in net profit, which jumped from NZ$1.3m to NZ$34.5m. Given the Xero share price jumped by as much as 6% on the day, the results were better than many had anticipated for a period throttled by COVID-19.
However, digging into the results, there are three big things that you may have missed.
1. Xero is piling up a lot of cash!
During the period, Xero’s free cash flow jumped from NZ$5.3 million to NZ$54.3 million. That is a big increase and the additional cash means that Xero now has NZ$572 million of cash and short term equivalents.
What could Xero do with that cash? Well, pop your dreams of a juicy dividend aside for now. Over the last few years Xero has made several careful acquisitions to expand the company’s platform and make it even more attractive to users. This includes the purchase of lending platform Waddle for $80 million, as well as the US$70 million acquisition of invoice and receipt capture software Hubdoc.
As Xero is still very much in growth mode, there is a good chance the company will continue to look for acquisitions that continue to add to the company’s platform.
2. COVID-19 caused the cost of acquiring new customers to spike
Although Xero was able to trim sales and marketing costs by 10% compared to the same period last year, the drag of COVID-19 on international subscriber growth meant that Xero’s Customer Acquisition Cost (CAC) jumped noticeably.
International CAC months, the number of months it takes for revenue from a new subscriber to cover the cost of acquiring them, jumped from 16 months at September 30 2019, to 22 months in 2020. Xero says the increase was largely due to the lower growth rate of new subscribers, so the average cost of acquiring each new user internationally increased 30%!
3. Xero still has a huge opportunity ahead
Although it was disappointing to see CAC rise, Xero reminded shareholders of just how big the opportunity ahead is. CEO Steve Vamos noted that Xero estimates that only half of small businesses in Australia and New Zealand have adopted cloud accounting, while for the rest of the world that number is only at 20%. This reiterates just how big the opportunity for cloud accounting, and Xero, remains.
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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia has no position in any of the stocks mentioned. 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.