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Why the Xero (ASX:XRO) share price zoomed 20% higher in November

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The Xero Limited (ASX: XRO) share price was among the best performers on the S&P/ASX 200 Index (ASX: XJO) last month.

Despite weakness in the tech sector, the cloud-based business and accounting software platform provider’s shares stormed 20% higher over the month.

Why did the Xero share price surge higher in November?

As well as benefiting from improving investor sentiment thanks to positive COVID vaccine developments, Xero’s shares were given a boost from the release of a strong half year result.

For the six months ended 30 September, Xero reported a 21% increase in operating revenue to NZ$409.8 million. Management revealed that this was driven largely by a 19% increase in total subscribers to 2.45 million.

Xero finished the period with 1 million subscribers in Australia, 414,000 in New Zealand, 638,000 in the UK, 251,000 in North America, and 136,000 in the Rest of the World.

This led to its total subscriber lifetime value (LTV) metric growing once again. Its LTV increased 15% over the prior corresponding period to NZ$6.2 billion.

Earnings growth accelerates.

Also growing strongly was the company’s earnings thanks to operating leverage.

Xero’s earnings before interest, tax, depreciation and amortisation (EBITDA) increased by a massive 86% to NZ$64.9 million during the half.

And on the bottom line, Xero’s net profit after tax came in a whopping 26 times greater at NZ$34.5 million.

Management revealed that its strong earnings growth was reflective of its disciplined financial control during a highly uncertain period. This approach led to a 10% reduction in sales and marketing costs when compared to the prior corresponding period.

What about the future?

Due to the continued uncertainty created by COVID-19, the company was unable to provide guidance for the full year.

However, management spoke positively on its long term prospects.

Xero’s CEO, Steve Vamos, commented: “This result demonstrates the value our customers attribute to their Xero subscription and the underlying strength of Xero’s business model. We continue to prioritise investment in customer growth and product development in line with the long term opportunity we see.”

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Returns as of 6th October 2020

James Mickleboro has no position in any of the stocks mentioned. 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.

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