Xero (ASX:XRO) share price on watch after delivering strong first half growth

Xero has handed in its half year results…

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The Xero Limited (ASX: XRO) share price will be one to watch today.

This follows the release of the cloud accounting company’s half year results.

Xero share price on watch after reporting further strong growth

  • Operating revenue up 23% to NZ$505.7 million (26% in constant currency)
  • Annualised monthly recurring revenue (AMRR) grew 29% to NZ$1,132 million
  • Total subscribers increased 23% to 3.0 million
  • Total subscriber lifetime value (LTV) growth of 61% to NZ$9.9 billion
  • Free cash flow down to NZ$6.4 million from NZ$54.3 million
  • Gross margin increased by 1.4 percentage points to 87.1%
  • EBITDA down 19% to NZ$98.1 million
  • Net loss of NZ$5.9 million compared to half year profit of NZ$34.5 million in FY 2021

What happened during the half?

For the six months ended 30 September, Xero reported a 23% increase in operating revenue to NZ$505.7 million. This was underpinned by a 23% lift in subscribers to 3 million and improvements in its average revenue per user (ARPU) and churn. This ultimately helped drive its AMRR beyond NZ$1 billion for the first time.

Things weren’t quite as positive for its earnings, with Xero reporting a 19% decline in EBITDA to NZ$98.1 million and a loss after tax of NZ$5.9 million. The latter is down from a surprise profit of NZ$34.5 million during the prior corresponding period (up from NZ$1.3 million a year earlier).

Though, it is worth noting that during the prior corresponding period, Xero reduced its spending materially due to COVID-19 financial discipline, which inflated its earnings in FY 2021.

How did its segments perform?

The Australia segment was once again a key driver of Xero’s growth during the half. Australian revenue increased 22% to NZ$224.9 million following the addition of 124,000 net subscribers. This brought its total to 1.24 subscribers in the country.

Things were positive in New Zealand, with revenue increasing 13% to NZ$72 million. Xero added 34,000 net subscribers to reach a total of 480,000 subscribers. Management was pleased with this performance, noting that delivering double digit subscriber growth in a market where cloud adoption is relatively high points positively to the potential of other markets.

Over in the UK, Xero’s revenue increased by a solid 24% to NZ$132.8 million following the addition of 65,000 net subscribers. This took total subscribers in the UK to 785,000. While deadlines for the implementation of Making Tax Digital (MTD) in the UK for income tax were deferred, Xero continues to invest in readiness for upcoming phases of MTD. These changes are expected to impact millions of UK small businesses.

One slight disappointment was the performance of Xero’s North America segment. It delivered revenue growth of just 5% (or 14% in constant currency) to NZ$30.1 million. Xero added 23,000 net subscribers to reach a total of 308,000 subscribers. Management advised that it continues to focus on developing the partner channel in North America and signed with a number of US and Canadian accounting firms to make Xero a preferred solution for their practices.

Finally, the Rest of World (ROW) segment performed strongly, reporting revenue growth of 72% to NZ$45.9 million. This segment was boosted by the first time inclusion of Planday and a 26,000 net increase in subscribers to 201,000. Xero notes that it continues to see strong progress within Xero’s South Africa business which is scaling a large base of subscribers. Singapore has also continued to be a strong performer within ROW.

LOCATE acquisition

Xero has continued its acquisition spree by announcing a deal to acquire LOCATE Inventory.

LOCATE is a US cloud-based inventory management provide which better supports the inventory needs of small business and enhances ecommerce capability.

The acquisition will embed LOCATE’s inventory and ecommerce talent and capability within Xero to enhance its inventory management offering. Management expects this to help meet increased small business demand for inventory and cash flow management tools.

Total consideration for the purchase and subsequent employee incentive payments will be US$19 million. Transaction, integration and operating costs are expected to have a minimal impact on Xero’s FY 2022 EBITDA.

Outlook

Xero plans to continue to focus on growing its global small business platform and maintain a preference for reinvesting cash generated, subject to investment criteria and market conditions, to drive long-term shareholder value.

While no sales or earnings guidance was given for the full year, management provided investors with an idea of its spending plans.

It commented: “Total operating expenses (excluding acquisition integration costs) as a percentage of operating revenue for FY22 are expected to be in a range of 80-85% which is consistent with levels seen in the second half of FY21 and the pre-pandemic period. Integration costs, relating to all the acquisitions announced since the start of FY21, are expected to increase total operating expenses as a percentage of operating revenue by up to 2% for FY22.”

The company will now have an uphill struggle to achieve what the market is expecting from it in FY 2022. For example, Goldman Sachs is forecasting full year revenue growth of 33%.

The Xero share price is trading flat in 2021.

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Motley Fool contributor 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 and has recommended Xero. The Motley Fool Australia owns shares of and has recommended Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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