The Xero Limited (ASX: XRO) share price is falling on Thursday following the release of the company's half year results.
At the time of writing, the cloud accounting platform provider's shares are down 7% to $67.60.
Xero share price lower on earnings miss and CEO exit
- Operating revenue up 30% (27% in constant currency) to NZ$658.5 million
- Annualised monthly recurring revenue (AMRR) jumped 31% (23% in CC) to NZ$1.49 billion
- EBITDA up 11% to NZ$108.6 million
- Total subscribers increased 16% to 3.5 million
- CEO Steve Vamos leaving after almost 5 years in the job
What happened during the half?
For the six months ended 30 September, Xero reported a 30% increase in operating revenue to NZ$658.5 million and a 31% jump in AMRR to NZ$1.49 billion. This was driven by a 16% increase in subscribers to 3,496,000 and a 13% lift in average revenue per user (ARPU) to NZ$35.30.
Here's a summary of its performance across different markets:
- Australian revenue up 31% (25% in CC) to NZ$294 million after increasing subscribers by 126,000 to 1.47 million.
- New Zealand revenue up 16% to NZ$84 million following a 24,000 increase in subscribers to 536,000.
- UK revenue up 32% (34% in CC) to NZ$175 million. Xero added 44,000 net subscribers, bringing its total to 894,000. New additions were impacted by a slower than expected uptake of MTD for VAT and partner sales approach changes.
- North America revenue up 44% (30% in CC) to NZ$44 million. Xero added 15,000 net subscribers in the market, bringing its total to 354,000. Subscriber growth was impacted by seasonality factors.
- Rest of the World revenue up 35% (25% in CC) to NZ$62 million. Subscribers grew 16,000 to 242,000 in the market.
Softer earnings
One disappointment was that Xero's top line growth didn't flow all the way down to the bottom line.
The company reported an 11% increase in earnings before interest, tax, depreciation, and amortisation (EBITDA) to NZ$108.6 million. This was due largely to the impact of a NZ$25.9 million non-cash impairment driven by changed operational and market conditions for the Waddle business, which was partially offset by non-cash revaluation gains of NZ$10.8 million.
Excluding these adjustments, EBITDA would have been NZ$123.7 million, up 28% against the comparative period. This reflects a slight increase in operating expenses as a percentage of operating revenue from 83.4% to 83.9%.
How does this compare to expectations?
This result was somewhat mixed in comparison to what analysts were expecting.
For example, Goldman Sachs was expecting "Revenue/GP/EBITDA +28/+30/+42% vs. PcP to NZ$648/571/143mn."
While Xero's revenue was higher than Goldman's estimate, its EBITDA has fallen well short both before and after adjustments. It was also the same for consensus estimates, which stood at NZ$656 million revenue and NZ$143 million EBITDA.
That may explain some of the weakness in the Xero share price today.
CEO exit
Also potentially weighing on the Xero share price is news that its CEO, Steve Vamos, is leaving after almost five years in the top job.
Vamos is retiring from the role and plans to return to his previous portfolio in business coaching and leadership development as an advisor, director, and investor.
The good news is that the company has acted fast and appointed a replacement, Sukhinder Singh Cassidy.
The release explains that Singh Cassidy is an experienced Silicon Valley executive, with more than 25 years' global leadership experience. This includes as President, Asia Pacific & Latin America at Google; President at StubHub; founder of theBoardlist; founder of Joyus, where she was CEO; and co-founder of Yodlee.
Singh Cassidy will join the company at the end of month and formally become CEO on 1 February 2023.
Outlook
Looking ahead, it is business as usual for Xero. Its outlook statement is little changed from the end of FY 2022. It stated:
Xero will 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. Total operating expenses (including acquisition integration costs) as a percentage of operating revenue for FY23 are expected to be towards the lower end of a range of 80-85%.
