The Xero Limited (ASX: XRO) share price is racing higher on Thursday morning.
In early trade, the cloud accounting platform provider's shares were up 11% to $87.50.
The Xero share price has eased back a touch since then but remains up 8% to $85.18.
Why is the Xero share price racing higher?
Investors have been buying the company's shares this morning after it announced a program to streamline its operations, realign the business to drive greater operating leverage, and better balance its growth and profitability.
The key to this will be reducing its workforce by 700-800 roles. This represents upwards of 16.3% of its 4,915 full time equivalent employees.
Management expects this action to reduce its operating expense to revenue ratio to approximately 75% in FY 2024.
As a comparison, total operating expenses as a percentage of operating revenue came to 83.9% or NZ$552.2 million during the first half.
At a ratio of 75%, Xero's operating expenses would have been NZ$493.9 million for the half. This is an improvement of more than NZ$50 million, which annualises to over NZ$100 million.
Clearly, big cost savings lie ahead if this program is a success. This goes some way to explaining why the Xero share price is having such a strong showing today.
Broker response
The team at Goldman Sachs has responded to the news and appear pleased with management's plans. It said:
Xero has today announced a 700-800 headcount reduction globally (c. 14-16% of the 4.9k Full-time-employees as at Sep-22), consistent with our view that the business may shift to profitable growth, following a considerable drop in job vacancies. While having a limited impact on FY23 costs (Xero reiterated FY23 opex guidance for lower end of 80-85% of revenue, GSe 81.6%), this is expected to drive a material reduction into FY24, with opex expectations of c.75% of revenue (vs. GSe 79%).
Appears to be focused on efficiency, not on any changes to trading: with the rationale for the cost out to be to: (1) streamline operations; (2) drive greater operating leverage; and (3) achieve a better balance of growth and profitability.
Goldman currently has a conviction buy rating and $109.00 price target on Xero's shares.
