Xero share price leaps 8% on staggering earnings upheaval

A major turnaround in profitability is sending investors into a frenzy over Xero shares today.

| More on:
A man in his 30s holds his laptop and operates it with his other hand as he has a look of pleasant surprise on his face as though he is learning something new or finding hidden value in something on the screen.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Xero Ltd (ASX: XRO) share price is moving with gusto this morning after releasing its full-year results for FY24.

An hour into trade, the cloud-based accounting software company shares are up 7.6% to $133.49. The move starkly contrasts the 1.02% slump in the S&P/ASX 200 Index (ASX: XJO) after the US Federal Reserve revealed it had contemplated more interest rate rises.

So, what about Xero's results enable its share price to perform while the rest of the market is struggling?

Profitable growth sparks Xero share price

Xero shareholders are celebrating this morning amid the company's latest result. Here's a look at the key numbers driving today's excitement:

  • Operating revenue up 22% year-on-year to NZ$1.71 billion
  • Subscribers grew by 419,000 to 4.16 million
  • Average revenue per user (ARPU) up 14% to NZ$39.29
  • Gross margin up from 87.3% to 88.2%
  • Net profit after tax (NPAT) swinging to NZ$174.6 million from NZ$113.5 million loss

Xero's ability to balance revenue growth and profitability in FY24 is significant after years of lacking the latter. Importantly, the company has now achieved the Rule of 40 — a metric that implies a software company's revenue growth and free cash flow margin should be 40% or more for a healthy business.

The company noted that it focused on balancing subscriber additions with ARPU during FY24. This might explain the 11% reduction in net subscriber additions compared to FY23. However, the positive is that Xero's gross margin is improving while it manages its cost to serve customers.

Furthermore, Xero implemented price changes during FY24, boosting ARPU. Despite increasing prices, the 0.99% monthly churn rate is a positive indicator of product stickiness.

What did management say?

Xero CEO Sukhinder Singh Cassidy touted the full-year result, stating:

This result shows we're doing what we said we'd do. We've delivered a strong and profitable FY24 result and Rule of 40 outcome, demonstrating our commitment to balancing growth and profitability.

We have a clear and focused strategy to win on purpose, and Xero is positioned well as we move into FY25.

Australia and New Zealand continue to be strong markets for the accounting platform. Xero achieved 22% revenue growth across the two countries, growing its subscriber count in the region to 2.4 million.

Meanwhile, revenue in its international markets (the United Kingdom, North America, and the Rest of the World) rose 24% to NZ$734.9 million. The company has 1.8 million subscribers in these expanding markets.

The road ahead

No light was shed on future earnings or revenue estimates for FY25. However, Xero expects total operating expenses as a percentage of revenue to be approximately 73% in the next financial year.

Product design and development costs are also forecast to be a larger portion of revenue.

Xero share price in review

The Xero share price is up 20% over the past 12 months. However, it was a considerably different story towards the end of last year.

Shares in the software company fell as low as roughly $70 apiece. Yet, positive sentiment has since returned to the technology sector.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Earnings Results

Man jumps for joy in front of a background of a rising stocks graphic.
Earnings Results

Catapult shines: 20% sales growth propels ASX tech stock to new 52-week high

A strong annual result from this tech player has caught investor attention.

Read more »

a construction worker sits pensively at his desk with his arm propping up his chin as he looks at his laptop computer while wearing a hard hat and visibility vest in a bunker style construction shed.
Materials Shares

Which ASX 200 stock just plunged 12% despite record full-year earnings?

It looks like an impressive report card but UBS doesn't like the FY25 guidance.

Read more »

A man sits thoughtfully on the couch with a laptop on his lap.
Earnings Results

ASX 200 tech stock lifts off on another record-setting half-year profit

Investors are bidding up the ASX 200 tech company following its half-year results.

Read more »

increasing rural asx share price represented by happy looking sheep
Earnings Results

Why is this ASX All Ords stock staying strong as profits crash 76%

How is this company's share price marching higher after mowing down more than three-quarters of its profits compared to a…

Read more »

Two men sit side by side on a couch with video game controls in their hands and expressive looks on their faces as they react to the action in front of them in a home setting.
Earnings Results

Guess which ASX 200 stock is surging 11% on an 'outstanding' result

This ASX gaming giant just posted a 17% jump in profits, and its shareholders are basking in the glory.

Read more »

Agricultural ASX share price on watch represented by farmer in field looking at tablet computer.
Earnings Results

Graincorp share price lifts off as dividend is maintained and debts plunge

ASX 200 investors are bidding up the Graincorp share price today. But why?

Read more »

Smiling elderly couple looking at their superannuation account, symbolising retirement.
Earnings Results

Why is this ASX 200 stock avoiding the market selloff and pushing higher?

Not all shares are falling with the market on Thursday.

Read more »

A woman wearing yellow smiles and drinks coffee while on laptop.
Bank Shares

CBA share price on watch following $2.4b third quarter profit

CBA delivered another bumper profit for the three months.

Read more »