Company Overview - Xero Limited is a software as a service (SaaS) company. The Company is engaged in the provision of a platform for online accounting and business services to small businesses and their advisors. The Company operates through two operating segments: Australia and New Zealand (ANZ), and International. The Company's small business cloud accounting software, Xero, is provided in Australia, New Zealand and the United Kingdom. Xero integrates with over 400 add-on applications allowing people to customize Xero to their needs. Xero includes various features, which include cash flow, invoicing, payments, pay runs, reports, contacts, security, support and mobile. Through its various features, Xero offers online accounting, automatic bank reconciliation, quotes and online training for small businesses. Xero allows access to real-time account information and business tools from any device.


XRO Details

Addition to subscriber base: XERO Ltd (ASX: XRO) is aggressively growing its subscriber base and recently added over 242,000 new subscribers year on year as on March 2016. New Zealand subscribers rose to 186,000 during the same period as compared to 138,000 in fiscal year of 2015. Australian subscribers improved to 312,000 during the period as compared to 203,000 in fiscal year of 2015. Xero international market is also growing in terms of penetration, wherein the United Kingdom subscriber base improved to 133,000 in fiscal year of 2016 against 83,000 for fiscal year of 2015. North America subscriber base rose to 62,000 in fiscal year of 2016 as compared to 35,000 in the same period of last year. The group’s subscriber base in new markets rose to 24,000 during the year from 16,000 in the same period of last year.  As a result, given this strong performance, the group expects its global subscribers to exceed over 1 million by the next year if the current growth rate prevails. Consequently, the group is aiming to expand its revenue generating business to over $1 billion.
 

Ongoing Solid Subscriber Growth Rate (Source: Company Reports)
 
Growth in Global Revenue: XRO has reported operating revenues of $207.1 million in FY 16, which is an increase of 67% as compared to FY15. The global revenue grew 95% in international markets on year-on-year basis while there was a 57% rise in Australia and New Zealand. Meanwhile, Xero has crossed quarter billion annualized revenue. Moreover, with the increase in subscription, XRO can add roughly NZ$100 million of annualized revenue. XRO’s annualized committed monthly revenue is $257.9 million, which is an increase of 62% on year-on-year basis.
 
Improvement in the Margins: The group is continuously improving its gross margins, and reached 78%, while grown from 67% as reported in the first half of 2015. There is an expectation of further improvement due to the recent transition to Amazon Web Services, which would reduce the costs further. Moreover, in FY 16, XRO has continued its investment in growth, while improving margins and moderating cash usage. The gross margin grew by 6 points on 76% on year-on-year basis. Additionally, the EBITDA margin in the second half of 2016 improved to -23% as compared to -36% in the first half of 2016 and -53% of second half of fiscal year of 2015. The EBITDA margin (excluding share-based compensation) in the second half of fiscal year of 2016 rose to -15% from -30% in the first half of 2016 and -43% in the second half of fiscal year of 2015. On the other hand, the group has reported a net loss of $82.5 million for the fiscal year of 2016, which is an increase of $12.9 million as compared to the last year, as the group is continuously investing in scaling up its global business. However, the net loss reached $38.1 million for the second half of fiscal year 2016 which has moderated from the net loss in the second half of fiscal year of 2015 by $6.9 million. We believe that the group would be able to offset this pressure by enhancing its top line and subscriber growth rate in the coming months.
 

Improving Margins (Source: Company Reports)
 
Product Innovation:The group is migrating from the cloud platform to Amazon Web Services, which is currently at the deployment stage. This move would unlock a new platform for innovation. Amazon Web Services would also offer Xero with access to a range of machine learning tools, which would drive better automation for customers saving them time and money. Additionally, XRO has been implementing more than 1,200 customer facing product improvements and features in the past year. XRO had released TaxTouch, a cloud-based tax solution for freelancers and the self-employed in the United States. After that they released Xero Tax, a cloud-based tax solution for the Australian market that has been used for more than 1.4 million tax lodgments. XRO has made significant strategic partnerships and integrations with the top technology companies in the past one year. Meanwhile, the recent data sharing deal with the leading investment bank, Wells Fargo & Co is considered significant because it is the first time Xero has done a deal with a US bank to further endorse the product. Such integrations would drive adoption of XRO in other markets as they would enable the automatic posting of bank transactions which saves time.
 

Solid Penetration (Source: Company Reports)
 
Expanding reach:During this year, XRO has connected to more banks and financial institutions globally. The group says that in the future intelligent data matching in XRO would automatically code banking transactions, making accounting even easier for small businesses. Meanwhile, XRO is making progress with major bank integrations in the United States. As a result, from the past one year, the XRO platform has been used to record more than $1 trillion of activity across more than 450 million incoming and outgoing transactions. The company uses its software to rewire the global small business economy by connecting small businesses to their trading partners.  Further, the Australia and New Zealand has reported for revenue strength with half a million subscribers in April 2016 while strong international growth has been witnessed in the UK and North America as well. Meanwhile, Xero has opened its first Asia region office in Singapore to meet the demand particularly in Hong Kong, Malaysia and Singapore.
 

Global Network Growth (Source: Company Reports)
 
Reduction in Cash Usage: XRO’s operating and investing cash usage for the second half of 2016 reached $39.1 million, which is an improvement of $9.4 million from $48.5 million of the corresponding period of 2015. The cash usage from operating and investing activities (including FX) was $86.1 million for FY16 that is lower than the cash usage of $88.2 million in 2015. The company reported for a closing cash and cash equivalents and short-term deposits position of $184.0 million.
 
Guidance for FY 17: The group reported that their operating metrics is expected to continue improvement in FY17 as the company continues to drive efficiencies through automation and economies of scale. The cash usage in FY17 (based on FX rates at 1^st April 2016) is forecasted to reduce from FY16. Moreover, Xero is managing the business to cash flow break-even within its current cash balance.
 
Stock Performance:XRO stock has risen 24.72% in the last six months (as of August 05, 2016) as the group delivered a solid subscriber growth and expanded penetration across the globe via innovative global products. Xero is the market-leading small business cloud accounting software in Australia, New Zealand and the United Kingdom, based on number of subscriptions. The subscriber base is continuing to grow and the company is focused on financial progress, and is taking further steps towards value added growth. XRO’s operating revenues and annualized committed monthly revenues are growing with the goal of becoming a $1 billion+ revenue generating business. Despite the recent stock rally, we believe that the investors could consider adding the stock in their portfolio. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $19.08
 

XRO Daily Chart (Source: Thomson Reuters)

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