Xero Limited

Scalable Growth Through Partners: Xero Limited (ASX: XRO) is a New Zealand based public software company with the market capitalization of circa 6.24 Bn as of July 30, 2018. It offers a cloud-based accounting software platform for small and medium-sized businesses. The company has over 1.38 million subscribers in more than 180 countries that are integrated with more than 600 apps. Recently, the group delivered its first positive EBITDA of $26.0 Mn in FY18 against (28.6) Mn in FY17. This was mainly supported by an increase in subscribers and revenue growth with cost optimization strategy. During the year, the group has added new 351,000 subscribers and this accounted to the total of 1.386 million. Moreover, the group received a positive response from the market in terms of transactional activity and recorded $2.15 trillion in transactions across the platform during the year. We expect that the company will continue to increase its subscriber base in years to come thus resulting in topline growth.


Xero Platform -Scalable Growth Through Partners (Source: Company Reports)

On the other hand, the group inked a strategic deal with Gusto for US payroll solutions. The objective of this deal is to enhance Xero’s North American customer proposition and US strategy which was communicated in 2017 to drive sustainable growth through accounting partners. Additionally, this deal will allow the company to redeploy resources into the other markets outside of the United States where the employees are being paid via Xero payroll, which in June 2018, accounted for 1.25 Mn people. Because of ceasing its own US payroll product, the company will incur an NZ$ 16.2 Mn non-cash impairment of assets which will be adjusted in the first half of the 2019 financial year.

Meanwhile, the stock price rose by 43.51% in the past six months but was down by 2.69% in the past one month as on July 27, 2018. The stock was down by 2.073 per cent and traded close to 52-week high level on July 30, 2018, and thus, we maintain our “Hold” recommendation at the current market price of $43.930, considering the high potential in the business and capability to come under a higher market capitalisation bracket backed by its organic and inorganic growth expected in years ahead. However, reaching the $100 billion mark would depend on opportunities and risks under international expansion and sustained domestic performance.

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