Xero Ltd (ASX: XRO)

XRO Details

While XRO stock might be down by about 3.37% on May 10, 2018, the group while reporting its full-year earnings to 31 March 2018 revealed about its continued focus on growing the global small business platform with cash outflow in FY19 to reduce from FY18. The group seems to be also benefitting from the sole listing on the ASX in February 2018 and was included in the S&P/ASX 100 index in March 2018 given the market capitalisation change based on performance of past months. The group lately appointed Steve Vamos as CEO effective 1 April.

Coming to price movement, the present slip seems to be coming in from lower than expected revenue growth and sluggishness in move to expand in the US in contrast to what market has been expecting. Therefore, there might have been some bit of profit booking. Nonetheless, Xero delivered its first positive annual EBITDA of $26.0 million compared to $(28.6) million loss in FY17, and has grown well in FY18 with addition of 351,000 subscribers.Net loss after tax for FY18 improved 60% to $(27.9) million from $(69.1) million in FY17. The revenues have soared by 38% (though below last few years) and operating cash flows improved by $45.6 million. Accordingly, group’s EBITDA increased by $54.6 million. During the year, XRO’s core accounting product revenues were up 37% while other platform revenues grew at 94%. Annualised Monthly Recurring Revenue (AMRR) growth of 33% to $484.4 million was also reported. Lifetime Value (LTV) per subscriber was up 8% to $2,310 (9% in CC) adding $990m ($1.0 billion in CC) in total subscriber LTV in the past 12 months to surpass $3.2 billion in total LTV Disciplined execution. There was growth in gross margin by 4pts to 81%.
 

Growth in Small Business Platform (Source: Company Reports)

On the other hand, XRO maintains its cloud accounting market leadership in established markets including Australia and New Zealand with region subscriber growth of 28% to 884,000 and revenue growth of 33%. In the UK market, there was a 47% increase in subscribers to 312,000. In North America, about 40,000 subscribers (up 43%) were added to 132,000 subscribers. Rest of World subscribers went up 49% to 58,000 subscribers.
Group’s strategy to drive global growth with better financial outcomes being laid through operating efficiencies has delivered on target results. Over the last three years, XRO’s revenue grew at a compound annual growth rate (CAGR) of 49% while it improved operating and investing cash flow margins from (71)% to (9)%. Its diverse recurring platform revenues such as transactional services, and other partner and small business products (AMRR has replaced Annualised committed monthly revenue (ACMR)) have been added to the recurring revenue and ARPU metrics.

Xero is also trying to catch up on its business to cash flow break-even within the current cash balance without relying on its debt facility, and this is aimed through operational efficiencies. XRO has further flagged to reinvest surplus cash flow subject to investment criteria, to drive long-term shareholder value. While the stand-alone growth for different segments and regions is decent, the comparison with past few years depicts some sloth creeping in. Given the run-up of about 103.5% in last one year, we maintain a “Hold” on the stock at the current price of $ 39.89.
 

XRO Daily Chart (Source: Thomson Reuters)

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