Xero Limited (ASX: XRO) positively surprised investors this week after reporting its full year result to 31 March 2019.
Founded in New Zealand in 2006, Xero has become the dominating player in the business and accounting software market in Australia, New Zealand and the UK. Employing more than 2,300 people, Xero helps more than 1.8 million subscribers manage their accounting and tax obligations.
3 Things I Like About Xero Shares
In this era of changing business models, a company that displays a high level of sticky revenue is very attractive.
Xero receives a monthly subscription payment from its clients, from tiny businesses to large companies. Average revenue per user increased from NZ$29.13 last year to NZ$29.25 this year.
However, more importantly its annualised monthly recurring revenue increased by 32% to NZ$638 million. It is really great knowing that many millions of dollars is coming through the door every month.
It takes quite a while to learn how to use accounting software, so the longer a business uses it the less likely they are to move. The switching costs of training etc would be much higher than the cost of any software cost savings.
Plus, accountants are rewarded with benefits and discounts if they can get more of their clients using Xero.
Xero is no longer just a Kiwi company with a large presence in Australia. It is a truly global cloud accounting company with over 1.8 million subscribers.
International net subscriber growth (239,000 added) exceeded growth from the ANZ region (193,000 added). UK net subscriber growth was 151,000 for FY19.
Other positive points were North American growth of 48% to 195,000, or 33% excluding the Hubdoc acquisition.
In the rest of the world, subscriber numbers were 43% higher to 83,000 with revenue up 48% in constant currency terms. Offices have recently been established in Hong Kong and South Africa.
Interestingly, Xero said that Canada continues to be a growth opportunity. Don’t forget, Canada’s population is materially larger than Australia’s.
Lower CAC And Growing Profit Margin
As a software business grows, one of the key things you want to see is that it is very scalable with growing profit margins.
The customer acquisition cost as a percentage of revenue continues to fall. At the end of FY19 it had reached 45% of revenue, which is still high but reflects the rapid growth and high level of service offered.
Meanwhile, the gross profit margin improved by 2.1% from 81.5% to 83.6%, making each revenue dollar more profitable than the last. Xero said a factor with this was incremental cloud hosting cost efficiencies combined with the launch of Xero Central.
Is Xero A Buy?
With the Xero share price up another 12.8% since reporting I am not sure that it’s good value today – there is a lot of excitement surrounding technology businesses at the moment.
Xero is going to continue to heavily re-invest for more growth like Amazon does, which is likely a good thing as long as you’re not expecting dividends any time soon.
I am also wary of what competition may do to try to neutralise Xero. Many users might say Xero is the best in its industry at a very reasonable price, but Intuit and Sage (to name two) will not go down easily. Xero does seem to be winning the battle in the UK though.
However, whilst Xero may still be a quality business to own from here, it might be better to consider one of the rapid ASX growth shares in the free report below for a better priced buy.
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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).
At the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.