FY20 report: Is the Xero (ASX:XRO) share price a buy?

Xero (ASX: XRO) just released its FY20 result, is the share price a buy?

What is Xero?

Xero has become the dominating player in the business and accounting software market in Australia, New Zealand and the UK, since being founded in New Zealand in 2006. Employing more than 2,300 people, today Xero helps more than 1.8 million subscribers manage their accounting and tax obligations.

What was in the Xero FY20 report?

The Xero share price hasn’t been affected much because of well investors think its subscriber numbers will hold up.

In the FY20 report Xero announced 30% growth of operating revenue to $718.2 million. It was 29% growth in constant currency. Annualised monthly recurring revenue (AMMR) increased by 29% to $820.6 million. All numbers stated are in New Zealand dollars from the FY20 report.

Total subscribers rose by 26% to 2.285 million. Australian subscribers increased by 26% to 914,000. UK subscribers rose by 32% to 613,000. New Zealand subscribers increased by 12% to 392,000. North American subscribers increased by 24% to 241,000. Rest of the world subscribers increased by 51% to 125,000.

Average revenue per user increased by 2% to $29.93, helping revenue grow faster than subscriber numbers. The gross margin percentage increased by another 1.6% to 85.2%, up from 83.6% last year.

EBITDA excluding impairments jumped by 52% to $139.2 million. EBITDA increased by 88% to $137.7 million.

Net profit went from a loss of $27.1 million last year to a profit of $3.3 million this year. Free cash flow climbed 320% to $27.1 million. Over time the Xero share price will follow the direction EBITDA, net profit and free cashflow.

In terms of the FY20 result, the effect of COVID-19 happened late in FY20 and only had a modest impact on the performance. But AMMR growth was hampered in March.

Xero CEO Steve Vamos said: “While COVID-19 brings uncertainty, our long term strategic ambitions are unchanged and we remain committed to our three strategic priorities: to drive cloud accounting around the world, grow the small business platform and to continue to build for global scale and innovation. Now more than ever, small businesses are recognising the benefit of being able to use the cloud to run their businesses and manage their finances.

Digitisation of tax and compliance remains a significant driver of demand for our cloud accounting solution during the financial year.”

Is the Xero share price a buy?

The FY20 report was solid, but trading in early FY21 has been impacted by COVID-19. Xero was unable to provide any guidance. It’s still aiming to be a long term focused, high growth business while being disciplined with costs and targeting allocation of capital.

Interest rates are very low, which does boost share prices in theory. The Xero share price does look a bit pricey at above $80 – what happens if subscribers close their business or at least stop paying Xero? Small businesses are seemingly doing it toughest during COVID-19.

If I were a Xero shareholder I’d definitely want to hold for the long term. But at this Xero share price, I think I would wait for another market pullback before buying. I’d also look at these other top technology shares:

Disclosure: at the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.

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