The Xero Limited (ASX: XRO) share price is under scrutiny after releasing its FY21 report which included growth like clockwork.
Xero’s FY21 result
The cloud accounting business reported that its operating revenue increased by 18% to $848.8 million (all figures are New Zealand dollars). Annualised monthly recurring revenue increased 17% to $963.6 million. That suggests there’s around 13% revenue growth for FY22 already baked in.
Operating revenue growth was largely supported by a 20% increase in subscribers to 2.74 million. Xero reported that its net subscriber additions decreased by 2% to 456,000, down from 467,000 in the prior year.
Average revenue per user (ARPU) decreased by 2% to $29.30. This suggests that more of its customers are smaller businesses that are utilising less of Xero’s overall offering.
Xero’s EBITDA (EBITDA explained) went up another 39% to $191.2 million. Net profit grew by more than $13 million to $19.8 million. Free cash flow more than doubled from $27.1 million to $56.9 million.
One of Xero’s most important financial metrics – its gross profit margin – saw further improvement, rising from 85.2% to 86% over the year.
Where is the growth occurring?
Xero is now a global business. It reveals to investors how many subscribers were added in each region.
Australian subscribers grew by 22% to 1.1 million, with revenue rising 20%. This was the best ever year for subscriber growth.
UK subscribers went up 17% to 720,000 and revenue grew by 22%. The second half saw a marked recovery, it was the second strongest six-month period in the company’s history.
New Zealand subscribers rose by 14% to 446,000 and revenue rose by 12%.
North American subscribers grew by 18% to 285,000, with a recovery in the second half. However, revenue only grew by 2% after the loss of revenue from bundling Hubdoc into Xero business edition subscriptions. It also lost Xerocon revenue (which is/was a large conference).
The rest of the world subscribers surged by 40% to 175,000 and revenue rose 27%. The largest contributors to growth were South Africa and Singapore.
Outlook and thoughts on the Xero share price
Xero is going to continue to focus on growing its platform, with a preference for re-investing profit to drive long-term shareholder value.
Total operating expenses, as percentage of operating revenue, is expected to be in a range of 80% to 85%, which is consistent with levels seen in the second half of FY21 and pre-COVID.
Then there’s integration costs for its acquisitions which will account for another 2% of operating expenses (or less). But Planday revenue should add 3% to operating revenue in FY22.
The Xero share price has done very well over the last year. But interest rates aren’t going to stay low forever. So, Xero won’t always command as high of a valuation (to revenue) multiple as it does today. However, that revenue does keep rising so there’s good support for the current Xero share price and it will help future growth for shareholders.
There are other ASX growth shares which may be better value today, but Xero is one of the highest-quality businesses around.
