The Xero Limited (ASX: XRO) share price has fallen 7% in reaction to the FY24 report.
Xero is one of the world’s largest cloud accounting software businesses.
Xero share price
FY24 result
These are some of the numbers for the six months to September 2023, compared against the same period a year ago:
- Subscribers increased 13% to 3.95 million
- Average revenue per user (ARPU) grew 6% to $37.38
- Operating revenue increased 21% to $800 million
- Gross profit margin increased from 87% to 87.5%
- EBITDA (EBITDA explained) jumped 90% to $206 million
- Net profit after tax (NPAT) grew $70.2 million to $54.1 million
- Free cash flow increased $91 million to $106.7 million
The business saw its net subscriber additions decrease by 9% to 204,000. Xero’s subscriber growth rate is slowing, but it continues to deliver good growth.
Xero said it’s trying to balance growth and profitability, which is why its profit metrics saw substantial growth in this result, in percentage terms. The free cash flow margin grew to 13.3%, up from 2.4% in HY23.
ANZ subscribers rose 13% to 2.27 million, with ARPU growth of 4% to $36.99.
International subscribers reached 1.67 million, while ARPU improved 8%. UK subscribers increased 13% year on year, North American subscribers rose 12%, though Canada subscriber growth was “disappointing”. The rest of the world saw total subscriber growth of 10% year on year, with South Africa the largest driver of growth.
Outlook for the Xero share price
The company reported that its annualised monthly recurring revenue (AMRR) increased another 19% to $1.77 billion, so this implies that revenue can rise at a good price over the next 12 months even if its subscriber numbers stay the same.
Xero talked about how it was going to remove a small pool of “long idle, lower value” subscriptions held by digitising and bookkeeping practices. Removing them will “support an evolution of Xero’s sales motions by allocating resources towards improving mix and working with accountants and bookkeepers to acquire their Xero inventory through smaller and more frequent sales motions.”
This pool is estimated at 150,000 to 200,000 subscriptions, with the majority across North America and the UK. Xero plans to remove these after the end of FY24. These subscriptions had an average ARPU of $3.70, and the removal would increase group ARPU by approximately 3% to 5%. The removal should have “minimal impact” on FY25 revenue.
It will look to keep investing in the US, but “targeted” and “at a reasonable rate” relative to the top line growth generated.
The Xero share price could also benefit from further use of AI, including conversational AI to better assist customers. AI can also help improve the productivity of Xero’s teams to deliver faster for customers.
Xero said it’s targeting an operating expense to operating revenue ratio in FY24 of around 75%, which is better than Xero’s result for FY23. In the long-term, it wants to keep improving this ratio, though a specific timeline has not been set.
I think Xero is a great business , though in this high interest rate environment I’m cautious about thinking this is the best price over the next 12 months, though it’s better value than it was yesterday.
