The Xero Limited (ASX: XRO) share price has jumped 7% after the ASX tech share reported its 2024 financial year result.
Xero is a global cloud accounting provider with a significant market share in Australia, New Zealand and the UK.
Xero FY24 result
Here are some of the financial highlights for the 12 months to 31 March 2024:
- Operating revenue increased by 22% to $1.7 billion
- Subscribers rose 11% to 4.16 million
- Gross profit margin improved 0.9 percentage points to 88.2%
- Adjusted EBITDA increased 75% to $526.5 million
- Operating profit jumped 346% to $255.7 million
- Net profit after tax (NPAT) improved $288.2 million to $174.6 million
- Free cashflow jumped 234% to $342.1 million
Xero continues to grow, though it’s now growing at a slower pace. The net increase in subscriber numbers was 419,000, which was an 11% smaller rise than the increase in FY23.
Pleasingly, the free cashflow margin was 20%, up from 7.3% in the prior period.
However, the average revenue per user (ARPU) increased at a strong pace, rising by 14% to $39.29. I think this metric could be increasingly important for driving the Xero share price higher in the medium-term.
The company has baked in more growth over the next 12 months thanks to its annualised monthly recurring revenue (AMRR) rising 26% to $1.96 billion. If its AMRR didn’t change during FY25, it seems it would generate $1.96 billion of annual revenue in FY25, a rise of 14.6% compared to FY24.
The increasing ARPU and ongoing subscriber loyalty has increased the total lifetime value of subscribers to $15.5 billion.
Regional breakdown
Australia and New Zealand saw revenue growth of 22% to $969.9 million, with total subscribers rising 2.4 million. Australia saw subscribers increase 205,000 to 1.8 million. New Zealand experienced net subscriber additions of 38,000.
In Xero’s international markets, the company generated revenue growth of 24% to $743.9 million and subscribers increased to 1.8 million. The UK saw net subscriber growth of 107,000, reaching 1.1 million. In North America, there were 38,000 net subscribers to reach 422,000 subscribers. The rest of the world subscribers increased by 31,000 to 285,000.
Xero was pleased with its international growth – the US saw both subscriber growth and ARPU expansion.
Outlook for the Xero share price
Xero said it has the opportunity to double the size of its revenue and deliver on the ‘rule of 40’ over time, that rule is the sum of its annual revenue growth percentage in constant currency terms, plus the annual free cashflow margin percentage (of revenue) being above 40. It will balance subscriber growth and ARPU expansion.
The ASX tech share is expecting the total operating expenses as a percentage of revenue to be around 73% in FY25. This compares to 73.3% in FY24. The product design and development costs as a percentage of revenue is expected to be higher.
I think Xero is a great business and it’s finally showing the level of profitability it can make. Profit can keep rising, but the market is pricing the ASX tech share on a high valuation. It’s valued at 55x FY24’s free cashflow.
There are other ASX growth shares that I believe look cheaper and have more growth potential.
