Investors gave Xero's solid rebounding interim results, released on Thursday, a thumbs-down. Despite a strong recovery from significant write-downs a year ago, the shares were down more than 5% by around 11 a.m., Sydney time. This decline was much larger than the broader market, which was down by around half a percent during the same period.
Xero, based in New Zealand, reported a 21% rise in operating revenue (20% in constant currency) to $NZ800 million and a 90% surge in earnings before interest, taxes, depreciation, and amortization to $NZ206 million from the September 2022 half-year results. This performance made the share slide somewhat perplexing, given that expectations were high for the tech stock, following a year of skyrocketing share price gains and promises from their new CEO, Sukhinder Singh Cassidy, to prioritise profitability over growth at any cost.
Xero attributed the improvement to its "ongoing focus on balancing growth and profitability," resulting in a free cash flow increase to $106.7 million, representing a free cash flow margin of 13.3% compared to 2.4% in the prior period. The company also reported that its net profit had increased to $54.1 million, compared to a net loss of $16.1 million in H1 FY23.
Ms. Cassidy stated in the release that the company had "demonstrated good momentum this half" and emphasised their commitment to becoming a higher-performing SaaS company while balancing growth and profitability.
For 2024, Xero revealed a modest ambition to improve returns by controlling costs and boosting margins, aiming for an operating expense to operating revenue ratio in FY24 of around 75%, which would be an improvement from the 79.1% in the six months to September.
The operating margin for the latest half included costs associated with Xerocon Sydney and support for the FIFA Women's World Cup 2023. Xero reported that total subscribers had increased by 13% to 3.95 million, with annualised monthly recurring revenue (AMRR) growing by 19% to $NZ1.8 billion (22% in CC). Additionally, total lifetime value (LTV) grew by 14% (17% in CC) to $NZ14.8 billion, with average monthly churn remaining low at 0.94% and average revenue per user (ARPU) improving by 6% (8% in CC). The company also noted solid growth in new subscribers in Australia and New Zealand, as well as internationally, along with significant revenue increases.
