Xero’s (ASX:XRO) FY21 results fail to cheer the market despite solid H2 recovery

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  • Xero Limited announced its FY21 results with impressive growth in operating growth and subscriber base, driven by solid performance in Australia and New Zealand.
  • The Company witnessed a remarkable recovery in international markets in H2 following a lacklustre performance in the first half due to the pandemic.
  • The results demonstrate the tech player’s solid position to meet the rapidly- volving customer requirements in an environment that has seen growing adoption of cloud-based services.

Cloud-based accounting software provider Xero Limited (ASX:XRO) announced a robust FY21 performance led by a remarkable recovery in the second half. While COVID-19 squeezed Xero’s top-line growth in H1, the Company generated excellent revenue growth and added a record number of subscribers in a 6-month period in the second half (a whopping 288,000 net additions).

XRO’s total revenue grew by 18% to NZ$848.8 million. The Company saw continued sales upsurge in Australia and New Zealand and a remarkable recovery across International markets in H2 FY21.

International net additions in H2 FY21 more than tripled compared to H1 FY21. Over the entire year, total global subscribers grew 20% to reach 2.74 million.

The FY21 performance is summarized below:

Copyright © 2021 Kalkine Media (Data Source: XRO Announcement dated 13 May 2021)

XRO’s results show that the Company is well placed to meet fast-evolving client needs in an ecosystem where the importance of integrated digital tools is proliferating.

Despite the notable performance, XRO shares took a tumble on the ASX and were trading 10.536% lower at AU$120.670 (at AEST 1:54 PM).

XRO’s peers include Wisetech Global Limited (ASX:WTC), Altium Limited (ASX:ALU), and Technology One Limited (ASX:TNE).

What drove the FY21 performance?

Growing awareness among small businesses contributed to a 38% increase in total lifetime value to NZ$7.65 billion. Xero's 20% subscriber growth resulted in a 17% increase in AMRR to NZ$963.6 million.

Xero’s management adopted a responsive spending approach in H1 FY21 by lowering its sales and marketing spend. Throughout FY21, we could see strict control of expenses and capital allocation. The product spend increased to 36.7%.

Copyright © 2021 Kalkine Media (Data Source: XRO Announcement dated 13 May 2021)

Other highlights of FY21

In addition to the financials, other notable highlights from the financial year include:

  • XRO undertook a successful capital raise of US$408 million via zero-coupon convertible bonds.
  • Steven Aldrich, a US-based technology and product development expert in small business services, joined the Board in October 2020.
  • The Company now has a global ecosystem of 1,000+ connected apps and 300+ connections to banks and financial service partners.
  • XRO was added in the 2021 Bloomberg Gender-Equality Index as one of only 13 companies headquartered in Australia or New Zealand.
  • Xero also qualified as a carbon-neutral Company before the Australian Government’s Climate Active program.

ALSO READ: Why Xero (ASX: XRO) plans to acquire e-tech business Tickstar

Outlook – The way ahead

  • XRO's acquisition of Planday is expected to contribute about 3% to operating revenue growth in FY22.
  • The Company expects total operating expenses to be 80-85% of operating revenues. This shall be consistent with H2 FY21 levels and the pre-pandemic period.
  • Integration costs relating to the three acquisitions announced during FY21 are expected to increase total operating expenses percentage by up to 2% for FY22.
  • Small businesses seek services beyond cloud accounting, and Xero shall respond to this with continued investment in its platform and products and make targeted acquisitions.
  • The Company is looking to drive its small business platform and cloud accounting to the next level. It seeks to build its platform innovatively for a global scale.

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