Is Xero Still A Long Term Growth Star?

  • Oct 08, 2018 AEDT
  • Team Kalkine
Is Xero Still A Long Term Growth Star?

Through its cloud-based accounting software, Xero Limited (ASX: XRO) connects small businesses to their advisors. Due to the operating efficiencies across the business, the company reported its first positive EBITDA of $26.0 million in FY18 compared to the loss of $28.6 million in FY17. On the balance sheet front, the current ratio stood at 1.93x in FY18. The company was having cash and short-term deposits of $80 million by the end of FY 2018. Cashflow from operating activities was $41.2 million in FY 2018 which is $45.6 million higher than last year. However, cash outflow in FY 2019 is forecasted to be reduced from FY 2018. Xero witnessed subscriber base growth which has added 351,000 new subscribers totaling to 1,386 million at 31st March 2018. The company started its new office in new Denver which is in line with company’s focus on expanding the Americas business. The new office space can accommodate 300 employees which will help the company to realize growth and expansion in North America. During the year, the group increased its footprints in Australia, New Zealand, and the United Kingdom, and continued to grow its presence in the Americas, South East Asia, and South Africa regions. Xero’s SaaS model is focused on acquiring subscribers economically at scale, increase revenue per subscriber, grow gross margin of the company, have retention at scale and generate long term value for the company. The company also formed a strategic alliance with Gusto which is a leading full-service US payroll platform, to integrate Xero’s platform in the US with Gusto which will provide customer access to full service payroll in all 50 states and this alliance will bring in important financial benefits and deploy the resources efficiently to execute the company’s growth strategy.

On 5 October 2018, the company announced the settlement of $300 million convertible notes which will provide additional financial flexibility to the business. The company is planning to use the proceeds for acquisitions, investments, strategic and complementary business and assets which are in line with the company’s strategy to drive long term share holder value.    

Meanwhile, the share price has risen about 8 percent in the past three months as of 5 October 2018. The stock was lately seen to trade close to 7.8% discount to 12-month high of $52.57 against the 87.8% premium to 12-month low of $25.828. Judging by the improved financial performance, increased subscribers base, increased financial flexibility and historic performance of the stock, it is expected that shares price of the company will get a boost in the future. The group which has a market capitalization of  $ 6.81 billion, was down by 4% in last five days in terms of the stock price. Given the fact that the group is aiming to continuously build up on subscriber base, grow revenue per subscriber with improved gross margins and better execution of strategy, the group is expected to trail back to higher levels. Additionally, the drive towards adoption of cloud accounting for existing and new markets and enhanced global footprint, is expected to prove favorable. The lately announced acquisition of Hubdoc is anticipated to streamline platform strategy. While FY19 cash outflow is estimated to be below FY18, the group still aims to witness cash flow break-even under the prevailing cash balance position.

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