Cloud Based SaaS Company Trading at Record Highs, Growing Strong Thanks to Strategic Investments

  • October 16, 2020 11:00 PM AEDT
  • Team Kalkine
Cloud Based SaaS Company Trading at Record Highs, Growing Strong Thanks to Strategic Investments

The cloud services market is the future of the way businesses operate, which has started to pick up, especially after the Coronavirus pandemic. A stock from this space that has seen its share price zoom by 45% in past 6 months to hit life highs. Stock performance backed by solid fundamental progress. Subscriber base and revenue surge over 51% and 43% respectively.

The global cloud services market is still in its growing stage with majorly big and established businesses taking advantage of its digital storage of data, global access with high-end encryption solutions etc. These functional capabilities added with cost benefits as compared to the traditional offline services is the major reason for businesses to adapt to this online regime.

One industry for which Covid19 has proved to be a blessing in disguise is the I.T industry under the umbrella of which the cloud-based services are expected to soar to new highs as businesses are forced to adapt to the new regime of digitization.   

The pandemic has also exposed the vulnerability of the businesses which are still operating in a traditional offline way, which could prove to be a catalyst for the industry going forward.

The cloud-based market is divided into many segments like, business process as a service (BPaaS), platform as a service (PaaS), software as a service (SaaS) and infrastructure as a service (IaaS). 

Xero is all set to take these businesses to the next level of ease with its stronghold in the SaaS segment.

Xero (ASX: XRO) provides easy to use beautifully designed cloud-based accounting software solution with a major focus on the small business. With the subscriber base of more than 2.38 million (as at 31st July 2020) and support for more than 800 apps on its platform with 200+ connections with banks and financial service providers, the company cannot go unnoticed.

The company is spreading its footprint into the capital lending platform space for small scale businesses

In the quest to help a small business grow and to address critical small business financial needs, the company has acquired a cloud-based lending platform Waddle, which helps small businesses access capital through invoice financing. The platform enables the delivery of tailored invoice financing solutions.  

Waddle already has its presence in this invoice based lending space, with a range Australia and the UK based banks and fintech companies on the platform which are eager to help these small businesses and lend them in a secured way by leveraging their accounting data.

The process is automatic and seamless, which keeps a lot of manual intervention aside and consequently saves cost and human resources for the entire ecosystem of lenders, platform and small businesses.

The total consideration for the buyout of Waddle stood at A$80 million, which includes A$31 million of upfront payment and subsequent earnout payment of A$49 million, based on product development and revenue milestones.

The company’s wide range of products features helps it to cater to numerous needs

Xero is not only aiming for providing the accounting and compliance solutions, but it intends to make the entire ecosystem around this to be easy and hassle-free. The host of features provided with its product also addresses the tedious and cumbersome work, which is associated with the account reporting and compliance adherence.

Some of the useful features rolled out by the company are 

  1. Bank connections

It helps the business to directly link their multiple bank accounts to Xero for easy and hassle-free transactions. The trace of money coming in and going out can be tracked at a glance. Direct bank feeds, automatic updates, reconciliation of bank transactions etc. are some other features.

 

  1. Xero Expenses 

It helps to track and manage the businesses’ employees claims, scan receipts, smart reconciliation, monitors spending in real-time.

 

  1. Multiple currency support

The software allows for multiple currency support to track gains and losses in different currencies, which is an important feature for cross-country businesses.

 

  1. Mobile app

For added convenience, the mobile app is probably the best solution for connecting with the business while on the go. All the major features are also available in the app, which helps to conduct and keep an eye on the business from virtually anywhere.

 

  1. Reporting

Reporting of financial statements and budgets is probably one of the most tedious jobs for a small business owner, but with reporting feature these statements can be made in real-time with ease or even the data can be shared with an advisor to curate the report.

 

Xero’s subscriber base continues to grow across all target markets, even during the initial phase of the pandemic

As the pandemic is still not over yet, and businesses continue to opt for low-cost online accounting solutions, Xero is on a spree to tap these potential subscribers. In the first four months of FY21 alone, the company has added 96k subscribers with strong net additions coming from their Australian and New Zealand market. The company’s massive efforts to capitalize on the opportunity across target markets resulted in net addition in the subscriber base.

Image Source: Xero’s ASX update

 

In FY20, the net addition of 188k and 41k subscribers were added from Australia and New Zealand, respectively. These markets have a cloud adoption rate of more than 50%.

 

In the United Kingdom and North America, where cloud adoption rate is less than 20%, the company added 150k and 46k respectively.

 

Xero had its own holistic approach to tackle the Covid19 pandemic

Xero focused quite intensely and had a well-rounded holistic approach to tackle the situation, considering its employees, partners and subscribers. 

 

Continuous product development is at the heart of Xero, which continued to be seen during rough times too. Xero made some changes to their existing products to better meet the current demands for leave entitlements, wage subsidies, tax and other government initiatives. Its short term cash flow features and financial dashboard also rolled out to Business Edition customers.

 

Strategic investments around these challenging times is the way to secure a brighter future  

When the businesses are cutting down on costs to minimize the cash outflow, Xero is going the opposite way with its strategic investments to not to let this once in a while opportunity go bland. The company has set three major priorities under which all the strategic investment would take place

.

  1. Driving cloud-based accounting

The focus on driving the cloud accounting to the masses would lay the foundation for the subscriber base. For this, investing in the products itself is a no-brainer for the company. Focus on extending the reach of the products to the small businesses to cater to the higher number of businesses is there with the addition of multi-lingual support to serve businesses in their native language.

 

  1. Growth of small business platform

Small businesses are short of many resources, apart from just accounting and compliance needs. They need payment solutions or maybe easier access to capital. Xero also has some plans in the pipeline to cater to these needs. Waddle has recently been acquired to provide easier route to secure small capital.

 

  1. Innovating and global operations

The holistic view of the company is to continue to increase the scale of its operations and serve more geographies led by innovations. For this, Xero aims to acquire and retain the highest quality of talent to drive the business. A focus on the optimization of operational and financial structure is also there to move in sync with the overall strategic plans and investments.

 

Continued growth on a global scale has also shown up in the numbers.

With 467,000 net addition of subscribers, the company ended FY20 with 2.285 million subscribers. The average revenue per user (ARPU) was reported at $29.93, up by 2% YOY, after -1% constant currency change. The company has consistently improved its revenue in the past few years.

 

The operating revenue was much better at $718.2 million, which saw an increase of 30% YOY, after accounting for positive constant currency change of 29%.

Average monthly recurring revenue (AMRR) stood at $820.6 million, up by 29% YOY with 25% positive constant currency change.

 Image Source: Xero’s ASX update

 

The company posted EBIDTA at $137.7 million which is massively up by $64.6 million from the last year. The net profit after tax of $3.3 million was a turnaround figure after posting a net loss of $27.2 million last year.

 

The cash position of the company has also improved 

The free cash flow of the business also improved massively from $6.4 million to $27.1 million, which is 3.8% of operating revenues. Operating cash flow saw an increase of 46% from $114.2 million in FY19 to $166.6 million for FY20.

Image Source: Xero’s ASX update

 

The net cash position also improved from $100.6 million last year to $111.5 million in FY20. At the end of the financial year, the total available liquid resources were valued at $686 million, including $150 million of undrawn committed debt facilities.

 

Outlook

Due to the massive damage on the global scale, and a lot of uncertainty in the future, Xero refrains from commenting on the expected performance of FY21, until the sky gets clear.

 

Although Xero’s fundamental vision remains the same to be a long-term growth-oriented business and to respond to any threat or opportunity in the future, it remains focused towards disciplined cost management and targeted allocation of capital. These survival measures are what keeps the company agile and well prepared towards any uncertainty, the result of which has already been seen in the financial numbers.

 

The performance has not been visible in just the numbers; it has reflected in the Xero’s share price as well.

Price Performance Chart (Source: Refinitiv Eikon Thomson Reuters)

With the market capitalization of $16.49 billion, the stock price is currently trading at $115.08. The stock has already delivered a healthy return of around 45% in the last six months, gaining steam from $79 to $115 odd levels. During the course of this rally, the stock also made a new 52-week high of $119.88 on 14th October 2020. In the past 5 years, shares of XRO have appreciated by 630%, beating both the sector index and the benchmark index by a wide margin as seen in the graph above.

All financial information pertains to New Zealand Dollar unless stated otherwise.

 

 

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Disclaimer
The video has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. The above video is NOT a solicitation or recommendation to buy, sell or hold the stock of the company (or companies) under discussion. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site.

 

   
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