UPDATE: Xero shares rise 6% as higher revenue brings maiden profit in sight

Thursday 11th May 2017

- Xero shares climbed 6 percent as the cloud-based accounting software firm moves closer to its first ever profit as customer numbers continue to swell and its 2017 full-year net loss narrowed as revenue grew.

The Wellington-based company said operating revenue was $295.4 million in the 12 months ended March 31, up 43 percent on the year earlier, or up 51 percent in constant currency terms. Its net loss was $69.1 million, 16 percent narrower than the $82.5 million reported in the prior period. The shares rose $1.30 to $23.15.

Xero's loss on an earnings before interest, tax, depreciation and amortisation basis narrowed to $28.6 million from $59.9 million. In the second half of the year, its ebitda, excluding share-based payments, turned positive at $1.6 million versus a loss of $17.4 million in the period a year earlier.

The company said it now has 1,035,000 subscribers, after adding 318,000 over the past year.

Chief executive Rod Drury declined to say when he expects Xero to post a profit: "I am very careful not to put dates on that sort of stuff."

Given the company was ebitda-positive in the second half of the year, excluding share-based payments, and the operating cash flow also moved into positive territory "you can see where we are making progress on all those things," he said. "It's a story of balance," he said, underscoring that the company's customer base has pushed significantly higher. "I don't think there's been a business operating at this size and scale out of New Zealand."

Market expectations, however, are for Xero to achieve a profit in the 2019 financial year.

"In the last two years we have added half a million customers," Drury told BusinessDesk. Five years ago Xero had around 50,000 customers and "we knew we had to make that massive investment in infrastructure because we knew we had to on-board that many customers," he said. "We have been really focused on making sure we can do what we need to do with the resources we have. That's driving great margin and getting us toward break even," he added.

Drury said he doesn't expect that expansion to slow down, with more potential in New Zealand, Australia, the US and the UK in particular "where we are the undisputed market leader."

The company didn't give any specific earnings guidance other than to say operating metrics are expected to improve in the 2018 financial year. It also noted that cash usage in 2018 (based on foreign exchange rates at April 1, 2017) is forecast to reduce from the 2017 financial year. In the current financial year operating cash outflow reduced to $4.4 million from $34.8 million in the prior year.

Looking ahead, Drury said innovation will continue to drive the company as it develops work around machine learning and artificial intelligence: "There are lots of ways we can expand the market now we have done the hard work of creating the core global accounting engine."

Given the speed of change, Xero is updating its software three or four times a day in different projects. "This continuous transition and this new way of working at speed is our competitive advantage," he said.

Drury also noted that the company's investor profile is starting to change as large funds who look for stability but also exposure to the cloud trend are joining the share registry. "This de-risks our business. These signals of getting close to breakeven, with the cash we have, are all good signs they like," he said.

(BusinessDesk)

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