By Nick Bonyhady and Millie Muroi
Accounting software maker Xero has become the latest technology company to announce major staff cuts, telling investors on Thursday it would axe up to 800 roles.
ASX-listed Xero employed 4915 people in September last year, according to its latest company filings, which means the cuts represent about 16 per cent of its global workforce. It’s not clear yet how many positions will be affected in Australia.
Xero CEO Sukhinder Singh Cassidy said the job cuts were “difficult but necessary steps”.Credit: AFR
The move highlights the deepening downturn in the technology sector, which surged in the pandemic amid record-low interest rates and intense investor demand, but has now come back to earth. Australia’s most successful technology company, Atlassian, said it would cut about 500 positions earlier this week.
Investors welcomed Xero’s cost cuts, with its shares surging 9.8 per cent to $78.62 after the announcement. The stock had plunged from a high of $154.47 in November 2021 to $79.62 on Wednesday’s close, hitting a low of $70.11 earlier this year.
In a statement to the ASX, Xero said the job cuts, which will affect between 700 and 800 positions, would help to streamline its business and improve profitability.
Xero chief executive Sukhinder Singh Cassidy, who took the helm only last month, said the decision had not been made lightly. In a message to employees – dubbed “Xeros” – on Thursday, she said she was deeply sorry to be taking this step. “As a leadership team and board, we are responsible for the decisions that led us here,” she said.
‘Externally, the broader tech landscape favoured high growth in this period; internally, we were less clear and measured in the rate of our hiring investments.’
Sukhinder Singh Cassidy, Xero chief
A consultation process with people potentially affected would begin next week, but “it may take up to four weeks for some people to have this conversation”, she said.
On a call with investors on Thursday, Singh Cassidy said the cuts would be across all Xero’s functions and regions. “I will note, of course, that proportionally we have higher head counts in some regions and some areas, so you can expect that there’ll be some proportionality there,” she said.
Singh Cassidy also noted there would be a deeper redesign of Xero’s technology, which “may result in role impacts of a smaller magnitude” in that part of the business.
Affected employees will be given at least 12 weeks’ pay, comprised of a minimum eight weeks’ severance with at least four weeks’ notice and additional severance based on tenure. They will also receive restricted stock unit shares for March 31, 2023, and career transition support.
The staff cuts come as the New Zealand–based company faces challenges in the economic downturn following a period of rapid expansion. It booked a net loss of $NZ16 million ($14.8 million) in its last financial year after operating expenses blew out by almost a third to $NZ552 million.
“As Xero continued to scale in recent years, we have grown our head count, areas of focus and cost base at a faster rate than our revenue,” Singh Cassidy said. “Externally, the broader tech landscape favoured high growth in this period; internally, we were less clear and measured in the rate of our hiring investments.”
Finance chief Kirsty Godfrey-Billy said most of the savings from the job cuts would flow through in the six months through September – Xero’s first half – and that they would improve the company’s profitability significantly across 2024.
In May 2021, then chief executive Steve Vamos flagged a surge in mergers and takeover deals. But Xero went in the opposite direction on Thursday, announcing it would exit Waddle, a cloud-based lending platform it acquired in 2020. Godfrey-Billy said Xero would write down $NZ30 million to $NZ40 million on the investment on the way out.
Analysts have broadly taken Xero’s cost-cutting initiatives as a positive for investors.
In a research note, Jarden director Elise Kennedy wrote that “cost-out was an important area that Xero had lagged its peers in”, but that her firm had upgraded its rating of Xero after the announcement.
“We saw the incoming CEO change as a potential catalyst to delivering a change in strategy towards cost-out and more free cash flow generation,” she wrote. “This marks a step-change for Xero, and we think highlights a new willingness on the part of Xero to make change towards profitability.”
RBC Capital Markets analyst Garry Sherriff wrote in a research report that Xero’s reshaping and refocusing to achieve better balanced growth and profitability were favourable moves.
“Short-term pain with one-off restructuring costs between $25 million and $35 million in financial year 2023 sets up positive operating leverage in financial year 2024,” Sherriff wrote. A business with high operating leverage generates sales with a high gross margin and low variable costs.
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