Xero CEO Steve Vamos eyes more acquisitions despite share plunge

The software firm’s chief executive Steve Vamos says he’s not worried about the share price, and won’t be backing down from big acquisitions.

Xero chief executive Steve Vamos says the company will continue to pursue acquisition opportunities.

Xero chief executive Steve Vamos says he’s not perturbed by a sinking share price — and won’t be backing down from making further acquisitions — after his software company hit 52-week lows on Thursday and was the worst-performing stock on the ASX amid a wider tech rout.

The New Zealand-based outfit lost more than 10 per cent of its valuation on Thursday, equating to more than $1.5bn in shareholder value, after posting strong FY22 revenue growth and a full-year loss.

Local technology stocks, of which Xero has been a star performer, suffered their worst single-day losses since early in the pandemic on Thursday.

The company slumped to a new 52-week low of $75.80, before dipping back up slightly to close at $76.90.

“We just have to focus on the fundamentals of our business,” Mr Vamos said in an interview. “And that is about pursuing a really big opportunity that we have, making sure we continue to execute our strategy and making sure that we do that in a very focused and responsible way.

“You know, we‘ve always done what we’ve said we’re going to do, and we’ll continue to do that. And the foundation of that is being disciplined in the way that we allocate capital and the way that we manage our business in a more broad and general sense.”

Thursday‘s full-year results were a mixed story for Xero globally, with the software company growing its overall subscriber base by 19 per cent but facing challenges in international markets particularly in the UK and in the US, where it’s up against the larger incumbent Intuit.

Xero CEO Steve Vamos.

It reported a 29 per cent lift in revenue to $NZ1.1bn ($1bn) and a 28 per cent climb in annualised monthly recurring revenue to $NZ1.2bn. It lifted earnings before interest, tax, depreciation and amortisation (EBITDA) by 11 per cent to $NZ212.7m and posted an overall net loss of $NZ9.1m.

“Overall we‘re pleased with North America in the half, and it’s two quite different opportunities and markets in Canada and the US,” Mr Vamos said. “Subscribers are a bit soft in the UK, and it was a disappointing half in the context of adding subscribers, and quarter three in particular was quite challenging for a bunch of reasons, but it picked up the quarter four.

“There‘s been a challenge in engaging with partners and helping them transform their practices when we can’t meet them face-to-face. And that has an impact on channel productivity. And we didn’t see as much pick-up on the initiative around making tax digital for companies with less than £85,000 of income.

“Long-term we feel really positive and adding 530,000 in the year was a record and seeing ARPU (average revenue per user) grow was good too.”

Xero has been on an acquisition spree over the past 12 months, buying up Planday, Locate Inventory, Tickstar and TaxCycle, along with Waddle in 2020, and Mr Vamos said that he remains on the look-out for attractive opportunities.

“The first question we ask strategically is what is it that we‘re looking for that can really create value for our customers and ultimately for Xero? What’s the nature of the business and the culture that it has? And is that culture one that will work with the Xero culture, and on both sides,” he said. “And I think I can tick those boxes with confidence in the case of the acquisitions we have made today, and we will keep considering acquisitions when something comes up that we think is compelling.

“It will be a continuing effort of keeping our eye on it.”

Despite the share slump the full-year results beat analyst consensus across most measures. Patrick Stokvis, vice president at research firm Third Bridge, said Xero and Intuit’s battle for market share in the UK may intensify over the next three years whereas the playing field in Australia has continued to shift in Xero’s favour.

“UK subscriber ARPU growth will be supported by module and third-party app uptake, rather than price increases, while in ANZ our experts see continued price power despite the entry of new players such as Hnry,“ Mr Stokvis said.

“Xero should be able to continue growing subscriber volumes across Singapore, Hong Kong, and Southeast Asia, with room for cloud penetration to double over the next two to three years in these markets.

“However, concerns remain around Xero‘s perceived focus on the US where they have hitherto faced an uphill battle versus incumbent Intuit.”

Analysts at Goldman Sachs said the results were “solid” while Wilsons’ described the results as ”very robust” with strong top-line growth driven by strong subscriber growth supplemented by above average price increases.