Xero targets growth in the US after restructure

The boss of Xero says a restructure earlier this year is bearing fruit for the accounting software firm as it sets a new strategy for growth in the US market.

Sukhinder Singh Cassidy took over as Xero chief executive in February.

The boss of accounting software firm Xero says a major restructure earlier this year is beginning to bear fruit for the company as it targets growth in the lucrative US market.

Xero chief executive Sukhinder Singh Cassidy executed the restructure in March, just weeks into her tenure at the ASX-listed technology giant, shedding 15 per cent of the company’s staff - around 800 jobs - amid the tech downturn.

Speaking after the Wellington-based company reported its interim results on Thursday, Ms Singh Cassidy said that while the restructure was a “very difficult” decision, it had enabled the company to become more flexible and open to new opportunities for investment.

“I think first and foremost it reset our operating cost base and set an expectation that Xero can be both a strong grower and profitable - it set that expectation internally with employees and externally,” she said.

“While I fully acknowledge it was a very difficult decision, and difficult for Xeros (Xero staff), I think the second thing it did is it allows us to be more dynamic in capital allocation going forward.

“I hope that reducing our fixed costs allows us to be more variable and responsive to opportunities for investment as and when we see them.

“I think of it as internal flexibility and then our balance sheet gives us a good amount of flexibility for things like M&A.”

Xero reported a $NZ54.1m ($49.9m) net profit for the six months to September, up from a $NZ16.1m loss in the first half of 2022-23, when the company was hit by a hefty writedown to its invoice lending subsidiary Waddle, which it later sold to Commonwealth Bank.

Operating revenue was up 21 per cent to $NZ799.5m, helped by a a 13 per cent increase in subscribers to 3.95 million - which was just below analyst estimates of 3.97 million.

Annualised monthly recurring revenue, a key metric for cloud software firms, grew 19 per cent year-on-year to $NZ1.77bn, while earnings before interest, taxation, depreciation and amortisation rose by 90 per cent to $NZ206.1m.

Despite the improved performance, Xero shares were trading 12.8 per cent lower on Thursday at $99.99.

Ms Singh Cassidy said she was not concerned that the growth rate in new subscribers had fallen for a fourth consecutive interim period, saying she cared more about striking the right balance of “volume growth and engagement”.

However, Xero has put the US market at the centre of its global expansion plans, and has undertaken a review of its approach in the US after acknowledging its been “inconsistent and unfocused” in the past.

“What’s true is in the past we’ve had a lot of inconsistent motions, and so I can understand when investors go what is going on in the US?” she said.

“But I think that despite having inconsistent motions, we have grown the business in a market that is lower cloud penetration overall ... and it’s pretty complex.

“Going forward I think we’ve pointed to where we see the opportunity in our businesses - it’s stick focused to things that are working, become even more focused on deeper penetrating a couple of segments where we see good product market fit and opportunity, and that’s a way you can grow your business with discipline, as opposed to trying to do everything all at once in the US which I think is an expensive strategy.”

Xero did not provide firm guidance for the full year, but reaffirmed its target for an operating expense to operating revenue ratio of around 75 per cent. The ratio came in at 79.1 per cent in the first half.

Ms Singh Cassidy said that while the broader tech sector faced several global headwinds, Xero was operating in a segment with strong growth potential.

“I do believe that the areas in which we play have macro tailwinds, and the level of penetration overall of tech in these sub segments is pretty low still,” she said.

“When there’s geopolitical instability or economic uncertainty, or, quite frankly, areas of tech that are more penetrated, I like the area in which we play because it still feels like there’s a lot of white space, and what we’re competing with is still spreadsheets.”