Xero records maiden profit but warns of coronavirus hit

Accounting platform Xero has swung to a maiden full year profit of $NZ3.3 million ($3.03 million) but warned the coronavirus pandemic will take a toll on its numbers for financial year 2021.

Xero was in the black for the first time for the 12 months through 31 March, compared to a net loss of $NZ27.1 million in fiscal 2019. Operating revenue for the period rose 30 per cent to $NZ718.2 million, slightly below analysts expectations of $NZ727.4 million.

Xero chief executive Steve Vamos said the coronavirus pandemic was a difficult time for many Xero customers. Credit: Jessica Hromas

However, Xero withdrew its guidance on Thursday, with its annualised monthly recurring revenue taking a hit in March as the coronavirus pandemic took hold.  

In a call with analysts chief executive Steve Vamos said the outbreak was having a widespread impact on the small businesses that make up the bulk of Xero's customers.

"The environment has evolved quickly over the last couple of months and has been felt in every aspect of our lives, this is particularly the case for our small business customers and advisers," he said. "Many customers and partners are having to adapt the way they operate while investing enormous effort to survive at this difficult time."

Mr Vamos added that despite the uncertainty created by the coronavirus outbreak Xero's strategic ambitions remained unchanged: to drive cloud accounting around the world, grow the small business platform, and to continue to build for global scale and innovation.

Xero grew its total subscribers by 26 per cent to 2.285 million in the full year. Its global push has also reaped results with subscriber numbers growing by 31 per cent in the United Kingdom and 51 per cent in those countries outside the UK, Australia, New Zealand and North America.

Xero continues to struggle in North America where its revenue was 15 per cent below analysts' forecasts.

Mr Vamos told analysts it was too early to detail the impact of coronavirus on the business and said there would be some upside to the crisis.

"The effect of Covid 19 we expect will accelerate the adoption of digital business and cloud platforms across the small business sector," he said. "We are also observing that people concerned about their employment prospects are now really considering starting their own business and these new businesses are more likely to use the support of cloud technology."

However, Andrew Mitchell, fund manager at Ophir, which invests in Xero, said Xero's subscriber growth will take a hit as a result of coronavirus.

"The standout risk for Xero at the moment is the extent and duration of business closures, a reduced number of new businesses and slowing subscriber growth," he said. "Business customers might de-prioritise a move to cloud accounting software as they are faced with more immediate threats such as improving cash flow, cost management and business survival full stop."

Investor John Hempton of Bronte Capital was also concerned with the growth rate, saying he was "pissed off" that Xero was chasing profits instead of new subscribers.

"The growth rate has clearly slowed at the moment, for good reason but the end game is better than anyone imagined and the reason is New Zealand," he said.

Mr Hempton said Xero's latest subscriber figures showed Xero had plenty of room for further growth, with a Xero subscription for every 27 people in Australia in comparison to one for every 12.5 people in New Zealand.

"Saturation is further away than you could imagine," he said.

Xero's shares ended the session 4.7 per cent weaker at $79.77.