By Cara Waters
Xero chief executive Steve Vamos has dismissed concerns about slowing revenue growth at the ASX-listed cloud accounting giant and says small business will drive the economic rebound in the post-pandemic world.
The platform reported slowing revenue growth in its full-year results, sending its share price 13 per cent lower on Thursday closing at $117.39 amid a broader tech sell-off across the Australian market.
“Xero is a company focused on the long term, orientated towards growth and really driving to support customers in a small business segment,” Mr Vamos said. “It’s a segment that has tremendous opportunity for usage of cloud-based software services.”
Xero chief executive Steve Vamos said he believes small businesses will be a driver of economic growth post pandemic. Credit: AFR.
Xero’s results took a hit from COVID-19 in the first half of the year and although it recovered in the second half to book a 39 per cent jump in its earnings before interest, tax, depreciation and amortisation (EBITDA) to $NZ191.2 million ($177.3 million), it missed analyst consensus estimates by 20 per cent.
Mr Vamos said Xero’s slowing revenue growth reflected its focus on investment for growth. “It’s a combination of essentially spending more money on the acquisition of customer sales, marketing, and continuing to grow the business and product,” he said.
The company reported its revenue increased by 18 per cent to $NZ848.8 million over the past year and made a profit of $NZ19.8 million for the year, up from $NZ3.3 million the previous year.
While Xero reported record subscriber numbers of 2.74 million, its closely watched growth rate for new subscribers globally slowed. The rate for new subscribers in the United Kingdom declined by 29 per cent over the year and in the United States it dropped 4 per cent. However in Xero’s more established home markets of Australia and New Zealand growth was up 7 per cent and 32 per cent, respectively.
Mr Vamos said it had been challenging to increase subscribers in the first half of the year globally.
“For the first half, particularly in the northern hemisphere it has been a tougher environment outside Australia and New Zealand as we know so the first half was subdued but the second half was very strong,” he said.
“It was pleasing to see growing momentum as the year progressed after the initial disruption of Covid-19,” he said.
He pointed to Xero’s completion of a significant capital raising in November and its acquisition of workforce management platform Planday, e-invoicing company Tickstar and invoice finance startup Waddle as “by far the most productive period of mergers and acquisitions we have had to date.”
Steven Ng, co-founder and senior portfolio manager at Ophir Asset Management, said the market had clearly looked past the better-than-expected subscriber growth and focused on EBITDA failing to meet expectations.
“EBITDA missed as they increased spending in the second half of the year on R&D and sales as conditions started to normalise,” he said.
However, Mr Ng said Ophir still saw a positive outlook for Xero as the big levers of growth were still the digitisation of accounting software globally and the extension into new products and services.
“The market will now be rebasing sustainable margins lower but we still see a bright outlook on subscriber growth, high customer retention and growing revenue per users as new products and services are rolled out,” he said. “This should all drive share value higher over the medium term.”
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