Xero closes in on maiden profit with positive annual earnings; stock rises to record

Xero accounting. Photo by Lynn Grieveson

Xero is closing in on generating a maiden profit after delivering its first positive operating earnings with wider gross margins and continued subscriber growth in a year that saw founder Rod Drury step back from the day-to-day business.

The Wellington-based company narrowed its annual loss to $27.8 million, or 20 cents per share, in the 12 months ended March 31, from $69.1 million, or 50 cents, a year earlier, its annual report shows. Having accumulated $334.8 million of losses over the past decade, Xero posted its first positive earnings before interest, tax, depreciation and amortisation of $26 million in the year on a 38 percent gain in operating revenue to $397.7 million and a 34 percent gain in subscriber numbers to 1.39 million.

Xero said it has made a conscious effort to improve efficiency in the period, something often put to one side when companies are in expansion mode, and the accounting software developer widened gross margin 4 basis points to 81 percent, or $330.3 million, as the shift to Amazon Web Services cut the firm's hosting costs. Operating cash flow also turned positive, with an inflow of $41.2 million, compared to an outflow of $4.4 million in March 2017. Spending on investment activities rose 18 percent to $78.1 million, leaving Xero with about $80 million in cash and equivalents.

"The results are excellent, with two key features: continued top-line revenue growth that's very strong, and positive movements in operational efficiencies," chief executive Steve Vamos said. "The top-line growth and operational focus will continue into 2019."

Xero went through a period of change in the 2018 year, with founder Rod Drury step back from the management of the company, replaced by former Microsoft Australia and New Zealand head Vamos, and de-listing from the NZX to take up a sole listing on the ASX, in a bid to boost global fund managers' ability to hold Xero as it heads towards profitability. The shift has already seen Xero added to the S&P/ASX 100 and 200 indices in the March reweighting and has attracted analyst coverage from Bank of America Merrill Lynch and the Royal Bank of Canada.

The ASX-listed shares rose 1.4 percent to a new record A$41.84 today.

With the company poised for profitability and some analysts predicting it will return capital through dividends once it's in the black, Xero today said it anticipates the cash outflow will reduce in 2019, and once cash flow breaks even, it will be reinvested into the business to drive long-term shareholder value.

Vamos said cloud-computing still has a lot of growth potential with limited uptake in the US and some other territories where Xero has recently entered, which can be easy to lose sight of given the number of opportunities in adjacent sectors.

"The challenge is choosing the thing you're going to focus on," Vamos said. "I don't want to lose focus on our core proposition of cloud accounting that has tremendous upside in many significant markets around the world."

Xero reported a 47 percent gain in UK subscribers to 312,000 as at March 31, leap-frogging New Zealand as the company's second-biggest region, behind Australia where subscribers rose 31 percent to 583,000. New Zealand subscribers rose 22 percent to 301,000, while North America gained 43 percent to 132,000. The rest of the world subscriptions rise at the fastest pace, up 49 percent to 58,000.