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Market Analysis Latest ASX News

Xero [ASX:XRO] Battens Down Hatches with Cost Reduction Strategy

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By Mahlia Stewart, Thursday, 09 March 2023

Xero is primed to absolve 700–800 jobs and pull out of its Waddle cloud-based company as it aims to save on costs and position the business to the pathway of ‘disciplined growth’.

New Zealand-based accounting and technology corporation Xero [ASX:XRO] has revealed a cost reduction crack-down, resulting in the loss of 700–800 jobs and abandoning its cloud subsidiary Waddle, acquired two years ago.

The company’s CEO, Sukhinder Singh Cassidy, said the changes would chase ‘disciplined growth’ and improve the group’s operating costs.

XRO took a slight dip after the news, moving down by 1.5% to $78.62 at the time of writing.

The tech stock has managed to inflate by 12% in the past few months. However, over the longer term, it has moved in the opposite direction — plunging by 19% over the past 12 months:

ASX:XRO stock chart

www.tradingview.com

Xero’s cost reduction program begins

Reporting from Wellington earlier on Thursday morning, the tech giant announced a programme to streamline operations, improve operating leverage, and better balance growth and profitability.

To achieve this end, Xero will be reshaping its organisational structure. This involves the 700–800 job losses across the company and the exit of its cloud-based lending platform, Waddle, which was acquired in 2020.

Xero says that reducing the headcount by this size will help it to reach improved operating profitability, cutting down its operating expenses and streamlining revenue ratio — of which XRO expects to see a vast improvement of around 75% by FY24.

CEO of Xero, Singh Cassidy stated:

‘These are difficult but necessary steps as we work to further strengthen Xero for the future, while carefully balancing the interests of all our stakeholders. We don’t take these decisions lightly and we recognise today is a very hard day for our people.

‘Todayʼs announcement does not take away from the significant contributions from everyone at Xero. We take our purpose and values seriously, and are committed to working closely with each impacted employee and providing them with the right level of support.’

Ultimately, Xero believes these changes will help it deliver better value to its customers and take advantage of growth opportunities from the cloud accounting sector. This will also lead to a $30–40 million write-down in FY2023.

The tech giant did not provide guidance for FY2024 but said that it would provide an outlook for FY23 ‘s annual report in May.

XRO did reveal it will be retaining its current guidance for FY23, with total operating expenses as a percentage of revenue to sit more towards the lower end of the 80–85% range — including acquisition and integration costs.

The company commented:

‘These costs are expected to have an immaterial impact on cash flow in FY23 with the majority of payments expected to occur in FY24. Xero remains committed to its aspirational focus on continued operating efficiency over the long term and will take a disciplined approach to reinvestment of cash and generating long term shareholder value.’

It’s not just Xero who has been looking at mass layoffs in these unprecedented times.

Many tech giants, such as Amazon, Twitter, and Meta, have all been announcing streamlined workforces to combat rising interest rates. Even lending platform Nimble Australia has been cutting back, and Atlassian is set to fire 500 staff within the same year of adding to its talent pool.

Are you prepared for the big economic shift?

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Australia is going to be looking very different very soon, and so will everyday life…

If you want to know how you can prepare for the biggest geoeconomic shift of our lifetime, click here to learn more.

Regards,

Mahlia Stewart,

For The Daily Reckoning

All advice is general advice and has not taken into account your personal circumstances.

Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

Mahlia Stewart

Mahlia’s Premium Subscriptions

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