Kiwi-based accounting platform Xero [ASX:XRO] failed to sway investors today with its 1HFY24 results, despite turning around a first-half profit and maintaining its full-year expense target.
Expectations had been high for the company as the new CEO, Sukhinder Singh Cassidy, promised a shift to profitability.
Perhaps investors are cautious about a higher interest rate environment and the company’s costly plans to expand further into the North American market.
Shares fell 9.18% — wiping $2.3 billion off their market cap — as the company begins to lose momentum through the second half of the calendar year.
However, Xero’s still up 43.49% in the past 12 months.
Xero’s balancing act
For new CEO Sukhinder Singh Cassidy, today’s results were a source of pride.
‘We’ve demonstrated good momentum this half…we’re sharpening our focus on Xero’s key levels of growth…we will continue to balance growth and profitability.’
The momentum shift can be seen in the company’s 90% increase in EBITDA to $206 million in the last 12 months, thanks to cost discipline such as workforce reductions.
They’ve also achieved a net profit of $54 million — a big improvement from a net loss of NZ$16 million in H1FY23 — driven by a 13% increase in customers.
The company also saw 6% growth in average revenue per user and 14% increase in customer lifetime value.
The average revenue per user (ARPU) also grew 6% to NZ$37.38 for the company, while they also saw 14% gains in the total lifetime value of each user.
The company pulled in revenue of NZ$800 million, which was a 21% year-over-year improvement.
Despite the drive to balance growth and profits, Xero faces a challenging second half of the year.
Free cash flow increased to $107 million with a 13.3% margin thanks to the restructuring, but the company will need to do more to bring costs down.
Xero forecasts that its operating expense ratio will continue to improve, falling from 79.1% to 75% by the end of the fiscal year.
AI integration to assist with productivity could help with this, but it may not be enough to regain its lost margins of the past.
Beyond costs, growth needs to accelerate amidst belt-tightening.
Xero is planning ‘targeted’ marketing at ‘reasonable’ cost to build US customers and improve international subscriber lifetime value.
Source: Xero FY24 Report
ANZ customers’ generate 80% higher lifetime value than international users.
Xero remains a strong business that must slog through this high-interest rate environment, possibly squeezing its share price further.
The company also did not declare a dividend for the year, disappointing some.
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For Fat Tail Daily