Balancing act

COST REDUCTION PROGRAM

Need To Know

• Announced 700-800 headcount reduction (~15% of total workforce) costing $25-35m
• Waddle business exit (acquired in 2020), a further $30-40m write-down
• FY24 opex/revenue target of ~75% (down from ~80-85% in FY23)

Like many other tech companies across the globe, XRO has been unable to escape mass employee layoffs, as it announced a ~15% or 700-800 in its headcount as it focuses on balancing profitability and growth. This would take the employee count back towards the September 2021 level. Whilst no specific details were released on what functions these would impact, the new CEO Sukhinder Singh Cassidy noted they would be broad and proportional across the business. The total restructuring program is expected to cost between $25-35m in the FY23 accounts, however cashflow impacts will be across FY24.

Opex savings. Whilst not specifically quantified, savings could be as significant, with XRO targeting an FY24 opex as a portion of revenue to be ~75%. This is down from the FY23 guidance of between ~80-85%, where XRO expect to be at the lower end of this. The CEO mentioned many times during the short conference call that the company is focussing on becoming more efficient with ‘disciplined growth’ being the new focus. Much of the savings will be reinvested into future growth opportunities.

Waddle write-down. The cloud-based lending platform acquired in 2020 clearly hasn’t performed to expectations, with XRO announcing its plans to exit the business, resulting in a further $30-40m write-down, on top of the $25.9m impairment made at the 1H23 result. Carrying value of Waddle will now be zero. 

Investment View

The announcement seemed relatively rushed from XRO on the back of a broker note out of Macquarie the day before, seemingly forcing them to come to the market to announce its strategy intentions. The announcement was heavily focused on the job cuts and operating expenses, with no inkling as to whether this was due to a slowing top-line growth figure.

The new CEO remained ‘optimistic’ about the future prospects for the business, with a stronger focused on disciplined growth. In a market which has punished tech related stocks for lack of profitability, the announcement today is a clear indication of the renewed balancing act of profitable growth. We and the market largely view the announcement positively, with this being the first real evidence of XRO pivoting to operating leverage, rather than being focussed purely on top-line growth. We reiterate our Buy recommendation.