Xero Limited (XRO)
BUY

Mixed result

 10 Nov 2022
Sector: Information Technology

1H23 RESULT

Need To Know

  • Strong revenue trends and cash-flow, offset by large EBITDA miss and NPAT loss
  • Cost guidance expected at bottom end of 80-85% target range
  • Result quality is poor and will weigh on share price.

Revenue NZ$659m vs NZ$655m market.

Strong performance from AUS/NZ subscribers. Group subs +255k HoH up to 3.5m

EBITDA NZ$109m well below market NZ$141m (higher reinvestment and impairment charge)

NPAT -NZ$16m vs market NZ$15m

Operating cash flow NZ$160m vs market NZ$168m. Implies a strong cash conversion number of 105%.

FY23 cost guidance expected to be a low end of 80-85% range vs 84% 1H23.

New CEO announced: Sukhinder Singh Cassidy, starting 28 November 2022. 

Investment Implications

Messy result which will not be well received by the market in this environment. The result is delivered against the backdrop of a large share price reactions to US tech names that have missed earnings over the last month  

The large miss in EBITDA is driven by ~NZ$26m impairment to the Waddle acquisition (2020), higher than expected share-based payments (NZ$8m impact), and higher OPEX/R&D costs. Partially offsetting this was ~NZ$11m in revaluation gains.

The loss at NPAT level (fourth consecutive half of losses) will also weigh, given the focus the market is placing on technology companies to demonstrate profitability in a higher interest rate environment.

Overall, at a core operating level XRO continues to perform well. We are particularly encouraged by the 12% lift in ARPU to NZ$35.30 – speaks to price rises and monetization of addition services which is a significant driver of long-term value.

Our Buy rating captures the long-term opportunity and success in ANZ + UK and selected other geographies. In our view the current share price reflects only the value of the ANZ business.  

 

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Stock overview

Share Price

Company overview

Xero is a cloud-based accounting software platform for small businesses. This gives customers real-time access to their financial data on any device. Xero provides over 1,000 third-party apps plus connections to banks and other financial partners.

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