The price is right

PRODUCT PRICE INCREASES

Need To Know

• Xero has increased its base prices by ~14% in Australia and ~9% in NZ on average across all relevant plans effective from 13 September 2023
• Consensus FY24e is for a ~3-4% rise in ARPU, similar price increases across other geographies would see earnings upgrades 
• Price increases are unlikely to have a material impact on churn rates (<1%), given the ANZ market is largely mature

Xero’s price increases set for September 2023 are a step up from the previous pricing increases in September 2022, and are likely to lead to consensus upgrades, assuming similar levels of price increases across North America and the UK. Interestingly, there is an absence of price increases in the UK, which could potentially reflect a market that is less amenable to price increases than ANZ or it is a deliberate ploy to take further share through pricing, noting that key UK competitor Sage has recently put through price increases across the board. We expect however that XRO will act on UK pricing in time as part of a broader strategy piece given recent comments in the FY23 call around the value upside they perceive in the overall product base.

The North American price increases have typically tended to take effect in November of each year, providing a further key catalyst to see ARPU improvements above consensus. Subscriber growth is still the key focus for the next leg of growth for XRO and we don’t see any material impact on subscriber growth levels despite the price increases. Recent trends from ASIC show that new company registrations in Australia rebounded strongly in May 2023, up 39% MoM and 14% YoY to 27.3k, providing a ripe market for XRO to add subscribers.

Investment View

XRO’s price increases should largely be digested by users and should flow through directly to the bottom line. Consensus numbers for ARPU growth in FY24 are likely too conservative, and with additional pricing increases to come through for XRO’s other geographies and products (before including customers adding additional modules) should see further upgrades for XRO, providing further support to the share price.

XRO’s focus on free cash flow margins will give investors’ confidence that XRO will continue focussing on profit, rather than the historic focus of ‘growth at any cost’. Subscriber and ARPU growth continue to be strong, and the outlook for growth remains solid. The operating margin is expected to lift materially and the operating leverage that has been promised is starting to show signs of life. We retain our Buy recommendation.

A summary of price increases below (among mainstream packages only):

Australia
Payroll – from $10/mth to $15/mth (+50%)
Starter – from $29/mth to $32/mth (+10%)
Standard – from $59/mth to $65/mth (+10%)
Premium 5 – from $76/mth to $85/mth (+12%)

New Zealand
Starter - from $31/mth to $33/mth (+6.5%)
Standard - from $66/mth to $71/mth (+7.5%)
Premium - from $84/mth to $91/mth (+8%)
Ultimate - from $95/mth to $105/mth (+10%)