Xero Shares Surge After CEO’s Strategic Overhaul
Shares in Xero surged by 9 percent on Thursday following a year of “foundational change” led by US-based Chief Executive Sukhinder Singh Cassidy, which resulted in better-than-expected profits and strong revenue growth. Shortly after assuming the CEO role 15 months ago, Ms. Singh Cassidy initiated a restructuring program that involved cutting 750 jobs, divesting non-core businesses such as Waddle, and implementing price increases. This streamlined and more focused Xero reported an after-tax profit of $NZ174.6 million for the fiscal year ending March 31, a significant turnaround from the previous year’s loss of $NZ113.5 million, surpassing the average analyst forecast of around $NZ160 million ($148 million).
Restructuring and Strategic Changes Drive Profitability
In her first full financial year report as chief executive, Ms. Singh Cassidy highlighted that Xero achieved a significant increase in profitability, aligning with the goals she set upon taking over from former CEO Steve Vamos. “It’s been a year of change at pace and evolution at pace,” Ms. Singh Cassidy told The Australian Financial Review. “We had to reset the cost base, right-size teams, and bring in new capabilities including a lot of new executives.”
Among the new recruits are Mike Strickman, former marketing executive at Uber; Ashley Grech, former global sales boss at Square; and Diya Jolly, Xero’s product and technology chief. Ms. Singh Cassidy emphasised the importance of this foundational year, stating, “It was good to get this foundational year of change under our belt and to bring in the capabilities we’re going to need to deliver the future.” Xero, which develops payroll and accounting software for bookkeepers and small and medium-sized businesses, saw a subscription increase of 419,000 during the year, bringing its global subscriber base to 4.16 million.
New Leadership and Subscription Growth Boost Revenue
RBC’s Garry Sherriff noted that the revenue per user, known as ARPU, showed solid growth, increasing by 14 percent to $NZ39.29. “ARPU should continue to be a strong revenue driver into FY25 on material price increases and plan changes for Australia slated for July (Xero historically raised Australian prices in September),” Mr. Sherriff said.
Earnings before interest, taxes, depreciation, and amortisation rose by $NZ339 million to $NZ497.4 million, while revenue climbed 22 percent to $NZ1.7 billion. In its pursuit of operational efficiencies, Xero also achieved the “rule of 40” earlier than analysts had anticipated. This rule is crucial for subscription software businesses, indicating that a company’s revenue growth plus profitability (both in percentage points) should total 40 or more.
E&P Capital analyst Paul Mason described the results as a “relatively strong beat” to overall consensus expectations. “Revenue is marginally ahead [of Visible Alpha consensus] however [underlying] EBITDA has come in well ahead at $NZ527 million vs VA consensus $NZ469 million,” Mr. Mason said. “Xero is also reporting that they hit the rule of 40 on combined revenue growth and free cash flow margin – much earlier than the market was expecting.”
Despite not declaring a dividend, Xero shares rose 9 percent to $135.64. Including Thursday’s rally, shares have increased nearly 20 percent so far this year but still trade below their pandemic peak of $154. Last month, Xero invested $US25 million ($37 million) in Sydney-born start-up Deputy, a $1 billion private company that offers software for shift workers. As part of the partnership, Xero will discontinue its Planday business in Australia and instead integrate Deputy into its payroll and accounting platform to track employee shifts.
Ms. Singh Cassidy noted that Planday would focus on its core European markets, including the UK, while the investment in Deputy would enhance their partnership with the local start-up. “Sometimes a minority investment just helps put a little bit more alignment behind the partnership. We’re not on the board, we’re not an observer … we believe it’s important also to have a bit of skin in the game,” she explained.
