Xero reported a 32 per cent jump in operating revenue to $NZ338.7 million ($313.4 million) for the first half, while maintaining the slim profitability it achieved in the six months to March 31, reporting a net profit of $NZ1.3 million.
The $10.5 billion tech company also passed the 2 million subscriber milestone, adding 239,000 customers in the last six months.
The result was received well by investors, with revenue growth in line with consensus estimates according to Factset. The company achieved a record high share price of $74.54 on the back of its financial performance and was trading up more than 9.5 per cent at $73.89 at 3:45pm.
The share price jump added $1 billion to Xero’s market cap, earning founder and largest shareholder Rod Drury around $111 million in additional paper wealth.
Xero hit its straps in the the UK , with the region becoming the second market to pass 500,000 subscribers. Both revenue and subscriber numbers jumped 51 per cent in the region, compared to the previous corresponding period.
In the last 12 months, Xero’s progress in the UK has been buoyed by the Making Tax Digital Laws, which form the basis of the UK government’s vision to end the tax return by 2020.
Similarly in Australia, where it achieved a record number of 114,000 new subscribers in the last six months, the company benefited from the government introducing the single touch payroll reforms.
In Xero’s long under-performing region of North America its subscriber growth was 21 per cent compared to the same period last year, with the total number jumping to 215,000. To try and accelerate growth in the region, Xero has changed its strategy to focus on the partner channel of bookkeepers and accountants, rather than targeting small businesses directly, about two years ago.
Mr Vamos urged the market to be patient when it came to expectations for North American growth and said he still had full confidence in the company’s abilities in the region.
“Looking at the time it takes to change strategy and build capability… you just need to be patient. The fundamentals are the things we’re focused on and the thing that will lead to success,” he said.
“We think it’s a significant market and our aspiration is to exceed 1 million subscriptions at some point in the future.”
But analysts were less convinced in the long term prospects of Xero in the US market, with Morningstar senior equities analyst Gareth James saying the 21 per cent growth rate was substantially slower than the previous two halves.
“They’ve been there a long time, it’s a very difficult market to compete in and the global giant Intuit has successfully defended its position for decades,” he said.
“The market expects Xero to get a reasonable market share in North America, and I don’t think it’s tracking to where the market expects it to get longer term.”
Wilsons’ Mark Bryan agreed the US market looked weak, saying the company had been fortunate that it’s relatively slow growth had been balanced out by other regions which had masked the weakness in the overall subscriber growth numbers.
“We’ve been worried about the US in the past, but we’re less so now because of the growth in other regions,” he said. “It’s potentially on the horizon [that another market could overtake North America].”
Of Xero’s non-core markets, South Africa was the top performer in the half.
The company highlighted the improvement in its gross margin, which increased 2.4 percentage points to 85.2 per cent. But Mr James said this was not being driven by economies of scale, rather it was more likely to be a one off improvement. Mr Bryan disagreed with this, believing it was reflective of the company’s growing scale.
Xero did not provide any clear guidance for the full year. Rather the company said it expected its free cash flow for the March 2020 full year to be “a similar proportion of total operating revenue to that reported in the financial year to 31 March 2019.”