Xero tops $1b revenue for first time but slips to $9m loss, shares fall sharply

Xero chief executive Steve Vamos with director Rod Drury. Photo / file

Xero crossed the $1 billion revenue mark for the first time in the year to March 31 but slipped to a $9.1 million net loss compared to its prior-year $19.8m net profit.

Shares fell 11.6 per cent to close at A$76.90, but one analyst sees it as a short-term dip (more on which below).

The ASX-listed, Wellington-based cloud accounting firm said subscriber numbers climbed 19 per cent from 2.74m to 3.27m, while average revenue per user increased by 7 per cent. The two factors combined for a revenue rise to $1.1b from the year-ago $848.8m.

The firm said it slipped into the red because it was investing for growth. Its headcount increased to 4784 - a 31 per cent increase, or 24 per cent excluding acquisitions.

Product design and development expenses increased by 49 per cent to $372m.

Xero gave no profit/loss or revenue guidance as Covid uncertainty continues, but did say that total operating expenses for FY2023, excluding acquisitions, "are expected to be towards the lower end of a range of 80-85 per cent" vs the 84 per cent reported for the year just closed.

Jarden analyst Elise Kennedy said the result was "not as bad as feared".

Ebitda, which rose 11 per cent to $212.6m, was not ahead of consensus, Kennedy noted.

But she qualified that free cash flow is key in the current environment, and Xero just edged into positive territory ($2.1m) on that count, with its net cash position decreasing $205m to $51m due to investments.

"It is not clear to us if this will be enough in the current environment for investors today. We would see any softness in the share price as short term and focus on the long term as businesses recover post-Covid," Kennedy said.

Recovery of small and medium-sized entities may not be as strong in Australia/New Zealand and the UK markets as expected by the market, but this was partially offset by very low churn.

The Jarden analyst maintained her buy rating and gave a 12-month price target of A$150.

While the 19 per cent subscriber growth rate was robust at a time when Xero's target small business market is under pressure, it still fell short of the 30 per cent-plus growth rates the company enjoyed pre-pandemic.

Australia (1.34m), the UK (850,000) and New Zealand (512,000) easily remained Xero's largest markets, although it continued to make progress in North America where subs were up 19 per cent to 339,000. NZ (15 per cent) had the lowest growth among Xero's major markets.

Xero shares hit an all-time high of A$156.60 in November (for a market cap of A$23.5b) before being caught in the Tech Wreck 2.0 downdraft. They closed on Wednesday at A$86.97 (for a A$13.0b cap).