On Thursday, Xero said in an ASX filing that it would cut 700 to 800 jobs, equating to around 15 per cent of its workforce, as part of a drive to save $100 million in operating costs.
Consultation will take place next week.
New chief executive Sukhinder Singh Cassidy alsoimplied in a message to staff that more cuts could be on the way, albeit “of a smaller magnitude” as part of a separate assessment that will be completed by July.
Shares jumped 10.5 per cent to A$86.86 ($93.60) on the news, and were up another 0.3 per cent in early Friday trading, despite the tech-heavy Nasdaq being in the red overnight and the ASX200 down 1.5 per cent.
And as of midday Friday, 12 of 18 analysts who cover the stock had upgraded their FY2024 projections for Xero (five yet to upgrade their guidance), with an average 12-month target price of A$99.00 and a top-end of A$118.00 (which would represent a 35 per cent gain on today’s trading price, if still being some distance from the A$154.47 it hit in November 2021 before “Tech Wreck 2.0″ rolled in).
So the market likes the pending cuts, which follow workforce reductions by global tech giants like Amazon, Google parent Alphabet, Facebook parent Meta, Microsoft, Netflix, Salesforce and Tesla that now total around 100,000 roles, and recent cuts and offshoring revealed locally by Sky TV and Xero rival MYOB.
But where will the axe fall?
Xero has major offices in New Zealand, Australia, the UK and the US.
There is speculation in the analyst community that Xero’s North American operation could bear the brunt of the cuts, Harbour Asset Management portfolio manager and research analyst Shane Solly told the Herald.
Xero has struggled to make headway in the US. It launched in North America 12 years ago, but today the territory still only accounts for around 10 per cent of its total subscriber base of around 3.5 million.
On the other hand, “Australia and New Zealand are the cashflow generators, where the franchise is strongest,” Solly said.
In the first half of FY2023, Xero added a net 150,000 subscribers in Australasia and 44,000 in the UK, according to its interim report, versus just 15,000 in North America.
However, Xero deflected a question about North America on an analyst conference call about the cuts.
“The impacted roles are across Xero’s business and affect all markets. We are not breaking down region by region or discussing specific job functions or areas,” Xero spokeswoman Kate McLaughlin said.
Sukhinder Singh Cassidy, who took over as Xero's new CEO last month. Photo / Supplied
Xero’s customer base of sole traders is bracing for recession, but Solly says the key reason for Xero to “get fit” is the end of cheap money. Low-interest rates drove a lot of the tech boom, and the related venture capital boom that peaked in late 2021.
“Nobody likes to see people losing their jobs. It’s quite a chunky set of the workforce,” Solly says. “But it’s a case where you need to pivot to profitability.”
“That low cost of money 18 months to a year ago has now well and truly sailed, so the return of capital requirement has gone up. Businesses need to get to the point where they’re self-funding.”
The “P” word
Xero’s founder and longtime CEO, Rod Drury, favoured growth over profit, in line with the philosophy followed by the software-as-a-service sector as a whole.
Now, “it’s a more delicate balance”, Solly says.
Although positive about Xero’s long-term prospects, he cautions that the 10 per cent bounce following the job cuts announcement could be short-lived.
“We tend to see some volatility in tech stock prices around these announcements. Sometimes there’s a bit of a fade over the subsequent few days as people ask ‘What’s being cut? Is it fat? Is it muscle?’ It can take a few weeks for things to settle down.”
Taking the paddle to Waddle
Xero’s Thursday announcement also included the news that it would kill off Waddle and take a $30m to $40m write-off as a result - on top of a $25.9m write-down last November with its half-year result.
Xero bought Waddle in 2020 for A$31m cash upfront, plus a A$49m earnout if performance targets were hit. Waddle let a small business take a quick secured loan against its accounts receivables, helping to tide it over until an invoice is paid.
At the time, it was billed as a broadening and diversification of Xero’s business.
POSTSCRIPT: New directions
Xero founder and longtime CEO Rod Drury revealed this week he had teamed up with investor Atlanta Daniel to form a venture capital fund, Radar Ventures, that will back tech start-ups in fields including biotechnology, defence and food science. The pair told the AFR they have already invested in Psylo, an early-stage Australian firm looking at the applications for “magic mushrooms” treating mental illness and Australian animal-free dairy products business Eden Brew. Radar Ventures has also put money into a number of venture capital funds, including the Auckland-based Outset Ventures, which is also backed by Peter Beck.
Meanwhile, Drury’s ex-wife, Anna Stuck, has co-founded Even Capital, a venture capital firm with a remit to back women-run start-ups. Earlier this month, Even Capital revealed it had led a $1.5m seed round for Woolchemy.
