For its half-year ended 30 September 2015, cloud computing accounting software provider XERO FPO NZ (ASX: XRO) posted a loss of $44.3 million.
However, the rapid growth technology company continues to invest heavily, fostering its network effect, scalability and long-term outperformance.
15 stats every tech investor must know
Here're 15 exciting performance statistics from Xero's half-year report:
- Subscription revenue rose 72% to $89.75 million (64% in constant currency)
- Total revenue rose 71% to $92.86 million (63% in constant currency)
- Cost of revenue rose just 36%
- Gross profit (revenue minus costs of sales) rose 88%
- Gross margin expanded to 74%, from 67% in the prior corresponding period
- Total Australian subscribers grew 66% to 262,000
- New Zealand subscribers grew 37% to 163,000
- United Kingdom subscribers grew 67% to 102,000 – making Xero the first cloud accounting business to surpass 100,000 paying subscribers
- North American subscribers (coming off a relatively small base) rose 114% to 47,000
- Xero's total paying subscribers base rose 60% to 593,000
- Subscriber churn remained steady at 1.3% across the group, but fell in international markets. Subscriber churn is the number of subscribers who leave Xero in a month, as a percentage of total subscribers in that month, averaged over 12 months.
- Sales and marketing rose 85% to $70.89 million; employee headcount grew 32%
- Product design and development costs rose 90% to $50.5 million; $22.5 million of the R&D spend was capitalised. That means the benefits of the R&D won't be realised for more than a year, but profits fall in the period it is recognised (i.e. now).
- Crucially, Xero believes its R&D spend (as a percentage of revenue) is more than double its next closest competitor.
- The lifetime value of Xero's current subscriber base (which is a product of subscriber churn, average revenue per user and gross profit margin) is more than $1 billion.
Commentary
"Xero delivered strong global growth while improving operating metrics, reflecting positive overall business performance," CEO Rod Drury said. "We have built a world-class team at all levels of the business who demonstrate disciplined execution to deliver on the global growth opportunity."
Areas of concern
Some investors will be put off by Xero's lack of profitability — that's understandable. Another potential concern is the cash burn. Xero's cash burn (outflows from operating and investing cash flow) was around $49.5 million during the half, up from $48.5 million in the half-year to March. It says full-year cash outflow will be roughly in-line with 2015's result. In my opinion, Xero is in a strong cash position with $224.5 million on its books — with no debt.
"Xero is focused on containing its full financial year cash outflow to similar levels to the prior financial year," Mr Drury said.
Outlook
"We've achieved strong growth for the first half and we're on track to achieve $200 million subscription revenue based on June 2015 foreign exchange rates this financial year," Mr Drury said. "While early SaaS companies have been focussed on medium-to-large enterprises, our connected ecosystem gives us access to the global small business market, positioning us to maintain strong growth rates for an extended period of time and drive further revenue monetisation opportunities."
Buy, Hold or Sell
In my opinion, Xero is the best mid-cap technology stock on the ASX. Yes, it's higher risk. Yes, it's not cheap. However, the scalability, ultra-long-term growth, premium product offering, savvy management team and global ambition culminate in a resolute focus on carving a robust competitive advantage with high levels of recurring revenue. All things considered, today's report gives me confidence Xero will be an exceptionally profitable business many years from now.
At its current share price of $16.50, for growth investors, Xero is a buy in my book.
