New Zealand-based global accounting software hopeful, XERO FPO NZX (ASX: XRO), released its full-year 2016 results to the market this morning. Although impressive, if previous results releases are anything to go by, investors are likely to remain concerned about ongoing losses and cash outflows.
Here's what you need to know:
(All figures are in NZ Dollars unless otherwise indicated)
- Revenue jumped 67% to $207.1 million
- Paying subscribers jumped 51% to 717,000
- Gross margins (revenue minus cost of sales) increased from 70% to 76%
- Cash outflows of $86.1 million, down slightly on the previous year despite significant increase in expenditure (thanks to rising sales)
- $184 million cash and cash equivalents; company estimates this is enough to see it through to break-even point
- Average Revenue Per User (ARPU) rose around 7%, but was impacted by weaker NZ dollar during the year
- Customer revenue churn (the % of customer revenue lost) of 1.2%, effectively flat on previous year
So What?
Xero's reports have been written with greater clarity compared to previous years and the company provides a number of helpful metrics on churn, average lifetime cost, and so forth that the average investor will find illuminating.
Digging further into the report, investors will find that Xero is still very much an ANZ story, with the region growing Annualised Committed Monthly Revenue by 56% compared to 76% internationally.
In dollar terms however, ANZ growth accounts for 65% of the increase in revenues, with the rest of the world growing strongly from a much lower base. Reading between the lines, this appears to be a function of the time it takes to develop tailored solutions for each market, such as the UK and the US – although the UK is set to overtake New Zealand soon in the number of subscribers.
Numerous mentions of working to develop further partnerships in the US suggest that more subscribers could jump on board as Xero's localised offering improves.
Currently it takes almost 24 months of revenue from an international user to cover the cost of acquiring that user, which indicates Xero is far from achieving critical mass in its foreign markets. Investors will be wise to keep this in mind, although international operating revenue growth of 95% is not to be sneezed at.
One other thing to keep in mind is Xero's average customer lifespan, which is around 7 years and represents a hefty store of future profits (since Xero pays once to acquire a customer, but the customer pays Xero for an average of 7 years). With such low churn, this could potentially increase further.
However, at beyond 7 years investors are starting to edge into uncharted territory, where the rapid pace of technological change can make a mockery of expectations and forecasts. Presumably Myob Group Ltd (ASX: MYO) also had a great pipeline of future customers – before they came under threat from competitors.
Now What?
All in all, it was an excellent report from Xero. Establishment of an office in Singapore provides a toehold for the company's next expansion, while ongoing growth in the UK and US bodes well – even though the business is far from achieving substantial scale in these areas.
Pages could be devoted to Xero's ongoing improvement of its product suite – with new apps, its 'financial web', and more than 1,200 software improvements made in the last year, according to management.
With everything moving in the right direction and an end in sight to the company's cash outflows – maybe two to three years away, at current rates, – CEO Rod Drury could be right to say "we're only just getting started."
