XERO FPO NZX (ASX: XRO) and Myob Group Ltd (ASX: MYO) are two technology companies that provide cloud based accounting solutions for small businesses.
Both XERO and MYOB have great user friendly software solutions and are growing in popularity but which one makes the better investment?
- Number of users. MYOB has 1.2 million customers but half of them use desktop products with no recurring fee. It has 601,000 paying SME subscribers with a compound annual growth rate (CAGR) of 8% since 2014. Xero on the other hand is growing its user numbers at a faster rate. It has over 1 million subscribers and half of them were added in the last 2 years. Xero also has a wider geographical reach. In addition to Australia and New Zealand, 300,000 Xero subscribers are based in the UK and North America.
- User retention rates. Both MYOB and Xero have average user retention rates of over 80%.
- Lifetime value per subscriber. This is the average gross margin expected from a subscriber over the time in which they have a valid subscription. Both MYOB and Xero have seen the lifetime value of their subscribers increase over the last year.
- Revenue growth rate. In its latest half year results, MYOB announced a 14% increase in revenue to $204 million whilst Xero announced revenues of $295 million in FY 2017, a 43% increase compared to FY 2016.
- Profitability. Whilst MYOB had a first half 2017 EBITDA of $87 million (up 10% from 2016), Xero is not yet profitable and had a $28 million FY 2017 loss.
- Investing activities. MYOB has spent over $70 million on investing activities in the first half of 2017 including $49 million to acquire Paycorp payment solutions and $16 million in new product development. Xero on the other hand has spent $66 million on investing activities for FY 2017 including $58 million on capitalised development costs.
- Balance sheet strength. MYOB has a net debt to equity ratio of 43% and cash reserves of $39 million, while Xero has a 1% debt to equity ratio, cash and term deposits of $114 million.
Foolish takeaway
MYOB's price to earnings ratio of 32 doesn't make its share cheap, but at least its bottom line is in the black.
Whilst MYOB is profitable, Xero is yet to achieve profitability which makes the comparison difficult as it depends on your assessment of Xero's potential to keep growing in the future.
Xero has the faster growth rates and given the 90% increase in its share price over the last year, the market is anticipating that Xero will be able to replicate its success in Australia in new markets abroad. Growth investors will likely pick Xero, while value investors will stay away from both.
