• Revenue Growth: 25% increase to $996 million, 23% in constant currency year-over-year.
• Adjusted EBITDA: $312 million, up 52% or $107 million from last year.
• Rule of 40 Outcome: 43.9%, up by 10.3 points year-over-year.
• Subscriber Growth: 10% year-over-year, with 401,000 net additions.
• ARPU Expansion: 11% increase.
• Australia Revenue Growth: 27% increase, with 103,000 net subscriber additions.
• New Zealand Revenue Growth: 13% increase, with 9,000 net subscriber additions.
• U.K. Revenue Growth: 26% increase, 22% in constant currency, with 49,500 net subscriber additions.
• North America Revenue Growth: 25% increase, with 12,000 net subscriber additions.
• Rest of World Revenue Growth: 23% increase, 22% in constant currency, with 13,500 net subscriber additions.
• Free Cash Flow Margin: 21%, up 7.7 percentage points.
• Cash Balance: Increased by $692 million, totaling around $2 billion.

• Warning! GuruFocus has detected 4 Warning Sign with XROLF.

Release Date: November 13, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Xero Ltd (XROLF) reported a strong revenue growth of 25% year-over-year, reaching $996 million.
• The company achieved an adjusted EBITDA of $312 million, marking a 52% increase from the previous year.
• Xero Ltd (XROLF) delivered a Rule of 40 outcome of 43.9%, up by 10.3 points year-over-year, indicating a balance of growth and profitability.
• Subscriber growth was robust, with a 10% increase year-over-year, and ARPU expanded by 11%.
• The company successfully completed the removal of 160,000 long idle subscriptions, which positively impacted ARPU.

Negative Points

• Subscriber growth in Canada was limited due to a subdued market backdrop and lack of cloud adoption momentum.
• The company faced challenges in driving payroll adoption in the U.K. and New Zealand, requiring further effort to improve product market fit.
• There was a slight increase in churn to 1%, reflecting a slight uptick from post-COVID lows.
• The increase in share-based payments to 9% of sales reflects higher costs associated with hiring domain experts, particularly in the U.S.
• The timing of hiring key domain experts was slower than expected, impacting the planned reinvestment in product development.

Q & A Highlights

Q: Could you discuss the guidance for the year, particularly regarding operating expenses and sales and marketing investments? A: Kirsty Godfrey-Billy, CFO: We maintained our guidance for operating expenses to be around 73% of revenue. This includes investments in both customer acquisition costs (CAC) and product development. We expect product and technology expenses to be similar to last year, around 30.7%, down from 28.7% in the first half. This reflects potential changes in capitalization rates and the timing of hiring domain experts. Sukhinder Singh Cassidy, CEO: In sales and marketing, we are focusing on optimizing performance marketing channels and improving attribution and measurement to enhance our marketing effectiveness.

Q: How are price increases affecting churn, and are there any regions more sensitive to price changes? A: Kirsty Godfrey-Billy, CFO: We are pleased with our churn rate, which remains low at 1%. Historically, price increases have not significantly impacted churn. Sukhinder Singh Cassidy, CEO: While price changes and packaging adjustments can lead partners to reassess their inventory, we are not concerned about long-term churn impacts. We believe these changes are necessary for long-term growth.

Q: Can you elaborate on the U.S. market strategy and how you plan to compete with Intuit? A: Sukhinder Singh Cassidy, CEO: We feel good about our momentum in the U.S. and the TAM opportunity. We are focusing on product acceleration and disciplined capital allocation. We aim to ensure our marketing investments are effective and attract the right customers. We are also enhancing our product offerings to compete effectively in the market.

Q: What are the expectations for ARPU growth in Australia, and how do plan and product mix changes contribute? A: Kirsty Godfrey-Billy, CFO: ARPU growth in Australia is primarily driven by price changes and product mix adjustments. We have seen positive signs from bundling and price increases. Sukhinder Singh Cassidy, CEO: Our sales teams are piloting new motions to optimize product mix, focusing on both new and existing customers. It will take time for these changes to fully impact ARPU across our customer base.

Q: How do you view the subscriber growth outlook given the challenging environment for small businesses? A: Sukhinder Singh Cassidy, CEO: We are confident in our ability to continue growing subscribers due to our diverse market portfolio and strategic levers. We have opportunities in markets with varying cloud penetration levels and regulatory tailwinds. Our focus on product innovation and marketing sophistication will support sustained growth.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.