Xero posts half-year net loss as investment in product development grows

Xero ended the six-month period to 30 September 2021 with three million total subscribers.
Written by Aimee Chanthadavong, Contributor

Xero has reported a net loss of NZ$5.92 million for the six months to 30 September 2021, a significant difference compared to last year's NZ$34 million net profit.

In EBDITA terms, Xero also saw a 19% decline year-on year from NZ$121 million to NZ$98 million. Free cashflow was also down to NZ$6.4 million compared to NZ$54 million during the same period last year.

"EBITDA, net profit, and free cash flow decreased versus H1 FY21 due to an increased level of investment spend across both sales and marketing and product development," Xero said on Thursday.

"The movement in these metrics reflects the heightened focus on cost management in response to the initial impacts of COVID-19 in the prior comparable period."

Revenue, however, was up 23% year-on-year, surpassing the NZ$500 million mark, which according to the small business cloud provider, was a first for the company in a half-year period.

Of that total operating revenue, subscription revenue pitched in NZ$86 million, which grew by 21% from H1 FY21. The company said the growth was primarily driven by organic subscriber growth, as well as the acquisition of Planday and Tickstar.

Subscriber numbers at 30 September 2021 increased by 560,000 to three million total subscribers.

Other operating revenue made up the remainder, more than doubling on last year's NZ$8 million to just shy of NZ$18 million for 1H21. The company said the 121% increase was driven by a combination of organic growth in financial services revenue, as well as new financial services revenue generated from its AU$80 million acquisition of Waddle in H2 FY21.

As for operating expenses, this increased by 46% compared to H1 FY21, from NZ$288 million to NZ$422 million, with product design and development costs contributing NZ$166.8 million.

"Small businesses around the world increasingly recognise the critical importance of digital tools to help them adapt to, and succeed in a changing operating environment. This is reflected in Xero's half-year 2022 performance, where we delivered strong revenue and subscriber growth," CEO Steve Vamos said.

"We are committed to delivering the world's most insightful and trusted small business platform to make life better for people in small business, their advisors and communities around the world. To support this, we continue to prioritise investment in product development and partnerships, and execute our strategy to meet our customers' evolving needs in both the short and long term."

Breaking the results by market, the UK saw the biggest revenue growth of 24% to NZ$133 million, and added 65,000 net subscribers during the period, taking total subscribers to 785,000.

Australia added the most net subscribers during the half year with 124,000 additions, taking the total subscribers in the market to 1.24 million, which lifted revenue by 22% to NZ$225 million.

As for New Zealand, it ended the six-month period with a total of 480,000 subscribers, following 34,000 new additions, and a 13% revenue uplift to NZ$72 million, while North America saw revenue jump 5% to NZ$30 million and total subscriber numbers grew by 23,000 to 308,000.  

Alongside the half-year results, Xero announced its acquisition of US cloud-based inventory management provider Locate Inventory. Xero believes the $19 million deal will help the company meet increased small business demand for inventory and cash flow management tools.

"The Locate acquisition supports our strategic priority to grow the small business platform, strengths our ecommerce offering, and supports our growth opportunities in North America and globally as we strive to be the most insightful and trusted platform for small business," Vamos said.

Looking ahead, Xero expects total operating expenses, excluding acquisition integration, will fall in the range of 80-85% for FY22 while integration costs, relating to all acquisitions announced since the start of FY21, are expected to increase total operating expenses as a percentage of operating revenue by up to 2% for FY22.

Additionally, the acquisition of Planday is expected to contribute approximately three percentage points of additional operating revenue growth in FY22.

Transaction, integration, and operating costs of the Locate acquisition are expected to have a minimal impact on Xero's FY22 EBITDA, the company added.

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