​Xero reports record EBITDA as it prepares to delist from the NZX

The cloud accounting firm has posted record EBITDA of NZ$5.4 million for H1 FY18, and will cease trading on the New Zealand Stock Exchange early next year.
Written by Tas Bindi, Contributor

Xero has announced positive earnings before interest, tax, depreciation, and amortisation (EBITDA) for the first time in its history, reporting NZ$5.4 million for the six-month period ending on September 30, 2017.

EBITDA in the previous corresponding period was minus NZ$25.9 million, marking a 121 percent improvement.

The Australian Securities Exchange (ASX)-listed cloud accounting software company also reported an improved after-tax loss of NZ$21.1 million for H1 FY18, compared to the loss of NZ$43.9 million reported in the previous half-year period.

Operating cashflow increased 145 percent on the half from minus NZ$13.4 million to NZ$6.1 million, while operating revenue increased 37 percent from NZ$137 million to NZ$188 million.

Subscription revenue accounted for a majority of Xero's operating revenue, as usual, coming in at NZ$183 million, up 38 percent from the NZ$133 million reported in H1 FY16.

The company, which boasts the title of the largest cloud accounting software provider outside of the United States, surpassed the 1 million global subscriber milestone in March this year, and counted nearly 1.2 million subscribers as of September 30, 2017. 160,000 net new subscribers were added in the most recent half-year period, while its global subscriber base grew by 47,000 half on half from 2016 to 2017.

During the half year, Xero expanded its ANZ cloud customer base, with more than 789,000 subscribers across the region, up from the 692,000 subscribers recorded in its 2017 full-year financial report.

In the United Kingdom, Xero grew its subscriber base by 54 percent in the half to 253,000 subscribers, while the company's subscribers in North America grew to 110,000, compared to the 92,000 subscribers recorded in its FY17 report.

Xero has additionally announced its intention to cease trading on the New Zealand Stock Exchange (NZX) on January 31, 2018, and will delist from the NZX two days later on February 2, after exhausting all its other options in an "extensive strategic process".

The company outlined a number of key reasons for the change, the first being that consolidating its listing on the ASX should "provide longer-term access to a broader marketplace for Xero shareholders" given the ASX is supported by a large number of international investors. The potential inclusion in major ASX indices is expected to facilitate increased investment interest over time.

In the medium term, Xero said it expects increased analyst and broker coverage will boost the company's profile among a wider range of investors internationally.

The consolidation is also expected to create a "deeper market for Xero shares" in that investors would be able to trade shares in greater volumes and more easily.

The company's CEO Rod Drury said that while more than half of Xero's employees live and work in New Zealand, 80 percent of its revenue comes from outside the country.

"Our strategy is to drive further growth in markets like UK, North America, and Southeast Asia," he said in a disclosure to the ASX.

"As Xero continues to grow, gaining enhanced access to deeper capital markets, increased liquidity, and a broader base of potential investors is critical to fulfilling our ambition to be the leading global small business platform serving millions of customers."

Shares on the NZX will be transferred automatically to the ASX, and shareholders will not be affected by the process, the company said.

Xero has additionally established a NZ$100 million debt facility with the Bank of New Zealand and the Australia and New Zealand bank to improve its liquidity position. However, there are no plans to draw down on the facility, the company said.

"We are well on our way to rewiring how businesses work together, leveraging our investment in Amazon Web Services (AWS) with artificial intelligence and machine learning to deliver a significant wave of new products," Drury said in a disclosure to the ASX.

Xero completed its migration to AWS in November last year, leaving its legacy environment and relationship with Rackspace behind, a move Drury told ZDNet he was glad to make.

It also announced a new machine learning system for SMB invoicing earlier this year, touted to transform the accounting practices of small businesses and their partners, and expected to save small business customers a working month every day for each second it shaves off the average edit time.

"Recording more than NZ$1.4 trillion worth of incoming and outgoing transactions in the last year, Xero manages a unique global graph of business transactions, enabling the development of machine learning to create new experiences for small businesses," Drury said in May.

"We believe the application of machine learning and AI to accounting will unlock significant productivity for our accountants, bookkeepers, and small business customers."

During the 2017 financial year, Xero made a string of new platform integration announcements, including a partnership with Macquarie Bank's DEFT payments system and integrated EFTPOS provider Tyro that will see the cloud accounting firm integrate with electronic bill payment system BPAY.

Xero also added a PayPal Express Checkout option to its software, allowing for an invoice created via Xero to be paid through PayPal directly from the invoice.

The company had partnered with payments company Stripe in December last year to allow its small business users to view and pay an invoice using Apple Pay.

Xero then in August expanded its partnership with Stripe by launching an expanded online payment solution with automated reconciliation, which means that when a Stripe payment comes in through a customer's bank feed, Xero will automatically match it, with the transactions in Xero tied to the Stripe statement line.

In the following month, the company introduced a wave of new products as part of its evolution from an online accounting software firm into a global small business platform. Four major releases were announced, with Drury in September calling the company's new Lifelong Learning Platform its "crown jewels". It is essentially an online learning tool aimed at students and the re-skilling of the workforce, to be delivered by educational institutions.

The platform includes a bunch of courseware, delivered via the cloud, that allows educators to build curriculum and exams.

During the 2017 financial year, Xero partnered with banks across Asia, including CIMB in Malaysia, HSBC in Hong Kong, and UOB in Singapore.

It also announced its partnership with Capital One earlier this year, adding to the partnerships it has established with Wells Fargo and Silicon Valley Bank.

For the full 2017 financial year, Xero reported a net loss after tax of NZ$69.1 million, up from the NZ$82.5 million loss reported in the previous year.


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