Xero’s Game-Changing Global Growth Drives Future Success.

About Xero Limited

Xero Limited (ASX: XRO) is a global small business platform with 4.2 million subscribers that provides small businesses and their advisors with tools to manage core accounting functions like tax and bank reconciliation, payroll tasks, and payments. Connections to banks and other financial institutions from within Xero’s open platform help small businesses manage their business and finance more efficiently.

Current share market turbulence

Xero is a macro-resilient business that is not impacted by current investment market uncertainty given the essential nature of its accounting software product to the functioning of the small businesses which it serves.

Experienced investors are more concerned about the quality of the individual companies in their portfolio than they are about the state of the market. Moreover, discerning investors are also focused on how well-positioned a company is for the future, rather than the state of the business today. In other words, investment success doesn’t come from investing in the present, or from what a company is earning today; it comes from what the company will be earning in two or three years from now.

This is what professional, and experienced investors find appealing about Xero.

Overseas expansion key to future growth

Xero’s expansion plans go beyond New Zealand and Australia, with a deliberate focus on the significant market opportunities in the UK, Canada, and the US.

In the UK Xero has introduced new product features that include tax and related compliance capabilities that connect with practice management to better manage workflows and improve job tracking and prioritisation. Other planned product enhancements for UK clients include new payroll features that save accountants and bookkeepers time by providing a consolidated view of client pay runs, making it quicker and simpler to identify clients whose payroll needs attention.

The Canada sales team has been restructured with a focus on cloud accounting, which is the way of the future because it provides speed, security, and flexibility with regards to data storage as well as providing economies of scale to users.

The US subscriber market is poised for growth with an expanded core accounting offering by extending direct bank feeds coverage to seven hundred banks verses only twenty 18 months ago, expanding sales tax reporting to enable businesses to automatically generate reports for each filing period to eliminate manual processes, and providing an integrated bill pay solution.

Xero is also set to roll out a generative Artificial Intelligence business companion that makes it easier for small businesses and their advisors to access business-critical information and manage their finances on the go. This product feature will be known as ‘Just Ask Xero’.

UK and US clients will also soon have Xero’s mobile phone offering known as ‘Tap to Pay’.

Subscriber numbers grew by 419, 000 last year and with enhanced product packages to be rolled out in FY25, similar growth rates can be reasonably anticipated in the years ahead.

The Future

Xero is building a world class global SaaS business, from an already strong market position today.

Management is focused on the key metric referred to as the ‘Rule of 40’ which states that investors reward software companies whose operating performance includes a combined cash operating margin and revenue growth rate of at least 40. Xero achieved this performance metric in FY24 with a strong free cash flow margin of 20 percent on revenue growth of 21 percent.

Xero’s management is confident of achieving this important revenue growth and profit margin metric again in FY25.

Another key financial metric that is the focus of management is Xero’s operating expenses as a percentage of revenue. This metric in FY24 was 75 percent. Xero has stated that in FY25 total operating expenses as a percentage of revenue are likely to be around 73 percent.

Management has gone further and stated that they have a clear line of sight to a doubling of the size of the business. No time frame was referred to however given Xero is confident of maintaining the Rule of 40 into the future, then this implies that revenue could double in the next five years. If this were to occur, and if the operating cash margin is maintained at or above 20 percent of revenue, quality growth of this nature should see substantial shareholder value accretion in the medium term.