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05-March-2024: Interesting that Xero's new CEO, Ms Sukhinder Singh Cassidy, has signalled a reduction in spending at Xero and a focus on the "Rule of 40", as shown on slide 19 of their recent Investor Day Presentation last week (29th Feb):
The Rule of 40 is a principle that states a software company's combined revenue growth rate and profit margin should equal or exceed 40%. SaaS companies above 40% are generating profit at a rate that's sustainable, whereas companies below 40% may face cash flow or liquidity issues. (Source: https://www.cloudzero.com/blog/rule-of-40/)
Ben and Jeremy from TMS Capital reckon that's a different approach for Xero and it could be an inflection point for them in terms of sustainable growth and profitability. See here: TMS Insights February Reporting 2024 - YouTube [29-Feb-2024]
In that video and in their previous "Insights" video (TMS Insights January 2024 (youtube.com)), the boys also discuss the recent spate of takeovers in the building products space, including CSR (https://www.afr.com/companies/manufacturing/saint-gobain-buys-into-csr-s-dark-past-along-with-its-bright-future-20240227-p5f887), Adbri (ABC, formerly known as Adelaide Brighton Cement) (https://www.afr.com/companies/manufacturing/irish-giant-crh-and-barro-family-in-2-1b-bid-for-adbri-20231218-p5es4e) and Kerry Stokes' Seven Group's bid for Boral (BLD) (https://www.afr.com/companies/infrastructure/kerry-stokes-seven-group-bids-to-take-full-control-of-boral-20240219-p5f5xo)
Further Reading: https://www.afr.com/chanticleer/why-bids-are-flying-for-australia-s-overlooked-building-materials-groups-20240222-p5f6wo
It's interesting that Ben & Jez reckon that Brickworks (BKW) is the one they like most in the sector and one that could see some fund inflows in terms of Instos reinvesting money from BLD, ABC & CSR, because all three are all-cash bids and Insto's often look to redeploy funds into the same sector in these cases.
In the same vein, Insto money from the Altium takeover might be looking to redeploy into the Aussie tech sector - which brings us back to Xero (XRO) and Wisetech (WTC), being the premier remaining ASX-listed tech exposures.
I had previously held Xero shares but sold out a couple of years ago because they looked like pushing out that "profitable and growing those profits" stage indefinitely, partly due to overpaying for acquisitions with questionable strategies behind those acquisitions (booking write-downs/impairments in subsequent years, suggesting they overpaid and that the synergies just were not there). New management at Xero seem to have a clearer focus on sustainable profitability, as demonstrated by this reference to trying to adhere to that "Rule of 40".
Positive!
I agree with @Wakem that XRO's results were positive, in that they reported:
- Good growth
- Low churn
- Continuing to grind out inroads in North America
- Very small Loss
So why the 10%+ sell down to around $77 to $78 share? The main areas of concern that the market may have, as I see it, are the reduction in free cash flow and the lack of profitability. In the current environment, I think the market is looking for companies that are on the verge of profitability to report profits rather than small losses. It's mostly psychological but it seems to make a difference to Mr. Market at this point.
I like that they are highlighting the balance required to keep investing in the business for growth in the commentary I've reproduced below:
It looks like a "buy" to me. However, in the current environment where tech stocks are getting hammered and the NASDAQ is leading the US markets south, I'm not sure how much lower XRO can go, but I feel that lower levels are still possible.
Disclosure: I hold XRO IRL and I'm thinking it's time to add them back into my Strawman.com portfolio also.
13-May-2021: Xero Full Year Results Presentation for year ending 31-Mar-2021
Plus: 2021 Annual Report
Plus: FY21 Results Investor Briefing Webcast recording
Highlights for me:
- After passing that inflection point last year and now being profitable, they've generated heaps of cashflow and finished March with:
- Net cash of $256,585K, i.e. $256.6 million, being more than double the $111.5m they had one year ago.
- Despite making acquisitions during the year including a reasonably large one (Planday - for a total potential consideration of €183.5 million [NZ$305m] including an earnout payment of up to €27.8 million based on product development and revenue milestones being reached), they remain in a net cash position - with NO NET DEBT!
- Pandemic? What pandemic - everything that matters has continued to move in the right direction, including:
- Total Subscribers (see graphic below) up +20% to 2.74m,
- AMRR +17% to NZ$963.6m,
- EBITDA +39% to NZ$191.2m
- EBITDA margin +3.3 pp to 22.5%,
- free cash flow up +NZ$29.8m to NZ$56.9m,
- even lower Churn (1.01%),
- Total Revenue +18% to NZ$848.8m,
- Gross Margin up to 86%,
- Net Profit up from NZ$3.336m in FY20 to NZ$19.774m,
- CAC as a % of revenue down -7.3pp to 36.3%,
- Total Cash and short-term deposits up +NZ$574.6m to NZ$1.11 billion, and
- Net Cash up +NZ$145m to NZ$256.6m.
Glossary (Acronyms and Abbreviations):
AMRR = Annualised monthly recurring revenue (AMRR) represents monthly recurring revenue at 31 March, multiplied by 12.
ARPU = Average revenue per user (ARPU) is calculated as AMRR at 31 March divided by subscribers at that time (and divided by 12 to get a monthly view).
Churn = the value of monthly recurring revenue (MRR) from subscribers who leave Xero in a month as a percentage of the total MRR at the start of that month. The percentage provided is the average of the monthly churn for the previous 12 months.
Constant currency comparisons for revenue are based on average exchange rates for the 12 months ended 31 March 2020. Comparisons for ARPU, AMRR and LTV are based on exchange rates at 31 March 2020.
Lifetime value (LTV) is the gross margin expected from a subscriber over the lifetime of that subscriber. This is calculated by taking the average subscriber lifetime (1 divided by churn) multiplied by ARPU, multiplied by the gross margin percentage. Group LTV is calculated as the sum of the individual segment LTVs, multiplied by their respective segment subscribers, divided by total Group subscribers.
CAC months: Customer Acquisition Cost (CAC) months are months of ARPU to recover the cost of acquiring each new subscriber. The calculation is sales and marketing costs for the year excluding the capitalisation and amortisation of commissions paid to sales people, less conference revenue (such as Xerocon), divided by gross new subscribers added during the same period, divided by ARPU.
Liquid resources comprises cash and cash equivalents, short-term deposits including proceeds from convertible notes, and undrawn committed debt facilities.
Free cash flow is defined as cash flows from operating activities less cash flows used for investing activities excluding cash used for acquisitions of, and investments into, businesses and strategic assets.
GAAP = Generally accepted accounting principles.
TAM = Total addressable market.
CAGR = Compound annual growth rate
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Not much there to complain about really.
