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Announcement

HALFYR: XRO: Market Release - 6 months ended 30 September 2016

03 Nov 2016 09:45NZX
MARKET RELEASE

Xero Limited (NZX: XRO; ASX: XRO) Reports Interim Financial Results for Half
Year Ended 30 September 2016

Xero Hits $303 million Annualised Committed Monthly Revenue, 862,000
Subscribers and $1.7 billion Lifetime Value
Continued strong growth in ACMR to $303.2 million
EBITDA loss reduced 23% from $(33.8)million in H1 FY16 to $(25.9) million in
H1 FY17
Reduction  in operating cash outflows from $23.4 million in H1 FY16 to $13.4
million in H1 FY17

Performance Highlights
All currency stated in New Zealand Dollars (NZD)

Strong global growth
? Operating revenue of $137.2 million, an increase of $44.6 million (48%)
over the same period in the previous year. Constant currency revenue growth
was higher at 55%
? Continued year-on-year growth to finish with 862,000 subscribers
representing a 45% increase from 30 September 2015
? Subscriber momentum increased in the current half with 269,000 subscribers
added in the 12 months to September 2016, compared to 242,000 in the 12
months to March 2016
? Annualised committed monthly revenue (ACMR) of $303.2 million. The
strengthening NZD adversely impacted ACMR by $29.9 million, with constant
currency growth rate at 30 September 2016 of 53%

Improving financial results
? Financial performance was impacted by the duplicate platform costs of
transitioning from Rackspace to Amazon Web Services (AWS)
? Net loss after tax of $43.9 million, broadly in line with $44.3 million in
the same period last year
? EBITDA loss reduced from $33.8 million in the same period last year to
$25.9 million. EBITDA loss excluding share-based payments (SBP) reduced from
$27.4 million to $18.5 million
? EBITDA loss margin reduced from (36)% to (19)%. EBITDA loss margin
excluding SBP more than halved from (30)% to (13)%
? Gross margin at 75%, while an improvement on 74% in the prior period, was
impacted by the dual cost of hosting during the six months
? Lifetime value per customer (LTV) increased 8% to $2,004 despite the
strengthened NZD adversely impacting ARPU. Constant currency LTV improving
16%
? Operating cash outflow declined to $13.4 million from $23.4 million in the
same period last year. Operating and investing cash outflows declined to
$45.8 million from $49.5 million for the same period in the prior year
? With $137.9 million cash and short-term deposits  on hand, we are well
positioned to manage cash usage to break-even

Market leadership
? Further extended cloud accounting market leadership in the established
markets of Australia and New Zealand, growing to 592,000 subscribers an
increase of 39% since 30 September 2015. The Australian subscriber base grew
45%
? In the United Kingdom, where Xero is the leader in the cloud accounting
market,  subscribers grew 61% to 164,000 since 30 September 2015
? Growth in North America of 64% to 77,000 subscribers

SYDNEY, 3 November, 2016 - Xero Limited (NZX: XRO; ASX: XRO) today reported
its half-yearly earnings to September 30, 2016, executing strongly on
diversified global growth while making progress towards EBITDA break-even.

Achieving milestones of annualised committed monthly revenue of $303.2
million and operating revenue of $137.2 million, a 48% year-on-year increase,
Xero''s paying subscriber base reached 862,000, and reached a total lifetime
value of $1.7 billion. Revenue growth rates, while strong, were adversely
impacted by the strengthened New Zealand dollar.

Xero remains focused on driving diversified global growth and executing on
its business strategy, including building towards a high-margin business.

"Our focus is to build a sustainable global business with high margins, while
managing our cash. Our revenue growth has allowed us to continue the
significant investment in our platform, back-office and team to support our
global footprint," said Rod Drury, Xero CEO and Founder.

"We are thrilled to deliver strong results while we build the long term
foundations for scale, including a complete re-platforming of the business."

Recently announced changes to Xero''s organisational structure will support
the next growth phase and the company''s strategy of reaching $1 billion of
operating revenue. Leveraging the growing management capability in each of
Xero''s operating geographies, the company is implementing a flatter
organisational structure with Country Managers reporting directly to the CEO.

Key strategic highlights
? Xero''s transition to AWS is near completion, enabling the company to
leverage machine learning technology, and deliver fast-paced innovation,
improved margins and increased uptime. While completing our move to AWS,
we''ve developed hundreds of product features and continued to drive the
innovation agenda in the industry
? Several financial web partnerships formed with - Wells Fargo in the U.S.,
UOB in Singapore,  Commonwealth Bank of Australia, Barclays in the UK and
HSBC in Hong Kong launching in 2016
? Xero is gaining traction in the U.S. market with strategic partnerships
with top financial institutions and top accounting firms. Future investments
in U.S. operations will build scale out of Denver to support the hubs in San
Francisco, New York, Austin and Seattle
? Global recognition for customer service, product innovation and business
leadership including the Canstar Award for Accounting Software for Small
Business for the second consecutive year in Australia, UK Cloud Awards for
Financial Product of the Year, and New Zealand Trade and Enterprise
International Business Awards finalist

Innovation shifts up a gear
Enabled by a comprehensive transition to AWS, Xero is well positioned to
capitalise on machine learning, which we believe will redefine accounting in
future years.

"It is a huge achievement to get through this massive transition. We expect
all business software vendors to re-platform over the next few years so they
too may take advantage of the commoditised innovation services in the larger
public cloud platforms," Drury said.

"With the right tools, capital, and financial services, we have the potential
to materially improve productivity of small businesses globally - which make
up 55% of the global economy, and are the largest job generators and
contributors to GDP.

"The network effect of strategic partnerships with top banks, financial
institutions and global technology companies, combined with Xero''s product
and platform, has created an opportunity to pull away from the competition
and leverage the significant white space in the global small business
market."

In the first half of this year, Xero has continued to lead the market with
disciplined investments in product and distribution channels while delivering
another period of industry-leading growth in revenue and subscribers.

The adoption of cloud software is in its early stages in most markets but is
accelerating. Xero has significant opportunities ahead, with a multi-billion
dollar global addressable market, an established product and scalable
platform, and a focus on strong execution and cash discipline.

About Xero
Xero is beautiful, easy--to--use online accounting software for small
businesses and their advisors. The company has over 860,000 subscribers in
more than 180 countries. Xero seamlessly integrates with over 500 apps, and
was ranked No. 1 by Forbes as the World''s Most Innovative Growth Company in
2014 and 2015.

Contact:
Alex Mercer
Head of Global Communications, Xero
Email alex.mercer@xero.com
Phone NZ +64 21 502 112  I  AU +61 3 8592 9167 I  US +1 415 237 1546
End CA:00292021 For:XRO    Type:HALFYR     Time:2016-11-03 09:45:40
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