Is the Xero (ASX:XRO) share price a buy?

Is the Xero Limited (ASX: XRO) share price a buy after it reported its FY21 half-year result?

The Xero share price has comfortably beat the market over 2020 in the calendar year to date, rising by 51%.

What was in the FY21 half-year result?

The cloud accounting software business reported that for the six months ending 30 September 2020, its operating revenue grew by 21% to NZ$409.8 million.

Total subscribers rose by 19% to 2.45 million whilst net subscriber additions decreased by 30% to 168,000. The total lifetime value of subscribers increased by another 15% to NZ$6.17 billion.

The rest of the world subscribers demonstrated the fast growth rate with an increase of 37% to 136,000, with revenue growth of 38%. This was led by South Africa, with progress in Singapore.

UK subscribers rose by 19% to 638,000 with revenue growth of 33%. Australian subscribers grew by 21% with revenue growth of 18%. New Zealand subscribers rose by 13% with revenue also increasing by 13%.

The average revenue per user decreased by 4% to NZ$29.81 whilst annualised monthly recurring revenue increased by 15% to NZ$877.55 million. The number of months it takes to recover customer acquisition costs increased from 12.3 months to 14.9 months.

The ASX 200 share’s gross margin percentage rose by 0.5 percentage points to 85.7%. This means more of the new revenue falls to the next profit line.

Xero’s earnings before interest, tax, depreciation and amortisation (EBITDA) went up by 86% to NZ$120.8 million. The net profit after tax (NPAT) rose from NZ$1.3 million to NZ$34.5 million and the free cash flow jumped from NZ$4.8 million to NZ$54.3 million.  

During this period of uncertainty, the company pointed out that COVID-19 has made it harder to market its product. This led to a reduction in advertising spending, which meant the cost of marketing (as a ratio of sales) declined, which is partly why its profit margins went up. Management expect to spend more on marketing as life returns to normal.

The company’s monthly recurring revenue (MRR) churn continued to remain low. In the first half of FY21 it saw MRR churn of 1.11%.

On the balance sheet the company’s net cash on the balance sheet improved by NZ$76.3 million to NZ$177.7 million.

The Xero share price has gone up 9.4% in November 2020 so far.

What is Xero’s outlook?

The company itself said that it’s a long-term orientated business with ambitions for high-growth. It said it continues to operate with a disciplined cost management and targeted allocation of capital.

Xero wants to remain agile so it can continue to innovate, invest in new products and customer growth, and respond to opportunities and changes in its operating environment. Due to the uncertainty caused by COVID-19, Xero said it couldn’t provide any guidance for its FY21 performance.

Is the Xero share price a buy?

The Motley Fool Pro team recently commented on the result: “We’re pleased with Xero’s performance through the first half. While customer acquisition was certainly impacted, we’re encouraged by management’s ongoing dedication to product development and its ability to continue offering significant value through the pandemic: not only does it allow its customers to continue operating remotely, much of its development was also based around creating new tools and functionality to help customers through. As an example, it was the first major cloud-accounting platform in Australia to enable small business customers to access JobKeeper through Single Touch Payroll. We expect customer growth, and its all-important SaaS metrics, to improve over time.”

The Pro team still rate Xero as a buy.

More reading

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• Why Orocobre, Ramsay, Webjet, & Xero shares are dropping lower
• The ASX 200 fell 0.5% on Thursday
• Why are ASX tech shares all over the place today?
• ASX 200 down 0.1%: Xero hits record high, Telstra and Wesfarmers updates impress

Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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