Xero share price on watch amid major cost cutting plans

A man packs up a box of belongings at his desk as he prepares to leave the office.

A man packs up a box of belongings at his desk as he prepares to leave the office.

The Xero Limited (ASX: XRO) share price will be one to watch closely on Thursday.

This follows the release of a major announcement out of the cloud accounting platform provider.

Why is the Xero share price on watch?

This morning, Xero announced a program to streamline its operations, realign the business to drive greater operating leverage, and better balance its growth and profitability. Management believes this will strengthen the company’s ability to deliver value to customers and take advantage of the significant growth opportunity presented by cloud accounting.

Unfortunately, this will involve significant job losses, with Xero revealing that the program involves reshaping Xeroʼs organisational structure by reducing 700-800 roles across its business. This represents upwards of 16.3% of its 4,915 full time equivalent employees.

Management expects these headcount reductions to improve Xeroʼs operating profitability by reducing its operating expense to revenue ratio significantly in FY 2024. Along with its reinvestment into strategic priorities, the company is targeting an operating expense to revenue ratio of approximately 75% in FY 2024.

As a comparison, during the first half of FY 2023, Xero reported a ratio of 83.9%. And for the full year, management still expects its ratio to be towards the lower end of its guidance range of 80% to 85%.

However, this guidance excludes restructuring charges associated with the program, which are expected to be in the range of NZ$25 million to NZ$35 million.

Xero’s CEO, Sukhinder Singh Cassidy, said:

We have made strong progress in executing our strategy. However as we aspire to build a higher performing global SaaS company and to enable Xeroʼs next phase of growth and drive better customer outcomes, we need to streamline and simplify our organisation.

These changes, and our decision to reinvest in key strategic areas, will adjust our operating cost base as we balance growth and profitability, while taking a robust approach to capital allocation that supports long term value creation.

Waddling off

The company has also revealed that it plans to exit cloud-based lending platform Waddle, which was acquired in 2020 in a deal valued at A$80 million.

Management advised that it expects to incur a write down of NZ$30 million to NZ$40 million in FY 2023 as a result of this decision. However, it has stressed that it remains committed to its broader small business platform strategy.

Singh Cassidy added:

These are difficult but necessary steps as we work to further strengthen Xero for the future, while carefully balancing the interests of all our stakeholders. We don’t take these decisions lightly and we recognise today is a very hard day for our people.

Todayʼs announcement does not take away from the significant contributions from everyone at Xero. We take our purpose and values seriously, and are committed to working closely with each impacted employee and providing them with the right level of support.

The Xero share price is down 19% over the last 12 months. Shareholders will no doubt be hoping the market responds kindly to its cost cutting plans.

The post Xero share price on watch amid major cost cutting plans appeared first on The Motley Fool Australia.

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More reading

Motley Fool contributor James Mickleboro has positions in Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Xero. The Motley Fool Australia has positions in and has recommended Xero. 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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