Xero share price leaps 8% on staggering earnings upheaval

The Xero Ltd (ASX: XRO) share price is moving with gusto this morning after releasing its full-year results for FY24.

An hour into trade, the cloud-based accounting software company shares are up 7.6% to $133.49. The move starkly contrasts the 1.02% slump in the S&P/ASX 200 Index (ASX: XJO) after the US Federal Reserve revealed it had contemplated more interest rate rises.

So, what about Xero’s results enable its share price to perform while the rest of the market is struggling?

Profitable growth sparks Xero share price

Xero shareholders are celebrating this morning amid the company’s latest result. Here’s a look at the key numbers driving today’s excitement:

• Operating revenue up 22% year-on-year to NZ$1.71 billion
• Subscribers grew by 419,000 to 4.16 million
• Average revenue per user (ARPU) up 14% to NZ$39.29
• Gross margin up from 87.3% to 88.2%
• Net profit after tax (NPAT) swinging to NZ$174.6 million from NZ$113.5 million loss

Xero’s ability to balance revenue growth and profitability in FY24 is significant after years of lacking the latter. Importantly, the company has now achieved the Rule of 40 — a metric that implies a software company’s revenue growth and free cash flow margin should be 40% or more for a healthy business.

The company noted that it focused on balancing subscriber additions with ARPU during FY24. This might explain the 11% reduction in net subscriber additions compared to FY23. However, the positive is that Xero’s gross margin is improving while it manages its cost to serve customers.

Furthermore, Xero implemented price changes during FY24, boosting ARPU. Despite increasing prices, the 0.99% monthly churn rate is a positive indicator of product stickiness.

What did management say?

Xero CEO Sukhinder Singh Cassidy touted the full-year result, stating:

This result shows we’re doing what we said we’d do. We’ve delivered a strong and profitable FY24 result and Rule of 40 outcome, demonstrating our commitment to balancing growth and profitability.

We have a clear and focused strategy to win on purpose, and Xero is positioned well as we move into FY25.

Australia and New Zealand continue to be strong markets for the accounting platform. Xero achieved 22% revenue growth across the two countries, growing its subscriber count in the region to 2.4 million.

Meanwhile, revenue in its international markets (the United Kingdom, North America, and the Rest of the World) rose 24% to NZ$734.9 million. The company has 1.8 million subscribers in these expanding markets.

The road ahead

No light was shed on future earnings or revenue estimates for FY25. However, Xero expects total operating expenses as a percentage of revenue to be approximately 73% in the next financial year.

Product design and development costs are also forecast to be a larger portion of revenue.

Xero share price in review

The Xero share price is up 20% over the past 12 months. However, it was a considerably different story towards the end of last year.

Shares in the software company fell as low as roughly $70 apiece. Yet, positive sentiment has since returned to the technology sector.

The post Xero share price leaps 8% on staggering earnings upheaval appeared first on The Motley Fool Australia.

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Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. 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.