Xero Limited (ASX: XRO) released its FY 2020 annual results last Thursday morning, with the initial market reaction being quite negative. The online accounting software provider for small businesses saw a 10.4% share price drop by the close of trade last Friday. However, Xero regained some of those losses on Monday, with its share price up by 2.4% to close the day at $77.15.
So, was this unfavourable initial market reaction justified, and does Xero offer a good long-term buying opportunity to investors?
Before we address theses issues, lets first analyse Xero’s recent top-level results.
Another strong full year set of numbers
Xero delivered another strong annual result, with revenue increasing by 30% to NZ$718.2 million for the 12 months ending 31 March 2020, with annualised monthly recurring revenue (AMRR) also growing strongly by 29%. This impressive result was driven by a 2% increase in average revenue per user and a 26% lift in subscribers to 2.285 million.
Also, pleasingly, Xero’s gross margin market continues to expand due to its increasing economies of scale, increasing by 1.6% to 85.2%. This contributed to Xero achieving its first ever full year net profit, which came in at NZ$3.34 million, compared to a loss of NZ$27.14 million a year earlier. Xero’s earnings before interest, tax, depreciation and amortisation result was also impressive, growing strongly by 52% to NZ$139.17 million.
In terms of geographic performance, its Australian, UK, North American and ‘Rest of the World’ segments all performed strongly. Australia grew its subscriber base by 24%, UK by 32%, North America by 24% and the rest of the world by 51%. Of particular note was the accelerating subscriber growth in the US market, with its US subscriber base now reaching 241,000.
The impact to Xero’s overall results by the coronavirus was minimal, however as its results only include the period up to 31 March, only the initial impact of the pandemic was reflected in Xero’s financial and subscriber performance. There was with a slight reduction in AMMR during the month of March, and since then there has been further AMMR reduction, as the impact of the pandemic intensified.
Did the market initially overreact?
Overall, I believe that this was a very strong result for Xero and I think that the market initially was too harsh on what I see as continued strong growth across all geographic regions. In particular, I was pleased to see a strong and increasing gross margin, and the achievement of positive net profit for the first time, as the benefits of increasing economies of scale are now really starting to kick in.
Are Xero shares a long-term buy?
Despite the potential further impact by the coronavirus in the months ahead, and its share price no longer looking cheap, I believe that Xero still has a long runway for growth ahead of it over the next decade. I think it is worthy of consideration for your share portfolio.
Small businesses are increasingly turning towards Xero to manage their entire business, not just their finances. Although competition could increase over the next few years, especially from US rival Intuit Inc, I believe that there still are strong growth opportunities for Xero to tap into across all of its operating markets, especially in North America and its other operating markets outside of Australia and New Zealand.
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Phil Harpur owns shares of Xero. 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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