A Jarden analyst is predicting house prices could keep declining for another 12 months, with a peak-to-trough fall in prices of up to 26 per cent. Meanwhile stocks are stuck in a catch-22, with an economic slowdown yet to hit company earnings. Video / NZ Herald
Xero will surprise the market when it reports its full-year result tomorrow, Craigs research analyst Stephen Ridgewell says.
He sees the accounting software firm exceeding earnings expectations, on the back of a rebound in its UK business.
The market liked it when Xero’s new-broom CEO Sukhinder Singh Cassidy announced plansto cull 800 of around 5000 total roles, or around 15 per cent of staff, and took a $40 million writedown on the closure of Waddle - a 2020 acquisition that lent firms money against their invoices.
Shares were at A$78.85 ahead of her March 9 pivot to cost-cutting, and sticking to Xero’s knitting.
The stock immediately spiked and has kept climbing. It closed Tuesday at A$92.39, close to the year-to-date high it hit early this week - if still well off the A$154.47 it hit in November 2021 at the height of the pandemic cloud boom.
Regardless, “Many investors have been concerned it also signals an end to Xero’s growth story,” Ridgewell says.
“We don’t think this is the case. With around 3.8m subscribers, Xero has captured only around 10 per cent of its total addressable market.”
Picked to beat expectations - and more next year
And in the here-and-now, Ridgewell and fellow Craigs analyst Rob Morrison say: “In the key UK market, which delivered a disappointing first half, we expect growth to well exceed guidance and market expectations in the second half.”
A regulatory shift to digitise tax and a clampdown on around 900,000 non-compliant small businesses, helped the successful launch of the freemium Xero Go tax app, the pair say.
Craigs’ punt is that the UK success will help Xero to full-year revenue of $1.42 billion (versus a consensus $1.40b), with ebitda of $284m (against the consensus $271m).
For FY2024, the wealth manager also sees Xero running ahead of expectations. with revenue of $1.72b (3 per cent ahead of consensus) and operating earnings of $490m - a chunky 12 per cent ahead of consensus.
Waiting for the other boot to drop
Harbour Asset Management portfolio manager Shane Solly says while investors reacted positively to the round of cuts announced in March, “what the market doesn’t know is where the costs will come”.
He’s looking for details to be filled in tomorrow. Solly notes analyst chatter about a disproportionate amount of the 800 layoffs occurring in the US, where Xero has struggled to make headway.
Xero launched in North America 12 years ago, but today the territory still only accounts for around 10 per cent of its total subscriber base of around 3.5 million. In the first half of FY2023, Xero added a net 150,000 subscribers in Australasia and 44,000 in the UK, according to its interim report, versus just 15,000 in North America.
So far, Xero has declined to comment on which roles, or regions, will be affected.
Xero CEO Sukhinder Singh Cassidy. Photo / Getty Images
Jarden analysts Elise Kennedy and Tim Halliday say Xero could pursue alternative ways to grow in the US, such as partnerships or alliances.
Thursday could also have more details on a second wave of cuts - which has been the typical pattern with multinational tech firms.
Singh said in a March message to staff more cuts could be on the way, albeit “of a smaller magnitude” once an assessment of all of the accounting software firm’s systems was completed in July.
The first round of cuts was relative. Like the Big Tech firms in the US who hired for the sake of grabbing talent whenever it was available during the tech boom and jobs squeeze, Xero had rapidly expanded its staff, adding 1500 in the 18 months before March.
And Solly says Xero’s initial round of cost-cutting reduced its operating expenditure-to-sales ratio to around 75 per cent - meaning Xero spends 75 cents of every dollar earned in sales - according to his reverse-engineering but “other businesses are lower”.
Jarden sees op-ex to sales coming in at 76 per cent for the year, which would edge ahead of market expectations after Xero’s first round of cuts. The consensus is 76 per cent.
Singh Cassidy will have to strike the right trade-off between growing user numbers and keeping costs in check, Solly says.
Economic slowdowns around the globe could crimp the numbers of sole traders and small businesses. But for those who stay in the game, a monthly accounting software subscription is not a discretionary spend, Solly says. And he says price rises of between 4 and 7 per cent by regional rival MYOB have put Xero in a stronger competitive position, in his view.
Craigs maintained Xero at “overweight” rating in a note issued on Tuesday, but raised its 12-month target price from A$97.27 to A$100.20.
In a May 10 note, Jarden also maintained “overweight” and kept its target price at A$92.
