Investors' response to Xero's first-half results was unambiguously positive despite it being a bit of a curate's egg.

Xero shares, which trade only on the ASX, rose as high as a record A$74.54 ($80.73), up 10.4 per cent from A$67.50 on Wednesday, before easing to close at A$73.95. The shares are more than 82 per cent higher than a year ago.

The good bits in the accounting software company's results include the overall 30 per cent rise in subscribers to 2.057 million, particularly the 51 per cent rise in UK subscriber numbers to 536,000, the fact that it reported a small bottom-line profit and free cash flow is positive and rising.

British subscriber growth accelerated from the 48 per cent pace in the year ended March and subscriber growth in the rest of the world – everywhere outside of Australasia, Britain and North America – also accelerated from 43 per cent in the year ended March to 52 per cent in the latest six months.


Xero's annualised monthly recurring revenue rose to $764.1 million, up from $638.2m in March and the life-time value of Xero's subscriber base is now $5.4 billion, up from $4.4b in March.

A new and intriguing feature is Xero's fledgling but fast-growing revenue from outside its core business. As it has previously talked about, Xero has turned itself into a platform from which to sell other related technological services.

That accounted for just 6 per cent of revenue in the latest six months but it more than doubled compared with the previous first half.

As chief executive Steve Vamos says, Xero's business beyond its core cloud accounting service now includes more than 800 applications including the payments service Stripe and the document management system Hubdoc, which Xero purchased in August last year for up to US$70m ($109.8m).

Vamos is expecting that "platform" revenue to continue growing very fast.

He also agrees with analysts who are cautioning that British growth may decelerate in the current six months.

The first phase of Britain moving to digital tax filing boosted the first-half growth and "there's still some question about the timing of other tax initiatives … we will continue to make Xero the best platform for tax and compliance."

Fisher Funds portfolio manager Sam Dickie, who includes Xero shares in his portfolio, notes that Xero's subscriber growth in Australia also accelerated from 25 per cent in the year ended March to 28 per cent. Australia is Xero's largest single market with 840,000 of its total 2.06 million subscribers.


And while New Zealand subscriber growth decelerated to 13 per cent in the latest half year from the 17 per cent annual pace in March, local revenue grew at a faster 22 per cent rate.

Dickie says New Zealand is a "fairly fully penetrated market" with 367,000 subscribers now and "this foreshadows where other, way less-penetrated markets – UK and US – could still be growing in 5-10-15 years.

"The most important point here is that the result was very strong and the company is doing even better than our bullish expectations."

Jarden analyst Arie Dekker shares Dickie's enthusiasm for what the NZ revenue growth says about Xero's future.

"NZ is showing that the platform/upsell strategy can drive revenue growth in a more mature market, which is also encouraging as it validates the embedded value in the existing customer base and Xero's strategy of unlocking this is working," Dekker says.

He also notes the Australasian figures mean "Xero is showing that once it attracts customers, it can extract better yields and thus more value over time."

So much for Xero's good bits. The big disappointment, which has been disappointing for years now, is North America where subscriber growth decelerated from the 48 per cent pace recorded for the year ended March to 21 per cent in the six months ended September, when subscriber numbers reached 215,000.

"North America underwhelmed and is the only fly in the ointment we can see on first glance," says Stephen Ridgewell, an analyst at Craigs Investment Partners.

"To be fair to Xero, management had been consistently talking down near-term growth in North America and Xero's argument is, of course, that efficiency has improved, the partner channel takes time to build etc. No doubt there is some truth to that, but optically, it's still a miss in this key market," Ridgewell says.

To put Xero's North American numbers in perspective, its arch-rival, US-based Intuit, reported that it had 3.3 million US subscribers at July 31, up 25 per cent from a year earlier, and another 315,000 subscribers in Canada, up 48 per cent from a year earlier.

Xero doesn't break out its Canadian figures and Ridgewell says the overall deceleration in North America "validates our caution vis a vis the bull case for a rapid uptake in Canada, which we have not been able to buy into.

"If Xero succeeds in Canada, it will be 3-5 years – more likely the latter – before that market makes a meaningful contribution to group growth," he says.

Intuit, which is Xero's most meaningful competitor globally, has also surpassed Xero in subscriber number terms in Britain with 545,000 at July 31, although its average revenue per subscriber is a little more than half Xero's.

Vamos says the North American market is "very much about foundations and fundamentals that have worked for us elsewhere. I think the critical thing here is to be patient."

Before Vamos took over as chief executive in early 2018, Xero had corrected its strategy in the US, going back to working through accountants as its primary means of attracting its small business subscribers.

Although this strategy had already proven itself in other markets, Xero had been impatient with the slow pace of US accountants in moving to cloud accounting and had tried to go over their heads directly to small businesses, but that departure from strategy simply didn't work.

Vamos says it takes time to support accountants in adopting Xero and then rolling it out to their clients but "that tends to accelerate over time."

He's also optimistic about the opportunity in Canada, which, as a former British colony, has very similar characteristics to New Zealand, Australia and Britain.

With cloud accounting having achieved only about 2 per cent penetration in Canada, "that means there's a massive opportunity there for us."