Investors had a downbeat reaction to Xero's first year of full-profit, as chief executive Steve Vamos said the Covid-19 impact had been modest so far but that his company is expecting a significant impact over the coming year.
Shares were down 4.3 per cent in late trading to A$80.15 on the ASX, although the stock is well above its March 23 virus trough of A$58.75.
Xero turned in a $3.3m annual net profit from a $27.1m net loss in the prior year as subscriber numbers grew 26 per cent to nearly 2.3 million and revenue rose 30 per cent.
But the cloud accounting company - like many list firms amid the coronavirus outbreak - gave no guidance for the year ahead.
Vamos did offer that initial analysis of Australian subscribers was that the sectors most impacted by the crisis were hospitality, arts, and entertainment.
Customer surveys showed most had been significantly impacted, "with many foreseeing a negative business outlook".
Last month, Xero did not bow to users who called for cuts to its monthly pricing to support struggling small businesses, but did cancel a round of planned price increases across multiple regions.
Fisher Funds senior portfolio manager Sam Dickie is bullish on Xero's prospects, however.
"They're one of those rare companies that's going to aim to come out the other side of this as a stronger company," Dickie told the Herald.
Juha Saarinen: Zero subscription relief from Xero during lockdown
"Everyone in the market has been super-focused on balance sheet liquidity for obvious reasons and these guys are extremely flush with cash. They have almost $700m of available liquidity to a) support the business but b) be on the front foot with acquisitions."
Xero said its net cash position was $111.5m as of March 31, from the year-ago $100.6m. It said including undrawn down debt facilities, its "total available liquid resources" were $686m.
Cash pile means no need to cut bone and muscle
"It's so important to be cash-rich for so many reasons and yes M&A is one - but the other is that there are going to be some companies who are not cash-rich who are going to have to not just cut fat but bone and muscle," Dickie said.
"They're cutting just trimming a few excess staff here and there but cutting into their product development."
Xero was freezing some hiring and lightly trimming fat "here and there".
By contrast, a well-placed source told the Herald that Xero's Australasian rival MYOB was cutting 130 positions across Australia and New Zealand. MYOB, which delisted from the ASX in April last year following a leveraged private equity takeover, had no immediate comment.
While today's share price fall indicates some Xero investors could be spooked by Covid-19's impact on the year - or years - ahead, Dickie saw volatility as the normal state of affairs for the small business market that Xero targets.
"It's not like they're not used to dealing with that because the average death rate for SMEs globally is 10 per cent per annum anyway. So over five years, you'd expect 50 per cent of SMEs to fail," he said.
He also said that while the pie might shrink, Xero could still grow by grabbing a larger share, given only around 10 per cent of small businesses globally had adopted cloud accounting software.
Dickie said he was heartened by Xero's performance in the UK, where subscriber numbers were "soggier than expected" but total revenue increased on upselling.
He added, "New Zealand is an interesting market because it's the most mature. For me, it's like a peek into the future as to what's going to happen for the other markets - and it's still growing revenue at almost 20 per cent despite it being quite mature. I'd say that's probably two or three years ahead of Australia; probably five to seven years ahead of the UK and probably a decade ahead of the US so if we can expect the UK to still be growing at 20 per cent in five to seven years, that's a hell of a long growth runway ahead."
Vamos said that digitisation of tax and compliance, especially in the UK and Australia, remained a major driver for the business.
Xero reported earlier today that monthly recurring revenue for the year was up 29 per cent at $820.6m.
It said the first few months of the current year had been impacted, but "the continuing uncertainty surrounding Covid-19 means it would be speculative for us to say anything more at this time on its potential impact on our expected performance in 2021".
Xero said all regions had been impacted by Covid-19, with Britain the worst. Subscriber numbers in the UK were up 32 per cent at 613,000.
In other regions, Australian subscribers were up 26 per cent at 914,000, New Zealand was up 12 per cent at 392,000 and North America was up 24 per cent at 241,000. The rest of the world was up 51 per cent at 125,000.
Net subscriber additions rose to 467,000, up 8 per cent on the 432,000 gained during the previous financial year.
The company's earnings before interest, tax, depreciation, and amortisation rose 88 per cent to $137.7m in the period from $73.2m the previous year.
Vamos said helping customers is Xero's immediate priority but that its strategic ambitions are unchanged.
"We remain committed to our three strategic priorities: to drive cloud accounting around the world, grow the small business platform, and to continue to build for global scale and innovation," he said.
"Now, more than ever, small businesses are recognising the benefit of being able to use the cloud to run their businesses and manage their finances."