Xero subs surge to 1.6m, but loss widens on writedown

Former Apple Australia and Microsoft Australia country manager Steve Vamos (left) took over from Xero's founding director Rod Drury on April 1. The pair are pictured at Brisbane XeroCon in September.

There is more red ink at Xero, but all other metrics are heading in the right direction.

The cloud accounting company has reported a first-half net loss of $28.6 million, compared to its first half 2018 net loss of $19.6m.

Speaking to the Herald this morning soon after the result was released, chief executive Steve Vamos pinned the wider loss on a $16.2m impairment incurred when Xero decided to abandon its inhouse payroll software development effort for US market in a favour of an alliance with Gusto.

Ebidta was $16.8m, a slight increase on the $15.6m reported for the year-ago period.

Revenue grew 37 per cent to $256.5m, a faster pace than the first half of 2018 when it grew 33% in constant currency terms (although now listed in Australia, Xero is still registered in New Zealand and reports its results in NZ$).

Annualised monthly recurring revenue (or the latest month x12) increased 40 per cent (against a 36 per cent gain in the same period last year) for an annual run rate of $589.1m.

Cash-burn on operations (the rate at which a company is spending its capital to finance its overheads) dropped significantly in both absolute and proportional terms in the six months to September 30, allowing the company to double its pre-impairments operating earnings surplus for the half-year from $17.1 million to $34.5 million.

Operating cashflow increased from the year-ago $20.9m to $36m.

Xero's Sydney-based chief executive Steve Vamos has quit Telstra's board, but is keeping his Fletcher Building directorship. Photo / Supplied.

There were net subscriber additions during the half of 193,000, taking Xero's total subscriber base to 1.58m as of September 30, excluding 174,000 from the Hubdoc acquisition.

There were promising signs in the US and Canada where Xero has struggled to gain traction against the incumbent Intuit. North American sub numbers jumped 45% to 198,000.

Average revenue per user increased 6 per cent (vs 3 per cent growth last year) to $31.10.

Vamos once again did not put a timeline on the accounting software company's push for a maiden profit, but re-iterated it could reach cashflow breakeven without the need to raise more capital - bar for M&A activity - for which Xero recently raised US$300m via a convertible note offering.

Xero's August purchase of Canadian company Hubdoc for US$70m should give investors a good line on the sort of businesses his company was in the market for, Vamos said. Hubdoc's software is by accountants and small businesses to capture data from bills and statements from organisations such as banks, utilities and suppliers. Xero is interested in anything that can be scaled and boost its small business platform, the CEO said.

Earlier this year, the NZ Shareholders Association question Vamos's workload.

The Australian quit Telstra's board on October 16. He told the Herald this morning that he have up his seat because "Xero is my priority," and because he had already served three terms.

He planned to keep his Fletcher Building directorship, however.

Earlier, NZSA chief executive Michael Midgley gave qualified support to Vamos staying on Fletcher Building's board, given he has jettisoned Telstra. The troubled contruction company could benefit from the Australian's tech expertise, Midgley said.

Rod Drury has largely disappeared from the radar since he quit as chief executive in April 1. Vamos said he still talks regularly to the Xero founder, who remains a director. The pair were in San Francisco together for a board meeting last week and made a joint appearance at Xerocon in Brisbane during September.

Xero shares surged in the New Year after the company switched to an ASX-only listing, then continued their bull run as the firm was added to the ASX100 in March then reported solid earnings in May.

Xero shares [ASX:XRO] surged in the New Year after the company switched to an ASX-only listing.

The bull-run continued as it joined the ASX100 index (replacing Fairfax) in March and reported solid full-year financials in May.

Its stock it an all-time high closing-day high of A$52.34 on August 24 before being caught in the general market pullback.

It closed Wednesday at A$42.97 for a market cap of A$6.04 billion ($6.5b). In midday trading today it was up 0.68% to A$43.26.

Xero's Australian subscriber base grew 27 per cent to 657,000 in the first half, with revenue increasing 33 per cent.

New Zealand saw 20 per cent subscriber growth to 324,000 and revenue growth of 22 per cent.

In Xero's other major market, the UK, sub numbers increased 40 per cent to 355,000 as revenue grew 45 per cent.

Xero opened offices in Hong Kong during the half-year and is reporting growth in South African sales.

Regional rival MYOB says it leads in growth across Australasia.

"In August, MYOB announced that it had added more than 186,000 subscriptions in the 12 months to June 2018, and was on track to add more than 200,000 during 2018," MYOB chief financial officer Richard Moore says.

"Our June result showed 61 per cent year on year growth in Australia and New Zealand, while Xero grew at 24 per cent."