The Xero Limited (ASX: XRO) share price is charging higher following the release of its half year update.
In morning trade the cloud-based business and accounting platform provider’s shares are up almost 7% to a record high of $130.95.
How did Xero perform in the first half?
For the six months ended 30 September, Xero continued its positive form despite the challenging COVID-19 environment.
Management feels that this demonstrate the resilience of its global subscriber base and its proactive response supporting customers and partners.
During the half, the company’s operating revenue grew 21% over the prior corresponding period to NZ$409.8 million. This was a 19% increase in constant currency.
This led to Xero’s annualised monthly recurring revenue (AMRR) growing 15% to NZ$877.6 million.
A key driver of this growth was a 19% increase in total subscribers to 2.45 million. Management advised that all markets made positive progress and Australia became Xero’s first market to pass one million subscribers.
And while there was some volatility in churn during the half, overall reported MRR churn was consistent at 1.11%.
One key metric of interest for investors is the company’s total subscriber lifetime value (LTV). This increased 15% over the prior corresponding period to NZ$6.2 billion. It is also up 12.7% since the end of FY 2020.
What about earnings and free cash flow?
Operating leverage was on display for all to see in the first half of FY 2021.
Despite revenue increasing 21%, Xero’s earnings before interest, tax, depreciation and amortisation (EBITDA) increased by an even greater 86% to NZ$64.9 million.
Things were even better on the bottom line, with Xero’s net profit after tax coming in 26 times greater than the prior corresponding period at NZ$34.5 million.
Also growing strongly was the company’s free cash flow, which came in at NZ$54.3 million for the half. This is up from NZ$4.8 million a year earlier.
Management advised that its strong earnings and free cash flow growth reflects Xero’s disciplined financial management during a highly uncertain period. This approach contributed to a 10% reduction in sales and marketing costs when compared to the prior corresponding period.
And while uncertainty from COVID-19 is likely to remain, management expects Xero’s focus on long-term growth, combined with a return to more normal market conditions, to lead to a return to sales and marketing cost growth in the future.
Xero’s CEO, Steve Vamos, commented: “This result demonstrates the value our customers attribute to their Xero subscription and the underlying strength of Xero’s business model. We continue to prioritise investment in customer growth and product development in line with the long term opportunity we see.”
“Subscriber growth was positive in all geographies, with stronger net subscriber additions in Australia and New Zealand with relatively less disruption in those markets from COVID-19. During a difficult period, it’s pleasing to report we grew to exceed one million subscribers in both Australia and in our International segment,” he added.
Management notes that Xero is a long-term oriented business with ambitions for high-growth.
It continues to operate with disciplined cost management and targeted allocation of capital. It feels this allows it to remain agile so it can continue to innovate, invest in new products and customer growth, and respond to opportunities and changes in the operating environment.
However, due to the continued uncertainty created by COVID-19, it believes it is speculative to provide further commentary on its expected FY 2021 performance at this time.
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James Mickleboro has no position in any of the stocks mentioned. 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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