Goldman Sachs reaffirms Buy, new PT $133

Goldman Sachs - 18 April 2022

We update our Xero estimates on the back of our channel checks, industry news and high frequency datapoints.

Key takeaways:
Our accountant channel checks provided positive feedback for Xero’s offering in APAC/UK, with room for improvement in the US/RoW, noting the software enables operating efficiency, new customer wins, fee uplift and increases retention (outperforming customer churn Exhibit 5). However, on app store fees, accountant partners remain cautious that it may disrupt the open API ecosystem.Regulation a meaningful tailwind with the recent Aus federal budget enabling SME’s to expense 120% of cloud accounting/e-invoicing software. Looking forward, e-invoice adoption is gaining further momentum, with NZ’s Feb-22 B2G announcement, Xero’s Mar-22 submission to Aus Treasury on its open consultation, and Latam/Europe/RoW all having upcoming policy changes.

High frequency data points highlight (1) Xero has had positive app download momentum in USA/RoW during 2H22; (2) Xero vacancies have normalised into 2H22 post flagged investment at the FY21 result; (3) app integrations have slowed marginally since introducing fees in Aug-21; while (4) PH/HK/ZA have accelerated growth in accountant partners (UK/Aus remain the largest channels).

Europe opportunity remains topical 12 months post the acquisition of Planday noting that c.70% of existing R&D can be leveraged into new markets. We continue to believe Western Europe is the next logical step for Xero (Planday footprint opens up GSe 7.5mn Subs, NZ$1.8bn revenue), with cloud penetration currently relatively low (somewhat higher in Scandinavia). This was confirmed by Visma, a Norway based hybrid accounting SaaS provider, which recently spoke at our DTS conference to the low levels of competition it has seen across Europe.

Following the recent underperformance (absolute/relative), we see an attractive entry point into what is a compelling global growth story and our preferred large cap technology name in ANZ. We make minor revenue changes on 2H22 downloads, ANZ regulatory tailwinds and FX (revenue outcome flat), with EBIT changes driven off a low base. We re-iterate our Buy on Xero (12m TP -1% to A$133), expecting revenue acceleration into FY22 to drive outperformance, with strong unit economics enabling continued LT growth (NZ$76bn 2020 TAM).