Xero FY21 Goldman Sachs, First TakeInternational sub momentum...

Xero FY21 Goldman Sachs, First Take

International sub momentum positively surprises and justifies increased investment; Buy
13 May 2021 | 10:29AM AEST

Key numbers:
XRO reported FY21 Sales/EBITDA/NPAT +18%/+37%/+NZ$23mn vs. pcp to NZ$849mn/NZ$191mn/NZ$28mn, which was +2%/-12%/-NZ$11mn vs. GSe.
Cash conversion was strong (GOCF +35% to NZ$242mn, = 127% of EBITDA), with XRO net cash increasing to NZ$256mn (vs. NZ$178mn at 1H21).

Subscriber growth accelerates to record in 2H21:
2H21 was the strongest subscriber net adds half on record (+288k vs. +168k in 1H21), with International growth accelerating (+155k in 2H21 vs. +46k in 1H21, and nearly 3X GSe expectations). Key performers were the UK (+82k subs in 2H21, vs. +25k in 1H21), RoW (2H21 +39k, vs. +11k in 1H21) and North America (+34k adds, vs. +10k in 1H21) which likely benefited from C$ functionality launched late in 1H21. ANZ sub strength also continued and where ahead of GSe. The record subscriber growth for the group corresponded with a meaningful decline in churn in both ANZ and International, pleasing in our view. We would note that XRO ARPU were slightly below our expectations (-1% vs. GSe), impacted by FX, lost Xerocon revenue, launch of XRO starter product (lower ARPU), an international growth, particularly in North America (greater channel distribution which is lower ARPU). Platform revenues grew +21% and increased to 7% of XRO revenues.

Investment to continue in FY22E:
Xero provided cost outlook for FY22, including (1) 80-85% opex (excl. acquisition integration costs) as a % of operating revenue (vs. GSe 74%), suggesting additional R&D/Marketing investment; (2) 2% integration costs as a % of sales (from FY21 acquisitions); and affirmed (3) Planday is expected to contribute 3% of additional revenue growth in FY22.

Summary:
Overall we view the FY21 result as a positive, with Xero showing earlier than expected subscriber traction across all of its key international markets, but without sacrificing unit economics. As a result, we believe the accelerated investment is more than justified, given the enormous TAM the company is targeting.

XRO.AX: Buy. Our 12m TP of A$153 is based on (1) 50% weighted EV/GP-based SOTP methodology; and (2) 50% weighted DCF valuation. Key downside risks: (1) competition; (2) disintermediation; (3) COVID SMB headwinds; (4) Lower platform revenues; and (5) failed expansion.