Xero - FY21 - Goldman Sachs updated report - $151 target lowered...

Xero - FY21 - Goldman Sachs updated report - $151 target lowered from $153. Buy rating.

In our view, Xero delivered a positive FY21 result, with revenue +2% ahead of GSe, as the company showed stronger sub growth across all key markets, without sacrificing unit economics. Sub momentum also improved across 2H21 (i.e. record March) and churn declined meaningfully (despite the growth). We believe this reflects the increased importance of Xero’s products through an accelerating period of global digitisation, with Xero meaningfully increased its investment into product/marketing as it looks to capitalize on this opportunity. This drove a -13% EBITDA miss, along with FY22 opex guidance that was well ahead of expectations (i.e. 82-87% of sales vs. GSe 77%).

Although Xero blended ARPU was -1% vs. GSe, we note that on a reported basis, Xero ARPU only declined -1% in constant currency terms, with ANZ/Int. ARPU +0%/-3%, a solid outcome in our view. We note the headline ARPU was impacted by a number of factors, including: (1) lost Hubdoc revenues (previously separate revenues, now bundled in the core product, but with the associated price rise implemented in Mar-21; (2) FX headwinds; (3) Sub mix, with US market lower ARPU given no-payroll & 100% sold through partner channel (vs. c.70% in ANZ); (4) Traction from Xero Starter Pack, but noting its A$27/m price is only marginally dilutive to AU ARPU (A$27.50).

Reflecting the FY21 result and strong sub momentum, we revise FY22-23 revenue +3 to +4%. However, given the step up in investment our EBITDA is -29%/-28%, but our FY30+ earnings are largely unchanged. Consequently, our XRO 12m TP is -1% to A$151 given a -1% DCF value (lost near-term cashflows) and -2% in our EV/GP (higher GP, offset by 2X multiple reduction, in-line with US SaaS peers). With strong subscriber and revenue trends we remain positive on Xero and retain our Buy, with +28% upside potential.