Xero reverts into loss-making territory in FY22: Expenses match revenue growth

FY22 results were a tough sell for Xero (ASX: XRO) as the business dug deep into its pockets to maintain a solid top line growth trajectory.

Xero shares dipped -6.3% ($81.52) as the market opened, down to a 2-year low.

Results at a glance

Financials

• Operating revenue of $1.096bn, up 29%

• Gross profit of $957m, up 31%

• Earnings of $212.6m, up 11%

• Net loss of -$9.1m compared to $19.8m profit a year ago

• Free cash flow of $2.07m compared to $56.9m a year ago

Subscribers

• Subscriber base of 3.27m, up 19%

• Net subscriber additions of 530,000, up 16%

• Average revenue per use of $31.37, up 7%

Solid results, wrong market

The last thing investors want to hear amid a rising interest rate environment and preference for strong cash flow businesses is a net loss and rising expenses.

Total operating expenses as a percentage of operating revenue was 84.0%, flat compared to last year.

However, given the 29% increase in operating revenue, it meant that costs were going up just as fast as the top line. Notable cost drivers include:

• Full-time equivalent employees increased to 4,784, up 31%

• Sales and marketing costs of $405.7m, up 32%

• Product design and development expenses of $372m, up 49%

Positive takeaways

There are a few positive takeaways from the tech market darling.

Xero's customer base is close to 3.3m and the average revenue per user (ARPU) rose 7% to $31.36.

The total lifetime value of subscribers rose 43% to $10.9bn thanks to factors including higher ARPU, favourable product mix and the value-add of recent acquisitions like Planday, Tickstar, TaxCycle and LOCATE Inventory.

Though, any positives were outweighed by the narrative of paying for growth and swinging back into net loss territory.

It doesn't help that the Nasdaq was down -3% overnight, with several fintech names like Affirm, Block and Coinbase down more than -15%.

Outlook

Xero said it expects total operating expenses as a percentage of operating revenue for FY23 to be towards the lower end of the 80-85% range.

Xero 12-month price chart