Xero shares plunge to March 2020 lows as losses widen, earnings miss expectations

Xero (ASX: XRO) reported a mixed half-year result with earnings below analyst expectations and widening losses. The company's stock tumbled -8.5% in early trade to $66.4, now down -54.5% year-to-date.

Results at a glance:

Source: Xero | Table: Market Index

CEO succession

Xero announced that Steve Vamos, who has served as CEO for almost five years, is retiring from the role and plans to return to previous activities in coaching and leadership development.

Sukhinder Singh Cassidy, a former President of Asia Pacific and Latin America at Google, will success Vamos in late November.

Subdued subscriber growth

Operating revenue rose 30% to $658.5m, which was ahead of Goldman Sachs expectations of 28%.

"While Xero delivered strong revenue growth in H1 FY23 and subscriber growth across all our markets, the subscriber outcome in some geographies was subdued," notes CEO Steve Vamos.

"Net subscriber additions in the UK were subdued due to slower than expected uptake of the final stage of 'Make Tax Digital' for VAT, a less than buoyant macro backdrop."

"Net subscriber additions in North America were impacted by seasonality, related to the timing of the tax year end," he added.

Choppy earnings

Earnings rose 11% to $108.6m compared to Goldman Sachs expectations of a 42% on-year jump.

The weaker-than-expected earnings growth reflects a negative $25.9m non-cash impairment from its Waddle acquisition, which was partially offset by revaluation gains of $10.8m.

Excluding these adjustments, earnings would have been $123.7m, up 28% compared to the prior period.

Total operating expenses as a percentage of operating revenue rose from 83.4% to 83.9% due to the costs associated with hosting three Xerocon events.

Excluding those events, the percentage figure would have been 82.0%.

Outlook

"We expect Xero’s momentum in subscriber additions in both the UK and North America to improve over the remainder of FY23, with performance in H2 FY23 expected to be similar or better than the prior comparable period," said Vamos.

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

Xero share price chart