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From Xero to $1 billion: Aussie tech company’s founder joins global big time

Thursday’s surge gave the accounting platform a market capitalisation of $8.6 billion, valuing Mr Drury’s 12.58 per cent stake in Xero at $1.08 billion. Mr Drury had already sold down some of his holding in 2017 netting $NZ95 million.

During the year Xero acquired data capture business Hubdoc and UK tax filing and compliance tool Instafile while its closest rival in Australia, MYOB, dealt with a takeover bid.

Xero founder Rod Drury.

Xero founder Rod Drury.

Mr Vamos said the results were “strong” with major milestones including Xero’s first positive free cash flow result.

“Number one is continuing to grow fast given the scale and the size of the opportunity Xero has and growing our platform business,” he said.

“Generating cash and being cash flow positive and being able to fund the business as it grows, if you do those things well profitability will take care of itself. All these things are outcomes.”

Mr Vamos pointed to UK government’s ‘Making Tax Digital’ initiative and the move to single touch payroll in Australia as driving subscriptions.

Xero has a path to being a really awfully large company.

John Hempton

Investor John Hempton, of Bronte Capital which an investment of about $72 million in Xero, said if the company were on listed on Wall Street it would be trading at 50 per cent higher.

“Xero has a path to being a really awfully large company,” he said.

“The goal is to get half the world eventually having most of their small business compliance, tax and all of that using a general accounting platform, you would have to say they are on that path. That path is a long and winding path but if they succeed at that, it is a $100 billion company.”

Xero is used by many small businesses with local subscribers totalling 1.077 million. For the first time Xero’s international net subscriber additions exceeded those from Australia and New Zealand totalling 239,000 compared to 139,000. These numbers were boosted by the United Kingdom which added 151,000 subscribers over the 2019 financial year.

“It is growing like a weed in the UK and growing ok in America, the former is not surprising as Sage is a mess and we know it is a mess because it stopped publishing subscriber numbers, the latter is more surprising as Intuit is a very good company,” Mr Hempton said.

A positive free cash flow result, of $6.5 million, was delivered for the first time, equating to 1.2 per cent of operating revenue but Mr Hempton said he was not concerned with profitability.

“I am sort of annoyed that they are cash flow positive,” he said. “If you have extra cash why don’t you put the foot to the floor? Why not just grow fast?”.

Xero’s results show it increased its operating revenue for the year by 36 per cent to $552.8 million for the year with 32 per cent growth in its annualised monthly recurring revenue, which accounts for future revenue from subscriptions, to $638.2 million.

The company booked 31 per cent growth in total subscribers to 1.818 million.

Earnings before interest, tax, depreciation and amortisation (EBITDA) of $73.2 million increased from $48.2 million in the prior period year, while EBITDA excluding impairments increased 84 per cent to $91.8 million.

In October 2018 Xero raised $US300 million ($451 million) through a convertible notes offering in order to execute acquisitions and investments.

Andrew Mitchell, senior portfolio manager at Ophir Asset Management, said being able to fund a high level of growth with the existing balance sheet is important so Xero’s profitability will make new investors look at it.

“They are now guiding that they will reinvest surplus cash back into the business this will certainly help maintain growth rates,” he said.

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Cara is the small business editor for The Age and The Sydney Morning Herald based in Melbourne

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