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Why the Xero share price crashed on Thursday

We examine the highlights from the cloud accounting software company’s latest annual report.

Why the Xero share price crashed on Thursday Source: Bloomberg

2021 in Review

Cloud accounting software company Xero (ticker: XRO) delivered another good set of results as part of its full-year report on Thursday, revealing solid growth across the top and bottom-line. Despite that, the stock fell sharply in response.

Impressively, while the company noted that the COVID-19 pandemic impacted its first-half performance, across the second -half, subscriber growth accelerated. Xero said it added 288 thousand new subscribers in the second half – a record for the company. Overall, Xero now boasts 2.7 million paying subscribers, with the company adding 456 thousand new subscribers in fiscal 2021, overall.

Growth in the company’s international markets also saw a step-up in the second-half of 2021, while good momentum was maintained in Xero’s core markets of Australia and New Zealand.

Off the back of this, the company notched up solid revenue growth – booking $848.8 million in revenue for the full-year – implying a year on year growth rate of 18%. On a per user basis, revenue dipped slightly, with Xero’s ARPU coming in at $29.30.

Despite APRU dipping slighlty, the company reported a strong uptick in the life time value (LTV) of its customers, rising to $7.65 billion in FY21 from $5.53 billion in FY20.

How did this all impact earnings?

From an earnings (EBITDA) perspective, 2021 marked a period of strong growth: Xero saw its EBITDA gain 39%, to come in at $191 million. Elsewhere, net profits came in at $19.8 million and free cash flow was $56.9 million, double what it was a year ago.

Why the Xero share price is down

Despite these results, investors sold the stock off heavily on Thursday, with the Xero share price down 10% in the opening hour of trade. At the time of writing Xero traded at $125.81 per share.

Part of this sell-off looks to be related to disappointment around Xero’s FY21 results, with analysts from RBC saying that the 'Implied EBITDA guidance appears a >20% miss to consensus, noting guidance is for OPEX rather than EBITDA.'

Compounding such issues, tech stocks in general have faced heavy selling pressure in recent days, as rising inflation concerns emerge.

The Nasdaq 100 fell 2.62% overnight after US CPI numbers shot the lights out, with the headline CPI figure coming in at 4.2%. IG Market Analyst, Kyle Rodda, elaborated upon the impact of those inflation figures, saying:

‘The numbers were a shock to the market. Bets of Fed hikes were boosted. After weeks of sluggish price action, yields jumped, with the US yield curve almost as steep as it’s been since the beginning of the COVID-19 crisis.’

‘The US Dollar ripped-face, as traders placed their bets on US economic exceptionalism. While stocks, naturally, plunged on the prospect of tighter policy and the more immediate impact of higher-risk free rates.’

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