Xero Limited (ASX: XRO) recently reported its HY21 result. I think there are some good signs for Xero in it.
A quick recap of some numbers
In the FY21 half-year report, operating revenue went up by 21% to NZ$410 million, total subscribers rose by 19% to 2.45 million, EBITDA (click here to learn what EBITDA means) went up by 86% to NZ$120.7 million. Net profit after tax (NPAT) grew from NZ$1.3 million to NZ$34.5 million and free cash flow grew from NZ$4.8 million to NZ$54.3 million.
Perhaps the most important figure was that Xero’s gross profit margin grew by another 50 basis points (0.5%) to 85.7%.
Why I think Xero’s FY21 result was so good
One great point was that total subscribers continue to grow fast despite all of the COVID-19 impacts on small and medium businesses, particularly in the cafe and restaurant space.
The scalability is the area that I want to focus on the most here. Xero reported that its operating revenue rose NZ$71.2 million. With that revenue added, EBITDA grew by NZ$55.9 million (78.5% of revenue), net profit rose by NZ$33.15 million (46.6% of revenue) and free cash flow went up NZ$49.4 million (69.4% of revenue). Whilst some of this increase only occurred because Xero was being careful with its marketing spending, I think it shows that Xero’s various underlying profit margins are/could be very high for new revenue.
If it slowed down some of its investing for growth then Xero could be a very profitable business, particularly as a software business with strong network effects and a loyal customer base.
But plenty of investors know Xero is great – it’s why the Xero share price is up another 3% to $127. There are other ASX growth shares I’d prefer to buy first like Pushpay Holdings Ltd (ASX: PPH).
