The Xero Limited (ASX: XRO) share price is under the spotlight today after the tech company announced a program to reduce costs.
Xero is one of the world leaders when it comes to accounting technology for small and medium businesses.
Cost cutting at Xero
The company is looking to improve efficiencies and “drive greater operating leverage”, while achieving a “better balance of growth and profitability.”
Xero said this would strengthen its ability to deliver value to customers and “take advantage of the significant growth opportunity.”
The company will be “reshaping its organisational structure by cutting 700 to 800 jobs across the business. This will “improve Xero’s operating profitability as its operating expense to revenue ratio is expected to reduce significantly in FY24.”
While investing in strategic priorities, management is targeting an operating expense-to-revenue ratio of around 75% in FY24.
The current guidance for FY23 is that total operating expenses as a percentage of operating revenue is expected to be towards the lower end of a range of between 80% to 85%. That guidance excludes restructuring charges related to this program, of between $25 million to $35 million.
Xero also said that it was going to exit its cloud-based lending platform called Waddle, which Xero bought in 2020. This is going to come with a write-down of between $30 million to $40 million in FY23.
Management commentary
The new Xero CEO Singh Cassidy said:
These are difficult but necessary steps as we work to further strengthen Xero for the future, while carefully balancing the interests of all our stakeholders. We don’t take these decisions lightly and we recognise today is a very hard day for our people. Todayʼs announcement does not take away from the significant contributions from everyone at Xero. We take our purpose and values seriously, and are committed to working closely with each impacted employee and providing them with the right level of support.
Final thoughts on the Xero share price
Xero said that its business remains “well positioned to realise its vision to be the most trusted and insightful small business platform.”
The ASX tech share looks like a very promising business to me. Stronger profit margins could revitalise investor interest in the business. I think it could be one of the best performers in the ASX 200 this year as good profitability starts showing in FY24.
