Australia | Mar 14 2023
Announced lay-offs are a step toward reducing Xero’s operating expense in order to shift from investing in scale to making money.
-Xero to lay-off staff
-Revenue should not be impacted
-Technology function to be redesigned
-Subscriber growth trajectory unclear
By Greg Peel
The biggest victims of the global push by central banks to swiftly hike rates to combat inflation have been technology companies, for which a higher discount rate applied to future earnings has led to steep valuation de-rating. Hit hardest are those companies still in their growth phase, reinvesting revenues and thus yet to make a profit.
Last week accounting software firm Xero ((XRO)) announced a -14-17% reduction in its headcount, representing some 7000-8000 roles. The reduction now implies FY24 operating expense guidance as 75% of revenue, down from FY23 guidance of “the lower end of 80-85%”.
Brokers have cheered what they consider to be a positive if not unsurprising move from the new CEO. Citi notes Xero’s revenue/earnings per headcount has been limited to around 1% over the last two years and growth is expected to slow going forward due to delays in the UK government’s Making Tax Digital initiative and generally softer macro conditions.
Management has also flagged a redesign of the company’s Technology function in the upcoming quarter which could see the potential for further, albeit much smaller-scale, efficiencies, UBS notes, with full organisational design to be completed by July this year.
Brokers assume the headcount reduction will have no impact on revenue growth, although in announcing the cost-outs Xero provided limited detail on growth trajectory or subscriber growth profile.
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