Small business sector shows resilience in challenging conditions; operational discipline during COVID-19 drives free cash flow of $54 million

WELLINGTON, NEW ZEALAND - Media OutReach - 12 November 2020 - Xero Limited (ASX: XRO) today reports half year earnings to 30 September 2020(H1 FY21) that demonstrate the resilience of its global subscriber base, andits proactive response supporting customers and partners, in a challengingCOVID-19 environment. While COVID-19 had some impact on Xero's ability toacquire new customers during the period, subscribers grew by 19% to reach 2.45million with all markets making positive progress and Australia becoming Xero'sfirst market to pass one million subscribers.

Performance highlights H1 FY21 (All figures are in NZD and comparisons are madeagainst H1 FY20)

• Operatingrevenue was up 21% to $409.8 million (19% in constant currency (CC))

• Annualisedmonthly recurring revenue (AMRR) grew 15% to $877.6 million

• Totalsubscribers increased by 19% to 2.45 million

• Totalsubscriber lifetime value (LTV) grew by 15% (in both actual and CC) to $6.2billion

• Free cash flowwas $54.3 million, compared to $4.8 million

• EBITDA of $120.8million increased 86% from $64.9 million

• Net profit after tax increased by $33.2 million to$34.5 million

*NM stands for not meaningful

**pp stands for percentage points

Xero's H1FY21

Xero prioritisedinvesting for the long term and addressing customer needs with a record levelof product development spend of almost $140 million in H1 FY21. This was up 29%compared to the same period last year, and significantly higher than operatingrevenue growth of 21%. Xero also continued to focus on execution of itsstrategy and M&A opportunities, demonstrated by the acquisition of invoicelending platform Waddle.

Thestrong EBITDA, free cash flow and net profit performance in H1 FY21 reflectsXero's disciplined financial management during a highly uncertain period. Thisapproach contributed to a 10% reduction in sales and marketing costs when compared to H1 FY20. Uncertainty fromCOVID-19 is likely to remain. However, Xero's focus on long-term growth, combinedwith a return to more normal market conditions, would be expected to drive areturn to positive sales and marketing cost growth.

Whilethere was some volatility in churn during the period, overall reported MonthlyRecurring Revenue (MRR) churn in H1 FY21 was consistent with H1 FY20 at 1.11%.

CEOSteve Vamos said: "This result demonstrates the value our customers attributeto their Xero subscription and the underlying strength of Xero's businessmodel. We continue to prioritise investment in customer growth and productdevelopment in line with the long term opportunity we see."

"Subscribergrowth was positive in all geographies, with stronger net subscriber additionsin Australia and New Zealand with relatively less disruption in those marketsfrom COVID-19. During a difficult period, it's pleasing to report we grew toexceed one million subscribers in both Australia and in our Internationalsegment."

"We'veresponded to COVID-19 by delivering new products and services that meet ourcustomers' and partners' changing needs. These include assisting with smallbusiness access to government stimulus and delivering Xero On Air, our firstglobal digital customer and partner engagement event."

Markethighlights

Australia subscribers grew by 21% compared to H1 FY20, to1.01 million subscribers. Revenue was up 18% (17% in CC). The AustralianTaxation Office Single Touch Payroll initiative, and the roll-out of JobKeeperstimulus payments by the Australian Government, contributed to continued strongdemand for cloud accounting in this market.

UK subscribers grew by 19% compared to H1 FY20, to638,000 subscribers. Revenue was up 33% (29% in CC), a robust outcome in one ofXero's more COVID-19 affected markets.

NewZealand subscribers increased by 13%compared to H1 FY20, to 414,000, with revenue rising by 13%. An acceleration innet subscriber additions from 16,000 in H1 FY20 to 22,000 net subscriberadditions in H1 FY21, demonstrated ongoing demand for Xero in its first and mostdeveloped market.

NorthAmerica subscribers increased by 17%to 251,000 compared to H1 FY20 as Xero continued to focus on the partnerchannel. Revenue grew 4% (2% in CC). This reflected the bundling of Hubdoc intoXero Business Edition subscriptions towards the end of FY20, with Hubdocsubscriptions most concentrated in North America. The absence ofXerocon-related revenue also contributed to this outcome.

Rest ofWorld continued momentum insubscribers, increasing 37% compared to H1 FY20 at 136,000. Revenue was up 38%(35% in CC). Growth was led by South Africa, and further progress was made inSingapore.

Outlook

Xero is a long-term oriented business withambitions for high-growth. We continue to operate with disciplined costmanagement and targeted allocation of capital. This allows us to remain agileso we can continue to innovate, invest in new products and customer growth, andrespond to opportunities and changes in our operating environment.

The continued uncertainty created by COVID-19 meansit remains speculative to provide further commentary on our expected FY21performance at this time.

Xero'searnings webcast

Xero's H1 FY21 earnings webcast at 10.30am AEDT on 12November can be accessed at: https://webcast.openbriefing.com/6654/  

Pre-registration for the event is encouraged at the abovelink. A replay of the webcast will be available on Xero's Investor Centre: www.xero.com/about/investors

Authorisedfor release to the ASX by the Chair of the Board and the Chair of the Audit andRisk Management Committee.

About Xero

Xero is a cloud-based accounting software platform for smallbusinesses with 2.45 million subscribers globally. Through Xero, small businessowners and their advisors have access to real-time financial data any time,anywhere and on any device. Xero offers an ecosystem of over 800 third-partyapps and 200 plus connections to banks and other financial partners. In 2020,Xero was included in the Bloomberg Gender-Equality Index and recognised by IDC MarketScape as aleader in its worldwide SaaS and cloud-enabled small business finance andaccounting applications vendor assessment.

About Subscribers

Xero measures subscribers as each unique subscription to aXero-offered product that is purchased by a user (eg a small business oraccounting partner) and which is, or is available to be, deployed. Subscribersthat have multiple subscriptions to integrated products on the Xero platformare counted as a single subscriber.

About ConstantCurrency

Constant currency comparisons for revenue are basedon average exchange rates for the 6 months ended 30 September 2019. Comparisonsfor ARPU, AMRR and lifetime value are based on exchange rates at 30 September2019. 

About Free CashFlow

Free cash flow is defined as cash flows from operating activities lesscash flows used for investing activities excluding cash used for acquisitionsof, and investments into, businesses and strategic assets.