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, and
its proactive response supporting customers and partners, in a challenging
COVID-19 environment. While COVID-19 had some impact on Xero’s ability to
acquire new customers during the period, subscribers grew by 19% to reach 2.45
million with all markets making positive progress and Australia becoming Xero’s
first market to pass one million subscribers.

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

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

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

• Total
  subscribers increased by 19% to 2.45 million

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

• Free cash flow
  was $54.3 million, compared to $4.8 million

• EBITDA of $120.8
  million 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 H1
FY21

Xero prioritised
investing for the long term and addressing customer needs with a record level
of 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 operating
revenue growth of 21%. Xero also continued to focus on execution of its
strategy and M&A opportunities, demonstrated by the acquisition of invoice
lending platform Waddle.

The
strong EBITDA, free cash flow and net profit performance in H1 FY21 reflects
Xero’s disciplined financial management during a highly uncertain period. This
approach contributed to a 10% reduction in 
sales and marketing costs when compared to H1 FY20. Uncertainty from
COVID-19 is likely to remain. However, Xero’s focus on long-term growth, combined
with a return to more normal market conditions, would be expected to drive a
return to positive sales and marketing cost growth.

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

CEO
Steve Vamos said: “This result demonstrates the value our customers attribute
to their Xero subscription and the underlying strength of Xero’s business
model. We continue to prioritise investment in customer growth and product
development in line with the long term opportunity we see.”

“Subscriber
growth was positive in all geographies, with stronger net subscriber additions
in Australia and New Zealand with relatively less disruption in those markets
from COVID-19. During a difficult period, it’s pleasing to report we grew to
exceed one million subscribers in both Australia and in our International
segment.”

“We’ve
responded to COVID-19 by delivering new products and services that meet our
customers’ and partners’ changing needs. These include assisting with small
business access to government stimulus and delivering Xero On Air, our first
global digital customer and partner engagement event.”

Market
highlights

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

UK subscribers grew by 19% compared to H1 FY20, to
638,000 subscribers. Revenue was up 33% (29% in CC), a robust outcome in one of
Xero’s more COVID-19 affected markets.

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

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

Rest of
World continued momentum in
subscribers, 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 in
Singapore.

Outlook

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

The continued uncertainty created by COVID-19 means
it remains speculative to provide further commentary on our expected FY21
performance at this time.

Xero’s
earnings webcast

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

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

Authorised
for release to the ASX by the Chair of the Board and the Chair of the Audit and
Risk Management Committee.

About Xero

Xero is a cloud-based accounting software platform for small
businesses with 2.45 million subscribers globally. Through Xero, small business
owners 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-party
apps 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 a
leader in its worldwide SaaS and cloud-enabled small business finance and
accounting applications vendor assessment.

About Subscribers

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

About Constant
Currency

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

About Free Cash
Flow

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