Xero Limited (XRO) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Xero Limited 2023 Results Conference Call. I am joined by Xero's Chief Executive Officer, Sukhinder Singh Cassidy; and Chief Financial Officer, Kirsty Godfrey-Billy. [Operator Instructions] I would now like to hand the conference over to Sukhinder Singh Cassidy, Chief Executive Officer of Xero. Please go ahead.

Thank you. Good morning from Sydney, Australia. Thank you for joining our investor briefing today, covering Xero's financial and operating results for the year ending March 31, 2023. I'm Sukhinder Singh Cassidy, and I'm with Kirsty Godfrey-Billy, our CEO -- our CFO. It's my first earnings call. You're all going to forgive me, I hope -- with Kirsty, our CFO. I'm pleased to be presenting my first results as the CEO of Xero. When I came to Xero, I was attracted to a great business that has strong momentum, a huge global TAM, a unique culture and a small business customer base, which I'm truly passionate about. My first 6 months of Xero and my first 90 days in the CEO seat have only increased my excitement for our business. Now let's move on to the agenda. The first item is an introduction and summary of Xero's performance during the year. I'll then pass to Kirsty to cover our financial results in detail before I finish with some observations in Xero's FY '24 outlook. We'll then move to Q&A. So moving to a summary of our results on Slide 5. Revenue grew 28% to $1.4 billion. This, combined with improving efficiency, delivered strong operating results. This is reflected across a number of our key metrics, which Kirsty will discuss in more detail later. Headline EBITDA of $158.4 million was impacted by noncash impairments and restructuring costs, resulting in a 26% reduction. However, backing these items out gives an adjusted EBITDA of $302 million, up 45%. This strong operating result drove free cash flow generation with free cash flow increasing to $102.3 million. This reinforces the strength of Xero's fundamental business. I have the privilege of leading it and the responsibility to make it even stronger. So now moving to our key themes. There are 3 themes I want to highlight from our full year 2023 performance today, as outlined on this slide. I'll talk briefly through each with more details in the following slides. Number one, we are a macro-resilient business that is generating strong growth. Number two, more customers than ever are subscribers to Xero and staying with us for longer. Number three, we are growing with efficiency as a company for the benefit of our customers and all the stakeholders we serve. Moving to the next slide. Xero is a macro-resilient business that continues to deliver strong top line growth. Here, you can see that revenue rose 28% or 25% on a constant currency basis. This was generated through both net subscriber addition of 470,000 or 14% growth and ARPU up by 10% or 8% on a constant currency basis. The strength of our high-value proposition is demonstrated by the number of customers who join us and stay with us. Moving on, as you can see on Slide 8, we have more subscribers than ever, with 3.74 million subs, supported by Xero to manage their business, tax prep and cash flow in a challenging macroeconomic environment. Xero is a critical tool for these businesses, demonstrated by the low monthly churn rate for our customers, which sits at 0.9%. Customers use us through accountants and bookkeepers or directly for tasks such as tax, bookkeeping, invoicing and payment collections and payroll. We are always thinking about how we can deliver more for our customers, however. And however they want to use us, whether that be through our core offering, the platform services we provide or via third-party apps in our app store, we want to be there to serve them. Slide 9 shows some of the value we're providing for customers. This next slide highlights that and the outcomes our team around the world has delivered for our customers this year. Across our portfolio of businesses, we have continued to roll out products to support our accounting and bookkeeping partners as well as small businesses. Examples include: continuing to evolve our practice management tools so that we can create a single source of client information for partners as they support their small business clients, working to localize our offering in the international segment. This has included the development of our beta product for U.S. sales tax in partnership with Avalara, alongside simpler solutions like providing local currency billings for customers in South Africa. We've also continued to invest in our Australian market. We've updated our payroll product for STP 2 Phase 2 compliance and also launched Planday for small businesses in Australia with the first 2 awards covered to date. Releasing products is not the only element of how we deliver for customers. We also resumed Xerocons and face-to-face roadshows this year as we exited COVID. Having attended Xerocon Sydney prior to becoming CEO, I truly understand the value that our partners place on the opportunity to connect, develop their skills and learn more about how they can help small businesses. The delivery for our customers around the world contributed to the strong progress we've seen across our regions. I'll now touch on our performance in the ANZ region. Slide 10 shows continued progress in Australia and New Zealand, with strong subscriber and revenue growth delivered as accountants and bookkeepers drove further adoption. This results in 26% revenue growth across the segment as we crossed the 2 million subscriber mark in ANZ and ARPU expanded 7% from price rises and platform revenues. Both countries contributed to this, with Australia growing revenue by 29% and adding a further 222,000 subs, while New Zealand grew revenue by 16% and added 55,000 subscribers. Turning to the international segment, where momentum returned in the second half, we delivered 30% revenue growth and reached 1.6 million subscribers, up 14%. ARPU grew by 15% to $35.1 or 9% on a constant currency basis. We had a busy year reconnecting face-to-face with our partners at Xerocon in London and New Orleans after almost 3 years. In the U.K., revenue increased by 27% to $371 million. On a constant currency basis, this was up 29%. Net subscriber additions for the year were 120,000, with subscriber adds of 76,000 in the second half, better than the prior period and in line with our guidance. The changes made to our partner sales channels have embedded down, and the team was able to convert the flow-through of the final phase of MTD for VAT into strong subscriber growth. We continue to see opportunities for both accountants and small businesses to digitize in the U.K. and welcome the opportunity of MTD for ITSA in the future. In North America, revenue increased by 32% to $96 million. In constant currency, revenue grew 21%, reflecting subscriber growth, price increases and Xerocon revenue. Total subscribers in North America reached 384,000, up 13% on the prior year, with performance weighted towards the second half. In line with guidance, the second half performance was similar to the prior year, reflecting normal seasonality and as our partner sales channel performance improved. In our Rest of World markets, revenue grew 36% or 26% in constant currency, with net subscriber additions of 28,000 resulting in total subscribers increasing by 12%. The second half was relatively muted across the region, in part reflecting the smaller emerging nature of these operations. I'll touch on this later in the presentation. Before I hand to Kirsty, I want to highlight another key theme, and that is growing with efficiency. We measure this through a number of metrics, but one that we are focusing more on is operating income, which we have calculated as gross profit less operating expenses. This provides a view of our operating performance. In calendar year 2022, we became increasingly focused on managing our cost base. Through more disciplined management of our headcount and other costs, we've met our FY '23 operating expense to revenue guidance with a ratio of 80.7%, excluding restructuring charges. This operating leverage improvement drove an increase in our operating income margin to 6.6%, excluding restructuring costs. In March of 2023, we began execution of a plan to further streamline and simplify our organization. This will set us up to be more efficient and effective in delivering for customers with our resources going forward. We also announced the majority of planned role reductions would happen through a consultation process with our employees, which is now complete. The technology team will be managing their own efficiency program to complete by July, which we are also on track to finish. In parallel, we are targeting an operating expense to revenue ratio in full year '24 of around 75%. This will improve our operating income margin compared to full year '23. We will continue to focus on managing our resources better to help support operating income growth and free cash flow. I'll now hand over to Kirsty to cover the financial results in more detail before coming back to you to talk about my observations as the new CEO as well as our full year '24 outlook.

Thanks, Sukhinder, and good morning, everyone. I'll now provide some further detail on our financial results for FY '23 starting on Slide 14. On this slide, I'd like to start on AMRR and gross profit. The result Xero has delivered showed continued growth momentum across the group, demonstrating our resilience against what remains a complex macroeconomic backdrop. As you can see on the left, headline AMRR increased 26% to over $1.5 billion, driven by subscriber growth of 14% and ARPU increase of 10%. This metric reflects the annualized benefit of price changes and subscriber growth that occurred in FY '23 and provides an effective exit rate for our business coming into FY '24. The chart on the right shows gross profit of over $1.2 billion, with a flat gross margin compared to last year of 87.3%. Our high gross margin, combined with the revenue result, has seen gross profit increase by 28%. The next slide gives you more of a feel for the composition of revenue and demonstrates resilience across both core and platform revenues. This shows the multiple levers for growth we have across our portfolio. Core accounting revenue growth of 27% or 24% in constant currency was driven by subscriber growth and ARPU expansion during the period from price changes. Platform revenues grew 26% or 25% in constant currency. This was ahead of subscriber growth as further take-up and usage of our financial service offerings and adjacent products continued. Platform revenues remained at 11% of operating revenues. There remains significant opportunity to drive revenue growth through both subscriber growth and ARPU expansion by deepening our relationships with customers. This includes driving further adoption of our platform products as cloud accounting adoption increases further. So let's turn to some of the underlying drivers. On this slide are the activity indicators for the 3 largest elements of platform revenue: payments, Planday and payroll. On the left, we show that monthly invoice payment value has continued to show strong growth, up 33% since March 2022. You can see an element of seasonality in the growth over the December period as typical users of our invoicing products such as trade people reduced activity. We are continuing to work on the user experience and onboarding for this product to drive further growth. The middle chart shows the number of Planday users at the end of each quarter since March '22. This increased by approximately 13% from the prior year period. It has been a transitional year for Planday, which Sukhinder will talk to more. The slightly lower growth rate in users reflects the business focusing on the smaller segment in its home European market, along with the operating environment in Europe. We have launched an initial version of Planday in Australia, however, it is really early days. The right-hand chart shows employees paid through Xero Payroll over the same period. This increased 11% since this time last year across Australia, New Zealand and the U.K. where we offer this product. This reflects a return to growth more in line with subscriber growth as STP tailwinds eased. We continue to see an opportunity to take our payroll offering to our U.K. customer base. We're also excited about the opportunity Planday provides in enhancing our Payroll product for small businesses with more complex employee needs. Moving to the next slide. We've talked to you in the past about the importance of SaaS metrics and reflecting the value of Xero. LTV is a high-level measure of the value customers bring to Xero over their lifetime which, on average, globally is just over 9 years. The chart on the left shows the expansion in LTV in recent years. Over this period, we have seen more customers join us, do more with us and stay with us for longer. This is reflected in the key contributors of LTV, which you can see on the right: ARPU of $34.61 and churn of 0.9%. We measure our efficiency of acquiring new subscribers through LTV to the average cost of acquiring a subscriber or LTV to CAC. The unit economics we generate in New Zealand and Australia reflects the value the Xero proposition can deliver in a more developed market, with an LTV to CAC ratio of 14%. While we don't expect to reach the same LTV to CAC in our international segment, over the long term, we see substantial opportunity to further grow LTV and become more efficient to drive an improvement in LTV to CAC. Moving to the next slide. Starting on the left, subscriber growth was the largest driver of LTV uplift with a $1.6 billion contribution. ARPU expansion on a constant currency basis contributed approximately $1 billion to the LTV uplift. The contribution of gross margin and churn to LTV was relatively unchanged, with both holding broadly flat, which is a great outcome. FX was also largely flat over the year. However, it was a slight drag over the first -- over the half due to movements in spot rates. I wanted to touch on some of the related metrics, which are highlighted in the chart on the right. LTV per subscriber, CAC and LTV to CAC. You'll also find these metrics in the appendix. LTV per subscriber grew 8% to $3,587. The CAC spend per gross new add was $551. This spend covers 3 broad areas: the cost of acquiring new subscribers, initiatives to educate existing customers to decrease churn and helping subscribers enhance the use of our platform. The majority of acquisition costs are expensed in the period, which is in contrast to the revenues from subscribers added, which is earned over multiple years. This CAC per gross add metric increased by 14% due to increased levels of investment in CAC, including the return of face-to-face events such as Xerocons, roadshows and increased travel in FY '23. CAC spend per gross add is reflected in CAC months increasing slightly from 15.5 months in March '22 to 15.9 months. This was reflected in both the ANZ and international segments. LTV to CAC decreased from 6.5% to 6.9% in March '22. The reduction here largely reflected higher CAC costs from the return of Xerocons and roadshows. Excluding this, LTV to CAC was 6.7%. Now I want to come back to ARPU and churn. As we show on the left-hand side of Slide 19, ARPU has increased by 10% or just over $3 over the year. The main elements of this movement are price increases, continued take-up of financial services and ecosystem products, offset by product mix over the period, and FX movements, which increased ARPU by approximately 3%. However, this was a slight drag over the second half due to volatility in exchange rates. As the right-hand chart shows, the decline in churn since COVID has been sustained and remains at 0.9% per month. While the trends are reassuring, given the complex macro backdrop, we're monitoring churn performance closely. We are aware of the pressure and uncertainty that small business owners are operating under. However, as we saw through COVID, macroeconomic challenges and disruptions can contribute to greater awareness of the value and importance of cloud accounting. Now moving to expenses. As Sukhinder said, we meet our guidance this year with operating expenses, excluding restructuring costs, equating to 80.7% of operating revenue. The performance in the second half was a pleasing outcome as the ratio, excluding restructuring charges, fell to 77.9%. This reflected the decisions we made to slow hiring and increase our discipline around programmatic spend. So let's look at the cost base in more detail. Sales and marketing costs increased 16%. The slower growth here resulted in these costs falling to 33.7% of revenue. Moving to G&A expenses. These fell to 12% of revenue. Finally, on product design and development costs, these increased to 35% of revenue. This reflected investment in our product road map. Total products and development costs, including capitalized costs, were 42.7%. I'd now like to provide some additional detail on our restructuring program we announced in early March. We incurred $34.7 million of restructuring costs associated with this program during the period, with the majority of the cash flow impact of these charges to be incurred in FY '24. The headcount reductions we made were broadly reflective of our overall headcount composition, with the largest reductions occurring in products and technology as well as sales and marketing. However, I would highlight that, in making reductions, we have been careful to consider our needs for future growth. Examples include insulating go-to-market teams closer to our customers. The reductions in sales and marketing have mainly impacted global support functions, rightsizing our business operations team across the organization, and over indexing towards senior roles. This included reducing spends and layers to increase speed and improve decision-making. Moving to Slide 21. Here we present a summary income statement for the year. To assist in understanding our operating performance, we have included 2 new metrics in our reporting: operating income and adjusted EBITDA. Operating income is calculated as gross profit less operating expenses and provides a view of our operating performance. It grew 61% to $57.3 million. You can see how this flows through in the table on the right. Adjusted EBITDA provides a view of underlying business performance and excludes the impact of certain noncash revaluations, other accounting adjustments and charges. We have provided a detailed reconciliation back to EBITDA on the top of the slide. The main items include: a $77.9 million noncash impairment to the carrying value of Planday, this was mainly from a reduction in market valuation multiples, along with the slightly weaker operating performance of the business; $48.5 million of noncash impairments and other costs related to the decision to exit Waddle, this includes an impact incurred in the first half of FY '23 as well as the impairment and additional costs we flagged in March; restructuring costs totaling $34.7 million and other noncash revaluations, including revaluation of contingent consideration and other management incentives totaling $17.9 million. These items contributed to our reported net loss of $114 million. On Slide 22, we show the trend of both EBITDA and adjusted EBITDA, which was 45% higher than the prior year. The underlying performance reflected in adjusted EBITDA shows the benefit of our increased focus on balancing growth and profitability. This reflects our continued revenue momentum, with 28% revenue growth against an operating expense growth of only 23%, excluding restructuring costs. This translated to a significant improvement in free cash flow margin to 7.3%, the highest that Xero has ever generated. So let's turn to the detail here on the next slide. This is a new slide, which shows how our shift towards balancing growth and profitability contributed to the improved free cash flow in FY '23. The waterfall chart highlights the year-on-year movements. The key operating cash flow components of this include: customer receipts, mainly reflecting payments from subscribers, this tends to follow our reported revenue; payments to suppliers and employees, the majority of which being staff costs; net cash interest payments, noting there is a divergence here from our P&L as the majority of the interest expense we incur as noncash amortization of our convertible note; and income tax payments, the limited size of which reflects our accumulated tax losses. Investing cash flows mainly reflects capitalized product development as well as investment in physical assets. Looking at the left-hand side of the chart, you can see how the decision to reinvest in our business, in line with our previous preference to reinvest cash generated resulted in a [indiscernible] free cash flow outcome in FY '22. Shifting to FY '23, the significant increase in free cash flow to above $100 million reflects a few drivers: strong revenue growth contributed to a $303 million increase in customer receipts; the flow-through of the decision we made to slow hiring resulted in the growth rate in payments to suppliers; and capitalized costs slowing. We also saw a benefit from the higher interest rate environment through earnings on our cash and short-term deposit balances. Turning to Slide 24. The increase in our cash generation this year was a key contributor to the $181 million increase in Xero's total cash position, including short-term deposits to just over $1.1 billion at 31st of March. Our term debt liability entirely reflects our Xero coupon convertible note that matures in December 2025. The increase here reflected exchange rate impacts as the note is in U.S. dollar denomination as well as the unwind of discount on the issue. Given the nature of our convertible note funding and another strong year of operating cash flow generation, we are comfortable with our net cash position at the end of the year at $97 million, up $46 million from the same time last year. Thank you. I'll now pass back to Sukhinder.

Thanks, Kirsty. Before we turn our attention to my observations on Xero and our future, I briefly wanted to touch on a few areas of our business and performance that may be of interest to you: North America, Planday and modernization, which you'll see on Slide 26. Starting with North America. While we delivered good results in FY '23, we are not satisfied with the size of our current business against the market opportunity. We remain confident that this is a critical market for SMBs and their advisers and that Xero is providing current value to customers. One of my tasks in the coming 6 months is to form a much more deep and nuanced view of our North America strategy and execution. I will be doing this in-depth work with our team to better understand the opportunity to improve and accelerate our path to our ambition with discipline. In the meantime, we will continue to be measured in our approach. And I hope to come back to you in November with my views. On Planday, I've mentioned the impact on the numbers, and Kirsty has discussed the details. The impairment is disappointing. As Kirsty said, it was mostly driven by a reduction in market valuation multiples, along with an element of operational performance. While we are pleased that Planday grew its business this year, there is no doubt that it was a year of transition for the team. The CEO chose to exit the business, and we took longer than expected to launch in Australia. However, we are excited about the appointment of our new CEO, Dave Lee, and our greater focus on the small business segment, both in Planday's home markets as well as through our Australia product launch. We see this as a great opportunity, given that SMBs continue to tell us that managing employee payroll and scheduling are core jobs to be done. And finally, on modernization. There has been considerable focus on the rate and size of P&T investment at Xero. I want to acknowledge that beyond shipping customer features month in and month out, we are amidst a continued multiyear journey to fully modernize our technology platform over the coming years while adding value for customers. I know you've heard about this before, but I wanted to call out specifically what this means. First, each year, we are ratably investing in modernization as part of our product and technology budget to modernize different aspects of our code base and application stack, which is included in our spend. We've been on this journey for some time, but there is still more work to do, given our company, like many others, has a range of maturities across our code base that have been built over a number of years. Secondly, certain parts of our code base have higher run costs than we would expect for a higher-performing SaaS business built on today's developer tools and capabilities. This will be one of the areas of strategic reinvestment that we highlighted for full year '24 and for continued measured investment in the coming years. I fully expect that as we progress and parts of our stack get modernized, we will be able to build with faster velocity for customers and with higher productivity in our product and engineering teams. Ultimately, as part of our code base modernizes, those pieces of the platform can run with lower run costs. But it is a journey and one we are making in parallel with continued product development to improve our features and offerings for our customers each year. I'd now like to look ahead a bit and share with you my key observations on Xero since taking over as CEO in February and as we move to our next phase of growth. On Slide 27, there are 3 key points that I'd like to highlight. Number one, we are well positioned with the significant long-term opportunity in cloud accounting. Number two, we have multiple levers for growth and are early in our journey of optimizing them. Number three, our opportunity is to be more disciplined and customer focused about how we grow and invest our capital to drive even greater value. Firstly, moving to Slide 28. I want to reiterate the excitement I have for the significant long-term opportunity. This slide shows you the size of this opportunity across the markets we operate in. By our estimate, there are over 45 million small businesses globally that can take advantage of what Xero has to offer. We are well positioned for this opportunity and have multiple levers for growth, and we are early in the journey of using them. We have a great portfolio of businesses with engaged customers and strong relationships. I'll spend a few minutes drilling into why I think we are overall well positioned. Speaking specifically to our regional views. Australia and New Zealand leads the world in small business accounting -- cloud accounting adoption and continues to demonstrate strong growth. This reflects the unit economics we can generate in a market that is more highly penetrated yet still underserved in its usage of the full suite of cloud platform solutions. In the U.K., changes to our partner sales approach have embedded down, and these will continue to support the digitization of small businesses. We are confident in the growth opportunity ahead of us as small businesses and accounting practices continue to adopt cloud accounting. While the flow-through of MTD Phase 2 supported performance in the second half of full year '23, we believe we can continue to drive migration to cloud accounting independent of specific government regulations. North America continues to be one of the largest SMB markets in the world when it comes to digitization of different SMB workflows. However, it remains a growth market with regard to adoption of cloud accounting software, which is still low, and we believe there is room for multiple winners in this market. However, as I said, our opportunities to understand how we can accelerate our execution against this opportunity, and I'll share my views once they are more fully formed. Rest of World currently reflects an amalgamation of businesses outside of our main region. We see opportunities to grow in these areas, in particular, South Africa and Singapore, where regulatory opportunities are more conducive. However, these businesses are merging, being small in scale, and early in the journey of cloud adoption. Moving to the next slide, I'd like to comment on our multiple levers for growth. As I said, we run a great portfolio of businesses with multiple products in multiple geographies, serving 2 key customer segments across 2 channels. This gives us levers for growth as the chart demonstrates. The X axis shows the levers we can use to drive TAM penetration across our regions, customer segments and channels. This highlights the optionality for how we can drive adoption globally and capture our share of this TAM. On the Y axis, we show the levers we have to expand ARPU through improving product mix, increasing attachment, better pricing and packaging strategies and deepening product usage across all segments and channels. This highlights the optionality for how we deliver our products to the market and meet all customers how and where they would like to be served. Each year, we can make decisions about how to use these levers. We are early in this journey, and I'm excited about what it can unlock. To bring this together, as the new CEO, there are 4 principles I'd like to see us use as a company to become smarter, faster, stronger together in our next chapter of investments. Becoming more focused, and by this, I mean more focused on serving our customers and adding value for them. This means being customer-centric in all we do and focusing on how we can continually add value for customers, serve them better and faster and increase their engagement with Xero. My slide earlier talked about the ways we added value in the last year. And this year, we will continue this, for example, improving our customer purchase and onboarding focus and improving the experience for customers who join us directly. Being more dynamic. This is about being more effective in our short-term allocation of resources operationally, so we can maximize our yield on our efforts. It focuses on the levers we have available today. An example includes shifting CAC allocations between geographies and customer channels based on the yield we are generating. Being more measured, this is about being clear on our investment and returns across our portfolio of bets so that we can optimize our capital allocation over the medium and long term and unlock value for shareholders. This will include being more granular and frequent in our assessment by linking investments to milestone delivery. This approach is being reflected in our continued investment in our technology to ensure that velocity and productivity from modernizing our code bases is realized with all adding value for customers, or by moving product investment to higher-yielding opportunities as reflected in the decision to exit Waddle and WorkflowMax. To help you better understand this, I want to spend a few minutes on how I think about capital allocation. I view this through the lens of 3 buckets: core, growth and emerging. This categorization will help us focus our investments and understand our potential for growth and returns across different time horizons and different levels of scale. I'll talk about how we think about these buckets and what's in them in more detail at a later date as we work through this. But I want to introduce this lens and provide a few examples so you can get a feel for how we're thinking about this. The core bucket is where we spend most of our time, and this is where we have a large TAM, scale and meaningful customer engagement already. Our growth bucket is for the regions or products where we see potential for growth in TAM or engagement. The emerging bucket is where we spend a smaller amount of time as we see the potential for that market or product area to reach growth status, but it is more nascent. Then the final principle is being more balanced. And this is about being balanced in our financial management as we drive both revenue growth and profitability. As I've mentioned before, our ambition is to build a truly world-class and higher-performing SaaS company. As a part of this, Xero will look to the Rule of 40 as a useful performance evaluation measure in managing this balance. I'd now like to turn to our outlook. Slide 31 and 32 are both slides you're familiar with. I will start by pointing to the statement at the top of the outlook slide, where we have adjusted from our prior preference to reinvesting cash flow generated, and we'll now seek to balance growth and profitability in our approach to capital allocation. The operating expense and operating income margin guidance underneath this reflects this. As we told you in March, along with reinvestment in strategic priorities, management is targeting an operating revenue to expense ratio in full year '24 of around 75%. The reinvestment will be split across sales and marketing opportunities and product and design, where, as we mentioned, we are continuing on our multiyear modernization journey while investing in value for our customers. Moving to the financial evolution slide. This shows you how the directional composition of this ratio in full year '24 as well as the longer-term evolution of these metrics. In full year '24, we expect to see improving efficiency across each of our expense lines. In the case of sales and marketing, the flat to down arrow reflects optionality to direct spending to revenue-generating opportunities across the levers I highlighted, of course, with the appropriate discipline. Our long-term aspiration is to improve both our operating expense ratio, and our operating income margin is 0. And the global cloud accounting industry continue to mature, noting that we haven't set a specific time line and there could be variability from period to period as we identify growth opportunities. This reflects the momentum the business has. As I said, I'm really excited about how we're positioned, the opportunity ahead and the multiple levers we have to grow. Before I conclude, I want to acknowledge around the world -- acknowledge our teams around the world, and I would really want to thank them for their hard work as they continue to do all they can to support our customers and partners. Thank you to all Xeros. That concludes our presentation, and I'll now pass it over to the moderator for your questions.

[Operator Instructions] The first question today comes from Bob Chen from JPMorgan.

Just on the comment around focusing on Rule of 40 is a bit of a metric. We're obviously still a fair bit away from that at the moment. What do you think would be sort of a reasonable time frame to sort of work towards? And how do you balance the reinvestment side as well as you are on this journey?

Thanks, Bob, for the question and good to meet you virtually. As we noted, we haven't really said anything about the timing in meeting the Rule of 40, but we do think it's a useful measure and one that helps us understand what it means to be a higher-performing SaaS company globally, which is our ambition. I think there are 2 components, as you well know, to Rule 40, and we really do think about this as balancing both of those. We are excited about our revenue growth opportunities, and we are excited about being more disciplined in pursuing them. So we will look to those opportunities. Kirsty, do you have anything to add?

No, I suppose just to give sort of a bit of a flavor of how we are looking at both of those sides. As I mentioned within my script, if you think around the ARR for the year, which is effectively the exit run rate you can think of the top line we did have a 26% growth, 23% in constant currency on that. So that just shows our momentum that we've got on that top line. And then we've said that we will sit at around 75% from the cost base. So we are definitely looking at both, really driving that growth and also with moderation in spend.

The next question comes from Lucy Huang from UBS.

I just wanted to ask about your thinking around growth in the ANZ business over the next 12 months, given we've seen pretty strong cadence of net adds continuing into this year, how should we be thinking about this level of debt, I guess, persisting over the medium term? And then just how are you thinking about price rises in this region as well? I think you put a price increase in business additions, packages in September last year. Could we expect another one coming in this year?

Thanks, Lucy. I'll take the first question, and I'll pass to Kirsty for the second. In terms of ANZ, we continue to be excited about the momentum we have in this business and the growth rates. And I think that's reflective of the fact that we have a compelling value proposition and we still have opportunities to both grow subscribers as well as deepen engagement. So I think we continue to feel like there is plenty of opportunity in ANZ. And as we said, we have multiple levers even in this penetrated market.

And just to add to that. So I mean we did see really good growth in subscribers in Australia, 17% growth year-on-year shows that there still is a lot of opportunity for us in this market. And as you can see, it's around growing subscribers, but also ensuring that we are continuing to focus on ARPU with the levers that we've got, which is around looking at the products and attach of adjacencies and also, as you mentioned, looking at pricing as a lever because as we do continue to increase the amount of value that we are providing to our accountants and bookkeepers and small businesses, that does give us the ability to be able to pull on that lever.

The next question comes from Garry Sherriff from RBC.

Sukhinder and Kirsty, just focusing on U.K. subscribers. That growth was better than market expectations. Can you maybe talk to -- and I know it's hard to unpick, but from a driver perspective, is there more increased marketing in the U.K.? Or do you think a lot of that growth is really being driven from the new enforcement compliance penalties that the U.K. regulator is putting forward. And I guess a follow-on to that is should we assume an acceleration of subscriber growth in FY '24 given the above?

So I'm going to share some preliminary views, but of course, Kirsty has a lot more history with the business, so I know she'll want to contribute to this question. First of all, I do want to give our U.K. sales team credit. They made a number of changes in the first half and really bedded down those changes. And I think we're seeing some of the fruits of their labor in terms of our second half results. So that's, I think, important to note. As you know, while government regulation does inevitably help small businesses accelerate their rate of digitization, I do think we feel like there's a strong independent opportunity the small business is recognized to digitize their accounting software.

Yes. So I mean we did see an improvement in the second half. I mean we were really thrilled at the 76,000 that we added. That did have a portion of it of the sort of the latter part of the Making Touch Digital Phase 2 for VAT. But as Sukhinder said, we still see a huge opportunity in that region. Cloud penetration is probably at around between the 30 and 40. It's a bit hard to tell without any other -- of our peers providing subscriber numbers. But certainly, we see a large opportunity there and would like to continue to see that growing. Just a reminder of those, with that sort of second phase of Making Tax Digital. They were for the smaller businesses. And so -- and they had other options that they could do. So they have -- some of them have moved on to Xero. There is also the opportunity for them to use bridging software, or they would also have a choice of being able to deregister from a VAT perspective. But as I say, huge amounts of opportunity in the future.

And given all of the above, again, trying to put you on the spot, sub-growth acceleration in '24. Does that sound reasonable given everything you've just discussed?

I mean, Garry, you know that we don't provide '24 guidance around subscriber growth. So I think we are clear on the opportunities that we've got, and we will do our level best to ensure that we get the right share of that opportunity.

The next question comes from Darren Leung from Macquarie.

Congratulations on a good result. Just one for me. On Slide 27, Sukhinder, you mentioned that the multiple levers of growth and sort of talked around subscribers and also on the ARPU side. But obviously, when we look at what ARPU has done this period, it looks like the product mix piece has actually gone backwards. Can you help us reconcile this please and how that sort of pathway for growth looks like going forward?

Sure. I'm going to pass to Kirsty, who I think wants to specifically take the product mix question, and then I'll come back and provide an overall commentary.

So I mean there are a number of factors within that product mix. And if you think around, I suppose, we have 2 channels which have different ARPU connected with them. And then also, we have the attach of the adjacent products. And so if we think around a market, for example, like Australia, we are, as I've just mentioned in the call before, really thrilled with the subscription growth up at 17%. As we start to completely 100% flip practices, a lot of those backing subscriptions within those practices are the lower ARPU products within the partner addition. And so that does have a bit of a downward momentum on ARPU. But that's when it's really pleasing. So if you look at on the attach of payments, for example, which is a good offsetting in the ARPU, we were really pleased with the level of growth that we had, say, in the U.K. market from that payment. So it's a portfolio, as Sukhinder was saying. There's 2 different levers. We look at ensuring that we want to take our first year of subscribers with the 10 that we've got and then also looking at what we can do to extend up the ARPU through the different levers that we've got.

And just to finish up, I think it was Darren, correct, on the question, I think if you just back up, one of the things I continue to be excited about and one of the reasons I came to Xero is we're early on the journey of using those levers, right? So I mean it's amazing to have still low cloud penetration and pure TAM available to us. But also on the other hand, to feel like there are dials in the business that we can learn to use across our products, across our pricing across our mix. And I think both of those vectors are available to us. But as I said, it's early on the leverage for growth.

The next question comes from Eric Choi from Barrenjoey.

Congrats as well on the strong maiden results, Sukhinder. I just had a question on the lower cost base and implications for revenues, if any. Just thinking we're ending FY '23 with a lower cost base, which suggests we're sort of entering '24 with a lower phenomenal cost base as well. And given we haven't changed that 75% OpEx to sales ratio, just wondering if that's got any implications around a potentially lower revenue outlook or if I'm just being too top down and too theoretical.

I think the way to think about it is our ambitions are to continue to be a high-growth company with increasing operating leverage. So while one could sort of take the exit run rate from '23 and sort of implicate something, I think the thing is just we want room to maneuver. We want room to maneuver and to be able to dynamically invest where we see opportunity to capture growth. So I wouldn't take anything more from that than we want to make sure that we are growing overall with increasing efficiency, but still dynamic in our ability to capture opportunity where we see it.

The next question comes from Roger Samuel from Jefferies.

Congrats on a good result. I've got a question around your costs, particularly around product design and development. So even now it's your partnership with Infosys 6 months ago. I'm just wondering how much that would drive more efficiency in your R&D cost. And also second part of my question is around sales and marketing. If I look at your CAC in ANZ, it went up by 10% year-on-year in this result, and in the international market, it went up by 17.5%. What measures can you -- what measures can we take to reduce that sales and marketing cost?

All right. Well, thank you for the question. Let me take the question. I think you're referencing our partnership with India, our partnership with Infosys India. So I would note that we see India as an option to expand our capabilities globally and are available resourcing globally, but it's just that. It's an option, and we're early in thinking about how and when we might leverage it.

Yes, so just taking the second part of that, overall, we did see CAC grow by 16%, which is obviously slower than the top line. And as I pointed out, that did -- that was a change from the previous year because the previous year didn't have Xerocons, it didn't have roadshows, it didn't have travel for those sales teams as well. So if you have a look at Note 5 in the annual report, you can see here that sales and marketing grew by 15%. But then if you look down at the amount of travel-related costs, that actually grew by almost 450%. So it's not really a like-for-like when you're comparing '22 to '23.

The next question comes from Stephen Ridgewell from Craigs Investment Partners.

I mean could you please share with us your thoughts on what competitive advantages you see over in North America, besting your view of the business so far? And then can you please tell us what you see as a priority to fix in that market perhaps before we want see more investment or acceleration of investment in that market, please?

Sure. Well, first, as I think, as I observed, I'm pretty early in the job, I'm 90 days in, and the U.S. is an important market to both understand and understand our execution in. So I would say I don't really have any strategy thoughts to share today on the U.S. market. And when and if I develop those, I'll come back to you when I happen to share. The one thing I do want to make clear, though, is I spent time with our U.S. customers and they value the service we bring today when I sit with accountants and bookkeepers, we just recently had our advisory council in Denver, and I had the advantage of sitting with a number of our customers. I can tell you what they love about our product today. What they love is that it's easy to use, that it is open and allows them to connect the apps that they want to use. And I'll tell you in something like the U.S. market, where there is a variety of applications that people use and bring together to run their business, I certainly know they love both our usability and the fact that it's an open platform. But any further comments on our U.S. strategy will come as I develop, I would say, far more nuanced views and understanding.

The next question comes from Nick Basile from CLSA.

Just interested to know, I guess, going forward, how you're thinking about the growth in platform-related revenues and, I guess, investment in noncore accounting functionality. I guess I'm just making the observation you've taken the decision to do the impairment on planned, and I guess, interested to know, I guess, the materiality of maybe some changes in strategy to achieving the 75% in '24.

Sure. So first of all, I want to reinforce that I'm broadly aligned to Xero strategy that was in place before I arrived at being the most trusted and insightful platform and partner to small businesses and their advisers. And so I think what's important there, as you ask your question, is to think about maybe some of the early thoughts I have around how we think about portfolio allocation. If you come back to that picture that I mentally drew, sort of core growth and emerging opportunities for us, we do run a portfolio. And I think our opportunity in that is to sort of place all of the businesses we're in inside of kind of a framework like that. Obviously, we have nothing to share today, but early in the thinking, and then give them the requisite investment. And so the balance for a company like us is always: a, to be focused, I'd say, on the most meaningful opportunities; and then b, to have an allocation across all 3 areas because they all have yield over different time frames. But focus is key. And you can have a portfolio where you sort of identify your opportunities for returns and investment across different time scales. But I think it's, as I said, focus is the keyword. We decided to exit Waddle because we believe that, that's a business where we didn't need to own it. And in terms of bringing our teams into focus, we basically said, look, we can provide access to credit through third-party applications. And that's an example of where we made a choice to exit. But I see it as running a portfolio. And so our platform and adjacent businesses have -- certainly have meaning inside of that portfolio.

The next question comes from Kane Hannan from Goldman Sachs.

I appreciate the commentary on the U.S. market, and obviously, you're expecting an update in November, Sukhinder. I suppose any early thoughts you can share around, I suppose, just the options that you're considering. I suppose given the focus on profitable growth, is it reasonable to assume the intention is to start narrowing those losses in the U.S.?

Yes. I think that I don't have anything to share today. One of the things I believe deeply is it would be a disservice to Xero for me to start sharing views long before I've had the opportunity to develop them. We have a complex business globally. We have a complex business in the United States. So I don't think that there's anything further to share. What I did know is our job as a company is to be disciplined across all the horizons of investment we have instead of that portfolio I talked about. And so different businesses can operate on different horizons and on different scales and with different investments. But that doesn't mean you don't have discipline in what you expect across each of those buckets.

Got you. And so the comment around not being satisfied with the size of the business, that means it could be bigger or smaller once you've completed this review of sort of TBC?

I think it just means that I recognize that investors have lots of questions for me about that business, and I recognize it's a large opportunity, and we're still a relatively small player. That's all it means.

The next question comes from Siraj Ahmed from Citigroup.

Just on Slide 29, I know you've answered multiple questions on the multiple levers of growth. Just can you understand how you think about the phasing between the 2 axes, right, in terms of subs versus ARPU? Asking this because, I mean, previously, there was discussion about going to Europe, multilingual markets. And arguably, your ARPU growth has not been as strong as it could have been, right? So just keen on understanding how you think about the phasing and what needs to occur to deliver growth on both those levers.

Well, I guess the way I think about it is, one could think that each of our existing businesses is on this axis, right? One can look at a country like Australia and say, okay, what mix you're going to use. You can look at a country like the U.K. and say, what mix you're going to use. You can look at a country like the U.S. and say what mix you're going to use. So I don't think that -- first of all, I think one of the key things I would note about Xero is we already play in a lot of big markets. We have existing businesses where we have tremendous opportunity. I think the question is as TAM expansion and entering in new markets is not something we're going to discuss today. But I would think about this slide, first and foremost, as even applying to our current markets and current businesses.

And I think just to add to that, Siraj, we did grow our ARPU by 10% over the year and subscribers by 14%. So we are using both levers even within FY '23.

The next question comes from Pallavi Malladi from E&P.

I wanted to ask about the trajectory of the Rest of the World business and if there are any prospects for adding new markets in the short to medium term.

I don't think -- thank you for the question, Pallavi. I don't think we're going to discuss expansion to new markets today. As I said, I think we feel like we have a large opportunity at hand in our existing businesses. And when we have updates on our new market strategy, we'll let you know.

That does conclude the question-and-answer session. I'll hand the conference back to Sukhinder for any closing remarks.

Well, thank you again for joining us today. We really appreciate the opportunity to be in conversation with you. And once again, I want to thank, certainly, our partners, our shareholders and our customers for their support, and mostly, always, Xeros, for all the work they're doing to make this business happen. Thanks. We look forward to connecting with you again.

Thank you for joining the Xero Limited 2023 Results Conference Call. If you have any further questions, please contact the Xero Investor Relations team. If you are a media representative, please reach out to the Xero's corporate communications team. That concludes our conference. Please disconnect your lines.