Xero Limited

Thank you. Good morning from Sydney, Australia. Thank you for joining our investor briefing today covering Xero's financial and operating results for the half year ending the 30th of September, 2023. I'm Sikandra St. Cassidy. This time I'm getting it right, I think. And I'm with Christy Godfrey-Billy, our CFO. Our first agenda item is an introduction and summary of Xero's performance during the half. I'll then pass to Kirstie to cover our financial results in detail before I finish with strategic themes and Xero's outlook. We'll then move to Q&A. So, moving on to a summary of our results on slide five. I'll touch on a few of the key metrics here, and Kirstie will discuss them in more detail later. Revenue grew 21% to $799.5 million. Headline EBITDA of 206.1 million is up 97.5 million on last year. Operating income of 67.4 million increased 46.7 million year-on-year. This strong operating result drove free cash flow generation, with free cash flow increasing to 106.7 million. This reinforces the strength of Xero's fundamental business and shows we are starting to balance growth and profitability. So now moving on to the two key themes in our H1 performance. I'll talk briefly through each key theme with more details in the next few slides. First and foremost, Xero has continued to deliver revenue momentum. Secondly, we're delivering emerging profitability as we operate more efficiently and effectively. Moving to the next slide. Xero is a macro-resilient business that continues to deliver strong top-line growth. Revenue rose 21% or 20% on a constant currency basis. This reflected subscriber growth of 13% year-on-year, with subscriber additions of 204,000 in the first half. Price changes across both our business and partner edition products were a key driver of ARPU, increasing 6% or 8% on a constant currency basis. While ARPU expansion slowed from 13% in the prior period, this largely reflects first half 23 benefiting from spot FX volatility. This was only 6% on a constant currency basis in the prior period growth, lower than the 8% we delivered this half. I'll now spend a few minutes outlining the regional contributions to this revenue growth. Slide 8 shows continued progress in our Australian and New Zealand businesses. with solid revenue and subscriber growth as we drove further adoption across both channels. The ANZ segment delivered 21% revenue growth, 22% in constant currency terms, with H1, from H1, FY23, outpacing subscriber growth of 13%. ARPU expanded 4% nominally. It was 9% on a constant currency basis, mainly from price rises. Both countries contributed to this, with Australia growing revenue by 22% and adding a further 122,000 subscribers in the half, while New Zealand grew revenue by 15% and added 17,000 subscribers. We see this as a great outcome in regions that already have high cloud accounting penetration. We also hosted our Zero Con event again this year in Sydney, attracting several thousand accounting, bookkeeping, and ecosystem partners from across our markets. XeroCon continues to be an important partner engagement opportunity and highlights the strength and importance of our relationship. Turning to the international segment, we delivered 22% revenue growth, 18% in constant currency terms, and reached 1.67 million subscribers, up 12% compared to H1 FY23. ARPU grew by 8% to 37.9, or 7% on a constant currency basis. mainly driven by price changes. In the UK, revenue increased 23% to $216 million, or 18% in constant currency. Subscribers were up 13% year-on-year, with net additions for the half of $40,000. Subscriber growth in the UK was subdued, largely reflecting a lack of MTT demand and accountants and bookkeepers managing their undeployed or idle inventory. This inventory management by accountants and bookkeepers led to an increase in subscriber volume churn, However, these subscriptions are much lower value, which meant we didn't see this come through on international MRR churn, and the revenue impact was limited. On MTB, we saw the benefit of phase two in the second half of full year 23. This phase is now completed, and we saw this contribute to softer demand for compliance software in the first half. Another factor impacting the half was seasonality, with the first half historically lower than the second half in this market. We continue to see a strong long-term opportunity to digitize small business cloud accounting in the UK and believe we have a strong value proposition, brand momentum that is building, and we'll continue to focus on product and go-to-market initiatives. In North America, revenue increased by 9%. However, this was impacted by a couple noisy items that Kirstie will talk to. Excluding those items, revenue was up 19%. Total subscribers were up 12% year-on-year with net additions of 12,000 in the half. There are a few dynamics at play here. Our U.S. business had good momentum and delivered a good balance between subscriber growth and ARPU expansion. Canada's net subscriber outcome for the half was disappointing. We're working through changes to our team and our sales motions in this market. This has translated to a good revenue outcome but impacted subscriber additions. In our rest of world markets, revenue grew 29% or 27% in constant currency terms, with a proportion of higher value customers in this region contributing to the high revenue growth we delivered. Total subscribers grew 10% year-on-year, with net additions of 13,000 over the half. The largest driver of subscriber growth in this segment was South Africa, where we continue to see good momentum. Before I hand to Kirstie, I want to highlight another key theme of H1 performance. and that is emerging profitability. As seen on slide 10, we have focused on managing our cost base while driving continued revenue momentum. We measure profitability through a number of metrics, but I'll highlight three here. In the first half, our net profit after tax increased to 54.1 million. Our operating income margin increased to 8.4% from 3.1% in the comparable period. Finally, on the right-hand side of the chart, you can see our free cash flow margins increased to 13.3% from 2.4%. Each of these demonstrates that we are focusing on the bottom line as well as top-line growth, and we're really pleased with this outcome. We will continue to focus on managing our resources better to help support operating income growth and free cash flow. I'll now hand to Kirstie to cover the financial results in more detail before coming back to you to cover our strategic themes and outlook.

Thanks, Akinda, and good morning, everyone. I'll now provide some further detail on our financial results for H1 FY24, starting on slide 12. This slide shows AMR in gross profit. The results Zero has delivered show continued growth momentum across the group, demonstrating the value that we deliver to our customers. As you can see on the left, headline AMR increased 19% or 22% in constant currency to more than $1.7 billion. This was driven by subscriber growth of 13% and an ARPU increase of 6% or 8% on a constant currency basis. This metric reflects the annualized benefit of price changes in ANZ and the UK in addition to the subscriber growth that occurred at the end of H1 and indicates an exit rate for our business coming into the second half. Price rises in our North America and rest of world segments are not reflected in this number as they became effective after the half closed. Our high gross margin combined with the revenue result has seen gross profit increase by 22%. The chart on the right shows this trend with gross profit at $700 million for the half. We have remained disciplined as we serve our customers, and this is reflected in an improved gross margin compared to last year of 87.5%. This focus on efficiency is part of our operating rhythm, and we continue to look at new ways to improve and innovate in this space. A great example of this is how we have experimented with generative AI in Zero Central, a customer support and learning site which Vikinda will talk more about later. The next slide is a breakdown of revenue showing the contribution of our core and platform revenues. Core accounting revenue growth of 24 or 23% in constant currency was driven by subscriber growth and after expansion as prior period price changes flow through. Platform revenues grew 21% or 17% in constant currency and remained at 10.5% of operating revenues. The decrease in other revenues largely reflects the reduction in zero-coin revenue as we only held one event in the half versus the three in H123. It also reflected the decisions of Sunset Allocate product as we released Zero Inventory Plus. At a regional level, this reduction in other revenue largely impacted North America, where these items contributed $3.7 million in H1 FY23. As Akinda mentioned earlier, excluding these items, North America revenue growth was higher at 19%. Let's turn to the detail on platform revenues. On this slide are the activity indicators for the three largest elements of platform revenues, payments, plan day, and payroll. While we're differing dynamics across each of these, an overarching theme is that we're still relatively immature, and we see a significant opportunity in flexing this attachment lever. This includes changes to sales motions, pricing and packaging work, and investment in product functionality. On the left, we show that monthly invoice payment value grew 23% since September 2022. We see this as a great opportunity and are focused on improving the user experience to increase customer uptake. For example, continuing to streamline the onboarding and workflow experience. Revenue growth was higher than that of the TPV at 37%, reflecting higher average payment value over the period. and improves economics with our partners as we reach growth milestones. The middle chart shows the number of Plan Day users at the end of each quarter since September 22. This increased by approximately 9% from the prior year period. As we highlighted in our last results, Plan Day is transitioning to focus more on the smaller segment in its European home market. This has impacted the growth rate in the number of employees using Plan Day as we transition between segments. We've now launched five awards of Plan Day's award interpretation tool in Australia, and we're pleased with momentum, although it has limited contribution to this number. The right-hand chart shows employees paid through zero payroll. This increased 10% since this time last year across Australia, New Zealand, and the UK, where we offer this product. While there is more work to do to enable our product to better deliver for customers in the UK and New Zealand markets, there is an element of normalization and growth in Australia following STP tailwinds in prior years. Turning to our FAS metrics, which we show on a half-by-half basis. As we show on the left-hand side of slide 15, ARPUP has increased by 8% over the half to more than $37. Price changes are the largest driver of the increase, followed by FX benefits, noting that FX impacts included in these metrics are on a spot basis, rather than average rates over the period. We also saw some benefits from mix shift. We are more actively turning our focus to improving mix, but it is early days. As the right-hand chart shows, the decline in churn since COVID has been sustained and was 0.94% per month in H1. We did see a slight uptick in churn, which we report on an MRR basis over the half. Moving to the next slide, here we highlight how these SAS metrics reflect the value zero generates. LTV is a high-level measure of the value customers bring to zero over their lifetime, which on average globally is around nine years. The chart on the left shows the expansion in LTV in recent years. Over this period, we've continued to see customers join us, and as we have delivered increased values for them, we've seen them stay with us. This is reflected in the key contributors of LTV, which you can see on the right. Apu is $37.38 and Churn is 0.94%. We measure our efficiency of acquiring new subscribers through LTV to the average cost of acquiring a subscriber or LTV to CAC, as this best reflects the individual value that customers bring. The unit economics we generate in New Zealand and Australia reflects the value that Xero can deliver in a more developed market with an LTV to CAC ratio of 14.6. Moving to the next slide, we break down how these metrics have evolved over the half. Starting on the left hand of this slide, we will show how the drivers of LTV have moved over the half. Moving from left to right, subscriber growth contributed 773 million to LTV. ARPU expansion was the largest driver of the LTV uplift, reflecting price rises across our full product range. FX was also a benefit, with the majority coming from our UK business. The contribution of gross margin improved slightly as we continued to efficiently serve our customers. This is a great outcome. The slight increase in churn was a drag on LTV of $634 million. I want 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 4% over the half to $3,742, or 3% on a constant currency basis. CAC spend covers three broad areas. the cost of acquiring new subscribers and investing in our brand for future subscribers, initiatives to educate existing customers to encourage retention, and costs associated with upselling and cross-selling to existing customers. The majority of acquisition costs are expensed in the period, in contrast to the revenue from subscribers added, which is earned over multiple years. Tax spend increased 16% as we increased investment and brand recognition, particularly in the UK, through partnering with organizations such as FIFA Women's Football to drive future growth. The CAC per growth ad metric increased by 6% over the last six months. The increase in CAC spend per growth ad is reflected in higher CAC months in the international segment, increasing from 23.3 months in March to 23.5 months in September. However, at a group level, CAC months fell from 15.9 to 15.6, reflecting improved efficiency in ANZs. 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 as the benefits of our investment come through as we become more efficient to drive an improvement in LTV to CAC. LTV to CAC was broadly flat at 6.4 compared to 6.5 in March 23. The reduction here was due to the higher CAC per growth add. Now moving to expenses. We completed our restructuring program and worked hard to embed these changes into our business in order to operate with greater clarity, speed, and effectiveness. The outcome of the restructure is reflected in the 14% decrease in our FTE through September 23 from 4,915 to 4,242. This has flowed through our financials with continued improvement and operating leverage driving our bottom line outcomes. we remain committed to our FY24 guidance with operating expenses to operating revenue ratio to be around 75%. There is an element of seasonality to both components of the ratio, which is reflected in our first half through a CAC investment on events like Xerocon and our FIFA Women's World Cup sponsorship and recently announced price changes, which have limited contribution to revenue this half. Let's turn to the detail in our cost base. Sales and marketing costs increased 16% against revenue growth of 21%, which resulted in these costs falling to 34.7% of revenue. Spend during the period included our sponsorship with FIFA and other brand spend. This investment we've made in our brand will take time to translate through to returns as brand awareness and recognition develop. Moving to G&A expenses, these fell to 12.1% of revenue due to cost control. Finally, on product design and development costs, these fell to 32.1% of revenue. This area was where the majority of FTE reductions occurred as part of our restructure, and the fall spent here is largely a foe through of these changes. Total product and development costs, including capitalized costs, were 34.9% of revenue, down from 44.3% in H1 FY23. This coincided with our capitalization rate falling slightly to 40.6%. This movement in our capitalization rate is largely an outcome of timing project spend and the impact of our technology function redesign. Moving to slide 20, here we present a summary income statement for the half, as well as a reconciliation to adjusted EBITDA. Our continued revenue momentum and lower cost base following our restructure contributed to the large increases in operating income and EBITDA this half. There were limited adjustment impacts in this period, with a $2.1 million restructuring charge as we finalised our organisation redesign, a $6.8 million benefit to the P&L from accounting adjustments related to the sale of Waddle, and a $3.1 million of non-cash revaluations. Shifting to the right-hand side, we present a summary income statement for the year. Operating income more than doubled, reflecting our shift to balance and growth and profitability. This flowed through to our cash position, so let's move to the detail there. This slide shows the constituent movements of our free cash flow over the past 12 months, and clearly highlights our shift towards balance and growth and profitability. Taking a look at the key components of operating cash flow. starting with our customer receipts. This is mainly payments from subscribers and tends to follow our reported revenue. Moving across the chart to payments to suppliers and employees. This movement, compared to H1 FY23, includes the payment of redundancy costs totaling $31 million from our restructuring, as well as increased payments for annual software licenses renewals, payments to suppliers for brand spend. While this chart presents a year-on-year view, A consideration for the movement half on half is we tend to pay more of our annual software license renewals in the first half. We saw net cash interest receipts during this period. This reflects higher earnings on our cash and term deposit balances given the current rate environment. I'd like to highlight that there is a divergence here from our P&L as the majority of the interest expense we incur is non-cash amortization of our convertible notes. Income tax payments had a limited impact on our cash flows in the period. We are beginning to utilise our New Zealand tax losses, which you can see in the deferred tax asset movement on the balance sheet. Finally, capitalised costs mainly reflect product development as well as a small amount of investment in physical assets. As I said earlier, we saw a slight fall in our capitalised spend during the half due to timing of our investment spend. This benefited free cash flow. Turning to slide 24, the increase in cash generation was a key contributor to the $136 million increase in Xero's total cash position, including short-term deposits to $1.6 billion at September 30. Our term debt liability reflects entirely the Xero coupon convertible notes that mature in December 25. The reduction here reflects exchange rate impacts, as the notes are US dollar-denominated, partly offset by the continued unwind of discount on the issue. This is a non-cash item. This is reflected in our P&L. Given the flexibility that our convertible notes funding provides us and another half of free cash flow generation, we are comfortable with our net cash position, which has increased by more than $150 million from this time last year. Thank you. I'll now pass back to Secinda.

Thanks, Kirsty. I'd now like to spend a few minutes on the early stages of our journey to become a higher-performing global SaaS company. We're excited as we look forward and are starting to implement some of the principles we discussed in the full year 23 results call. On this slide, you can see these principles which set us up for Xero's next chapter. We talked about becoming more focused, being more dynamic, more measured, and more balanced. We also outlined our multiple levers for growth. Today, I'd like to share some strategic themes that are important as we continue to evolve in the direction of our global aspirations. The first thing we're doing is sharpening our focus on segments and mix as a key lever for growth. Secondly, our U.S. review has finished, and it shows us there is a clear opportunity to be more focused and grow in two key customer segments with more consistent executions. Thirdly, evolving our global leadership team is key to Xero's next chapter, and we've added new capabilities to that team. Fourth, we see AI as a critical opportunity, and it's one that already powers Xero. Our opportunities to invest and experiment further. We have a good understanding of our customers, how they use Xero, and how they work with accountants and bookkeepers. And now it's time to sharpen our focus on Mix, as we seek to improve this over the coming years. Xero generates value through serving small businesses who have a range of requirements, from those with simpler needs, with one or two jobs to be done, to those who have multiple needs and engage Xero as part of their core business activities. Accountants and bookkeepers support customers right across this range. Underlying all of this is Xero's ladder of products, from simpler to more complex, that meet the different needs of customers in these segments. Understanding these segments and how our products align to them enables us to focus on where we should both invest our GTM and product efforts and drive the right solutions for the right customer. We want to be proactive in driving mix. This is a relatively new lever for our business, and as we grow, revenues will seek to better balance mix with subscriber volume. As we sharpen our focus on customer segments and mix, our teams have undertaken a review of the level of customer usage and engagement in subscriptions with accountants and bookkeeper practices that are digitizing. Through this work, we've identified a small group of long, idle, low-value subscriptions that are still undeployed after an extended period and where we no longer expect them to deploy in a reasonable timeframe. By way of definition, we count idle subs as those that have been purchased, largely by accountants and bookkeeping partners, but are yet to be deployed and have tasks initiated on behalf of a small business. As accountants and bookkeepers transform their practices, they tend to buy zero subscriptions in packages ahead of deploying these subscriptions to small business clients. As a result, there's often a natural period during which these subscriptions are idle, and then they are increasingly deployed and actively managed by partners as they utilize them on behalf of new or existing small business clients. We estimate there is a small pool of between 150,000 and 200,000 long idle subs that it makes sense to remove from our overall base going forward. As you can see on the slide, we define long idle subscriptions as those that have been undeployed for more than 24 months and are not expected to deploy in a reasonable timeframe. The majority of the subscriptions are located in our international segment across North America and the UK, with a smaller portion in Australia and the rest of the world. We plan to remove these subs after the end of full year 24 during the first half of 25. Based on the midpoint of that range, as of the 30th of September 2023, these subscriptions had an ARPU of approximately $3.7. And if they were removed at that date, group ARPU would increase by approximately 3 to 5%. The removal of these subscribers is expected to have minimal impact on FY25 revenue. We believe this is the right approach for Xero as we seek to build an even more engaged customer base going forward. Removing these subscriptions will support an evolution of our sales motion by allocating resources towards improving mix and working with accountants and bookkeepers to acquire and deploy their Xero inventory through smaller and more frequent sales motions. Moving to our U.S. review on the next few slides. Over the half, we undertook work to form a deeper and more nuanced view of our U.S. strategy and execution. We continue to see a strong opportunity for Xero to deliver value to U.S. customers. But I'd like to start by acknowledging what we've done less well historically, shown on the left-hand side of this slide. Over a number of years, we've had inconsistent sales motions, such as targeting multiple segments with suboptimal onboarding, frequent North American sales leadership changes, and a varied product and technology investment approach. While our approach has varied over time, our level view of investment in the U.S. overall has been fairly measured, with the average annual net direct investment in the U.S. over the last 10 years sitting at around 30 million New Zealand dollars. We believe this is comparable to a U.S. venture-led growth business. So if I now turn to what is working well, we have better product fit that is desired, and offers value to two key segments in the U.S., small businesses with multiple jobs to be due and the client advisory services segment of accountants and bookkeepers. Our go-to-market approach is steadily improving. We've learned from our previous experience and we're increasingly aligning our sales motions to our key customer segments. And thirdly, our open ecosystem and partnering approach is a differentiator. It serves us well in a market where customers continue to use a variety of platforms and want choice in their app stack. Now I'd like to talk about how it will drive growth going forward. As we now better understand where we offer value, our efforts will be directed towards our two key segments, with investments in the right products, with the right marketing for those segments. Making our product better for small businesses who have multiple needs will enable us to scale ARPU over time. through Xero, and through our ecosystem partners. As we serve the CAV segment of accountants and bookkeepers who want to build their advisory practices, we'll look to leverage our tools that can provide them help in moving up the value chain to advisory. Secondly, as part of this focus on segments, as we said, we plan to remove long-idle, lower-value subscriptions during the first half of FY25 from our U.S. subscriber base. This will enable our sales teams to further focus their efforts on mix, and work with accountants and bookkeepers to buy and deploy inventory in small and more frequent motions. Thirdly, we'll be more targeted in our go-to-market investment. We'll do this by increasing efficiency of our direct product funnel and being more focused on targeting our marketing spend in local U.S. geographies with critical density in our core segments where that spend can be more effective. Additionally, we'll try to increase our execution capability through a revised operating structure designed to better respond to North America's needs. This includes giving our US and Canadian country heads more visibility and accountability by reporting directly to our new chief revenue officer and reducing one management layer. It also includes enhancing our product and technology delivery with more onshore US-based product and engineering support for improved localization. Finally, we'll continue to use our open ecosystem as a point of differentiation. to enable customers to build the solutions that work for them. In a robust, highly fragmented small business software market like the U.S., this partner approach is a key tenet to Xero's value proposition. So in conclusion, we're clearer about the execution path in the U.S. and will be more targeted in how we approach growth. In line with our overall strategy to be more focused and disciplined as a company, our U.S. plan is to invest at a reasonable burn rate relative to the top-line growth we generate. Moving on to our next key theme, the evolution of our leadership team. We've made a number of strategic appointments over recent months to evolve our executive leadership team for Xero's next chapter. This ensures we have the right leadership capability and structure in place to more effectively operate and manage a global portfolio. Each leader is now fully responsible for global functions and brings in-depth experience to help optimize each area of our business. Ashley Grech joined Xero in August as our new Chief Revenue Officer, responsible for our go-to-market functions. This includes global sales operations, regional managing directors, customer experience, ecosystem and partnerships, and revenue operations across all geographies. Before Xero, Ashley was Chief Operating Officer for ReCharge, a payment solution provider, and Global Head of Sales for Square, now Block. Michael Strickman was appointed as our Chief Marketing Officer in October. driving our direct customer and partner marketing journeys across all regions, and aligning our brand, marketing, digital, and communications teams. Michael joined from Uber, where he was Vice President, Performance Marketing and Growth, and prior to that, led global demand generation for TripAdvisor. Dia Jolly joined in April as our new Chief Product Officer to lead our user experience team, product management, and product marketing functions globally. Prior to Xero, Dia was Chief Product Officer at Okta, a global SaaS security provider, and previously led YouTube's advertising monetization product efforts. In September, Dia assumed additional responsibilities for our global product engineering team. Dia is closely supported in her expanded portfolio by Chris Padilano, who joined Xero's senior leadership team in October as Executive Vice President for Engineering. Prior to Xero, Chris was Chief Technology Officer at Realtor.com and previously was an engineering executive at Pandora. These new additions strongly complement our existing tenured and experienced executive leadership team, which includes Damian Coleman, our Chief Legal Officer and Company Secretary, Christy Godfrey-Billy, our Chief Financial Officer, who many of you know well, Nicole Reed, our Chief People Officer, and Angan Soin, our Chief Business Operations and Strategy Officer. Xero's executive leadership team represents a deep and diverse set of capabilities designed to help deliver on our aspirations. We're really looking forward to providing investors with an opportunity to meet and interact with the full executive leadership team at our inaugural investor day in February 2024. As part of the organization's structure changes we've made, Rachel Powell, Chief Customer Officer, Mark Reese, Chief Technology Officer, and Chris O'Neill, Chief Growth Officer, decided to leave Xero to pursue new opportunities. We want to sincerely thank Rachel, Mark, and Chris for their deep and meaningful contribution to Xero, our customers, and our people. And of course, we wish them all the best in the future. Now to finish, I'd like to provide a brief update on our approach to AI at Xero. Xero has always been committed to innovating to help businesses streamline time-consuming and manual processes, while delivering useful and timely insights to help them make more informed decisions. As part of this commitment, AI is a core technology that already powers many of Xero's products. It's important to note that we will always look to protect customers, security, and trust in every solution we launch. Our approach to AI, including the opportunity presented by generative AI, is focused on four key areas. First, reducing customer toil. To help customers run their businesses more efficiently and effectively, we seek to automate and streamline repetitive, time-consuming work. A great example of this is our continued investment in improving bank reconciliations, which now applies existing machine learning tools to populate new contacts that aren't already in a customer's zero contact list, saving small businesses time on repetitive manual data entry. Secondly, we seek to use AI-powered insights to deliver the right insight at the right time to help customers thrive. Our short-term cash flow in Xero Analytics Plus now includes predictions for recurring invoice and bill payments, giving small businesses a clearer picture of a potential future cash flow. Thirdly, we see an opportunity to introduce conversational or next-generation interfaces to assist customer engagement and improve the customer experience. An example of this is our launch of generative AI in Xero Central, which aims to deliver accurate support answers faster by applying a large language model to our array of customer support articles and processes. It's early days in our experimentation here. However, we're seeing good results with a 40% reduction in search time for customers and a 20% reduction in customer experience caseload. Lastly, we see, of course, the opportunity to increase the productivity of our teams using AI, and to move faster for customers. This is where we're evolving and experimenting in our marketing and engineering functions. We see the opportunity to expand our use of AI into the future by further investing, experimenting, implementing, and refining to create beautiful customer experiences. Now moving to Xero's Outlook. Slides 32 and 33 are both slides you're familiar with. I'll start by pointing to the statement at the top of the outlook slide where we've reiterated our statement that we are seeking 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 May, along with reinvestment and 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're continuing on our multi-year modernization journey while investing in value for our customers. Moving to the financial evolution slide, this shows you the directional composition of this ratio in FY24, as well as the longer-term aspiration for these metrics. In full-year 24, we expect to see improved efficiency across each of our expense lines, and we've delivered this in the first half of 24. In the case of sales and marketing, the blacked-down arrow reflects optionality to direct spending to revenue-generating opportunities across the levers I highlighted, of course, with appropriate discipline. Our long-term aspiration is to improve both our operating expense ratio and our operating income margin at zero and the global cloud accounting industry continue to mature, noting that we have not set a specific timeline and there could be variability from period to period as we identify growth opportunities. This reflects the momentum our business has. I'm really excited about how we're positioned, the opportunity ahead, and the multiple levers we have to grow. Xero is evolving, and we are early on the journey to become an even higher performing global SaaS company. Before I conclude, I want to acknowledge our teams around the world, and I really want to thank them for their hard work as we continue to do all we can to support our customers and our partners. That concludes our presentation. I'll now pass over to the moderator for your questions.

Thank you. We will now have a short question and answer session. Just a reminder, if you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. Please limit your questions to one question at a time. Your first question comes from Bob Chen from JP Morgan. Please go ahead.

Morning, everyone. I just want to get a bit of colour on the first half cost base and how we should think about that instead of the second half. We can see that you've reduced employee headcount quite materially, but we haven't actually seen the benefit coming through in the cost space. So can you talk a little bit about how that was staged through the first half? And then just on the FIFA Women's World Cup sponsorship as well, can you sort of quantify how much that contributed to the first half cost?

Hi, Bob. Thanks for your questions. I'll take those. So if we just look at the first half and compared to the second half, we'll then ultimately, you know, working towards that around 75% for the year. Within the first half, we did have some one-off expenses. So, you know, I mentioned around FIFA, which I'll get to in a moment, explain a bit more about it, and also Xerocon. We also, you know, just because revenue's growing, we therefore do see a higher percentage in the first half. And then sort of into your next point around the restructuring, We announced that just before the end of the year, the financial year, and so therefore it didn't really start to take effect until a couple of months in. So for you to be able to sort of work out how you get from where we are in the first half to where we need to be for the full year, you are going to see quite a considerable reduction in that operating expense to revenue ratio to get us across the year to that 75%. Now, as far as the fee for sponsorship, I don't think we go into the details of exactly how much that deal was worth. It is a multi-year deal, but just from an accounting perspective, you actually look to see where you expense it based on the value that you get from the particular sponsorship across the duration of the multi-year deal. And so based on the fact that there was all the matches and the... The brand that we got in the first half, it did have a greater impact on the first half than it will have any other periods through the full sponsorship.

Thank you. Your next question comes from Elise Kennedy from Jarden. Please go ahead.

Hi, Secondary and Kirsty. I just want to ask a question around the U.S. and the more targeted growth approach. I thought it was my understanding that you previously had pulled back or streamlined into those markets three to four years ago when the UK was a focus. I'm trying to understand what that growth profile looks like going forward in terms of subs, revenue, offset by the expense growth.

Okay. Thanks, Elise. I'll start and then I'll pass to Sikanda. So we did, a few years ago, as you say, really look at the cost base and did really, that was, I presume you were talking around that move when we moved from, you know, really focusing on direct back to the partner channel. And so we, you know, at that time we did look. And so when we say the, you know, 30 as an average across the 10 years, you know, that obviously hasn't been exactly the same through that through that 10-year period, and so prior to that three to four years, you know, obviously, potentially, there was slightly higher investment than that. As far as the difference between three to four years ago and today, I think, and, you know, this is what Sukinda can elaborate further on, there is more focus, and three or four years ago, when we did talk around, for example, the community strategy, We then had only really started to do that and then COVID hit, which then meant that we weren't able to have that same level of in-person development of relationships with the accounts to bookkeeper channel as we would have liked as we first started that community strategy. But, Sekinda.

Sure. So, first of all, thank you for the question. I think to Kirstie's point, remember we offered an average across the 10-year period, and my review was just looking back on the last 10 years and try to understand the history of the business while doing a deep dive review with the current team. So I believe many of the things we'll chat about today are obviously already some of the things that we're happy are starting to happen in the business. It's not sort of that they're just happening going forward. It's one thing we've reflected on is that some things that have been going well more recently reflect this more targeted approach. And when we think about moving forward, we've already stated at a company level, our desire is to invest, but invest in a measured and disciplined way. And that extends to the U.S. as well. So we wanted to provide some quantum, so people actually have a level set on what we've actually invested. Christy and I have heard a variety of numbers in investor meetings, and we wanted to first level set. And then as we talk about, just talk about our approach going forward, which is to be focused and reasonable while we will continue to invest as we think is appropriate for a market of this size and scale.

Okay, thanks.

Thank you. Your next question comes from Suraj Ahmed from Citigroup. Please go ahead.

Hi, Sukhanda and Kirsty. The question is just on, Sukhanda, maybe this one's for you. It sounds like there's a bit more focus on higher value subs rather than just the low value partner edition subs, which is bought in advance. So just how should you think of this impacting your cadence of growth, right? Should we be thinking lower subs editions going forward? And maybe potentially lower revenue growth as well as you pivot towards this higher value subs. I'm trying to find that.

Thank you. I think our ambition is to remain a high-growth company and to be smart about our growth. And I think that's a theme that we started to chat about when we said, hey, we should be using multiple levers in our toolkit to grow, to both grow subscribers but also deepen our engagement. So we just think that there is a continuum of opportunity available to us in product mix, and we want to signal that that is as important a consideration as just subscriber volume. So to think about subscriber volume alone, I think, is maybe a less sophisticated way of thinking about growth, and we seek to be more sophisticated in how we think about the levels of growth available to us as we go forward. So I think it's about smarter growth and balanced growth.

I just kind of think that that should mean that there's going to be a bit lower focus, but MRR extra should be a bit higher potentially. Is that the way you're thinking?

I think that we really don't offer guidance. I think it's more about wanting to use these levers in balance.

Okay, sure. Thanks.

Thank you. Your next question comes from Gary Sheriff from RBC. Please go ahead.

Yeah, hi, Sukhinder and Kirsty. A couple of questions. One on pricing. You've got really strong back book growth, which is impressive. From a front book perspective, there's been intense discounting in Australia and the UK market of late, particularly by QuickBooks. And it's not just the depth of discounting, but it's the prolonged nature of that discounting. Just interested in your views as to whether you think that could impact your subs growth or churn in those markets, those two big markets of yours in the coming six to 12 months.

So, yeah, if we look at the, you know, focusing on the international market and what competitors are doing and therefore what impact they'll have on us, you know, we do obviously take an interest in what competitors are doing, but in all of the international markets, there is so much opportunity for growth with cloud penetration being so low that we certainly don't believe that, you know, that they should hinder our growth in those markets. And as far as As Churn goes complete, you know, connected with that, as I say, there's so much opportunity, you know, so we don't believe that that should have an impact.

Yeah, I think one of the themes that hopefully is emerging from our different results calls is we care about long-term quality growth. And so there are always competitive dynamics in our markets. We operate in many intensely competitive markets. And of course, we need to be aware and responsive to short-term dynamics. But we hope everybody is focused on quality growth.

Thank you. Your next question comes from Lucy Huang from UBS.

Please go ahead. Good morning, Sikinda and Kirsty. I just have a follow-on question around the US. So should we be thinking about that kind of $30 million net investment rate to be the number that we should be thinking about your spend in that region moving forward? And I guess now you've narrowed to two customer segments. Do we need to see a bit of a step up or the way in which you develop the product? Would that require a bit of a change or a step up in cost?

I don't think we're here to offer guidance on the dollar investment. I think we're here to say, you know, our investment should be reasonable relative to the top line revenue that we seek to generate. And again, that's more the way I would take that commentary. I think the way I'd take the commentary on our segments is it allows us to be focused in our product investment. And I think we think that is one type of operating discipline that's important for us.

Great.

Thanks.

Thank you. Your next question comes from Eric Choi from Baron Joey. Please go ahead.

Oh, thanks very much, guys. I was wondering if I could do two as well. The first one, just wondering if we can extrapolate that implied second half FY24 OPEX to sales ratio of call it 71 to 72 into FY25. I feel like you can argue it both ways, like maybe there's potential attrition on that 4,200 headcount. further leap into FI25, or maybe you can say second half FI24 is missing some one-off costs like Zerocon. So maybe if Kirsty can talk us through some of the variables. And then just following on on Lucy's question, I'm not going to ask you, you know, how that minus 30 evolves going forward, but can you just clarify if it was close to the minus 30 in FI23? And I'm just asking because obviously the US is delivering a revenue delta of about $20 million per annum annually. So on that map, if it was close to minus 30 in FY23, the US could be breakeven in a few years. So yeah, that would be really helpful.

Thank you. Okay, so I'll start, Eric, and then pass this to Kendra if she wants to add anything at the end. So as far as the operating cost base, you are quite correct. To get to 75 for the year, you do have to have, as I said, a lower OPEX to revenue ratio for the second half And then as far as giving guidance for next year, we don't give guidance for FY25, but what we do say within our outlook statement is that we will, in the long term, continue to really focus on that operating expense ratio, plus also our operating revenue margin. So both looking at the revenue growth, but also really still focused on that efficiency. And as far as one-off costs, you know, there is a bit of seasonality to every year. And so that does need to be taken into account. You know, from a zero-con perspective, they are one-off costs that do have an impact, you know, depending on which half they fall in. And then, you know, it's just about looking at the opportunity. And if we see one, then we want to be able to take hold of that opportunity. So as far as next year goes, we're not giving guidance on it, but we're certainly ending the second half with a lower than where we sit today operating expense to revenue ratio. As far as the U.S., as we said, that's an average across 10 years. We, as I was speaking earlier on in the call, There was a period of time there for a year or two where we did put a bit more investment in when we were doing that, you know, going more and focusing just on the direct channel. So that's all part of the average. So if you think around that and the fact that in the first few years, you may not have put as much in, but you definitely wouldn't have had as much revenue. We've had revenue growth, you know, and it does also... fall within that 75% as far as our cost outlook that we provide. We're not going to give you the figures for going forward, but we're certainly saying that we will manage the amount of investment. And as far as whether or not we're going to be breakeven in a couple of years, well, we're saying that we will invest depending on the revenue. And so therefore, we need to see the growth in that, but we'll ensure that we invest the right amount.

That's helpful. Thanks, Kirsty.

Thank you. Your next question comes from Roger Samuel from Jefferies. Please go ahead.

Hi, Monty. I just want to clarify what did you acquire during the half? I can see from the cash flow statement there was $8.6 million going out. And I'm just wondering, With your positions, you sold Waddle, you've retired Locate. What's your strategy for plan day going forward? Just wondering if plan day is still loss making?

Thanks. Okay, so I'll take the start and then I'll pass to Skinda. So Roger, we didn't acquire anything in the half. The cash that you're seeing in the cash flow statement is actually an earn out for one of our acquisitions that we've made in the past. So no new acquisition.

And then on plan day overall, I mean, that is a business that is in investment mode. Now, I think we noted that plan day is in transition. It had a CEO exit and a new CEO arise in May who we're very excited about, Dave Lee. And we will be looking to, you know, expand on our product offering for a simpler customer where we've seen resonance with the, you know, with the plan day existing base. And so that's an area of opportunity investment. But again, we manage a portfolio of businesses, some that are in growth stages and investment mode will be loss-making. Others are mature and quite profitable. And our goal is to balance all those things to deliver the right outcome while appropriately investing in things we think have long-term potential. And of course, it goes without saying, time and attendance is one of the key jobs to be done that our small businesses continue to point to as they need.

Thank you. Your next question comes from Darren Lung from Macquarie. Please go ahead.

Good morning guys. Thanks for the opportunity. I just had one on subscriber growth please. Obviously the rate of additions is still positive but moderating pretty much across most regions. Can you provide a bit of colour please as to what you think the drivers on this are? And in particular I'm thinking of things such as whether it's market or macro driven? Is it market share or the impacts in terms of the new operating cost base post the post the restructure that you completed earlier in the year?

Sure. First, let me assure you that our operating cost base reductions were not targeted at our go to market activities. If anything, we want to be flexible in our capital allocation to be able to invest in demand generation and We freed up some of our cost base in order to be able to be more flexible and dynamic. So when we see revenue opportunities, we want to actually be able to take them, I think, in a better way. So I would not correlate those two at all. Number two, if you think about our business, obviously we run a very large business across a number of markets. And as we said, our goal is to use our leverage for growth in conjunction with each other and smartly. And so we are always looking to grow our share and position in our markets. That has not changed, but we will also seek to, as we talk about going forward, start to think even more deeply about mix and ways of making sure we're driving engagement with our customers. So I don't think there is any kind of anything more you should read other than we're continuing to try and be smart about subscriber growth and where we spend our cap dollars and if we see opportunity, we'll take it but always with an eye towards growing a quality book of business.

That makes sense. Thank you.

Thank you. Your next question comes from Nick Brazil from CLSA. Please go ahead.

Hi, Secinda. Hi, Kirsty. I have a question on the new focus on the balance of subscriber volume and mix. Can you tell us a little bit more about the mix of growth from a customer tier perspective? You have been seeing where you're seeing churn and which type of user you'll sort of be leaning into in the future. I guess the observation I've made is I think Intuit has made a more explicit case for focusing on advanced users. I think historically Xero has been more focused on smaller businesses. So just trying to understand, I guess, how you're seeing that evolving and where you think the sweet spot lies for Xero from LTV perspective. Thanks.

Sure. Well, first of all, I think what we meant to do and share in that slide was that we have a range of small businesses. By the way, they're all small businesses. We're not talking about mid-market or enterprise in that slide we gave you. We're talking about customers that on average might be zero to 100 employees, maybe even 50. But what is distinguishing that we want to start to point to is the amount of business they can do with zero. Some people who come to us just for tax or compliance, some people who might come for just invoicing, and those who can take advantage of all the products we have to offer. So, you know, the way I would read that slide is we have a continuum. We, you know, we're excited about serving the continuum. That actually helps us drive, obviously, share in every market. But it's also increasingly important to understand, like, you know, who are the customers we can do more with and be very intentional about about, you know, seeking to do more with them, as you said. That's the way I think about it. It's a continuum. We're excited to serve small businesses of different kinds. Some are more volume driven and some are clearly able to engage with us in a deeper way and drive more ARPU advances.

Okay. Yeah, that makes sense. Thanks for the clarification.

Thank you. Your next question comes from Paul Mason from A&P. Please go ahead.

Hi, Tame. I just wanted to ask about the US Client Accounting Services opportunity. I mean, about two years ago, you guys signed what looked like this really big deal with Block Advisory. I don't think we've really heard that much color on it since. I was just hoping maybe you could talk to us a bit about how that deal's gone, whether you've got any other firms like that in your pipeline that might give you scale. Yeah. or any that are already sort of on your books that we just haven't heard about because they weren't sort of publicized as much. Yeah, just sort of how big it is for you at the moment and what's in your pipeline around that.

I don't know. I don't think we're going to go into kind of describing different customer accounts we have on this call. That's obviously more appropriate for kind of a deeper U.S. review that we're giving today. But I will note that, you know, Block is a strategic partner. We're continuing to do business with them, I'd say, Both they and we are excited about the opportunity to continue to activate clients. So it's been a positive deal for us, and I know there are continued opportunities with Block that we're both excited about.

Thank you.

Thank you. Your next question comes from Annabelle Lee from Goldman Sachs. Please go ahead.

Morning for Kinder and Kirsty. So on the UK sub growth, in the first half of 23, when growth was also softer, you provided some positive commentary around the second half outlook. Given you didn't make any of these thoughts and comments again, is it reasonable to assume that the second half run rate for this year will be down a year? And also, do you expect to be all the way through the UK subscription management issue that impacts the house?

Sorry, when you say UK subscription management issue, what are you referring to specifically, just so I make sure we understand the question?

Just the accountants and bookkeepers managing that undeclared inventory that impacted your churn.

Got it. And as we noted, it's a volume churn, not a dollar churn issue. I think overall, the way we think about the UK, we're not giving guidance on subs. I think think about the macro messages that we've been giving you on the call. Number one, we're pleased with our revenue growth. Number two, our brand awareness and momentum is building. You know, I would say we're pretty pleased with the go-to-market activities we conduct, while I think that partners may continue to manage their inventory levels, and that's up to them. Sometimes we see that happening after a price rise, as an example, which is one of the things we put through at the end of last year. And so, you know, from time to time, you will see that activity. And we want partners, you know, deploying and engaging with us. So, you know, that's up to them to manage. And we'll seek to, you know, obviously continue to help them manage that more proactively going forward. So no sub-guidance. And as we've noted, generally, we will look to manage in all of our businesses and all of our regions a balance between NICs and SUBs going forward.

Thank you. Your next question comes from Rowan Sundram from MST Financial. Please go ahead.

Good morning and thanks, team. Just the one for me. In terms of Secinda, how would you describe the operating environment at present and maybe how would you compare it to, say, six or 12 months ago? And is there anything you're seeing in some of these more challenged markets that you'd view as encouraging? Sure. Do you mean the macro operating environment or the operating environment within the company? The operating environment in light of the macro, thanks. Got it. Got it.

Yeah, look, I think that it's, as you know, it continues to be a pretty, I would say, mixed operating environment. Inflation is sort of, you know, still like while it's coming down, it's sort of sticky. There's no indication that interest rates are going to come down anytime soon yet. Unemployment rates overall are low while layoffs continue to be a theme in tech and macro small businesses. They're still having challenges finding enough people to kind of fill their open vacancies. In Australia, we see kind of maybe a more positive environment, according to our ex-SBI, than we see in the UK, where companies are seeing in real dollar terms lower sales growth and they're taking longer to get paid. So I think overall, the operating environment is mixed. And then, of course, we have new kind of geopolitical issues. So I think it's a mixed bag. And I think we continue to see it staying a mixed bag. So inside of those environments, what do we try and do every day? We just try and stay focused on making sure we're putting in the hands of our small businesses the tools they need to make decisions in good times and in uncertain times. And that's about as much as we can control. So that's what we're going to stay focused on. Thank you.

Thank you. That is all the time we have for questions today. I'll now hand back to Ms. Singh-Cassidy for closing remarks.

Well, thank you again for taking the time. And, of course, most of all, we want to thank our customers for their continued support, our partners for their continued loyalty, and bureaus around the world for really all the hard work they do every year, every half, every month, every day. Thanks so much.