Thank you for standing by, and welcome to the Xero Limited 2024 results conference call. I am joined by Xero's Chief Executive Officer, Sukhinder Singh Cassidy, and Chief Financial Officer, Kirsty Godfrey-Billy. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you'll 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. If you wish to ask a further question, please rejoin the queue. I would now like to hand the call over to Sukhinder Singh Cassidy, Chief Executive Officer of Xero. Please go ahead.
Good morning from Sydney, Australia. Thank you for joining our investor briefing today, covering Xero's financial and operating results for the full year ending March 31, 2024. I'm Sukhinder Singh Cassidy, and I'm here with Kirsty, our CFO. Moving to our results. Our first agenda item is a summary of Xero's performance during the full year. I'll then pass to Kirsty to cover our financial results in detail before I finish with strategic priorities and Xero's outlook. After that, we'll move to Q&A. So moving to a summary of our results on slide 5. We're really proud of this result, and in particular, it shows you we are capable of executing towards our future aspirations.
You'll see that Xero has continued its track record of strong revenue growth, and at the same time, we have delivered a meaningful increase in profitability, and that led to us achieving a Rule of 40 outcome. I'm going to touch on the key metrics here, and Kirsty will discuss them in more detail later. Revenue grew 22% to NZD 1.714 million, or 21% on constant currency terms. Adjusted EBITDA of NZD 527 million is up NZD 225 million, or 75% over last year. Together, the strong operating result and improved free cash flow generation resulted in a Rule of 40 outcome of 41%. Moving to the next slide, Xero is a macro-resilient business that consistently delivers strong top-line growth.
This year, we saw growth balanced between subscribers and ARPU, with subscriber growth of 11% year over year and ARPU of 14%. Subscriber additions were 419,000 in the year. Price changes across both our Business Edition and Partner Edition products were a key driver of ARPU, increasing 14% or 10% on a constant currency basis. I'll now spend a few minutes outlining the regional contributions to this revenue growth, as well as the features we delivered on the product side to support this. Slide seven shows the continued strong revenue growth in our ANZ segment. We delivered 22% revenue growth year over year. Within this, subscribers grew 11% and ARPU expanded 11% or 9% on a constant currency basis, mainly from price rises.
Both countries contributed to this, with Australia growing revenue by 23% and adding a further 205,000 subscribers in the year, while New Zealand revenue grew 15% and added 38,000 subscribers. This is a great outcome in a segment with high cloud accounting penetration, reflecting our strong brand presence and product offering in these markets, alongside our ability to continue to bring small businesses to the cloud and offer more services. Turning to the International segment, we delivered 24% revenue growth, 20% in constant currency terms, and reached 1.8 million subscribers, up 11% year-on-year. ARPU grew by 17% to $41, or 11% on a constant currency basis, mainly driven by price changes. In the U.K., revenue increased 24% or 20% in constant currency.
Subscribers were up 11% year-over-year, with net additions of 107,000. This is a pleasing outcome in a period where there were no MTD tailwinds. In North America, revenue increased by 17%. However, there are some noisy items affecting the comparison. Adjusting for them, revenue grew 22%. Total subscribers were up 10% year-on-year, with net additions of 38,000 for the year. Canada's net subscriber outcome for the year was subdued, largely reflecting a lack of adoption tailwinds. We've made some GTM changes, which I'll touch on later, in response to our execution there and the cloud accounting backdrop. In our Rest of World markets, revenue grew 26% or 25% in constant currency terms. Total subscribers grew 12% year-on-year, with net additions of 31,000 in the year.
The largest driver of subscriber growth in the segment was South Africa, where we continue to see good momentum. So now moving to the next slide and the product investments we made in FY 2024 to support this growth. The revenue growth we've delivered across our regions reflects the value of our product and the continued enhancements we've made. This slide shows our investment in completing the three most important jobs to be done: core accounting, payroll, and payments in our three largest markets, Australia, the U.K., and the U.S. In core accounting, we've made great progress. In the U.S., we've upgraded our coverage to extend to more than 600 direct bank feeds. We've also increased the number of banks that can use our bank statement extraction feature within Hubdoc, which extracts data to populate into Xero.
We've also made a number of improvements to Xero tax in the U.K. in the last year to support compliance changes. In payroll, the work we've done over the past 12 months across product and engineering is making it easier for small businesses to onboard. We've also improved functionality in our U.K. offering for non-traditional work hours and pension needs. Alongside this new functionality, we have also modernized the payroll monolith, breaking it down into microservices and removing 50% of unused code. This is a great achievement and highlights our focus on delivering for customers while payment is one of our biggest opportunities in our new partnership with Bill in the U.K. as part of our 3x3 strategy. We've also made it more intuitive and frictionless for small businesses to sign up with Xero for payment.
In November 2023, we became the first major small business accounting software company to launch e-invoicing in the U.K. We will continue to unlock opportunities in these core areas to deliver value for our customers and support revenue growth. Moving to the next slide, which shows how this translates into profitability. The chart on the left shows a meaningful change in Adjusted EBITDA year-on-year, up 75%. This contributed to a strong free cash flow margin of 20%. You can see in the chart on the figure on the far right, that adding this to revenue growth, where we use the 21% constant currency metric, resulted in our Rule of 40 outcome of 41%. This neatly shows how we've shifted to delivering profitability without moving away from adding value for customers and generating strong revenue growth.
Before I hand this to Kirsty, I want to summarize the actions we've taken against the commitments we made to you. FY 2024 was a significant year of change for Xero and our team as we set the foundation for our next chapter of growth. We called out three key opportunities or goals in my first earnings call at CLSA, roughly a year ago. These were to target more balanced, profitable growth, to be more focused in how we allocate resources, and to start on our journey to use new levers to grow. Underpinning this was a commitment to build on our capabilities and evolve towards more performance-based culture. We've made a number of moves in FY 2024 to deliver on what we said we'd do.
As I talked about, we successfully balanced growth and profitability through continuing our strong revenue growth while rightsizing Xero and delivering a Rule of 40 outcome. There are a number of proof points of where we've been more focused in our allocation of capital. Key among these were our sharpened focus in the U.S. and the discontinuation of a number of non-core businesses, such as Waddle and WorkflowMax. We've started on our journey to use multiple levers to grow and a focus on improving mix through onboarding enhancements and becoming more dynamic in our tax allocation. However, what I'm most excited about is the new capabilities we've added and the steps we've taken to evolve our culture to be even higher performing and purpose-driven.
So as I said, it's been a big year, and we're proud of what we've accomplished, but it doesn't stop here. We've made some moves in early FY 25, which I'll speak to later, but for now, I'll hand to Kirsty to cover the financial results in more detail before coming back to you to wrap up.
Thanks, Sukhinder, and good morning, everyone. I'll now provide some further detail on our financial results for FY 2024, starting on slide 13. Before turning to the details, I want to echo Sukhinder's commentary on our FY 2024 financial performance. We have delivered a strong financial result with a pleasing Rule of 40 outcome. This slide highlights the key internal metrics we use to monitor our success as we identified at our investor day. There are three key things you will notice about our financial performance this year: our continued growth momentum, the value that customers place in Xero, both of which are reflected in our ARPU growth and also net subscriber additions, and finally, our focus on balancing growth and profitability, shown in our OpEx ratio and significant revenue per FTE improvement.
So let's start by taking a deeper look at top-line growth. This slide shows breakdown of revenue between our core accounting revenues and platform add-ons. Core accounting revenue growth is 24%, or 23% in constant currency, was driven by subscriber growth and ARPU expansion with the benefit of price changes. Platform revenues grew 22% to 18% in constant currency and remained at 11% of operating revenues. There was some drag in performance from the Waddle exits. The decrease in other revenues largely reflects a reduction in Xero revenue, as we only had 1 event in FY 2024 versus 3 in FY 2023. Let's turn to the underlying sales metrics that show how we generate revenue. This slide shows our continued strong AMRR performance alongside the key drivers, subscriber growth and ARPU expansion.
On the left-hand side, you can see the change in mix between the two, with ARPU contribution expanding to reach 10.8% in constant currency this year, while subscriber growth was 11.2%. This shows a continued focus on ARPU expansion. Both drive AMRR, which, as you can see on the right, translated into continued strong momentum with growth in FY 2024 of 26% or 22% in constant currency. This resulted in AMRR ending the year at more than $1.9 billion. Just as a reminder, this metric reflects the annualized benefit of our subscriber base and ARPU as at the 31st of March, and indicates a revenue exit rate in absolute terms for our business moving into FY 2025. Now, it's worth noting that price rises in our Australia, which take effect in July, are not included in this number.
Turning to more detail on ARPU and churn. As we show on the left-hand side of slide 16, price changes were the largest driver of the 14% increase in ARPU, followed by FX benefits, primarily from the pound and U.S. dollar. It's worth noting the FX impact included in these metrics are on a spot basis at the 31st of March, rather than an average rate over the period. We saw limited benefits from a shift in our product mix, which we are moving more actively turning our focus to, but it is early days. The improvements we have made to our Australian product ladder demonstrate the work we're doing to build and support this muscle. Platform attach was flat over the period, with key drivers outlined on the next slide. However, I want to touch on churn first.
Churn is a key outcome we consider when looking at levers to drive ARPU expansion. We have seen an uptick in partner product churn over the year as ABs managed undeployed inventory. This was largely in response to partner-resistant price rises from 2023. This translated to only a slight uptick in MRR churn from the all-time low we reached post-COVID, with churn up 9 basis points over the year and 5 basis points in the second half. The small impact reflects the lower churn, the lower price point of these products, which dampens the impact on MRR churn. As you can see on the chart, despite the uptick, we remain below the long-term average, reflecting the value that customers continue to place in Xero to run their business. Now turning to the drivers of platform revenue on slide 17.
We saw good growth in payments, offset by slower growth in payroll and Planday. On this slide are the activity indicators for each of these. While there were different factors across each, we see a significant opportunity in developing this lever, in line with our strategy to win the 3x3 . This includes pricing and packaging work to support adoption and increase usage across our markets, targeted investment in product functionality to improve the customer experience, and changes to sales motions to better align our go-to-market priorities. Starting on the left, we show that monthly invoice payment value has grown strongly. In the year to March, it increased 18%. Now, this was impacted by the timing of Easter, with the underlying trend better seen in the April data, where we delivered 30% growth.
Revenue growth for the year to March was 36% in currency. In addition to the increase in volume, this reflected the unit economics margin expansion with our partners improving as we reached key growth and product development milestones. We see payments as a core opportunity, which is reflected in this inclusion in the 3x3 . We are focused on improving the user experience to increase customer uptake. For example, continuing to streamline their onboarding and workflow experience by working closely with our partners. The middle chart shows employees paid through Xero Payroll. This increased 7% since this time last year across Australia, New Zealand, and the UK, where we offer this product. There is an element of normalization and growth in Australia, where we have seen very high adoption following STP tailwinds in prior years.
There's more work to be done to enable our product to better deliver for customers in the UK and New Zealand markets, and this is a focus for product delivery in FY 25. We're also reviewing our approach to product packaging and bundling across markets, learning from our experience in Australia. The right-hand chart shows the number of Planday users at the end of each quarter since March 2022, which increased by approximately 8% from the prior year. As we said previously, Planday has been going through a period of transition to focus more on the small segment in its European home market. This has impacted the growth rate and the number of employees using Planday in FY 24. One of the decisions made in this transition was to exit the Australian market, as we announced in April.
A final consideration for top-line dynamics is our plan to address long-idle subscriptions. As we mentioned in the first half, we define long-idle subscriptions as those that have been undeployed for more than 24 months and are not expected to be deployed in a reasonable timeframe. As you will see on Slide 18, the range has shifted down to 125,000-175,000 . This can be due to partners either deleting early or indicating their plans to deploy. We've also provided a more granular disclosure of the regions we expect to be impacted by the removal of these subscriptions. The majority of these subscriptions are located in our International segment across North America and the UK.
As we said before, we plan to remove these subscriptions during the current half, and we'll update you on the outcome of conversations at our first half 2025 results. This will be a drag on subscriber growth, but benefit ARPU in that period. Based on the midpoint of the updated range we have provided as at the March 31st, 2024, if these subscriptions were removed, group ARPU would increase by 34%. The low ARPU nature of these subscribers means that removing is expected to have minimal impact on FY 2025 revenue. Moving to the next slide. Here we highlight how the stat metrics I've discussed reflect the value Xero generates. LTV is a high-level measure of the value customers bring to Xero over their lifetime, which on average globally is around 9 years.
The chart on the left shows the continued expansion in LTV that Xero has delivered....
This is reflected in the key contributors of LTV, which you can see on the right, ARPU of $39.20, $29, and churn of 0.99%. We measure our efficiency of acquiring new subscribers through the value of the subscriber or 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 that Xero can deliver in a more developed market, with an LTV to CAC ratio of 14.3. On the next slide, we break down how these metrics have evolved over the year. Starting on the left of the slide, we show how the drivers of LTV have moved. From left to right, subscriber growth contributed $1.3 billion to LTV uplift. ARPU expansion was the largest driver of the LTV uplift and contributed approximately $2 billion.
The uptick in churn partially offset this increase, reducing LTV by NZD 1.7 billion, and FX and gross margin were slight benefits. I wanted to touch on some of the related metrics 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 year to NZD 3,732.
CAC spend increased 15% as we increased investment in brand recognition and performance marketing, particularly in the U.K. and North America. This included our partnership organizations with FIFA Women's Football, which came through in the first half. This resulted in CAC per gross add metric increasing by 9% over the year. The increase in CAC spend per gross add was more than offset by ARPU expansion. This resulted in CAC months falling to 15.2 from 15.9, with similar trends in both the ANZ and International segments. While we don't expect to reach the same LTV to CAC in our International segment, over the long term, we expect to see it improve, albeit at times it may move around as we become more dynamic in our CAC allocation as we see specific opportunities to invest.
LTV to CAC fell slightly to 6.2, compared with 6.5 in March 2023. The reduction here was due to the higher CAC per gross add. Turning to slide 21 and our cost base. Our high growth margin, combined with the strong revenue results, has seen gross profit increase by 24% year-on-year. The chart on the left shows the trend with gross profit of NZD 1.5 billion for the full year. We have remained disciplined in how we serve our customers, and this is reflected in an improved gross margin, up nearly a percentage point compared to last year. This focus on efficiency is a 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 Xero Central, our customer support and learning site, as well as other AI experiments throughout the onboarding process, which aim to reduce the need for human intervention. Now moving to operating expenses. We delivered our guidance that operating expenses to revenue would be around 75%, with our revenue for the year sitting at 73.3%. This significant improvement in efficiency reflects our commitment to balancing growth with profitability. The key driver of this improvement was embedding the changes post the step change in our cost structure following our 15% headcount reduction. We also benefited from greater clarity, speed, and effectiveness across our organization.
It's also worth highlighting the half-on-half seasonality we saw in this number, with the first half higher reflecting timing of CAC spend, the flow-through of our restructuring, and the timing of price rises. In line with our commitment to balancing growth and profitability, we will invest to drive growth across our business in FY 25. As such, we expect our OpEx ratio in FY 25 to be around 73%. Sukhinder will talk about this later. To show you how we deliver an operational leverage, leverage while continuing to grow revenue, I'll take you through the individual function areas in our cost base. Starting on the left, sales and marketing costs increased 15% against revenue growth of 22%, which resulted in these costs falling to 31.6% of revenue.
During the period, included increased brand and performance marketing investment, including our partnership with FIFA. The benefits of this brand investment will roll through over time as brand awareness and recognition develops, particularly in our international markets. Moving to product design and development costs, these fell to 30.7% of revenue. Now, this area was where the majority of FTE reductions occurred as part of our restructure, and the significant decrease in spend here is due to these changes. Total or gross product development costs, including capitalized costs and excluding D&A, was 33.6% of revenue, down from 42.7% in FY 2023.
This movement in total product spend is largely reflected on our restructure, which was partially offset by paying reinvestment... albeit to a lesser extent than expected due to timing. We expect to continue this investment in FY 2024 as we build on the momentum we've seen in our product velocity.
Finally, on G&A expenses, these fell to 10.8% of revenue, reflecting robust cost control. These efficiency improvements reflect our commitment to balancing growth and profitability. Net effect of this can be clearly seen in our adjusted EBITDA margin shown on slide 24. As a reminder, adjusted EBITDA includes share-based payments and focuses on providing a view of underlying business performance. Adjusted margins expanded over 9 percentage points in FY 2024, reflecting the benefits and efficiency across all functions in the business. There were limited non-operating impacts to EBITDA this period, with the largest item being the non-cash impairment of Xero Go, as we retired that product. The improvement in margins translated to a significant improvement in free cash flow generation.
As slide 25 breaks down the NZD 240 million increase in free cash into its constituent components, clearly highlighting both our strong growth and improved profitability. Taking a look at the key components of operating cash flow, starting with customer receipts, where we continue to see strong growth. This is mainly from subscribers, and trends closely follow the growth of our reported revenue. Moving across the chart to payments to suppliers and employees, we can clearly see the benefits of our restructure and subsequent margin expansion. This included NZD 34 million of redundancy payments from our restructure. Excluding this, growth here was only NZD 85 million. We continued to generate net cash interest receipts during FY 2024. The improvement here reflects higher earnings on our cash and term deposit balances, given the current rate environment.
I'd remind you that almost all of the interest expense we incur is non-cash amortization of our convertible notes, which does not impact free cash. Income tax payments had a small impact on our cash flows in the period. We are monitoring our tax payments carefully as we utilize our accumulated New Zealand tax losses, which you can see in our disclosures and through the deferred tax asset movement on the balance sheet. Finally, capitalized costs mainly reflect product development, as well as a small amount of investment in physical assets. Turning to slide 26, the increase in cash generation was a key contributor to the NZD 268 million increase in Xero total cash position, including short-term deposits of NZD 1.5 billion at March 31st. Our term debt liability entirely reflects the zero-coupon convertible notes that mature in December 2025.
This note has thus offered us optionality for inorganic investment at a lower cost than bank debt, with a mechanism that provides us flexibility in managing the dilution through our call spread and the choice to settle in cash or shares. Given the flexibility that our convertible note funding provides us, the significant improvement in our cash generation and the growth we are delivering, we have a strong balance sheet with our net cash position increasing more than $320 million from this time last year. Thank you, and I'll now pass back to Sukhinder.
Thanks, Kirsty. Now moving to strategic themes. Having recently spoken with you at our Investor Day, I'll briefly revisit our strategy. I also wanted to update you on a few recent moves we've made. As we said on Investor Day back in February this year, the next 3 years are themed, "Winning on Purpose." For us, this means providing winning solutions for our customers, living our purpose consistently in what we do and how we do it as a company, and being purposeful and focused in what we choose to do and what we choose not to do. Moving to the next slide, as you know, our vision and purposes are constant at Xero. Successfully delivering on these is key to achieving our aspirations, which I'll cover in a few moments.
Our How to Win strategy, which you saw us lay out at Investor Day, has 4 key pillars: Win the 3x3 , Building Winning GTM Playbook for Xero's next chapter, Win the Future, which is really about Focus, Best, and Innovation, and continuing to grow our medium and small markets. And lastly, Unleashing Xero and Xeros to Win. On this slide, you, as you will remember, there are 12 key tactics, 3 under each theme. Now, I won't go through these again, but we'll be making moves against all of these, and we are doing so already, which I'll discuss on the next slide. We've made a number of moves in recent months as we execute against our strategic priorities.
To support winning the 3x3 , we recently established a partnership with Deputy to embed time and scheduling into our core products in Australia. As part of this, we are exiting Planday in Australia and will focus the Planday team and business in Europe and the U.K. We've launched simplified product packages in Australia. This supports our GTM playbook to make it easier for customers to choose the right plan for them and their level of complexity. As part of our focus back to the future and grow other markets efficiently, we've restructured our Canadian sales team. This reflects us rightsizing to the current cloud accounting backdrop. We also retired Xero Go in the U.K. as we evolve our mobile efforts and focus on our primary segments.
Finally, as part of continuing to unleash Xero to Win, we promoted Diya Jolly to Chief Product and Technology Officer. Her leadership across these teams is improving the team's ways of working together, particularly how our engineering and product functions operate seamlessly as we continue to evolve our capabilities and improve product delivery and velocity. You will notice many of these moves are about purposefully allocating capital towards our 3x3 . This feeds into the next slide, where I'll touch on our priority areas for product investment in FY 25. For accounting, we want to continue to add value for our customers by deepening and localizing local core accounting capabilities.
We'll continue to support the evolving accounting and tax laws in Australia and deepen our U.K. tax offering. In the U.S., we will continue to localize key bookkeeping and compliance features such as bank feeds, bank reconciliation, sales tax, and reporting. Further, across all of our regions, we will empower accountants and bookkeepers with bold tools and insights.
Xero's multi-year modernization program in payroll has boosted momentum. Automation will be leveraged, especially in the U.K., to simplify pay runs for SMBs alongside their compliance needs. To boost payment and tax rates, we'll continue to focus on reducing friction for small businesses onboarding to Xero. We're also going to provide more ways to pay for customers receiving a Xero-generated invoice. We will enhance the U.K. bill pay experience and introduce our Bill.com embedded solution in the U.S. There's a lot here, and you should take from this that product investment across our 3x3 is a priority as we add value for customers and support revenue growth. This brings me to our FY25 outlook, which reflects this investment we're making.
Total operating expenses as a percentage of revenue is expected to be around 73% in FY 2025, and compared to FY 2024, product design and development costs as a percentage of revenue is expected to be higher. Of course, in addition to this, we continue to pursue our aspirations. These are to be a world-class, global SaaS business from a very strong position today. We have the opportunity to double the size of this business and deliver Rule of 40 or greater performance. We will focus on high-quality growth, which is a balance between subscriber growth and ARPU expansion. As I said before, these aspirations are powerful and purposeful, and we will continue to pursue them aggressively over the short, medium, and long term. To wrap up, there were four key themes you will pick up from today's presentation.
Our results show we are capable of executing towards our future aspirations. They show that we are delivering on our commitments. They show that we are progressing our strategic priorities and purposefully allocating capital, and we've given you some proof points to support this. And finally, they show that we're well-positioned to win on purpose as we move through the FY 2025 and 2027 strategic period. Before I conclude, I want to acknowledge our teams around the world, and I really want to thank them again for their hard work as we continue to do all we can do 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 Eric Choi from Barrenjoey. Please go ahead.
Good morning, and great result, and well done on getting to Rule of 40 well ahead of anyone expected. My question is just on FY 2025 investment and the return on that investment. I think you're guiding to a nominal increase in cost of $200 million or more in FY 2025. And I know there's extra Xerocons and wage inflation and maybe some revenue shares, but to get to that cost guidance, I think you're also implying either a continuation or acceleration in that FTE growth that you did in second half of 2024. So I'm just wondering, if you can talk to where that headcount's going, how it differs from the original 400 R&D roles that were originally cut and Sukhinder's sort of razor-focused on ROI.
How do we think about the long-term returns on, on that investment? Thank you very much.
Thanks, Eric. I'll start, and then, if Sukhinder wants to add anything, she can, afterwards. I mean, the cost, the way in which we're looking at cost allocation, as I had, you know, sort of went through on the Investor Day, is that we start very much with our strategy, and then from there, we look at what we should be deploying into CAC and into products and technology. Now, we talked through around the way in which we look at allocating out the CAC and, you know, Mike's doing some investments and experimentation around ensuring that we are getting the best use and return out of our CAC. And then Diya also went through, you know, and has a very detailed product roadmap, which links into that strategy.
Now, as far as the increase between 2024 and 2025, as I sort of alluded to within my script, there was a bit of timing difference between, particularly in that product and technology space, around bringing in and recruiting some key sort of domain expertise that we need and are required within Xero to really ensure that we are continuing to do that growth. And so just due to the timing of nature, you know, we did recruit some people, some of them, you know, hopefully those that were at our Investor Day, were able to meet them over the lunch breakout session. We now have the annualized cost of their costs throughout the whole of 2025, plus also any additional capability that we bring in.
We also are really focused with our purpose and performance culture, about ensuring that we are really, you know, paying people the right amounts for high performance. And so that plays part of it as well. And then, you know, as with all years, there is also a bit of, wage inflation there. So, we're certainly not saying that you should see a massive uptick in headcount per se. It's more about ensuring that we're bringing in the right people with the right expertise, and then, you know, ensuring that we're paying them the right amount.
Yeah, I don't have anything, to add, Eric, other than to say I think Kirsty's point is important. We're pretty focused in making sure our headcounts are in areas that are aligned to our strategy, that give us velocity in the area we need, that we are competitively paying the team we have. We think we have a great team at Xero, and we wanna make sure that we are both disciplined but also have a acquisition and retention strategy for our people that's important. So I don't think it implies that we kind of wanna go wild on headcount. I think we wanna be pretty focused, but investing, because that supports, you know, our revenue growth and our velocity in the right areas.
Thank you. Your next question comes from Garry Sherriff from RBC. Please go ahead.
Good morning. Just a quick question on the Australian plan overhaul. How do you think that affects churn versus the price and mixed benefits? We're just trying to think from a holistic net revenue retention perspective. You know, should we continue to see the type of ARPU growth in Australia, in your eyes, given those changes to plans and pricing?
Sure. Well, why don't I start, Gary? Thanks for the question. So first of all, I think that the plan changes we announced recently are really in line with our long-term strategy of simplifying our product plans, so people get onto the right plan, giving them more value. In fact, the majority of users who are being migrated to new plans will get more features and functionality for a given level than previously, and driving long-term adoption to features they might enjoy. So I think it's really setting us - ourselves up for the future while simplifying the amount of plans we have in the market, which is in line with what we said at Investor Day. Now, how should you think about all of this?
Well, I think that as we talked about at Investor Day, I think there are numerous levers within pricing and packaging, price increases, simplicity of offerings, what gets bundled, what doesn't, and then, of course, our sales teams are thinking about mix, i.e., what's the mix of penetration of these different products, and do we have the right customer on the right product? So we believe between all those levers, there is opportunity to consistently demonstrate ARPU yield. And of course, the most important thing is making sure our customers utilize all the benefits and features that we continue to add to our plans. So we think there are kind of multiple levers within there, and you kind of wanna feel like you have at your disposal getting the right people on the right plan and then deepening utilization.
Thank you, Sukhinder. Thank you.
Thank you. Your next question comes from Tom Beedle, from Jarden. Please go ahead.
Well, thanks for the opportunity to the question. I just wanted to ask you the numbers-based questions around product design and development. Can you just talk to the capitalization rate you're using in FY 25? Because I'm obviously just trying to work out that, you know, you did that 68% OpEx ratio in the second half, which was obviously outstanding. But you're guiding to that stepping up to 73% in FY 25. So I'm just trying to work out: Is there any sort of issue around capitalization, right? And just trying to work out what that... I guess the step up as a percentage of sales, that product design and development costs actually is. Thanks.
Yeah, thanks, Tom. I mean, if you sort of look back over the years and have a think about how the capitalization rate has, you know, has been, it's always been in around that sort of low forties, and it has, it has come down a bit, for this year. You know, we've been consistent for the full year as pretty much where we were at the first half. And the main difference in that is around the, the use of our own internal resources rather than contracting out P&T. So as we bring in new capabilities, specialist services, you know, we are, we are using our own resource. And from a capitalization perspective, when you capitalize a, a contractor, it is a, at a far higher capitalization rate than, an FTE.
And so that has been, you know, the big swing to just under 41%. So you're obviously not giving guidance around 25, but I suppose from your perspective and your modeling, there's probably no reason to believe that it should be anything that is too different from, you know, where it's sort of sitting at the moment.
Okay, great. Thank you.
Thank you. Your next question comes from Lucy Huang, from UBS. Please go ahead.
Morning, Sukhinder and Kirsty. I have a question around the U.K. I mean, I think pretty decent set of numbers, given there's been no Making Tax Digital tailwinds for this year. I guess, what are your thoughts on the level of subscriber momentum coming into FY 25, given, I guess, macro is still slightly more challenging, we still are waiting for phase III to kick in? How should we be thinking about subscriber growth in the U.K. next year? Thanks.
Thanks, Lucy, for the question. Well, I think, as you pointed out, you know, absent regulatory tailwinds, which do provide sort of temporal velocity, we really just think about where are we in the U.K. with regard to overall cloud penetration, and there's still plenty of opportunity. So within our control, of course, is the levers in our own GTM playbook. I think you might have noticed, that in the second half of this year, we also promoted Kate Hayward to be our new head or MD under Alex von Schirmeister in the U.K., which speaks to sort of both our opportunity to keep investing and to bring great talent to bear, alongside increased product velocity.
So I'd say overall, we continue to feel good about the U.K. and our opportunity there, and we continue to invest in a targeted way to go after both subscribers and more features and functionality.
Thanks.
Thank you. Your next question comes from Kane Hannan from Goldman Sachs. Please go ahead.
Good morning, guys. Just the international ARPU trends were, I think, very, very strong in that second half, and I appreciate some of that's pricing. But can you just talk a little bit more about the other moving parts in there, mix, you know, things that, that impacted and, you know, are you seeing some of the early benefits of that UK plan suggested that, that you highlighted at the Investor Day, for example?
Hi, everyone. If you'd like, Sukhinder. So, when we look at ARPU, so I suppose the first comment is that international has a bit of a mix of different markets within it. You know, you've got the U.K., you've got North America, but then you've also got Rest of world. And so in Rest of world, outside of those areas that we have a physical presence, the only plan we can buy is a BE, which has a you know a very good ARPU associated with it, and usually in USD. So I think that's the first point. There is just a bit of mix in there. As far as where the growth has come from, so we have seen some good upside from price increases across the International segment.
We have also benefited from FX. And then there has also been, you know, pleasing, and not massive, but definitely working in the right direction, seeing that change in product mix, which is not only just within the, the Rest of world, but also is within, you know, within other markets, within that International segment. And then also, we are seeing some increase in, you know, other areas, so attach of payments, for example. So there's been... You know, we're basically, we're ticking every box of moving in the right direction in ARPU on, in that, particularly in that International segment.
I think that's great. Thank you.
Thank you.
Thank you. Your next question comes from Siraj Ahmed from Citigroup. Please go ahead.
That's good, Kirsty. Just maybe a multi-part question. Just on the price and packaging changes you've just announced, what's the feedback that you've had so far? I know it's online, some of the feedback is a bit negative, but just keen to hear what you're seeing based on the feedback that you've got so far. And just secondly, on that same pricing and packaging, if you look at the ARPU drivers this year or in the last few years, it's been mainly price, right? Do you expect the packaging changes that you've announced in Australia to be more of a driver of ARPU in 2025 or is it more 2026? Thanks.
Hey, Siraj, it's Sukhinder. Well, first of all, yes, we monitor, you know, all the communications around any changes. And so of course, we are monitoring the, you know, the feedback on the pricing and product plan changes we just announced. I would say there's a couple important context pieces. Really, this was about a set of plan changes, but we know from our customers that they always ask us to, give them a heads up on next year's pricing changes early because of when the fiscal year starts for accountants and bookkeepers and their clients in Australia.
So please note that, like, we made the decision to put those together largely in response to customers wanting to know early, what the price, you know, what the pricing will be for the following year before they sign their contracts with customers.
But there were two changes in there, and you noted that. The first change, obviously, was about simplifying the product packaging, because we believe we have too many plans in Australia, and we want to make sure that we simplify the amount of offerings you have, take away a pretty, you know, long list of add-ons, and start to bundle more capacity and capabilities that you can utilize and should discover. And we think that's the right thing for Xero long term and customers. Having said that, the changes we announced were first and foremost for new plans, people coming into Xero for the first time, and we said we will work with customers on their specific migration path with a game plan or intention to be done by March of next year.
So we'll continue to monitor the feedback, work with our customers, our existing customers, while setting ourselves up, for the future to have a simplified product ladder that should benefit everyone longer term in discovering our features and functionality.
Then just a second part of your question around ARPU. The majority of the changes within the packaging actually don't increase the underlying cost. They improve the amount of value that a subscriber is getting. Now, that's the majority, so therefore, there are a small number that are seeing a bit of a price rise, but they are not going to be... You know, there's, as Sukhinder was saying, there's going to be a lot of communication working out which bundle, new bundle is going to be the, the best for them. And so therefore, we really expect that ARPU, any ARPU change to be really towards the back end of the year. So it wouldn't really have a massive impact on 25.
It's more likely, as Sukhinder said, it'll be the new subscribers coming in that will be directed to the right bundle, so it would be more of a 2026 story.
Can I ask further, Kirsty? So what you're saying is that payroll changes is now only in the middle, I forget which plan it is, but that's not a big number as such. It's really new, new drivers, new business that comes in-
Right.
-that drives. Yep.
Yeah. Great.
Got it. Thanks.
All right.
Thank you. Your next question comes from Roger Samuel, from Jefferies. Please go ahead.
Oh, hi, morning all. Very good result. Just on your Rule of 40, do you think you can deliver the Rule of 40 every year? Obviously this year you benefited from the higher interest rate, but I'm conscious that you may need to retire your convertible bond at some point next year, and then you also get some benefit from the New Zealand tax losses as well.
Yeah. So, I'll take this one, if you'd like. So thanks, Roger. I mean, it was, we were really thrilled that we hit the Rule of 40 to 41. Has been, you know, a bit of an ambition that we've had, and certainly we continue to have that. Now, what we... The first point is, we've shown that we can do it, but what we want to do is be able to have the optionality to, you know, continue it if we'd like. But if we see an opportunity in the short term to invest in something that we see will drive growth, then we want to be able to have that flexibility. Hence, why we're not giving this as guidance, that every year now, we will be, 40 as the Rule of 40 or greater.
Now, as far as those sort of one-off items that you talked around, you know, it is pleasing to be able to see that the funds that are effectively free because of the zero- coupon are also now attracting cash interest income. And so, you know, we certainly have had a bit of upside from that. We've also, though, for example, paid the restructuring within this year, where we expensed it in the previous year. So there are some puts and takes on both sides that need to be considered. You also mentioned the New Zealand tax payment. You know, we are certainly looking. Well, we are utilizing the tax losses, accumulated tax losses.
But we did also, in recognition to the fact that we are becoming, in time, a taxpayer within New Zealand, we did also, as you'll note in Note 22, note that we did make a payment of NZD 30 million in preparation for that tax payable that we will have in New Zealand. So as I said, there's puts and takes to both sides of the one-offs, of the Rule of 40 cash free cash flow implications this year.
The aspiration remains-
Okay, got it.
The aspiration remains solid. Like, we put that aspiration out Investor Day. We think we can do both: double the size of this business and be a Rule of 40 or greater company. So we take that aspiration seriously, even though it's not guidance.
All right, got it. Thank you.
Thank you. Your next question comes from Rohan Sundram, from MST. Please go ahead.
Hi, Sukhinder and Kirsty. Just the one from me regarding the stronger rate of net adds in subscribers in international. Maybe if you can just talk through any improvements that helped drive that, whether it be operational or market. I take on board your comments earlier, Sukhinder, on UK, but any commentary on that would be great. Thank you.
On what's driving... Sorry, Rohan, I just want to make sure I get the question. On what's driving strong performance in the International segment?
Well, yeah, I just noticed a better rate of net adds in subscribers-
Okay.
-in the second half versus the first half. And is there anything you'd like to attribute that to?
Yeah, I mean, it's... I'll jump in on this one. So, different markets have had different, you know, different halves, which is stronger. So, for example, Australia, with year-end in, at the end of June, generally has a stronger net add in H1. We then have the U.K., New Zealand, and many in the Rest of world, which have their year-end sitting in H2, which therefore does drive an increase in net subs in that sort of second half to March. But then I think if we just sort of look across across the different regions, it was really pleasing to see the U.K. results, particularly without that sort of Making Tax Digital tailwinds that we've seen.
But we also have, you know, we've seen a really pleasing uptake again in Rest of world, which is great. Colin's doing an amazing job in South Africa. There were huge numbers of attendees in the roadshows that were practically the size of XeroCons, across the two different locations in South Africa, just over the last month. So, you know, it's great to be able to see those newer, smaller markets starting to really sort of gain a bit of traction. Still small numbers, but you know, those are the sort of the, those regions that will become more major over time.
Thanks. That's helpful. Thank you.
Thank you. Your next question comes from Stephen Ridgewell, from Craigs IP. Please go ahead.
Yeah, good morning, and thanks for taking my question. Just a question on, on the sort of revenue outlook. Clearly, no guidance has been provided today. If we look back to this time last year, AMRR was around NZD 1.55 billion in FY20, ultimately delivered NZD 1.7 billion in revenue. FY24, around about 10% growth relative to where AMRR started the year. In looking at the disclosures this morning, I see AMRR is up to NZD 1.96 billion, as of the March 31 . So if we add 10% to that, it sort of implies revenue around NZD 2.15 billion for FY 2024, FY 2025.
And even if we take away, you know, NZD 20 million for, for WorkflowMax and NZD 10 million for the inactive subs, does suggest revenue coming in around about NZD 2.1 billion. Consensus is currently NZD 2.02 billion, so I'm just... It's quite a big gap. I'm just interested if you're able to make any comments around the revenue momentum you're seeing in the business, and whether there would be some other considerations to suggest that, you know, the historic relationship between AMRR and revenue growth, you know, won't hold in FY 2025, please. Thank you.
Thanks, Steven. Good to hear a New Zealand accent on the call. So I suppose. And I really appreciate it actually, that you sort of spelled out really clearly for everyone on the call, just that connection between AMRR, exit run rate, and then the revenue for the next year. I think, the only thing that you need to just watch out for when you are thinking around that, is just the timing of things like price rises. Because depending on what month they happen, that will always be included in the AMRR at the end of the year, it's March 31 . But depending on when it went through, if it went through later in the year, it means that you haven't had so much revenue in the previous year, so then the revenue growth looks higher.
So when you're doing that 10%, you've just got to, you've just got to be a bit mindful of that. You've also, as you mentioned, there are a few different nuances, particularly for the, for the 25 year. You've mentioned WorkflowMax. We've also got... You know, although it's not hugely material, we do have the, the headwind of the removal of the, long- idle subscribers. But, on the whole, you know, I like your thinking around looking at the AMRR, the growth rate is of 22%, and then thinking about how that could impact , the next financial year.
Cool. Thanks, Kirsty.
No worries.
Thank you. Your next question comes from Roy van Keulen from Morningstar. Please go ahead.
Second, the question. My question is on the receivables, quite fast, I think faster than it would be for revenue growth. It looks like it's accelerating in HQ. Could you talk about what's driving that and whether that should be perhaps viewed as a leading indicator for churn? Thank you.
I think I got your question. We've. It was a bit hard to hear you, but I think you were asking around the increase in the accounts receivable. And so there were a couple of items that meant that there was an increase in that, you know, as at the March 31 . The first thing is around the timing of Easter. So Easter happened to fall right smack bang on balance date, and so therefore, we hadn't, you know, we hadn't received the cash of the sales because it was during Easter, and so therefore, those sales are accounts receivable. We also did have some prepayments.
We had, we had particularly in the sales and marketing, and so, you know, that can be to do with the, the lead up to Xerocon. Also, just looking at sort of timing of longer-term licenses that we've got with, say, Salesforce. So there's a few different, so a few different things to look through in the accounts receivable, but I suppose what you can hear from that is that it, you know, business as usual type activities, and the timing of Easter does make a bit of a difference to, you know, whether or not we receive the cash or whether or not it hits the balance sheet in accounts receivable.
Thank you. Your next question comes from Andrew Gillies, from Macquarie. Please go ahead.
Morning, guys. Thanks for the opportunity. Most of my questions have been answered, but I'll just ask a quick one on that AI opportunity. It sounds like it's kind of expanded a little bit beyond JAX, which you flagged at the investor day. You talked about, you know, potentially removing, you know, the need for human intervention in the sales cycle. I don't want to read into it too much, but is this something that impacted margins in FY 2024? And, you know, is it a potential sort of structural tailwind over the next few years? Thanks.
Got it. Thank you for the question. I think, that was Andrew, right? Andrew, thanks for the question.
Correct.
So, a couple of things. I think that we discussed it in 2024. We used AI in Xero Central to take a bunch of queries that would otherwise go to search and use a conversational interface. And we saw some nice, just early productivity wins in the number of people using that, feature. I don't think... So I think it was a minor set of support, I would say. We have, as you know already, a pretty healthy gross margin in our customer service team, but they're also in the teams who really are, great adopters of technology to keep staying efficient while providing very high Trustpilot scores, and I appreciate that about the team. So, you know, some minor support, but already a very strong margin.
Do I think structurally there's an AI tailwind to our cost base?
Well, I think like every company, you know, that has the same problem we do, which is too many things to do for our employees, and they're looking to get more productive with their time. We think there will be maybe more productivity yield, you know, for every Xero, and that's great, but I don't think we think about sort of that hitting our OpEx necessarily. It's just about how much time they spend on the business versus on administrative tasks. So I think it's, you know, I think we'll stay measured regardless. I think the biggest structural tailwind is for our customers and our partners, you know, because AI will fundamentally give them back time, and allow them to spend more time on value-added services. So if you're an SMB, the value-added service is running your business.
You know, and if you're an AB, the value-added service is advisory work, and we think we can power that. So I think we see the biggest structural tailwind probably in, you know, providing great software that increasingly, you know, gives you back time to, and insights that help you create more value for your business, that's the biggest one by far. Given that we're a software company that deals in the delivery of data.
Thank you.
Thank you. Your next question comes from Paul Mason, from Evans and Partners. Please go ahead.
Hey, morning. Just one on Making Tax Digital in the U.K. and your strategy around the next date. That's sort of, you know, some of the accountants are starting to gear up for it now. You've obviously retired Xero Go, and the next stage is sort of anticipated to be a lot of lower-end SMEs with smaller revenue bases, like sole traders or landlords and things like that. So could you tell us, like, have you got, like, another product that you're planning to bring out for that to hit those target subscribers really well? Or are they sort of, like, deprioritized now that you're, like, focusing on, like, SMEs with more jobs to be done? What's sort of the general view of the world there?
Hey, Paul, it's Sukhinder. Good to hear from you. I think, first of all, we do think Making Tax Digital phase III is very relevant to us in the U.K. because we have accountants and bookkeepers, you know, who, A, first and foremost, service customers of all sizes, and B, even though our primary segment is employing SMBs, you know, so many sole traders use our product. So in order to have a whole offering in the U.K., we anticipate that we will need to satisfy Making Tax Digital phase III. Having said that, I don't think we believe that Xero Go has to be the way to satisfy it.
One of the reasons we retired it, it was great learning for us, is we want to make sure our mobile strategy is, I would say, more cohesive and not on its own code base. So think of that as more a technical decision than anything else. But we do anticipate that we will need to make sure we're ready for it. It's a phase three, it's our MTD phase three, and our teams anticipate that. You know, we have to be a full service provider in the market.
Yeah. Thank you.
Thank you. We have a follow-up question from Siraj Ahmed from Citigroup. Please go ahead.
Sukhinder, just a question on capital allocation. Just in terms of the investment in Deputy, can you just touch on why you actually made that investment, given sounds like it's a pretty small stake, and what that could imply in terms of M&A in terms of capital allocation as well? Thank you.
Sure, Siraj. So first of all, we partnered with Deputy because we want to make sure that we have a great time and attendance solution for customers in Australia. As you know, this is one of our largest markets in terms of the subscribers we support and their needs. And we wanted a free Planday up to really focus on the markets where it can, you know, provide an even more robust experience, like the U.K. and the Nordics. And so first and foremost, it was a decision to purposefully, you know, I would say, allocate capital at Planday in the best possible way, and then also to satisfy Xero's requirements for a really strong solution in a timely manner in Australia. Now, why did we do the investment?
As you noted, it's a minority investment. We could easily have not done it.
We did it just to strengthen our partnership. I mean, it's really just to support our partnership. We think we're adding value to Deputy, as a strategic partner to them, and so, you know, we want to have some small participation in the company, but it's very small. It doesn't imply anything more than it's just. I mean, we're not on their board. We have no observer rights. I mean, none of those things that come with, you know, more active participation in the company's strategy. We're just happy to be a strategic partner and cemented that with a small investment. In terms of larger M&A, I think you know, independent of Deputy, we do believe that systemic M&A will be warranted in our build, buy or partner strategy in the 3x3 . There are...
Those are super jobs, and there's a lot to do within them, and we'll continue to look at systemic M&A to fill meaningful gaps, or accelerate product development, in our core strategy.
Thank you. We have a follow-up question from Roger Samuel, from Jefferies. Please go ahead.
Oh, hi. Thanks. Just gonna follow up on your product development cost. Looks like you're putting more money into the U.S. to localize the product. And, yeah, just wondering what sort of guardrails are you gonna put in place to make sure that you're not over investing in the U.S. like before? And, maybe second part of the question is, in the longer term, do you expect that the product development cost as a percentage of revenue to decline in the long term?
Okay, how about I take the first part, and I'll give Kirsty the second part. With regard to a US strategy, I'm sure, Roger, you recall our first half business review of the U.K., sorry, of the US, and we also disclosed our historic investment rate. You know, I think we disclosed it around NZD 30 million historically over the last 10 years, and we said we will keep our investment rate. We will not be profitable, we will keep our investment rate reasonable relative to our top line expectations.
So while we do think one of the reasons we've improved our velocity of execution in the U.S. is the formation of an onshore team in the U.S., in engineering and product, and, that's great, we do intend to keep it reasonable, and the guardrails we provided at the half are the same ones we would look to today. Kirsty, second part?
Hey, Roger, as far as the percentage of P&T of revenue going forward, I mean, we're not giving forward guidance today, apart from saying that for FY 2025, it is expected to be greater than it is in FY 2024, for the reasons that I've gone through. And we will continue to invest across the strategic period of 2025- 2027, with the year's product roadmap, to ensure that we are maximizing the opportunity in the markets that we're in.
Okay. I mean, yeah, the reason why I'm asking is because in the previous result presentation, you show, you know, the percentage, you know, there's an error going down for the long term, not for any particular year. But, yeah, I'm just, I'm just wondering if,
Uh-
... the trend is gonna be down over the long term.
Yeah, well, I think, I mean, definitely in the long term. I mean, if you think about what Xero could look like in steady state, for example, it would be a different sort of business than it is today because we wouldn't be growing, we wouldn't see the same level of opportunity 'cause we had so much more cloud penetration around the globe. So definitely at that stage, you know, we would still absolutely expect P&T to be down in the long term.
Fantastic. Thank you.
Thank you. That is all the time we have for questions today. I'll now head back to Ms. Singh Cassidy for closing remarks.
Well, we want to thank you again for joining us today. We appreciate your time, we appreciate your support, we appreciate the continued, you know, curiosity and investment in our business and, of course, all of our shareholders as well. So thank you so much for your time, and of course, always a shout-out to Xero employees and the Xero team around the world for all they do to make this possible. Thank you.
Thank you for joining the Xero Limited 2024 results conference call. If you have any further questions, please contact the Xero Investor Relations team. If you're a media representative, please reach out to Xero's Corporate Communications team.