Ladies and gentlemen, welcome to Xero's Half Year Results FY 'twenty Earnings Call. I must advise that today's call is being recorded. There will be a presentation followed by a question and answer session. I'll now hand you over to the 1st speaker today, Steve Ramos, Chief Executive Officer. Thank you.
Please go ahead.
Well, hello, and thanks to all of you for joining us for Xero's financial and operating results for half year to the 30th September 2019. I'm Steve Ballos, Xero's CEO, and I'm joined on our call by our CFO, Kirsty Gopi Billi. This morning, I'll share our latest performance highlights and the progress we've made against our strategic priorities during the period, and then Kirsty will dive into the financial results in more detail before we move on to the outlook and Q and A. We're really pleased to update you today on Xero's performance in the first half. Our strong progress is evident across a number of areas, including lifetime value, subscriber net adds and revenue.
I thought we should start with subscriber growth on Slide 5. This first figure highlights the success we've had in the first half and underscores the cumulative progress we've made in recent years. Our net 239,000 new subscribers joined Xero during the half, equaling our best ever result for 6 month period, which was second half of fiscal year twenty nineteen. Subscriber additions took the business through a significant milestone, 2,000,000. We ended the period with 2,060,000 subscribers, up 30% on the same period last year.
It's interesting it took more than a decade to add Xero's 1st new subscribers, and it's taken just 2.5 years to add the next 1,000,000, indicating the increasing momentum of our business. We've continued to drive the adoption of cloud accounting in New Zealand and Australia, and we're expanding our presence in a number of international markets. Net subscriber adds of 130,000 during the half from Australia and New Zealand reflect a particularly strong performance from Australia. International net subscriber adds of 109,000 also increased markedly versus the same period last year. On Slide 6, we feature another highlight AMRR, which is Xero's annualized monthly recurring revenue.
AMRR increased by $175,000,000 in the first half of fiscal year twenty nineteen and for the first time exceeded $0.75 to reach $764,000,000 AMR is an important forward looking indicator of the value of our existing customer relationships and how our business is growing. Moving to Slide 7. Here we have the main financial highlights for the period. We added more than $1,400,000,000 in lifetime value versus September 2018 to reach $5,400,000,000 in total lifetime value. Operating revenue for the half increased by 32% over the same period last year to $339,000,000 While subscriber numbers increased strongly, ARPU or average revenue per user trends were effectively flat with a slight decrease of 0.4% to just under $31 Kirsty is going to talk you through the underlying trends on ARPU later in this briefing.
EBITDA, excluding the impact of impairments, increased by more than 90% or $31,400,000 to $65,900,000 Moving to Slide 8 and framing the remainder of my presentation are the 3 strategic priorities for Xero. These are to drive cloud accounting adoption, grow the Xero small business platform and continue to build Xero for global scale and innovation. These haven't changed at the highest level we don't expect them to for some time. A tremendous amount of work has and continues to go on to further execute the initiatives supporting these priorities. Driving cloud accounting on Slide 9 is a core focus for us.
And as our half year results show, subscriber additions remain the single largest source of growth for Xero. We estimate global small business cloud accounting penetration currently less than 20% in the countries in which we operate. So there remains significant headroom for growth, and we are incredibly excited about that. Australia and New Zealand, we see aggregate cloud accounting adoption levels being over 50%. This is testament to our product innovation, the fact that 0 was born in this part of the world.
The compliance needs of small business owners continue to play a big part in driving demand for cloud accounting. Government initiatives such as Single Touch Payroll in Australia, Payday filing in New Zealand and Making Tax Digital in the UK all contributed to the 239,000 new subscribers added in the half. In addition to these growing digital connections between government and business, increasing adoption of cloud and innovation in financial services are significant trends that also support the growth of our business. Slide 10 and going around the regions. We see that Australia and New Zealand performed strongly in the period with total subscribers now exceeding 1,200,000, an increase of 23%.
AMRR within ANZ increased by 22% year on year. In Australia, subscribers increased by a net 114,000 in the half to 840,000, a 28% year on year increase. This is a new record for subscriber net additions for any region within a 6 month period. Operating revenue performance in Australia was also strong, up 26% year on year. In New Zealand, where cloud accounting adoption is the highest in the world, our growth in subscribers remained strong at 13% year on year and in the period on 367,000.
Subscriber net additions of 16,000 e slightly versus the same period last year. The 9 percentage point gap between operating revenue growth and subscriber growth in the first half of fiscal year 2020 in New Zealand demonstrates progress we're making on upsell and adjacent product sales as we shift our emphasis to additional platform services such as payroll, expenses, projects and payments. Moving to the next slide. The results of our U. K.
Business in the half were strong. Our U. K. Performance reflected the influence of HMRC's Making Tax digital initiative, which has sparked a shift in the way small businesses interact with government. Subscriber numbers in the U.
K. Increased by 51% year on year, and we added 73,000 subscribers in a half to reach 536,000
subs.
Revenue in U. K. Also increased by 51 percent to $80,000,000 while AMRI grew by 56%. We're also heavily invested and we have also heavily invested to ready our customers for open banking, and this has positioned us well in the UK and for similar initiatives in other markets. We see the open banking movement as positive for business and consumers alike.
It will drive competition, innovation and create better value financial services that drive or that small businesses rely on our day to day. The pace of innovation within the FinTech space is exciting, and we're pursuing potential opportunities to partner with others to deliver new financial services products. FinTech is going to feature in the announcements we're making next week at ZERECON in London, where thousands of our partner community will be in attendance. We also opened a new office in Manchester earlier this week, which complements our existing London and Milton Keynes locations. To summarize, there's plenty of headroom for growth within the U.
K, and it remains
a top priority for Xero.
Moving on to North America in Slide 12. Our go to market team in North America continues to develop and execute our community focused partner playbook that's proven successful in other markets. Subscriber numbers in North America increased by 21% versus the prior year to 215,000 subs, driven by steady progress in the U. S. And our newer Canadian business.
Overall, North American operating revenues increased by 34% or 29% on a constant currency basis. In terms of forward looking indicators, year on year, we have seen an uplift of more than 40% in partner channel capacity, That is being the number of small businesses we can reach through our partner community. We expect to see our strategy translate into revenue growth across North America as we gain further traction with new partners and drive increasing adoption. We're also encouraged by the level of engagement at our Xerocon San Diego event, which was held in June. We were joined at the event by more than 1,000 attendees, which is a positive indicator for the appetite interest in Xero within North America region.
This underpenetrated market remains an attractive opportunity for us with a huge TAM on offer. A key priority continues to be the enhancements of our local product fit and to build improved compliance functionality such as the work we've done on GST returns for Canada and tax mapping for the U. S. Now on to Slide 13. The Rest of World includes our businesses in Singapore, Hong Kong and South Africa.
These markets remain a great opportunity for us and while still relatively new to the group, delivered impressive momentum during the half. Revenue for rest of world region grew 43% year on year and subscriber numbers grew 52% year on year to 99,000. Net subscriber adds more than doubled over the same period last year as we continue to benefit from our positioning and grow brand awareness in these growth markets. During the half, we launched a bank free partnership with Hang Seng Bank, a leading provider for small to medium businesses in Hong Kong. In South Africa, the road shows we hosted in Johannesburg and Cape Town during the half attracted over 1200 attendees, which again is a great indicator of early stage interest and demand for Xero.
We also announced a number of alternative lending integrations in South Africa, including Bridgeman, Retail Capital and Lula Lend, leveraging our global bank feed API. So that's a good segue to the next part of my presentation where I want to talk about our second strategic priority, the Xero Small Business Platform. The diagram on Slide 14 is an illustration of the Xero platform and surrounding ecosystem, which is central to our strategy and future. I'll just take a moment to revisit the key elements of the diagram. Xero's birth in the cloud established us as a platform for collaboration between advisors and their small business clients.
From these origins, we extended the platform beyond thanks for the connections, which acted as the foundation stones to Xero's initial push into cloud accounting. By giving small business customers access to even better and more useful data and information regarding the financial performance and health of their business, the platform allows us to offer a much wider range of complementary services and applications. Growth of the Xero platform to date means we support more than 200 connections to banks and financial services partners around the world. We have more than 800 application solutions in our ecosystem, and we support more than 50,000 users of Xero's API developer tools. This diverse and vibrant community gives our customers better access to data insights to make their lives easier.
We've also worked hard to develop a range of new partnerships that ensure even more opportunities for small business customers to benefit from being on the platform. For example, our app partner FIGR in the agricultural space is working with us in a number of geographies beyond their key roots. Xero and Figured work together to support farmers and other agricultural business owners to manage their business and gain better access to capital. On Slide 15, we show the progress and growth in the revenue performance of Xero's small business platform in the first half of fiscal year 'twenty. The left hand chart on this slide shows Xero's operating revenue composition.
And you can see from that slide that from there that platform and noncore other noncore accounting revenues accounted for 11% of total operating revenue in the first half of the year, increasing from 9% of total revenue in the first half of fiscal year 'nineteen. The bar chart on the right hand side shows the platform revenues in the form of add ons like expenses, payroll, projects, hubdoc as well as teamwork transaction revenues grew collectively by 116%. This growth reflects our focus on the small business platform and the work we're doing in areas such as payments. We're excited to have extended our existing partnership with global payments platform, Stripe. On Slide 16, I want to reinforce how our platform strategy is core to everything we do, including and beyond cloud accounting needs.
Our customers' data is at the heart of Xero. Small business customers interact on a day to day basis with their data in Xero by the actions they or their advisors take. Our ambition is to help and encourage small business owners to manage as many of their workflows on our platform as possible. This will enhance the quality and quantity of customer data. Leveraging our machine learning capabilities, we can further optimize and improve the applications we build and the workflows managed on the Xero platform, which in turn further enhance the quality of data in a virtuous circle.
We can also use artificial intelligence to generate applications which surface insights
for
our small business customers based on the underlying data that has been generated, also bringing the wisdom of the crowds of individuals. These insights might inform our customers as to what they should worry about, could do better or should do next. Going beyond what they're doing, each day to consider the so what and the now what is very important to delivering the ultimate value of Xero as a small business platform that provides our customers with trusted human insights. Having talked the opportunity, it's great to be able to provide you with a couple of examples of actions we've taken in the half to drive our platform agenda on Slide 17. Since we acquired Hubdoc just over a year ago, we've been working on how we can bring Hubdoc smarts closer to more 0 customers.
HubSpot can make a big difference for small business owners and their advisors, saving them a significant amount of time. Over the past year, we've already seen a marked improvement in speed and accuracy of both data ingestion and coding functions within Hublot. In April, we extended and expanded our partnership with Stripe to continue helping people in small business spend less time chasing payments. Small business customers can now open a new Stripe account within Xero, and existing Stripe customers can also log into their Stripe accounts as they create invoice. The typical benefit of using a pay now option such as Stripe is that an invoice can be paid up to 2 weeks faster.
Additionally, Xero's autopay feature works with Stripe to allow you to set up and receive recurring card payments for repeat billings for customers. The new Stripe feed means every Stripe transaction can now be accounted for and reconciled with one click in 0. These are and has been among the top requested features from customers and will address key moments in their day to day activities where things can be done simpler and smarter so they can get back to focusing on running their business. On Slide 18, our first strategic priority is really critical for us as Xero continues to grow and evolve and reflects the need for us to build today the capabilities that will support a business in 3 or 4 years will be significantly larger than we are today. We focused on growing our talent and tuning all our business processes for operational excellence.
During the first half of fiscal year 'twenty, we continue to invest significantly in developing capabilities across technology, data, product management, strategy and M and A to mention a few. We've hired several senior and experienced people to enhance our talent pool in all these areas. At the leadership team level, during the period, Damian Kampling joined Xero as Chief Strategy and Corporate Development Officer from Deloitte bringing significant technology and digital experience. Tony Ward joined as President of the Americas being big technology industry sales, marketing and product management skills, having held senior positions at Microsoft and LinkedIn. And as Xero continues to evolve, our Chief People Officer role has been reestablished as a stand alone role reporting from E2Me.
Rachel Powell, who was previously Chief Customer, People and Marketing Officer, has been appointed Chief Customer Officer, now responsible for our global sales and marketing functions and leading and developing them. Nicole Reed is now acting to people outside until a formal recruitment process is completed. Nicole recently joined Xero with human resource and organizational development experience across both the financial services and technology sectors. And I feel very fortunate to be working with a talented group of executives who have the skills and passion required to help Xero grow and continue to evolve. Coming to the next and final slide I'm presenting before I hand over to Kirsty, I wanted to touch on social and environmental impact.
As we've said previously, at Xero, we believe a beautiful business also means being a good corporate citizen. So we're pleased to announce we've made some meaningful early strides towards our social and environmental ambitions in the first half of fiscal year twenty twenty. We've been actively working with ESG rating houses to improve our ratings, such as those you can see on the slide. We're also announcing today that we're taking action to reduce Xero's emissions footprint and will offset 100 percent of Xero's carbon emissions across all areas of business covering last fiscal year 2019 and on a go forward basis from this year onwards. We're calling this program Net 0 at 0 and we'll share more details about our carbon offset provider and projects as they're finalized.
We're also looking forward to providing future updates on our investment in our social environmental impact programs as we explore a range of initiatives such as employee volunteering and support for nonprofit and for purpose organizations. Xero's purpose is to make life better for people in small business, their advisers and communities around the world. This is a purpose we believe in and we are committed to. So with that, I conclude my business update, and I'll pass over to Kirsty, who will take you through the details on the financials. Thank you.
Thanks, Steve. Hello, everyone. I'm Kirsty Godfrey Bille, Xero's CFO, and I'll now cover our financial performance for the half year in more detail. Turning to Slide 21. Results for the 1st 6 months of FY '20 are a great indicator of the business' continued top line momentum alongside an increasing number of strong performance indicators.
2 of the most important financial metrics to us in terms of managing the day to day business are our annual monthly recurring revenue or AMRR when talking to the top line and free cash flow when it comes to returns and efficient capital allocation. As Steve has mentioned, AMRR was a key performance highlight, growing by 30% over the same period last year. Of this growth, more than half came from our international segment. This is further evident of Xero's progress as a global business. Looking at the chart on the right, we recorded a positive free cash flow performance for the period.
This was the first in Xero's history for an interim result. Free cash flow of $4,800,000 was equivalent to 1.4% of Xero's first half operating revenue and an increase in dollar terms of $14,600,000 on the same period last year. This positive evolution in our free cash flow profile is a strong indicator of the underlying trends as we scale the business. Positive free cash flow provides us with the flexibility to deploy capital towards investments and initiatives that support further growth and value creation. As we'll get into in the outlook, we continue to anticipate a positive free cash flow profile for the current year.
Our priority will remain to reinvest or invest in growing the business in order to address the significant opportunities that lie ahead. Turning to Slide 22. Positive contribution margins in both Australia and New Zealand and the international segment for the year signal that we're another step closer to really uncovering the long term economics of our business model. In Australia and New Zealand, segment contribution grew $33,000,000 or 34% year on year. Contribution growth for AMD continues to exceed revenue trends, and this highlights our ongoing operating discipline and scale benefits.
What's exciting about our International segment is that we achieved a positive contribution margin in the half for the first time. This improved by $12,000,000 over the year to reach $11,000,000 while supporting an increase in revenue of $40,000,000 or 46%. This outcome was due to the realization of scale and customer acquisition despite growth investment and a focus on subscriber additions. On Slide 23, we show how lifetime value per subscriber and the total lifetime value of the Euro subscriber base has increased over the past 12 months. Lifetime value or LTV is a key metric used across the business to guide decision making on FLYA and TASO Invest.
It shows the value created that is not captured elsewhere in our financial statements. Overall, LCD per subscriber climbed 5% over the year to $2,619 This was driven by a lift in gross margin, while churn and ARPU trends were consistent at a group level with the same period last year. There were a couple of opposing trends that contributed to the ARPU outcome that are worth looking at in more detail. In Australia, the onset of single touch payroll afforded us an opportunity to serve a fast growing area of the market with a payroll only product at a competitive price point. S and P was extended to businesses of all sizes from the 1st July this year, and we moved quickly to support the changes that many Australian employers were required to implement.
The success of our payroll only products in Australia resulted in a small shift in product mix and some downward movement on ARPU. The new connections were established with these Australian give us the potential to offer further value add services in the future. The ARPU trend in Australia was offset by the positive progress on ARPU made in the period through upsell and cross sell within New Zealand. Pleasingly, ARPU trends internationally were consistent with the same period last year. With the increase in LTV per subscriber and the 30% increase in subscriber numbers, total LTV added in the past 12 months was over $1,400,000,000 I'm pleased to highlight that over $1,000,000,000 of that $1,400,000,000 was added in the last 6 months.
This took our total LTV to $5,400,000,000 up 37% from the previous 12 months, which is a great result. On Slide 24, I'd like to give some more color on the compelling SaaS metrics that the business is currently delivering. In the first half of FY 'twenty, tax months of 12.3 indicates the time it takes for us to recover the cost of acquiring a new subscriber through subscription payments. And LTV to CAC ratio of 6.9 remains a very strong indicator of the significant value created by adding a customer to the platform. It means we have added almost $7 of lifetime value to every dollar we spend on CAC.
This measure has improved over the last 6 months from 6.0% and from 6.2% this time last year. Moving to Slide 25. Here we summarize our financial performance measures for the year showing year on year changes from the first half of FY 'nineteen. Operating revenue increased 32 percent to $339,000,000 This was driven primarily by subscriber growth in all markets. Gross margin lifted by a further 2 percentage points to 85%.
EBITDA on a reported basis was 65,000,000 dollars which is a $48,000,000 improvement on the same period last year and a major and almost threefold increase. This reflects the continuing benefits of scale and efficiency improvements as well as the significantly lower impairment charges incurred, which at $1,000,000 was $17,000,000 lower than the same period last year. We've also reported a great bottom line accounting result with a first time interim net profit of $1,300,000 This is the 2nd consecutive net profit we've had for a 6 month period after we achieved a positive net profit for the second half of FY 'nineteen. I'll now break down some of the key trends within our financial performance. Moving to the next slide.
Here you'll see we've continued our gross margin improvement to 85.2%, an increase of 2.4 percentage points over the same period last year. It's pleasing to see this upward trend continued across the segments. Gross margin continues to reflect the efficiency improvements we've gained. This includes economies of scale realized in hosting costs and the use of machine learning for our customer experience portal 0 Central to deliver better service outcomes at a lower cost. In the next slide, you'll see we have maintained a focus on efficiency benefits in CAC and product spend over the half year.
CAC as a percentage of revenue reduced to 43%, down from 45% in the same period in FY 'nineteen. This result was achieved despite the continued significant investment in both new and existing markets. In addition, tax spend over the past 6 months has included additional technical spending to help address single touch payroll in Australia and making tax digital in the UK. Looking to product spend, as a percentage of revenue, product costs, including OpEx and CapEx, increased slightly to 31% over the same period last year. Product investment in the first half of FY 'twenty targeted a range of initiatives that will support near term and customer objectives as well as longer term strategic and technological needs.
We recently launched some exciting new product features including single sign on, adviser app recommendations, in app account provisioning and Stripe transaction fees. Moving to Slide 28 on our cash generation and our capital position. As already mentioned, we delivered a positive free cash flow result in the first half of FY 'twenty of $4,800,000 which is equivalent to 1.4% of Xero's first half operating revenues and an increase in dollar terms of $14,600,000 Operating cash flows improved significantly, coming close to doubling to 71,500,000 dollars which, given a monetization ratio in excess of 100%, shows the underlying quality of our EBITDA results. Investing cash flow for the period was $66,700,000 an increase of $21,000,000 or 46% year on year excluding M and A. In terms of our capital structure, total cash and short term deposits at the 30th September 2019 were $496,000,000 Our net cash position at the end of the first half was $101,400,000 The $300,000,000 of capital raised last year from the convertible notes provides us with considerable flexibility to assist future investment opportunities.
At the end of the period, we recognized a term debt liability of N395 $1,000,000 We also renewed our standby debt facility during the half. The new facility has a 3 year term and we increased its size from 100 to $150,000,000 We added 2 new global banks to the syndicate, HSBC and Citibank, and continue to be supported by the BNZ and ANZ. Despite the 50% increase in size, we were able to secure more flexible terms while maintaining broadly the same annual cost to 0. Although there are no immediate plans to draw on the facility, the slope has been expanded to include short term liquidity requirements should they arise. The capital we have on hand combined with the ongoing capital generated by the business enables us to pursue acquisitions and investments that extend and enhance our small business platform and ecosystem.
We're carefully reviewing future opportunities to do this through both organic and inorganic avenues as we continue to develop our strategy and apply our capital allocation framework. In summary, we put together a really exciting strategic launch pad for growth. So with that, I'll hand back to Steve to comment on our outlook before the Q and A. Thank you.
So thanks, Kirsty. And now touching on the outlook, which remains unchanged from the statement we made at the end of fiscal year 2019. Xero will continue to focus on growing its global small business platform, maintaining a preference for reinvesting cash generated, subject to investment criteria and market conditions drive long term shareholder value. Free cash flow in the financial year to 31 March 2020 is expected to be a similar portion or proportion of total operating revenue to that reported in the financial year 31 March 2019. Finally, before I conclude, I'd just like to acknowledge and thank our entire team of Xero people for their hard work, which has delivered these results.
And on that note, I'd like to thank all of you for listening and attending today and hand back to the moderator now for your questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from Paul Mason from Evans Partners. Please go ahead.
Hey, guys. Just a couple for me. The first one, just wondering if you could talk a bit about your U. S. Subscriber numbers, whether there was any hard docking there or whether that was all core Vero subscribers?
And I'll ask the others in sequence.
So our U. S. Or Americas subscriber numbers did include Hubdoc only when there is no 0 core subscriber included. So we only count 1 subscriber for core 0 and any adjacent adjacent subscriber.
Okay. So in terms of like, let's say, the 20,000 average, we should look at that as basically all being like people that subscribe to the 0 accounting suite?
They are unique subscribers. So there will be a portion of those that will have only Hubdoc subscriptions, but most will be core 0.
Okay, good. Just on the Australian business quickly as well. It looks like your subscriber numbers have gone really, really hard because of single touch payroll. Just in terms of the ARPU dynamics that we can expect, say, going forward as a result of that, should we read that as a lot of subscribers that were really back loaded? Or should we read that as having an element of like lower ARPU subscribers and sort of treat the current ARPU as sort of a baseline for our loan forecasting purposes?
Yes, Matt. As I said in the script, there has been a slight downtrend in ARPU in Australia due to the single touch payroll product at a rack rate that has a price point of $10 which is obviously substantially less than our ANZ ARPU, which currently sits at 31 point 64%. So ongoing, I think you are we are certainly ensuring that we are driving attachment of adjacent products and services through our core subscriptions. And so within those numbers where we have achieved a payroll only subscription, we see that then as a benefit to being able to then be able to upsell the course of Xero subscription and also additional adjacent products.
Okay. Great. And just the last one for me. In terms of if we went back to the second half twenty nineteen, you guys had like a bit of a surge in your CAC months in ANZ because you guys are running like a marketing program for existing subscribers to upsell them payroll and things like that, if my memory is correct. And it looks like the CAC months have sort of dropped back again.
Assuming my recollection of history is accurate, can you maybe talk us through sort of what's going on there, whether those programs are going to come back again or the numbers are being discarded by the surge in subscribers from Single Touch Payroll? Yes, just any color there.
So as you say, there are 2 components to that. So CAC is broken down into 3 different components. The first is driving growth in subscriber numbers. And so we will have seen we have definitely ensured that we have invested enough to be able to capture the opportunity within single touch payroll. There is the second component, which is ensuring that we are driving the increase in platform revenues across our existing customer base and so that we definitely continue within the future.
And then the third is around loving the customer base that we've currently got. And so as we grow subscriber numbers, there are obviously more subscribers that we do need to be able to love. So as far as your recollection, you are correct. So if we look back at March, we had CAC months in ANZ of 9.4 because there was a bit of a surge up. As we've said before, LCV to CAC, which really looks at the efficiency across ANZ, is now sitting at 12.3%.
And I think that has shown that there has been absolute efficiency during this half due to the real increase in subscriber numbers held by STP. Longer term, I would feel that we'd be making the wrong decision if we were to continue to have those levels of efficiency within ANZ. And we've said that it would be probably right for those longer term to slightly come down as our base becomes larger, and we do have more customers that we need to show that love to.
Okay, great. Thanks. Great result.
Thank you.
Our next question comes from Rohan Sundram from MST Marquis. Please go ahead.
Hi, guys. Just had a question around the cash position. I'm not sure if you flagged this in the past and sorry if I've missed it, but is there any preference internally to maintain a net cash position or not have you said anything in the past around a willingness to move to net debt for the right opportunities? I'm just looking for a bit of an update on that.
So we have within our outlook, we do state that we are reinvesting our cash back into the business. So the expectation is that we will keep our net cash position to be at similar levels to our similar levels to what we had at the end of last financial year. So we certainly in that statement, we are saying that it will be positive, but it will be a similar percentage of where we are looking at doing where we hit March last year.
Okay. No problem. Actually, Kirsty, while I've got you, around your ANZ ARPU commentary, do you have an estimate of what the ARPU growth could have been if not for the STP payroll product?
Yes. No, we don't disclose that. We don't disclose that. But I think if you look back in time, the ARPU that we sit at within ANZ at 31.64, That is up from March. So we certainly have maximized the opportunity of STP.
But in a number of cases, also with the with being able to move our subscribers through the product stack and also ensuring that we are maximizing the use of platform revenue growing at 116% year on year. There are a number of different contributors to that ARPU mix at the moment within Australia and across the business.
Our next question comes from Roger Sanyal from Jefferies. Please go ahead.
Hi, good morning. I've got 3 questions, please. First one is, obviously, you there was some benefit from single touch payroll and making tax digital in this result. Do you expect to get more benefits from this in the future periods? And the second thing is on North America.
You mentioned that the capacity went up by 40% year on year. Is there any more color you can give us on the region, especially how you convert these businesses into customers with the new yes, with the new hidden pace right now? And then thirdly, just on your lifetime value, which went up pretty well, about 6%. You've got some best in class churn rate there and also gross margin of 85%. Is there any more lever you can pull, perhaps the ARPU lever for price increases and perhaps growth in platform?
Okay. Thanks, Roger. It's Steve, and I'll touch on the answers to those. Firstly, on the benefit to of STP and making tax digital, I think in the bigger picture context, you have to believe that the trends are for governments to continue to increase the extent to which they encourage, expect digital connections with business. That is, in my view, one of the significant trends that defines more than this year, but potentially the next 10, 20 years.
So we see that as a core part of in addition, let's say, to the adoption of technology and cloud, the change that's going on in the innovation of financial services, those three big things all make Xero's business very relevant and gives us supports the potential that we have. Each of those, by the way, is worth sort of drilling into at the right time. But single touch payroll is not over. There is still the next wave, which will be addressing the businesses that have 1 to 5 employees and those that also deferred from the initial burst. So it's not over yet.
And also when you look more broadly at, say, Making Tax Digital, whilst the burst around that is certainly something that has been influencing recent periods, there's other potential initiatives by the U. K. Government that they've mentioned, they've talked about, and that will emerge over time. So I see these things as definitely encouraging our business growth, but also being a continuing trend for a long time yet to come. On North America, the important thing about the TAM metric is that it is an insight to the progress we're making in building the community, the partners, the accounts and bookkeepers that really do underpin the foundation of business model and how it's evolved over the years.
But what we do once we connect and we engage those partners is a range of activities that enable them to go on the journey of practice transformation that's really key to them building the capabilities in house and then helping their customers come on board with Xero. So it is a process, and it's one way within a practice, the journey accelerates over time. And that's why we keep stressing the need to stick to the course and be patient about the growth of our business in the Americas. It's a phenomenal opportunity for us, and we remain very strongly committed to that course. The final one, which was let's see, the LTV, yes, look, I think, Roger, on LTV metrics in churn and gross margin, probably the only appropriate thing to say right now would be that we continue to really focus on operational excellence across our business, and we look for the opportunity to do things smarter and better.
Very fortunate in our customer service organization to have leadership that's been very strategic over the years and leverage technology very, very well to enable rather than
put
sort of a commentary on what I think is rather than put sort of a commentary on what I think is possible, all I would say is continuous improvement is fundamental.
Okay. Thank you.
Thank you.
Our next question comes from Suraj Ahmed from Citigroup. Please go ahead.
Thank you. Just a few questions. Firstly, on the U. K. Stephen Kelsey, can you just talk to the impact of the price increase you had in the UK recently?
How should we think about ARPU uplift going forward? And I will see I mean, your subscriber growth is very strong, but are you seeing an increase in churn in recent months?
So yes, if I just take that on behalf of Steve. So we did put the price increase up on the 5th August in the U. K. And so that has had a positive impact on ARPU. Just also just be mindful of the fact that this hadn't we hadn't had a price increase for 3 years prior to that.
And we haven't seen any real churn impact based on that price increase. There was a sense in the market that we absolutely have been increasing the value
of our
products seats by the £2 or £2.50 or well in excess of that over the last 3 years.
I think just to add to that, we also made announcements of the product road map resulting from our Instafoil acquisition. And as we make more announcements next week at Xerocon, the supporting the statement Kursky just made about additional value in the subscription, we're going to have some very strong features around compliance that we know their accounts and bookings, in particular, are going to really enjoy.
Great. Secondly, just kind of just following on the ARPU question of Australia. Should we expect that ARPU to increase going forward? I mean, you had that single digit benefit in the first half, but should we as the tax rate increase, should expectation be the optimal increase going forward? Or should it remain flat near term?
So I mean, as Steve was saying before, single touch payroll has it has only become required for employees that have 5 or more employees. We still have next year to come the smaller businesses. So there's certainly still opportunity we see to further the benefit out of STP. So you have 2 moving forces within the Australian ARPU. You have the ability for us to be able to sell single touch payroll, payroll only product to market, which would have a downward trend on ARPU.
But then we also have the ability to be able to ensure that our small businesses are maximizing the benefit out of the adjacent products and services that we can offer through platform. So it will be a mix of both of those that will impact Iyaku going forward.
Last one. Can you also give an update on the Stripe partnership? I know it's too recent, but just data attached rate and stuff like that?
I think we're more than happy to talk more offline about the details. But essentially, we've built a good relationship with Stripe and we've just added the functionality, as I mentioned in my remarks, that continue to offer our customers a great opportunity to get paid faster and also to process payments much more efficiently for those recurring customer billing events that they have. So I think at this point, I'm not sure what more I can connect to that.
Our next question comes from Tom Beadle from UBS.
Just the first one, just around the platform opportunity. Obviously, strong revenue growth there, but still a relatively small contributor. So I guess, firstly, would you be able to go into more detail about the specific drivers of that growth? Was payroll a big driver in the last half? And also, are there any initiatives on top of the Stripe partnership that might drive platforms contribution materially higher?
Second question is related to this, just around product development. Could you talk about the types of things that you're investing in? Is there anything worth singling out by either at the platform level or capabilities within specific markets? And then just finally around M and A, You obviously issued that convertible last year with the intention to do M and A. And just given you haven't done anything material yet, has your strategy around M and A changed since then?
Okay. Tom, why don't I have I'll answer those. Firstly, on platform growth, it is absolutely across the board. So everything that we mentioned that is part of that growth in revenue applies quite equally actually across all elements of the business that we're doing in adjacent products as well as transactional services. So it is across the board.
And by the way,
in terms of are there other opportunities, yes, there are. There's plenty of very interesting opportunities. I think that the important thing to remember is that this is an emerging part of our business where we are adding resources and building capabilities. So Xero got we got where we are today by really being focused on subscriber growth. And over the last 12 months, when you see it in New Zealand numbers, We are getting much, much more efficient in the way that we go to market for those adjacent products but also much more experienced in terms of the potential that we have around financial services and partnerships in financial services.
So plenty more opportunity there, but it is a process where we are developing and growing those capabilities in the business. In terms of product development, it's really interesting because we look very regularly at where we're investing our product development capital, and it is actually across the board. So everything from the areas of practice management for accounts and bookkeepers through the mobile customer experience, through to some new initiatives in the reporting area and also in the short term cash flow management area, we've got a lot of work going on. There really isn't any part of our product suite that is, let's say, not being enhanced or isn't being led by people who see real opportunity to add more to the customer experience. So we really don't see our product as it is today and product lines are static.
There's plenty of opportunity to do more. On M and A, nothing's changed on strategy. The strategy is the 3 areas that I talked about around driving adoption, building a platform and building capability. And when we assess M and A opportunities and partnering, we look at those 3 as the foundations to why would we do this. We've built our M and A team and our strategy capability over the last 6 months, and we are actively evaluating opportunities.
And as those progress towards any outcomes, you will know.
Okay, great. Thanks.
Thank you.
Our next question comes from Gary Cherif from Royal Bank of Canada. Please go ahead.
Steve and Kirsty, just a couple of quick questions. 1 on the U. S. Tony Ward's been at 0 now for about 5 months. I'm wondering if you could provide some color on any changes Tony has made or elaborate on what he's done since arriving, whether there's been any change to, I guess, sales strategy, whether you're accelerating your U.
S. Sales staff hiring process or sales tactics or targets have changed?
Yes. I'd say a couple of things. Tony certainly has very quickly brought into the strategy we have had, which is to move from where we were to focusing on executing the playbook through accounts and bookkeepers that has worked elsewhere. He has moved to separate the U. S.
Business from the Canadian business and has appointed country managers in each. And he's also advocating very strongly, as a good region executive does, for more investment and more local compliance and other features of the product that will support our business in the Americas. So Tony's off to a great start and has only added to our belief in the path we're taking and conviction to continue to invest in the Americas.
Thank you. Second question, just in terms of the U. K. So Intuit appear to be also doing a good job of posting strong subscriber growth and extending pretty aggressively in the U. K.
Market. You guys obviously also doing very well. I'd be interested to hear as to where that share is coming from. Do you believe that's mainly coming from Sage? Or can you provide a little more color as to where do you think your share is being acquired from?
Yes. Look, I think that the U. K. As a cloud accounting marketplace, it still has a lot of runway. So our best estimate to say that it's penetrated around 20%.
So still a lot of headroom. Our focus and our business is very much oriented towards accounts and bookkeepers and businesses that employ people, although we do have a lot of customers who are not employing businesses. So we're very much focused on continuing to execute the playbook and growth rates starting with 5%. And both subscriber numbers and revenue are very, very healthy, and we're really pleased also with the progress we've made around making tax digital and our presence in that very important change that's going on in the U. K.
And final question on the regulatory environment. You've talked about ANZ in the UK with regulatory tailwinds in terms of cloud adoption. Is there anything in the U. S. Or North America broadly that you can point to that's on the horizon, which may also provide some tailwinds?
I think potentially in Canada, the move to Open Banking could help a lot because interestingly, cloud adoption in Canada is probably around a 10% mark, if not lower. And one of the things that's interesting as you observe that is whilst the Canadian environment is very, very similar to Australia and New Zealand from a, let's say, reporting and accountant bookkeeper engagement with small business. What isn't as evident there is the banks being as oriented towards technology and connecting in more progressive ways, the way that we've been very fortunate to be supported by the banks in Australia and New Zealand and in the U. K. So I think that Open Banking is going to accelerate innovation in the Canadian banking system.
And then in the U. S, we'll just have to wait and see.
That's great. Thank you very much for the color.
Thank you. And our next question comes from Gareth James from Morningstar. Please go ahead.
Hi, guys. Firstly, I didn't quite catch if you gave constant currency ARPU growth. And also, can you clarify what the price growth was in New Zealand versus the prior comparable period, please?
So constant currency ARPU had minimal change. And so what was the second question around pricing strategy? We did a price rise in New Zealand, but that was back in September last calendar year. There's no change in the half. No.
So what's the change versus the PCP?
Okay. You're talking about the increase in ARPU on the year. So I'll let Kirk answer that.
Okay. So yes, I mean, there was an increase in ARPU in New Zealand, and that was due to the team doing a great job at being able to upsell current small businesses through the product stack, but also the attachment of our platform, our products and services.
Okay. And just on the gross margin. There's a comment about it being driven by economies of scale. How much of it was is just kind of one off? And how much is likely to continue?
So yes, I mean, you will have watched us over the years as we have strived towards 85 percent of gross margin, so it's really exciting today to have been able to hit that milestone. And that has been driven by a couple of factors. The first was that we moved from Rackspace to AWS a couple of years ago and continue to drive efficiencies through our hosting costs with negotiating with AWS. The second was the way in which we are looking at providing services to our customers through our customer experience team and the use of 0 Central and machine learning in that area with no degradation of service whatsoever. So we have strived hard to get to the deadline of 85%, which we've made today.
We will continue to look at how we can drive further efficiencies in the future. But today, we're really pleased with hitting 85.2%.
Okay. And just one final one for me. Just with regards to the H and R Block acquisition of Wave, I think Wave claimed about 400,000 subscribers, although that's in the U. S. I'm just wondering if you expect that to be impact your business very much going forward.
Yes. We are partners with H&R Block, and I have checked in on that with APSEAM in the Americas, and it's very much business as usual. So we still collaborate, work very well with them, and don't look forward to doing so in the future.
Okay. Thanks guys.
Thank you. Just in the interest of time, I believe we'll take one final question from Mark Bryan from Wilson. Please go ahead.
That's okay. The question has just been covered on gross margins. Thank you.
Thank you.
With that, I'll pass back to the speakers for any closing comments.
Well, look, thank you. Thanks again for your interest and for joining us today. Really appreciate it. Obviously, very pleased to be able to announce results and to discuss them today that demonstrate continued growth and continuing improvement in our key financial metrics. So thanks again, and I'm sure we'll be talking.
Thank you.
Thank you so much. Thank you so much for joining the call today. You may now disconnect.