Ladies and gentlemen, welcome to Xero's half year results FY 2019 earnings call. I must advise you that today's call is being recorded. There'll be a presentation followed by a question and answer session. If you wish to ask a question, it is star one on your telephone keypad. I'll now hand the call over to you for our speaker today, Mr. Steve Vamos, Chief Executive Officer. Please go ahead.
Thank you very much. Well, hello everyone, and thanks for joining us. I just want to let you know I'm joined by our Chief Financial Officer, Kirsty Godfrey-Billy, and our Chief Operating Officer, Sankar Narayan. We're really pleased to present an overview of our half year 2019 financial results for the six months ending 30 September 2018. Now, as many of you may know, this is our last results announcement with Sankar before he moves on from Xero at the end of the calendar year. I'd like to thank Sankar for his significant contribution to Xero, and also congratulate him on his new role as CEO of SiteMinder, effective January next year. I'll now walk you through some key business performance highlights, and I'll hand over to Kirsty to cover the financial results, and after that, we'll have a Q&A.
During the first half of fiscal year 2019, Xero continued to deliver strong growth and strong operational and financial discipline. At the same time, we made significant steps in executing our strategy and positioning Xero strongly for the longer term. The slide you see in front of you, slide five, you'll see the trajectory of Xero's continued growth. We've seen 380,000 subscribers join our small business platform over the past 12 months. This took subscriber numbers to just under 1.6 million at 30 September 2018, a lift of 32% on the prior year, compared to 351,000 subs added in the year to March 2018, and 337,000 subs added in the year to September 2017. This shows continuing strong momentum in our subscriber adds. Onto slide six, which is a real highlight.
This chart shows that Xero's annualized monthly recurring revenue, which we call AMRR, has increased significantly to reach NZD 589 million, a 40% increase over prior year. As I said, this is a highlight, as AMRR demonstrates we're capturing more value from our existing subscribers, plus adding more subscribers. Pleasingly in this result, we've been able to grow both subscriber numbers and the revenue from those subscribers, demonstrating our ability to boost revenue quality or ARPU as we grow the small business platform. The AMRR position is a great measure of how the business is traveling and provides some forward-looking indication of top-line revenue trends to come. NZD 167 million of AMRR was added over the last 12 months, up from NZD 121 million added in the 12 months to March 2018, and NZD 116 million added in the year to September 2017.
Moving on to slide seven, where we've summarized key highlights for the period. These results provide further evidence of Xero's strong top-line growth and disciplined execution, demonstrated by strong financial metrics. We saw a 6% lift in ARPU. Operating revenue for the half increased 37% to reach NZD 256 million. The EBITDA and operating cash flow result illustrate our ability to convert strong strategic positioning into improving financial outcomes. Excluding the impact of impairments, EBITDA more than doubled to NZD 34.5 million, and operating cash flow is also up sharply, increasing in the half NZD 21 million year-on-year to NZD 36 million. On slide eight, before we dive into the operating and financial detail, I want to highlight three key strategic priorities for Xero. Driving cloud accounting.
Xero has a great opportunity to keep growing internationally by continuing to do what we have over the past decade or so, which is really to drive cloud accounting. This remains at the center of what we do and will remain a core focus for us as we see current levels of adoption around the world at or around or well under 20% of market potential. At the heart of our business is the interaction and connection between advisors, which accountants and bookkeepers, and small businesses. That interaction drives the way we think about our go-to-market approach and investments we make in product development. That interaction ultimately leads to a strong word-of-mouth effect when advisors recommend Xero to each other and small businesses, and small businesses do the same. We're making significant moves to ensure we're even better positioned to capitalize on the cloud accounting opportunity.
We've moved our small business product team under Anna Curzon next to our partner product team to align our product development and marketing efforts further to capitalize on the cloud accounting opportunity around the world. Anna's new role is Chief Product and Partner Officer. An area of greater focus for us going forward is the opportunity to further unlock TAM in a number of different markets. These include entry-level and lower complexity businesses, more complex businesses, and vertical or industry-based segments and opportunities. Initiatives that better target what we view as highly attractive sub-segments of the overall cloud accounting market is a key priority for us. Growing the small business platform.
There's strong evidence in the results of our progress and potential in growing Xero as a small business platform, which means continuing to drive the Financial web, building our app ecosystem, and pursuing data services opportunities which drive new transaction and other revenue streams. Converting the opportunity we have in front of us is a key priority, and it's behind the appointment of Keri Gohman, Chief Platform Business Officer, whilst Kerry continues to lead our business in the Americas. Kerry brings a strong understanding of our financial services, customer and partner needs, and innovative thinking to this opportunity to enhance and extend Xero's product offering and business model.
The $300 million of capital raised with the issuance of the convertible notes in September enables us to pursue complementary acquisitions and investments, such as the Hubdoc acquisition, to extend our capabilities to meet a wider range of customer and partner needs and support our growth both in cloud accounting and with Xero as a small business platform. Finally, building for global scale and innovation, which means preparing ourselves for the future and making sure today we're doing the things that enable us to be the business with the people and technology platforms and capabilities we will need one, two, three years from now and beyond. During the half, we made the leadership role changes I referenced earlier, and we continue to acquire new talent to grow our capabilities in areas such as product management, technology, strategy, and M&A, just to mention a few.
Slide nine shows the Xero leadership team organization. Our leadership team and those who report to them continues to evolve and align with our strategic priorities. You'll also note the establishment of a CTO role, with Mark Rees reporting to me, reflecting the importance of the continued development of our technology platforms and associated capabilities. I'll move to the performance of our business in each of the regions around the world. On slide 10, you'll see that we further extended our cloud accounting market leadership position in Australia and New Zealand. We had a total of 981,000 subscribers at the end of September, up 24% versus the first half of last financial year. Making like-for-like comparisons with competitors is difficult, given the differences between our business models.
However, Google Search Trends, which we see as a high-quality independent indicator of market dynamics, shows Xero's leadership of cloud accounting further extending in the period. The chart on the side shows search data for Australia, with the data for New Zealand showing an even stronger position as you might expect. In Australia, subscriber numbers are up 27% over the past year to 657,000, and the revenue performance in Australia was even stronger, up 33% year on year. Xero's also making important contribution to payroll in Australia. Today, there are over one million people paid through Xero Payroll in Australia. We see scope for further TAM penetration in coming periods with our rollout and support of Single Touch Payroll. This is an ATO initiative that helps drive improved connectivity and automation we believe is beneficial for the penetration of Xero in the Australian market.
Consistent with previous indications, subscriber net adds has begun to level off in New Zealand, with us adding 23,000 subs in a six-month period. Importantly, though, growth in New Zealand subs and revenue remains solid, and AMRR points to strong future revenue momentum. Subs are up 20% year on year to 324,000, while revenue climbed 22%. AMRR, which was up 27% year on year, made even better progress driven by a focus on platform products and deeper customer relationships. The progress here is really pleasing and demonstrates that sub growth is not a limiting factor on revenue growth. Slide 11, moving to the U.K. The U.K. business has again delivered a standout result, with revenue climbing 56% year on year or 46% on a constant currency basis. Xero has a market-leading position in the U.K.
Subscriber growth was up 40% from the same period last year, with a subs base at September 2018 of 355,000. Google Trends data continues to indicate Xero's strong relative position versus others. As I've already mentioned, we see great potential for new initiatives that help further accelerate penetration of TAM in Xero's key markets. In the U.K., we see these opportunities in both the present as well as the future scope of HMRC's Making Tax Digital scheme, which affords us the opportunity to develop additional linkages to HMRC to support tax and compliance services that will drive further accounting partner adoption. We'll elaborate further on our strategy in front of 3,000 attendees at Xerocon London next week. We also see great opportunity to serve businesses with lower complexity to drive penetration and businesses with advanced complexity to drive ARPU in the U.K. market.
The headroom for growth in the U.K. is exciting. With these initiatives, we aim to ensure that Xero is well-positioned for continued strong subscriber growth and revenue expansion. Slide 12, we talk about North America. Headline subscriber numbers grew by 62% versus the same period last year to 178,000. The acquisition of Hubdoc helped, but without this, the sub numbers lifted 45%, driven by progress in the U.S. and good growth from the Canadian business. We continue to follow our partner-focused playbook in the U.S. market and remain committed to building momentum in our channel capacity. Growth here is strong, with 70% year-on-year growth in partner TAM. The U.S. remains attractive to us, with significant TAM in a market that is still very under-penetrated. In the half, we added new financial services partnerships with Citi and BBVA Compass.
As previously released in the market, we entered into a full-service 50-state payroll solution partnership with Gusto, offering a more comprehensive payroll solution for a wider range of small businesses. Finally, on the North American business, I want to add how pleased we are with the great early progress we're having in Canada. We've had good engagement with the partner channel and a very successful round of roadshows. Slide 13, pardon me. Slide 13, we show our rest of world markets. Subscriber numbers grew 38% year-on-year to 65,000. Revenue up 55% year-on-year or 48% on a constant currency basis. The progress we've made in our Singapore, Hong Kong, and South Africa businesses reflects the consistent application of our global playbook. In Singapore, Xero's positioning has been further boosted through our partnership announced with DBS Bank, Singapore's largest bank. Over 1,000 accountants and bookkeepers attended our Asia road shows.
We launched into Hong Kong in March and we're optimistic about the potential in this market. In South Africa, Xero's profile continues to grow. We appointed our first country manager in the half, and we're excited by the potential contribution this market can bring to the group. Slide 14 shows how our business is changing. New revenue streams are emerging quickly. While core accounting revenues are strong and growing close to the group revenue growth rate of 37%, Xero's other sources of revenue collectively grew faster. Platform revenue growth of almost 100% is a highlight. Platform and other non-core accounting revenues have moved from 7% of our total revenue in FY 2018 to 9% this half. As we execute the small business platform strategy, this trend will continue with Xero's revenue composition shifting further and the group's growth profile continuing to benefit.
Which leads us to slide 15, extending the small business platform. As we've discussed previously, we're focused on extending Xero as a platform for small business. The acquisition of Hubdoc in August was an exciting step for us, delivering a key element in Xero's code-free accounting strategy and enabling small businesses and their advisors to focus less on paperwork and more on helping small businesses grow. The convertible note issue announced in September means we now have additional financial flexibility to pursue complementary acquisitions or investments. These acquisitions and investments will target applications and connections that drive extension and enhancement of Xero as a small business platform. Our investment criteria is clear about how these acquisition investments enhance lifetime value through higher ARPU, improved churn, retention, or acceleration of subscriber net adds.
On slide 16, the final slide in my presentation, it's going to give you a picture of how we are looking at Xero from a business, a product, and a platform perspective. This framework points to a number of important things. At the core, we recognize two often connected customer groups that we serve. Around the core is the Xero system of record, at the heart of our cloud accounting heritage. Around that are applications that Xero provides, like bank feeds, payroll, projects, and expenses. The next ring of the wheel are solutions, like the Gusto partnership, where we partner to build a more integrated solution that we take to market. I expect we'll do similar partnerships as we take solutions to market that are aimed at specific segments of small business or at accountants and bookkeepers.
The final ring of the circle are applications provided by our 700-plus ecosystem app partners the customers can select from to meet their specific needs. Internally, a much more detailed version of this picture, which segments the circle into application areas and needs of our customers with more granular associated TAM and value pools, will inform our build, our partner, and our buy decisions. We'll then look to pursue those applications and the connections on the platform they enable, which add the most value to our customers and to our business. On that note, I'll finish by saying that H1 FY 2019 demonstrated strong continued growth and operational discipline. At the same time, Xero made significant progress in taking the actions we need to continue to position us well to execute our strategy. I'll now hand over to Kirsty, our CFO, to take you through the financial results.
Thanks, Steve. It's great to be here, and thanks to everyone who's joined the call. Today, I'll cover Xero's financial performance for the half, which is showing continued strong growth and further evidence of Xero's disciplined approach to its operations and finances. Moving to slide 18, contribution margins. The progress in both Australia and New Zealand and international segments for the period is something we're very proud of and we think points to the long-term economics of our business model. The Australia and New Zealand contribution climbed 39% year-on-year to reach NZD 98 million this half. This outpaced revenue growth of 30% as efficiencies in operating leverage continues to emerge. We've continued to invest in geographic expansion, supporting our newest offices in Canada, Hong Kong, and South Africa.
This effort has helped to drive revenue growth of 52% within our combined international businesses, but this has come alongside substantial improvement in investment loss, which came in at under NZD 1 million. Moving to slide 19, a great half-year result. We've delivered again on top line and bottom-line metrics. We've achieved a 40% year-on-year increase in annualized monthly recurring revenue, while at the same time reducing cash outflow, excluding the acquisition cost of Hubdoc, to just 4% as a percentage of operating revenues. These are really important trends as Xero increases its global scale. AMRR growth of 40% is higher than subscriber growth of 33%, showing the quality of growth achieved in the period and supporting further lifetime value expansion. The trajectory of cash outflows over recent periods shows the progress made towards our commitment to manage the business to cash flow breakeven.
On slide 20, we show how the lifetime value has expanded over the last 12 months. We are very pleased and focused on this metric. It is a great holistic indicator of the business's execution. LTV per subscriber climbed 8% in the period, driven by a lift in both ARPU and gross margin, while churn trends were consistent versus March 2018. This shows we're driving growth in a disciplined fashion and ensures we are adding subscribers that add value to the overall performance of the business. Total lifetime value added increased by more than NZD 1.1 billion over the 12 months to September. As a reminder, this is a measure of value created in the period that is not captured elsewhere in our financial statements. Moving to slide 21. Here we have our high-level financial performance measures showing the year-on-year improvement between H1 2018 and H1 2019.
Xero delivered strong operating revenue of NZD 257 million, up 37% from the same period last year. This was driven by subscriber growth in all markets and increased ARPU, which lifted by 6%. As Steve's already mentioned, revenue growth was boosted by a 96% year-on-year lift in platform revenue. Alongside the strong revenue result, we saw further progress in gross margin, which lifted 3 percentage points to 83%. EBITDA on a reported basis was NZD 16.8 million, or 7% improvement on the prior year. Perhaps a better reflection of the progress delivered in the period is the improvement in EBITDA, excluding share-based payments and impairments, rising 91% year-to-date to NZD 49 million. The strategic partnership with Gusto improves the product market fit in the U.S. It also enables us to reallocate product development resources and to optimize our capital allocation going forward to enhance our global competitive positioning.
Whilst we expect benefits in the future, we took an impairment which is included within the net loss. This was in addition to the cost related to the Hubdoc acquisition, higher finance costs due to lending arrangements entered into in the period, and accounting policy changes. I'll run through the key elements of our financial performance in the following slides, but as a reminder, we adopted 3 accounting standards on the 5th of April, and comparative results have been restated. Overall, the impact of the 3 standards on our restated H1 FY 2018 net loss was a modest improvement of NZD 1.5 million. Our restated H1 FY 2018 EBITDA was boosted by just over NZD 10 million. The impact was split fairly evenly across the deferral of commission costs under IFRS 15 and the improvement of operating lease costs under IFRS 16.
We also adopted IFRS 9, but the impact of this change was much smaller. The key thing to note is that these three disclosure changes do not impact our business, our operating performance, or our strategy. We've provided more detail on the changes and their impact on the restated H1 FY 2018 figures in the appendix to this presentation and also in the interim report. Starting with gross margin on slide 22, Xero has delivered an improved gross margin of 83% for the half, up three percentage points from the prior year. We've been able to achieve continued efficiency-driven improvements through economies of scale and hosting costs and automation within Xero's customer service platform. We expect these benefits to continue to flow through the business in coming periods. Moving to slide 23 in EBITDA. After last year's breakthrough EBITDA result, we have delivered further momentum in H1 FY 2019.
Reported EBITDA was affected by impairments due to our new strategic partnership with Gusto in the U.S. and also costs relating to the Hubdoc acquisition. Gusto-related impairment costs recognized in the period of $16.3 million related to ceasing development of our in-house U.S. Payroll product. Excluding both share-based payments and the impairment cost, EBITDA improved by NZD 23 million to NZD 49.3 million year-on-year. On slide 24, continuing on our theme of disciplined execution, we are becoming more efficient as shown with bottom-line performance. As the first chart shows, product costs, both including OpEx and CapEx as a percentage of revenue, reduced to 30% in this half, down from 35% in H1 FY 2018. There's also a similar story when we look at our sales and marketing costs.
CAC, or customer acquisition costs, have also improved by 3% to 45% when expressed as a percentage of revenue. We expect these trends to continue in future periods as the business continues to scale. Although we see this improvement efficiency, in dollar terms, the CAC to gross add has increased within the period from NZD 363 to NZD 402. This was due to the impact of FX and also the investment in the U.K., Canada, and other new markets. Slide 25. This is a key highlight of the results, showing the strengthening of the operating leverage and discipline while driving top-line growth. Operating cash flow for the half was NZD 36 million. That's a further marked improvement of NZD 20.9 million from the NZD 15.1 million for the same period last year. As you can see from the chart, the last few H1 performances demonstrate very healthy dynamics within the business.
The total operating and investing outflows for the half was NZD 40.1 million. Excluding the Hubdoc acquisition, total operating and investing outflow was NZD 9.8 million, a significant reduction from the NZD 30.9 million outflow seen in the prior year period. On slide 26, we've summarized the high-level drivers behind our recent $300 million convertible notes issue. We are very happy with the reception the notes issue received from the market following an extensive pre-deal marketing campaign. When considering how best to raise capital earlier this year, we evaluated a few options. Like a number of U.S.-based tech companies, we saw a combination of convertible notes and call spread as striking the right balance between the cost of funds raised and potential for dilution of existing shareholders. The transaction was a first for a New Zealand or Australian company not listed in the U.S.
With the call spread protection in place, we have extended the effective conversion premium on the notes by 40%-70%, minimizing dilution of existing shareholders and expressing confidence in Xero's growth outlook and operating discipline. As Steve has flagged, we intend to use the net proceeds raised for complementary acquisitions and investments that will help to power our small business platform strategy. We've repaid NZD 31 million in bank loans drawn at the time of the Hubdoc acquisition and invested the remainder of the proceeds raised in liquid investments and cash. We have retained our existing undrawn NZD 100 million standby facility, and we have a capital structure that is optimized for the group's strategic and financial needs going forward. With that, I'll hand back to Steve to comment on our outlook before Q&A.
Thank you. Thanks, Kirsty. Slide 28, the outlook. I won't read the outlook, but it's absolutely consistent with what we've previously communicated. To conclude, great results, really continue to demonstrate strong growth and operational excellence. Finally, I'd really like to just say how proud I am of the team at Xero for delivering such a strong performance over the half. Really appreciate the hard work of our team around the world. On that note, thank you. I'll hand back to the moderator so that we can take your questions.
Thank you. Ladies and gentlemen, we now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Once again, ladies and gentlemen, it is star one and wait for your name to be announced. Thank you. Our first question there is from Sameer Chopra from Merrill Lynch. Please ask your question.
Morning. Congratulations on a strong result. I had two questions. One, Steve, just in terms of the U.K. and the United States, what are you seeing in market dynamics over there, both in terms of what you're seeing in terms of pricing in the market and share shifts in the market? My second question is just around the cost of acquisition NZD growth. How should we think about this on a going-forward basis? Do you think you'll keep a similar level of NZD growth? If you're hiring, which kind of specific countries are you hiring?
Thanks, Sameer. Thanks for your questions. I'll take the first, and I'll let Kirsty comment on the second. U.K., obviously, we're extraordinarily pleased with the progress. We see that the focus we've had on executing our playbook around partner focus and really targeting the quality business is really delivering a great return. We also, as I said in my remarks, see great opportunities going forward, both to leverage the HMRC connections in the market to bring more and more small businesses on board, and the opportunities we have to serve organizations with less complex needs and more complex needs. We're very acutely aware of the opportunity, the TAM in the U.K., and very focused on progressing and continuing to grow our business there. Very pleased.
On the U.S., as you know, a year and a half ago, we reoriented our business towards the approach that has worked for us elsewhere. We make good progress in building the partner connections and channel and the TAM associated with that. We also continue to build the basic elements of our business from our Financial web and connections to banks, and also extend and improve product market fit. With those things in train, we see a good foundation for our business going forward, and we're very optimistic about the business. At this stage, we're still really progressing the development of our business and look forward to continued growth.
Steve, just a quick follow-up. Say, in the U.K., are you seeing competitive intensity is dialing up or dialing down over the last six months or so?
Look, I would say that the opportunity is significant, and penetration rates are still quite low. That means that there's great potential for us to continue to grow our business. If you look at the Google Trends, people are talking about Xero, and Xero is being referred from partner to partner, customer to customer. Look, at this stage, I don't see that as being a major obstacle to our continued growth.
If I just pick up your second question, Sameer, just around the sales and marketing increase year-over-year. It has increased by 28%, but there are a couple of components to that. One is, as I mentioned, the impact of FX, which does have an impact on increasing our cost base for this half. We also have one additional Xerocon in this half, which is not therefore showing a true like-for-like comparison. As you point out, we are investing in new markets as well as ensuring that we're doing the right level of investment in our core markets. We have recently pushed into Asia. We are continuing investment via Canada, the new market, South Africa. As you were just asking around new offices, we have actually just recently opened a new office in Hong Kong to further expand our Asian footprint.
Thank you. Thanks.
Thanks, Sameer.
Next to our questionnaire is from Stephen Ridgewell from Craigs Investment Partners. Please ask your question.
Good morning. On the platform revenue growth, which was a good number again in the 90% range in the first half, could you just please call out which products were driving the lion's share of that growth? Perhaps comment on which products you see with good momentum going into the second half and beyond.
If I just pick that one up. In platform revenues, what it does include is it includes your payroll. We've also recently had the expenses and projects, our FinWeb revenue, and also the new addition to it is Hubdoc. With Hubdoc, as we do have within our financial statements, the revenue is relatively small because it only included less than two months. It's sitting at NZD 1.2 million for the half. I suppose going forward, this is really our exciting growth area, and that's why we want to be able to show you that we are continuing that really good traction of just under 100% year-on-year growth within that platform revenue.
Okay. I guess if we look on an organic basis then going into second half with the product set that perhaps from memory, payments and also U.K. payroll were quite strong last year. Is momentum on those products continuing? Are we seeing any momentum in the expenses and projects products?
Yeah, absolutely. That has been a key driver. As I said, Hubdoc is only actually one and a half to two months of the revenue. Therefore, it is the momentum on all of those other areas, FinWeb, projects, expenses, really starting to get some traction that is really where our growth area is.
Okay, thanks. Maybe just on North America, slightly messy compare, but just given that Hubdoc acquisition, even though it's only a couple of months, but back of the envelope, it looks like there was a subscriber growth did pick up, but revenue growth did pick up a little bit as well compared to first half last year in absolute terms, but it wasn't a significant acceleration. Looks like ARPU was down a bit. Are you able to just talk about the relative performance of Canada and the U.S.? Steve, you sort of alluded to a good early start in Canada. How much of that growth was coming from Canada and are you able to touch on perhaps some pricing strategy in that market?
Yeah, look, Steve, it's a good question. Fundamentally what's happening in the U.S. is we continue to reorient the business. That sort of flows through in the numbers towards partner orientation. That's why you see, in a sense, higher subs growth than you do revenue growth. In terms of Canada versus the U.S., it's too early for us to be breaking that out. Canada is still early stage for us, but we're really encouraged by them. It's a market that really does suit Xero. It has all the conditions that we need that have also helped us in other markets. We're encouraged by both, and we've got teams now set up in both markets driving our business.
The overall view is the way I like to look at the U.S. business. We continue to build the foundations, drive the reorientation of the business, invest in the communities that we think are the right ones to pursue. We're patient.
Okay, thanks. Maybe if I just have one last one, I'm just following up on some recent line of questioning on CAC in the U.K. I think it's very expected that as you're earlier stage in some of the newer markets, that CAC's going to go up. I suppose if we were to look at a market like the U.K., though, where Xero has been around for a while, where should we be thinking about CAC in a market like the U.K.? Are you going through an elevated period of investment currently in that market? Perhaps that might dial down going forward? How should we be thinking about the U.K. in particular, but broadly CAC over the next 12 months?
Yeah. I suppose if I turn your attention to the contribution slide that we went to on slide 18. If we focus on the international segment, what we are doing is we're seeing that year-on-year improvement in the contribution. The contribution losses is shrinking quite substantially. Therefore, that's showing that the revenue is going up at a higher rate than the CAC cost. Obviously, still wanting to do the right level of investment because we do see it as such a great opportunity market.
The next telephone question is from Roger Samuel from CLSA. Please ask your question, Roger.
Hi morning guys. I've got two questions. First one is just on your ARPU. Notice there's an uptick in the ARPU in this half. Just wondering what's the primary drivers of that. Is it price increases? Because I thought you only put through price increases at the end of September this year. Shouldn't have a lot of impact there. Or perhaps all the new products and perhaps the subset of that question is, how do you treat Hubdoc? Is it part of your ARPU calculation as well? The second question I've got is on accounting changes and the impact from IFRS 15. I just want to clarify the impact on the commission, because I thought that you net off the commission at the revenue line, there shouldn't be any benefit on the cost line, because of the changes. Thank you.
Okay. Roger, I'll take your first point on ARPU and then carry on with the accounting policy change. If we just look at ARPU and sort of break it down between ANZ and international, and particularly the U.K. As you pointed out within Australia and New Zealand, we did have a price increase, which has assisted us with our growth in ARPU across the ANZ market. Now, this did come into play right at the very end of the half. It means that it doesn't impact our revenue, but it does actually impact our ARPU because that is calculated at the very last day of the period. As you also point out, we have also seen traction with our expenses and projects and payroll. That does have a positive impact on ARPU too.
One of the very pleasing results within the U.K. was actually that we had organic ARPU growth. No price increases whatsoever, because of us focusing so much on quality, which you can see within the revenue and increase in MRR into the future, ARPU increased organically, really pleasing with the ARPU growth there. We've spoken around the U.S., as we drive into the partner, that does have a slight impact. We've sort of pretty much flat-lined across there. From an ARPU perspective, yes, pricing did have a small impact, we are starting to really see that play on the platform growth. Your question related to Hubdoc and whether or not that has an impact on ARPU. It actually has a neutral impact because the ARPU is very similar to what we had previously.
It is included but has had no real impact. Going to your second part of the question, which was around the accounting policy changes. It doesn't really have an impact on revenue. As you're aware, we do have a majority mostly monthly contract, it doesn't there. What it does have though, is within our CAC cost, and this is why we've made the restatement both for last half year H1, FY 2018 and FY 2019. It has moved commission costs into the balance sheet. Effectively, it's being spread across a potential lifetime of that particular contract. There are some pretty in-depth information around the accounting policy changes, which you can see in the interim report. It is only the internal staff sales commission costs that are being spread. It does have an impact.
We've actually showed at the back of the investor deck too, just the impact of the different IFRS from last year, which gives you a good indication of the impact this year. It is a like-to-like comparison therefore.
Okay, got it. Thank you.
Thanks, Roger.
Our next question is from Tom Beadle from UBS. Please ask your question, Tom.
Hey, guys. Thanks for the questions. I just had three, if that's okay. Firstly on the U.K., it looks like it was a good result there, but on your sub number, it was probably a bit below what I'd expected, just when you're looking at some of the forward indicators like Google Trends. It also looks like Intuit's growing a bit faster than you in the U.K. Just wondering what might explain the difference versus Intuit. Secondly, on the U.S. The U.S. subscriber numbers look like they're tracking a bit better than history, even once you adjust for Hubdoc. They're obviously going the right way, but not materially accelerating in the context of the market size and obviously what Intuit's doing as well. If you want growth to accelerate, what do you think needs to be done?
I realize you've got the partner strategy in place, but do you think that SMEs in the U.S. have the same strength of relationship with their accountants as in, say, other markets? Just finally, could you confirm that your revenue and EBITDA guidance that you gave at your convertible notes offer still stands? Thanks.
Why don't we start with that last question with Kirsty, and then I'll take on to answer the question about the U.S. and then finish with the U.K. Kirsty, over to you.
I would like to It's gonna be a quick one.
Yeah.
I would like to confirm that that is the case.
Tom, on the U.S., the reorientation of our business, it is something that does take time. We have to make sure that all the conditions that really have driven success elsewhere exist in the U.S. market. We're making good progress. I think the numbers sort of reflect that we're certainly in there with a business that is worth investing in, and we'll just have to take the time. We're just patient about that. I think it's still going to take us a little bit more time to get to the place that I think we're all hoping to get to. It is about making sure we do have the partner TAM, making sure we do have the connection to the banks, making sure we do have the local product fit that, for example, Gusto helped us with.
On the U.K., excellent result for us in the U.K. I did say in my remarks straight up front that we do see opportunities to extend Xero into organizations with less complex needs and those with more. We also think that there's real opportunities as well in the connection with HMRC and the developments in the U.K. market to accelerate. The continuum between subs and revenue is one that's continuous in our business market to market, and our leadership teams, quarter to quarter, look at what their objectives are and adjust accordingly. We're very comfortable that the opportunity is there, and our position relative to competition is one that gives us confidence there's great growth opportunity ahead.
Okay, great. Thanks.
Thank you.
Our next question is from Tristan Joll from FNZC. Please ask your question.
Morning. I don't have too many left, actually. Just on the sales and marketing costs of just the LTV to CAC. We've talked about a few ratios, but that ratio went from 6.4 to 6.2. I guess you've explained the CAC side of it reasonably well. Do you think that it'll stay there, or do you think we could expect that to expand? In a similar vein, as the sales and marketing growth that we saw in this half, year-over-year, which I think was high 20s, is that something we could take as a guide to the year ahead or the rest of the year?
Just on the LTV to CAC, I think something that we're not giving the detail within it, but what happens is that this actually becomes a blended, particularly across the international segment. If you're comparing, say, the U.K. to Canada, where we are putting a lot more investment up front, you are looking at that blending. We're comfortable with the position that we sit at the moment. These are good numbers, just, I suppose, one, showing the level of investment that we're putting into new markets, but then two, showing the efficiency within our ANZ segment.
Well, I suppose as a follow-on to that, though, looking at the segment disclosure, ANZ went from 12.2 to 11.5. How do you characterize that? What's going to improve that? Is it going to be lower CAC going forward, or is it going to be an acceleration of LTV?
Yeah. I suppose I'll give you a bit on that. What happens is, I suppose within our CAC costs, we have both the CAC of new business plus also our existing customer base. As our markets get into more maturer phases, we will start to level at a particular LTV to CAC.
Okay. Just one other question, really, which is just a sort of strategic one. Steve, you sort of explained quite well at Xerocon how Hubdoc fitted into the vision. I guess when you look forward and you think about these resources that you've got to deploy, are there other things that look like Hubdoc, which are core to the accounting mission? Is one question. Secondly, when we think about what you might be looking at, is it mostly technological stuff, things that add to the technology of the platform, or would you be open to buying things that take you into other geographies or expand your presence in a geography?
That's a great question. I did touch on the strategic priorities. I think they do lay out a framework. When we look at acquisitions, what boxes do they tick? You look at Hubdoc, it helps us in cloud accounting, helps us extend the platform. It also brings us capabilities, technology, and people in a market that's very attractive to us, being Canada. It really stood up nicely. We'll look at the various opportunities we have against that strategic framework, as well as obviously the financial returns that we expect to get or desire. That's probably the best way. The final slide I showed, which sort of gave you the picture of how we're looking at Xero from a customer viewpoint, a core cloud accounting viewpoint, and then extensions into apps and services.
It doesn't tell you a lot. It does give you an indication that what we'll do is really, and we are doing, is getting a really good picture of what are the different applications and services we can add to Xero to create the best value for our customers and also to us. It's a combination of those two things that we'll look at. We'll look at the big picture of our strategy. We'll also look at the specific application areas and pursue those we think that will have the most impact.
That's great. Thanks very much for taking the call.
Thank you.
The next question is from Avinash from Macquarie. Please ask your question, Avinash.
Hi, guys. Just a question on the strategy to unlock a bit more TAM in those entry-level customer base. Can you just provide a bit more color around that?
Not at this stage. We're not going to give you more color on that other than to say that we do appreciate the opportunity, and in the future, it sort of sits in the frame of our thinking.
Okay. Thanks, guys.
Next question is from Paul Mason from Evans and Partners. Please ask the question, Paul.
Hi, guys. My question is sort of an extension of Alan Ansell's. One of your big competitors has obviously gone really hard with the self-employed product that's pitched at a really quite thin ARPU level, at least initially, and seems to have a little bit of a sub-segment to itself for the time being. I'm just curious on your thoughts about that product and whether it's worthwhile you guys developing something copycat or that potentially exceeds it, obviously. Yeah, if you could maybe talk around that.
Well, I think I've said as much as I would want to say at this point in time. I genuinely believe that in every market we're in, we're focused on really extending the elements to our business that worked very well for us in the past and underpin the quality of revenue growth that we are seeing. We can see the opportunity unlock TAM. We'll obviously pursue that in time.
All right. Thanks.
The final question for today is from Gareth James from Morningstar. Please ask the question, Gareth.
Hi, guys. I was just keen to clarify something regarding the Rest of the World segment. Are you able to clarify where the growth is coming from, if there's any areas in particular? Also why the ARPU seems relatively high in comparison to other regions.
The growth in the Rest of the World regions is consistently across all regions. I mentioned Hong Kong, Singapore, South Africa, they all are showing good growth. On the ARPU, have we got the
Yeah. With Rest of World, because this caters for not only just the areas that we're in, but also where we don't sit, those are all direct, therefore they have a higher ARPU.
Just to sort of add to that, essentially what we're saying is that we're developing the partner channel in these markets. That's in a sense, is a critical part of growing those markets. In the meantime, there are people in those markets buying directly from us. That means that the blended ARPU is higher.
Yeah, because Xero's in over 180 countries around the globe. All of those that we don't have a presence are direct customers, which therefore have the direct ARPU associated with them.
There is no more further questions at this time. I'd like to hand the call back to the speakers for any closing remarks. Please continue.
Well, look, thank you everyone for attending today. Obviously, we're excited about the results. They do show continued growth and definitely the fact that we are driving growth with great operational discipline. Really appreciate your interest in Xero, and thank you again for attending.
Ladies and gentlemen, that does conclude the call for today. Thank you for participating in the Augur's convey. Goodbye.