Interim Report - H1 FY2022 (PDF)

XERO LIMITED

Interim Report

2022

Contents

Highlights		1
Chair & CEO Review		2
Our Performance		7
Independent Auditor's Review Report		22
Interim Financial Statements		23
Directors' Declaration		39
Corporate Directory		40

Right: Xero team members, New Zealand

1

Highlights

$505.7m

Operating revenue

Up 23% YOY

$1.1b

Annualised monthly recurring revenue Up 29% YOY

87.1%

Gross margin percentage

Up 1.4PP YOY

$1.2b

Total available liquidity

Cash on hand, short-term deposits and undrawn committed debt facilities

3.013m

Subscribers

Up 560,000 YOY

$9.9b

Total subscriber lifetime value Up $3.8b YOY

$6.4m

Free cash flow

Down $47.9m YOY

$98.1m

EBITDA

Down $22.7m YOY

CHAIR AND CEO REVIEW

2

Chair and CEO Review

David Thodey AO	Steve Vamos
Chair	Chief Executive Officer

Dear Shareholder,

Small businesses around the world are increasingly using digital tools as they adapt to a changing operating environment. We see this reflected in Xero's half-year 2022 (H1 FY22) performance, where we delivered strong revenue and subscriber growth, and made progress executing our strategic priorities. While we continue to monitor the macroeconomic environment, we are confident small businesses will continue to be a driver of global economic recovery, and cloud-based software applications will be essential in helping them adapt and succeed during this critical time.

The opportunity ahead for Xero is significant, and in particular, we see substantial room for growth in our international markets. We estimate that in the markets in which Xero currently operates, the Total Addressable Market is more than 45 million small businesses1. People are also discovering connected apps that further streamline their business operations and make their lives easier. We will continue

to invest in cloud-based tools to meet the needs of our customers around the world.

There are multiple drivers of the adoption of cloud-based software, including the digitisation of tax compliance, and innovation in access to financial services, which point to an exciting landscape ahead for Xero.

Governments are helping to lead the way. In Australia, the Government's Digital Economy Strategy is aimed at boosting digital capability and adoption among small businesses, evidenced by initiatives such as Open Banking and e-invoicing. The US and Canada are moving toward

Open Banking. The UK is pushing to further digitise the tax system and simplify small business tasks through Making Tax Digital. Singapore is also promoting e-invoicing and offering incentives for small businesses to adopt technology through its SMEs Go Digital program.

Xero's unique position means we can provide anonymised, aggregated data and generate insights about the small business economies in our largest customer markets. One of the ways we use this information is in our engagement with governments and regulators to advocate for small business, and support publication of academic research. This is driven through Xero Small Business Insights, which was enhanced during the first half of FY22 with the launch of a composite Small Business Index that shares a perspective on sector and geographical trends.

1Estimated TAM across English speaking addressable cloud accounting markets, based on publicly available data

CHAIR AND CEO REVIEW

3

Our vision is to be the world's most insightful and trusted small business platform. To support this, we continue to prioritise investment in product development to meet our customers' needs, and scale to support continued growth.

Xero's purpose is to make life better for people in small business, their advisors and communities around the world. We remain mindful of the challenges and opportunities ahead, including as a result of the COVID-19 pandemic, and the importance of keeping people at the heart of everything we do.

Execution of strategy

We made strong progress in executing our strategy in H1 FY22. Xero's strategic priorities, set out below, guide our decision- making, product prioritisation and investment approach:

Strategic priorities

Drive cloud accounting adoption

Grow the small business platform

Build for global scale and innovation

Following the challenges of the COVID-19 pandemic and our careful management of expenses in the early stages of Xero's FY21, with a return to more normal conditions we undertook a considered increase in investment in customer growth in H2 FY21 that has continued into H1 FY22. Product development costs and sales and marketing spend in H1 FY22 increased by 47% versus the prior year period to support our long- term growth ambitions. Total operating expenses inclusive of integration costs increased to 83% of operating revenue, consistent with our guidance range for FY22.

Targeted acquisitions are a key part of growing the small business platform and delivering on our vision. Our recently acquired businesses, Planday, Tickstar and Waddle, contributed 5 percentage points to group revenue growth of 23% during the half year.

Above: Xero Customer,

Clovalley Farms, New Zealand

Planday's workforce management platform continues to expand as the business prepares for market entry in Australia. Planday simplifies employee scheduling, allowing businesses to forecast and manage their labour costs.

We continue the integration of Tickstar, an e-invoicing infrastructure business that allows organisations such as Xero and our customers to connect to a global e-invoicing network. We anticipate e-invoicing will be widely adopted by more governments and countries around the world, with initial traction most marked in Singapore, Australia,

New Zealand and the UK.

There are multiple drivers of the adoption of cloud-based software, including the digitisation of tax compliance, and innovation in access to financial services, which point to an exciting landscape ahead for Xero.

During H1 FY22, two new lenders in the Australia-New Zealand market adopted Waddle's invoice lending platform to support their own invoice finance offerings, including Commonwealth Bank of Australia, that country's biggest lender.

Enhancing our ecommerce and inventory capability

To better support the inventory needs of small business and enhance Xero's ecommerce capability, we are acquiring LOCATE Inventory (LOCATE), a US cloud-based inventory management provider. The acquisition will embed LOCATE's inventory and ecommerce talent and capability within Xero to enhance Xero's inventory management offering, and meet small business demand for inventory and cash flow management tools.