Xero Ltd is a New Zealand-based company which provides an
online accounting system, on a cloud platform and is designed for small business. The product integrates small businesses with their customers, banks, payment services, tax authorities and accountants and the cloud platform allows market business applications, such as Expensify, ADP, PayPal, Stripe and Bill.com, to integrate with major financial institutions. The product is building a platform to win in 2015 and has established its capability with 1161 people have been inducted 403 people into the team in FY 2015. The team is at scale after a major focus on recruitment and hiring top talent and establishing a leadership team in the US as well as scaled out product teams which are globally distributed. Global marketing and sales infrastructure has been initiated and capital put into place to implement growth plans.
Product releases now total 500+ and the horizontal platform has been completed.
The product now meets the needs of the majority of small businesses including payroll and inventory in all core markets and game changing practice reporting has been introduced. 214 people have been added to the product team and the product cadence is now outpacing the competition. Customers now total 475,000 and the customer base has expanded in all markets. The company is building an operating platform to support millions of customers and the partner channel is being meticulously executed. The company is building online capabilities to capture large and expanding TAM.
This is an accounting experience that people love and the product has established itself as the recognised leader in the first three markets by establishing responsive and trusted relationships with customers. Uptime has been 99.99% with best in class availability and an innovative support model which delivers high levels of customer satisfaction. The product has also demonstrated resiliency which is industry-leading. Ecosystem applications now number more than 400 with a 20% attach rate across business editions and a 40% attach rate across the premium editions. Registered developers now number more than 20,000.
The company has delivered revenue growth of 80% + and subscription revenue is $ 121 million with $ 67 million for the year ended 31 March 2014. Year-on-year subscription growth is 81% (83% at constant dollars) and annualised committed monthly revenue is $ 159 million ($ 93 million as at 31 March 2014). Cash resources for investment totalled $ 269 million compared to $ 210 million as a 31 March 2014.
XERO Daily Chart (Source - Thomson Reuters)
The company has positioned itself to win in a highly competitive environment.
Hybrid software tactics include a flood of brand and marketing spend, aggressive price discounting, acquisition of adjacent cloud products and customers, talking vision ahead of delivery and treating customer service as cost even to the point of outsourcing. The effect of the cloud platform is to provide a beautiful experience which builds viral growth, allowing premium pricing because of the quality of the experience, the advantage of an open ecosystem and community over a single brand, faster delivery with empowered teams without legacy products and better rates of customer adoption because of the superior experience. Apart from maintaining premium pricing, the cloud platform effect has resulted in more than 15,000 conversions to Banklink in FY 2015 and more than 35% of customers in Australia have been won from their incumbent software. The 424,000 cloud accounting customers won by the company in Australia, JK and New Zealand are more than the combined total of the four incumbents which total a little more than 300,000. Apart from the recognition as best product from various sources, the company is favoured by large firms thinking in global terms and using cloud applications in high-growth areas. Partnerships include Deloitte Private Australia, KPMG UK and KPMG Singapore.
Results
Subscription revenues in millions of dollars for the 12 months ended 31 March 2015 (previous year's figures in brackets) are New Zealand 32.6 (23.2 and 41% growth), Australia 56.5 (27.7 and 107% growth), UK 19.3 (10.1 and 91% growth), North America 7.7 (3.3 and 133% growth) and rest of world 4.8 (2.6 and 85% growth). The total works out to 120.9 (66.9 and 81% growth). Similarly figures for customer expansion as follows:
Customer Expansion (Source: Company Reports)
For the financial year ended 31 March 2015, subscription revenues were $ 120.9 million compared to $ 66.9 million in the previous year and total operating revenues were $ 123.9 million and $ 70.1 million respectively. Cost of revenues were $ 37.4 million and $ 24.5 million respectively representing 30% and 35% of operating revenues. Gross margin percentages came to 70% and 65% respectively. Sales and marketing amounted to $ 93.5 million and $ 55.1 million, product and design to $ 49 million and $ 18.4 million and G&A to $ 24.5 million and $ 11.7 million respectively. The net loss after tax was $ 69.5 million and $ 35.5 million respectively. The investment in staff has been considerable and is reflected in the following diagram:
Growth in staff (Source: Company Reports)
The growth has been most impressive and the CAGR in subscription revenue has been 110% and 91% in the case of ACMR. The company is now well poised for the future because it provides the first global accounting solution that people actually love as well as the first global small business accounting product on a cloud platform. The large and expanding TAM provides significant opportunities for new revenues and the company has already established its credentials in planning and implementing global strategy.
Growth Rate (Source: Company Reports)
We believe that the company has plenty of potential to grow especially in countries like the USA and the UK where it has barely scratched the surface. It is a first mover in the cloud platform space and it has shown that it can integrate with other applications as demonstrated by its partnerships. The product is both successful and affordable. We put a buy on the stock at the current price of $15.45.
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