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Xero triples revenue. Again.

Well it’s that time where as a public company we hang it out for all to see. Here are the numbers.

2011 full-year results commentary

20 May 2011

  • Operating revenues of $9.34m up from $3.15m
  • Operating expenses of $18.0m as the company invested in growth
  • Net loss after tax of $7.5m reduced from $8.4m
  • Cash at bank of $16.9m

Xero is now one of the leading global online accounting software companies, tripling its revenues in the 2011 year.

From February, Xero has exceeded $1m per month of revenue and the annualised subscription run rate is approximately $14m. Revenue is expected to continue to grow strongly.

Paying business customers have doubled from 17,000 to more than 36,000 across 100 countries as at 31 March 2011. Xero has now processed in excess of $35 billion of customer transactions. This signifies the quality of Xero’s Software as a Service model and its growing importance in the Financial Services industry.

Xero has now established itself inside 2,200 accounting firms and continues to develop innovative features to gain broader adoption within the accounting community. A growing number of accounting practices are 100% Xero. The accountant channel provides access to hundreds of thousands of small business customers.

Xero continues to carefully balance investment in its existing business operations and the pursuit of growth opportunities as the Company drives toward monthly break-even. The Company retains a strong cash position as it refines its US strategy and it begins to create a presence in the vast US market.

You can read the full release here.

How numbers reflect strategy

For those that follow technology businesses, I thought I’d kick off the discussion with a few points and compare what we are doing at Xero to other models, like the ‘lean start-up’, which we are clearly the opposite to.

Firstly revenue. It’s growing well and you can see how cumulative monthly revenue is a wonderful thing. What astounds even us about this is how fast revenue has grown even while we are still actively building the product.

We’re thrilled (and relieved) that Xero is already good enough to provide value to our customers. We’ve only scratched the surface in meeting the needs of  small businesses and accountants and pursuing our roadmap for the product.

And as you can see above, while we reported revenue of $9m, we already have $14m or 55% growth locked in for next year because of the growth curve. Love that!

Next is investment. Wow $18m. That is a huge number and a couple of businesses ago I would have said “imagine what you could do with all that money”.

Our major cost is staff. The operating model we chose requires more staff than most start-ups. Developers, testers, designers, sales people, marketing, customer care people, billing specialists, HR, documentation etc etc.

While this is lot of cost, it’s not compared to the incumbents (which we are competing very well against). We are a fraction of their size – but ‘just big enough’ to be a real competitor.

It’s not easy to raise the money we have to do this massive investment and it’s proving to be a real competitive advantage.

Start-ups continue to flourish and we love that because we’ve been there too. But the Global Financial Crisis and the nature of early stage start-ups has created a situation where most new tech businesses don’t have access to large amounts of money. They need to execute on a business or two before people will give them a lot of money. Our experience has allowed us to raise more than anyone else and challenge some really big companies. Accounting software is big and it’s hard to sell because the incumbents have such a lock on the market and channels. There are lots of other things people would rather do in a weekend than change their accounting software.

The money raised has allowed us to build a ‘big enough’ team to have a go at building a long term business. And it’s working. What’s more, we are changing the category – we believe online accounting should cater for both small business and accountant sides of the industry. This makes the investment even larger and therefore harder for new entrants to compete.

So when we eventually win, it will be because we did an IPO early, giving us access to the capital to invest enough to win.

Next up is the loss. Over the last four half years our loss has decreased which is what you’d expect as we drive to break even. This was what we said we’d do which I hope gives investors confidence we are carefully managing our spend – large as it is.

Lastly cash. We have a strong cash position and sufficient resources to get to break even. It’s our responsibility to use that cash to grow the long term value of the business for shareholders. The balancing act we face is driving to break even so Xero looks less odd to New Zealand investors, and putting the accelerator down to exploit the huge opportunity. We will always take a long term view.

Emerging Saas FinTech sector

It’s also worth noting there are now other SaaS FinTech companies that are in a similar space to Xero. Bill.com and Square are useful peers having raised money recently as private companies at what best industry estimates deem to be well above our public company valuation. We do expect a greater focus on FinTech as a category over the next year with significant M&A action.

LinkedIn’s IPO yesterday is another important business web milestone. LinkedIn connects social media to business and is part of the process of investors working out that the business web can have direct and lucrative business models.

A business like Xero hasn’t been done before from New Zealand. We’re learning a lot as we go and we are far from perfect. But we are incredibly proud of our results to date and very very excited about where things go from here.

As always feel free to shoot through questions in the comments. Happy to cover off any public information.

 

Read more about Company News

 

16 comments

Simon Lampen
20 May 2011 #

That is very exciting news Rod and Team, congrats! Do you have a road map and financial model for looking after the needs of larger companies? What kind of publicly available future plans are there?
Cheers Simon

Vaughan Rowsell
20 May 2011 #

Congratulations Team (and Rod :)).

Coming at thing from the other “lean” end with Vend I watch and learn eagerly! There are plenty of learnings I am taking.

I agree 200% about the FinTec industry, the planets are finally aligning to let us do some pretty amazing and disruptive things. Xero is obviously a key part.

Keep inspiring the little guy to aspire a little more!

Vaughan

Kelvin Hartnall
20 May 2011 #

Congratulations guys! And don’t worry about us “New Zealand investors”. I personally would prefer to see Xero accelerating as much as possible rather than worrying too much about reaching break-even early. In the long term I’d prefer to own a bit of the #1 online accounting solution than owning a bit of a non-dominant accounting solution that reached break-even early. Push hard on the accelerator; we can handle it!

Ivan
20 May 2011 #

Do you have any plans to list on ASX or Nasdaq? Previously read somewhere this could happen sometime in the future.

Rod Drury
20 May 2011 #

@Ivan – that’s a good question. A couple of years ago I would have thought that was the next logical step as it would be good for creating brand in those other markets. Since then we’ve been able to attract overseas investors to the NZX and we have good profile here that we may not get on a larger exchange.

Eventually SaaS companies should drive dividends as a primary way to pass value back to shareholders and then I think it’s less important where you list.

The NZX has the benefit of six monthly rather than quarterly reporting so you have the time to get things done.

So right now we’re very comfortable on the NZX and have a goal of getting on the NZX50.

We have a lot of options in the future.

Rod

Julian A Waters
20 May 2011 #

Great stuff. For those of us who avidly follow the US tech scene your strategy makes complete sense, yet you seem a voice in the wilderness here. Thanks for starting to introduce local investors to the concept of a big-potential web company & introducing overseas investors to NZ.

Miki Szikszai
20 May 2011 #

Rod

Good result from you and the team. Very clear to see that even without a scale US launch that Xero’s revenue will exceed costs very soon. No doubt that your US launch will be focussed, well resourced and successful based on your achievements to date.

The Xero number is a real testament to the value Xero provides to business. We’ve transacted close to $100 m since we’ve been live, most of that through Xero.

Good to see you flying the flag for the type of economy NZ needs with your own coin with Xero.

Miki

Disclaimer. Snapper uses Xero. Costs us $50 per month. We can hardly believe it.

Denis Breen
21 May 2011 #

Well done rod and team. Keep up the good work and if you need to break-even earlier I for one would have no problem paying a higher price for your exceptional software. Best of luck

Paul Williams
23 May 2011 #

A few people have asked over the weekend about the background to the change in amortisation period. These are sort of questions we welcome as it is relevant to all software companies .

Each year we complete a review of the carrying value of the software asset in our books and over what period in accounting speak that “this will generate future economic benefits”.

As part of the current year’s review we noted that the initial code we wrote in 2007 and 2008 is still at the heart of the application today. This together with the fact that Xero product is now much more mature, reinforced that the useful life over which the software development cost was being amortised was longer than the existing estimate and should be increased. Accordingly the Board of Xero chose to increase the estimated useful life period from 3-4 years to 3-5 years resulting in a lower amortisation cost of $880,000 in 31 March 2011 audited financial statements.

The capitalisation and amortisation of software development costs is a core issue for software companies and there are many approaches ranging from the US general policy to write off all development costs as incurred, to the UK/Australia/NZ policy of capitalisation and amortisation over a range of years.

I would be keen to hear other peoples thoughts on this.

Paul
GM Finance

[...] Friday, Xero reported its full year results to 31st March, 2011. Total revenue came in at NZ$9.3 million, with NZ$1.3 million coming from the UK and NZ$1.5 million [...]

Tim
23 May 2011 #

@Paul Interesting talk about the capitalization and amortization of s/w. Working in the s/w business, I have seen a couple development models in operation, but you could usually classify a given release as either one of two extremes – 1) rewrite the version from scratch 2) build it by enhancing the previous version. To me it seems like in 1) you are effectively limiting your amortization to how often you do the rewrite, whereas 2) the limits are whether your coders/architects were good at designing for the future, I could easily imagine a s/w business amortizing over 10 years, because that’s how long its product can last on the same codebase without rewriting, assuming the business keeps selling the same product that long. (There’s also some anecodal evidence that doing rewrites is a risky or bad idea… Joel Spolsky has some interesting writing on this re Netscape. My experience is also that rewriting tends to always be more expensive than you think.)

Philip Bridgen
24 May 2011 #

@Paul, @Tim. Interesting and useful points about s/w amortisation. I can support up to 5 years for well-written, market-successful s/w, on Tim’s #2 basis. However, 5 years is probably the limit simply because of the rate at which the fundamental technologies change – Moore’s Law et al.

Anna
8 June 2011 #

When will the strategic update for Xero happen for the U.S market? Going by NBR article written on March 8th the update was meant to happen in late May.

http://www.nbr.co.nz/article/xero-relocates-technology-officer-us-beachhead-nn-87664

Rod Drury
8 June 2011 #

Hi Anna, wouldn’t believe everything you read in the NBR :)

Our AGM will be our next strategic update. It’s a good show. Come along.

Rod

James R
9 June 2011 #

Can you confirm the AGM is 21st July? ( while there are still grabaseat flights available…)

Rod Drury
9 June 2011 #

Yes, Thursday 21st July, 4pm in Wellington. Like last year we’ll do a company update in Auckland the following Friday morning.

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