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March 2013 Operating Update

Today we’ve released an Operating Update to the market on our progress over the past year (see further below). This phase of the business is about building out our products, proving our operating models and rapidly growing capacity.

This chart is useful in showing our revenue growth compared to our losses as we invest. You can see clearly that after our capital raising in 2012 we upped our investment to more quickly grow the team so we can continue to deliver rapid growth as we build the foundations for a million paying customers.

RevenueLoss2013

The results should give confidence that we’re executing and allows us to continue our substantial investment to deliver the best accounting software in the world, making life easier for millions of small business owners and their advisors. We really love what we’re doing and feel we’re making a positive difference.

It’s been interesting hearing from people watching us closely. We’re getting lots of congratulations and in our home market many people think we’re nearly done. Nothing could be further from reality. We think we’re still at the beginning. Half of all Xeros are in their first year of what we hope will be long Xero careers. We’re thrilled to have quickly grown to over 150,000 customers but that is just a drop in the bucket globally.

We’re fired up, have a ton of stuff in the pipeline and we’re going for it!

Thank you again to our many customers, fantastic partners and patient shareholders who are allowing us to build a great long term business.

Today’s Market Release:

Xero executing to plan

5 April 2013

(Note: all currency is in New Zealand dollars and results are unaudited)

Xero continues to deliver on its high growth strategy, doubling full year revenue to 31 March 2013 to NZ$39m. With Monthly Committed Revenue growing to $4.3m and a recurring revenue model the company commences the 2014 financial year strongly with $51.5m in annualised subscriptions.

The loss for the second half of the year to 31 March 2013 is anticipated to be similar to that reported for the first half resulting in a full year loss less than $15m, up from $7.9m last year.

Key metrics

  • Operating Revenue doubled from $19.4m to $39m.
  • Annualised Monthly Committed Revenue (MCR) is $51.5m, up from $25.5m at 31 March 2012, or +102% growth.
  • Offshore revenue is 62% of Monthly Committed Revenue, up from 51% at 31 March 2012.
  • Staff increased from 194 to 382 in the past year.
  • Paying customers are at 157,000 at 31 March 2013, up from 78,000 at the same date last year, or +101% growth.
  • Cash on hand exceeds $78m.

Commentary

Xero continues to attract global talent adding 188 new jobs in the 2013 financial year to provide additional product development and operating capability, and expanded sales footprint in offshore markets.

A vibrant small business ecosystem has evolved around Xero as it matures into a business platform with over 200 add-on solutions and over 6000 accountants, bookkeepers and trainers working with their customers on Xero.

Over the period Xero continued its significant investment in building professional accountant tools connecting advisors seamlessly to their small business customers. This combined advisor and small business strategy and architecture has disrupted the accountant-side software market in New Zealand and Australia and has been a significant contributor to growth.

In addition to continuous improvements and broadening of the core Xero feature set, new longer-term strategic development projects are progressing well. Expected in calendar 2014 is delivery of US Payroll and Australian Tax features, which will further enhance Xero’s position in those markets.

Regional customer breakdown

Paying customers At 31 March 2013 At 31 March 2012 Year on year change
New Zealand 73,000 47,000 +55%
Australia 51,000 16,000 +219%
United Kingdom 22,000 11,000 +100%
United States/Global 11,000 4,000 +175%
Total 157,000 78,000 +101%

Regional activity

In New Zealand most accountants offer Xero and the focus is on increasing customers per practice. Xero is steadily replacing incumbent providers and seeing strong take-up of its accountant-side software.

Australia has experienced the greatest regional growth during the period and in March overtook New Zealand as the largest regional contributor to revenue. This has followed substantial investment in the Australian team, which has grown from 27 to 71 over the year. A new Australian HQ was opened in Melbourne in December.

In the United Kingdom, tripling the team to 27 over the course of the year also contributed to sustained growth. About a third of the UK’s top 100 accounting firms are now Xero partners.

Xero has established a beachhead in the US market. Product localisations are complete and the foundations of an accountant channel are established. Growth has exceeded that experienced in other markets in their early stages. The US team grew from 19 to 29 in the first 3 months of calendar 2013 with teams in San Francisco, Los Angeles, and Atlanta. A further 14 staff begin employment in April.

Outlook

Xero anticipated the substantial opportunity as small businesses moved to the cloud. It takes a significant investment and many years to build a broad and global small business financial platform. Xero has proven the opportunity, its strategy and its execution ability. The incumbents continue to struggle with the complex transition of their businesses to the cloud model. Xero is now investing in its global sales capability and feels confident in achieving its objective of gaining a million paying customers.

 

Read more about Company News

 

25 comments

Adrian Pearson
5 April 2013 #

Well done guys. Impressive growth and now looking like a truly global business. Keep up the good work, building a great product and conducting yourselves the right way.

James
5 April 2013 #

Holy Moly. More than doubled customer numbers again! Each year I think that surely you can’t keep doubling. 1 million customers not far off at this rate… Well done.

Gayle Buchanan
5 April 2013 #

Agree with Adrian, truly global and new team members coming on board is exciting – thanks for the helicopter view Rod.
Oooooo LA? Fast cars, Movie Stars and Xero! Very cool

Justin
5 April 2013 #

Congs team Xero. At this rate Xero will hit 1 million paying customers by 30 September 2015. Keep doubling.

Ben Wood
5 April 2013 #

Congrats guys. Thanks again for disrupting the incumbents in Australia and around the world.

Nigel
5 April 2013 #

Great progress – congratulations. Just because I am interested do you publicly state what proportion of businesses using Xero buy it directly from Xero, and what proportion get it via their accountant? It would be interesting to know – but may well be commercially sensitive, in which case fair enough!

Rod Drury
5 April 2013 #

@Nigel

Happy to answer. Over of two thirds of customers via our accountants and bookkeepers channel.

This year we’re gearing up to do more direct activities to small businesses but we’ll still connect them to our partners as we believe that is the secret to making small business more productive at scale and we love providing new business to our partners.

Anna
5 April 2013 #

When will be separating the results for United States/Global instead of combining both results together? It Will be interesting to see how many customers you now have in the United States or is this commercially sensitive?

Rod Drury
5 April 2013 #

@Anna, when the numbers get meaningful. A lot of our global product is US customers and Canadian customers. Still early days and if we create a dedicated global team we’ll likely split them out.

Cecil
5 April 2013 #

The growth number is very impressed. By comparing to the number announced in Feb this year, another 20K customers were added in just two months! This is a good indication for the future growth. By looking at the growth of the customer number in UK though, the number seems a little bit low comparing to other market other than US. I know developing the US market is very important to Xero in the next few years. Would Xero also need to put a bit more focus on developing the UK market?

Rod Drury
5 April 2013 #

@Cecil. Fully committed to the UK and have just released UK specific features. We were happy taking it a bit slower while we waited for additional banking feeds and a few more signs in market and to be frank our success in Australia pulled in quite a few resources as we managed that growth.

We’ve hired some more great people into our UK team over the last 6 months and we’re really pleased with how the UK market is tracking.

We’re deliberating not adding other territories at this stage so we can focus in our four existing geographies.

It is correct that traction in the US is what most people are looking for but we are still working really hard in the UK and we are already seeing the benefits of growing our team there.

So this year there is a lot to do which is why we’ll continue to grow our team significantly.

Tom Blundell
6 April 2013 #

I having been using Zero since 2007 and held shares since 2009. The 1,000,000 customer target is not that far away. My question is what happens after that ? – You have given us something to be proud of so I sincerely hope it is not going to be a great kiwi sell out.

Mike Block CPA
6 April 2013 #

Congratulations on your fantastic growth. However, it is very confusing to see 157,000 customers here, after seeing “Loved by over 200,000 people worldwide” at http://www.xero.com/. I know the difference between paying customers and users, but how do you track lovers? I most respectfully submit that you should only use one metric.

Graeme Leo
6 April 2013 #

Impressive growth. Is there any churn analysis information Xero is willing to share? Is there a decrease as a % of new subscribers as more features are released?

Rod Drury
6 April 2013 #

@Mike our most important number is paying business customers which is what we use on all our market information. We have well over 200,000 users (actually that number is very old it’s much more than that). We used that number earlier on because many of the private SaaS companies (and even the public ones like Intuit) use this number to show progress. It’s a marketing number and some vendors count not just active users but anyone that has touched their software. Our user numbers are always real active users (logged in in the last 12 months to a real business).

That number is still useful as it shows the network potential and also potential for partners like trainers. We’ll update it.

We track lovers the traditional way (notches on our belt).

@Graeme churn is around a percent a month. All our numbers are net of churn. Our churn rate is less than the death rate of businesses and we of course monitor churn closely. We don’t see people going anywhere else and the main reasons for leaving ‘not ready for accounting’ or ‘out of business’.

The reason our churn numbers are low are

1. We are conservative about counting customers. We only count them when we have billing details and by then our customers are pretty committed.

2. Accounting software is sticky. So customers are hard won but when we have them they tend to stay if you treat them well.

You could argue that businesses with online accounting are more likely to survive on our numbers. That would be a useful study.

It’s very interesting to look at customers now as our numbers have become significant. As a pure-play SaaS accounting vendor our Customers, Revenue and therefore ARPU are clear to see. In MYOB’s recent update they did not disclose online customers or revenue. Intuit continues to obfuscate their QBO count and revenue in their reporting.

We challenge them to come clean with their numbers. It’s important for the industry to know where the customers are and who’s strategy and platform are working as their industry makes their investments.

Rod Drury
6 April 2013 #

@Tom, then you should be able to spell Xero correctly :)

After 1m we chase 2m customers. The 1m we intentionally use so that people trying to understand our business have a number for the top of their spreadsheets. You can build models from that number and then ask the question ‘how likely are they to get to 1m?’ and ‘how long will it take?’.

We have said that we are not building the business to sell.

1. It’s too much fun doing what we’re doing,
2. Unlike private companies, as a public company staff have liquidity so we don’t have to drive to a liquidity event like a trade sale or IPO. We’ve already done it.
3. We’re doing this because we love helping small businesses and their advisers to be more productive. That grows economies and means better schools and hospitals so our business has a clear purpose which is fundamentally good.
4. An acquirer would stuff it up and slow everything down.
5. As a team we love working with each other and our partners. For us working as part of a global team of switched on people is a big part of the reward.
6. We are only just at beginning and we have unique opportunity to change the world. It’s fun to control your destiny and be able to implement strategy quickly and at scale.
7. It’s hard work doing this in the investment phase. There is a lot of pressure. It’s going to be awesome to run the business when we are very profitable. I think we owe it to ourselves to experience that.

Hope that sets your mind at ease.

James
8 April 2013 #

You have been out performing my projection spreadsheet since IPO!
One area of my spreadsheet that is hard to predict is the expense side. Obviously this is proportionally high during the growth phase as you build out the product and processes. Support requirements must be higher than they will eventually be as more than half of your customers are brand new to the product at your current growth rate.
Do you have any feel for what the expense side of the equation would look like at an arbitrary customer number of say 1 million customers and assuming only moderate growth at this stage? (not saying there will be moderate growth at that stage, in fact my bet is that it will reach critical mass at some stage and explode)
I’m sure you do have a feeling for this but anything you can make public?
Presumably with all that cash in the bank you’d like to increase the loss if you could hire fast enough. But some in the media seem to have an assumption that current expenses are required to support current levels of revenue.

Rod Drury
8 April 2013 #

@James good to hear.

Your line of questioning is exactly right. As we get to ‘steady state’ and are at scale we would hope to decrease costs per customer across the business to make margin as good as we can and the nature of SaaS and platform economics gives good scope for this. Already we have a big focus on costs per customer and seeing some good trends in support and platform spend but are still very much in the ramp up phase.

Another way to build your models is to look for the ‘best in class’ margin for SaaS providers. Our target will to be near or exceed best in class. So that should give you some useful ranges to play with.

We feel quite relaxed about future margin as the nature of our product means that there are significant other incomes streams we’ll be able to add to the platform and immediate present to a large base of customers at a relatively low cost as the business matures further.

Hopefully that gives you some ideas.

James
9 April 2013 #

Thanks. I’ve tried this approach in the past and found various figures published by public SaaS companies. I’ve found it difficult though to find public SaaS companies that are a) Not Enterprise b) Not free for the user with revenue from advertising or selling mined data etc c) In steady state d) Only SaaS without legacy operations and vague reporting.
Any hints where I could look?

Michael Mori
9 April 2013 #

OK, seriously now, just confirm that South Africa is your next market growth area – or else!
Well done XERO.

Conrad
16 April 2013 #

How many Xero Personal customers are there and are these counted in your customer numbers? Is this something that you will continue with as your B2B success takes off? I only ask because I’m interested using it.

Rod Drury
16 April 2013 #

Xero Personal customers are not included in the numbers. Xero Personal covers it’s costs but the ARPU is small. You’ll see some exciting new Xero Personal features soon.

Kent
9 December 2013 #

Hi there,

What is your definition of paying customer? Is that currently active subscriber?

Thank you

Rod Drury
9 December 2013 #

Hi Kent, it appears you are sending this in from an Intuit IP address.

Our paying customers are businesses (not users) who are actively paying and net of any churn. As we report our revenue number we keep this number very conservative so that ARPU can be easily calculated.

Would love to know what your real paying customer count is and looking forward to seeing the QBO revenues broken out. Your turn.

Sara
27 March 2014 #

Hi,

Can someone please help me. I really need to know who is Xero largest shareholder and what percentage of the Business do they own? Thanks

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