Hot of the press are the Xero year end (at 31 March 2008) financial reports. Key highlights include (with my comments in italics);

  • Revenue from subscriptions of $134,000 less than expected – key will be the figures to the end of May 2008 – projected  revenue from the prospectus is $550000
  • Operating expenses of $5,146,000 that’s a significant burn rate which is fine if revenue ramps up significantly
  • A net loss for the year of $4,310,000
  • Cash and bank balances of $9,517,000

An interesting read is the unaudited comparison between the results and the projections detailed in the prospectus – again with my comments in italics;

  • In the 12 months since Xero’s Offer Document was issued Xero achieved 1406 customers. 1300 were forecast. but at a lower subscription rate than forecast – is this what Chris Anderson meant about the “trend towards free”?
  • Generated revenue in the United Kingdom while no revenue was forecast from either the UK or Australia in the first year. awesome – it’d be interesting to know what those revenue figures actually are
  • Receipts from customers of $213,000 was lower than the updated (February 1 2008) forecast of $250,000 – $350,000 for three main reasons not sure why receipts from customers figure is different from the revenue from subscriptions figure – perhaps Rod can advise? The following is a direct quote from the prospectus;

the assumed average pricing is $75 (plus GST) per customer per month, based on Xero’s current level of functionality. There will be no significant change in pricing during the prospective period.

  • The customer growth curve Xero experienced was weighted towards the end of the period as sales accelerated at the commencement of the 2008/2009 financial year hmmmm – but it’s hard not to think that anyone contemplating signing up for the 2008/2009 would have done so prior to 1 April and would therefore be included in these figures
  • Greater focus on accountants in the first year, and their request for Xero to spend more time on the core accounting engine rather than value added services. Therefore average revenue per customer was less than the assumption included in Xero’s Offer Document which can only but suggest that either the focus on accountants strategy was wrong or the prospectus projections were flawed
  • Less new customers than expected took advantage of the option for a one year in advance payment discount, preferring to pay monthly
  • arguably the primary reason for the lower revenue than projection  (especially given the higher than expected customer count) is the fact that Xero had to drop it’s subscription rate from that indicated in the prospectus.
  • Costs were less than forecast and interest income was greater than forecast resulting in a better closing cash position by $613,000. Closing cash balance at 10 May was $8,991,000 compared to $8,378,000 contained in the Offer Document

So overall an interesting result, nothing o shout from the rooftops but not completely off track either. Bottom line is that Xero needs to ramp things up – fast!

Ben Kepes

Ben Kepes is a technology evangelist, an investor, a commentator and a business adviser. Ben covers the convergence of technology, mobile, ubiquity and agility, all enabled by the Cloud. His areas of interest extend to enterprise software, software integration, financial/accounting software, platforms and infrastructure as well as articulating technology simply for everyday users.

4 Comments
  • What it amounts to I believe is that XERO is like no other business in the sense that, remarkable product or otherwise, to build a sustainable SaaS business just takes time and hard work (and watching the balancesheet.

    SaaS businesses in the early years always looks ‘on the surface’ like they’re finding sales hard as the revenue always appears less than people expect. This is because the very nature of SaaS is many, small payments, monthly. It takes time to build the revenue, and for quite a while it seems like not a lot is happening – but then the revenue picks up. And SaaS revenue is like gold!

    When you have thousands of committed customers paying monthly, it takes a major event to dent the revenue stream. SaaS becomes a solid revenue model, compared to traditional software service companies that may have only a few high paying customers. ie: When they lose a customer – there goes 250k and some jobs.

    I do wish XERO all the best, and New Zealands tech community is watching with great interest, but what we all want to see is XERO get to the positive cashflow – covering overheads, before the cash in bank runs out. A XERO success is good for everyone…

    So yes, looks like they need to ramp up fast, and they’ll know that and be working towards it… But my comment for the day (We’re in SaaS too) is don’t judge a SaaS businesses potential by it’s first years results. it’s the nature of this type of revenue stream to be low initialy, then (if they have a winner product/model) it grow exponentially.

    What we don’t want to see is linear growth. These business models should grow exponentially.

    As a side note. It takes some balls to run a company with public financials. I wonder what comments we’d all make if we could publicly scrutinize each others business accounts?

  • Good man Ben,

    Just keep planting doubt in the punters minds 🙂 I’ve no doubt Rod’s already had nibbles from potential suiters now that Xero has proven itself as more than credible. Julian’s comment earlier about public scrutiny was dead on. Everyones a critic.

    Fact of the matter is that Xero have gone from 0 to 1400+ in twelve months, most of that happening since Jan 08. Has anyone thought to extrapolate the sales curve to see what the picture will look like in a few years time? I doubt lack of funds will ever be an issue.

    Well done to all at Xero for getting this far – full steam ahead.

  • Paul – I’m not attempting to plant doubt in anyones mind – I am trying to provide some neutral commentary of xero’s perfromance. Something that Rod expected when all this began.

    As for the potential suitors thing – Xero is a publicly listed company, it’s shareholders can sell to whomever they wish (well other than those who were shareholder pre-IPO, they’re embargoed from selling their shares until 12 months have elapsed from the listing date)

    🙂

  • Good point, but it’s Rod that holds the majority, a very good strategic move ala Steve Tindall.

    Probably far too early for this conversation, but there’s no point MYOB trying to pick off the 15 million shares that are available on the NZX. When they decide that Xero is too big to ignore a hostile takeover is impossible – so it’ll be straight on the phone to Mr Drury.

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