Xero Annual Report – Quick Analysis

At the Xero AGM today both CEO Rod Drury and Chairman Phil Norman addressed the audience and gave  roundup of annual performance. Some quick points to note:

• Customer count now over 22000 (see graph below). Note the steepness of the growth curve has flattened somewhat – it’s still heading in the right direction but given financial year-end occurred in the final quarter, I would have hoped to have seen a real steepening in that period

• Xero is now articulating a “near term vision” of 100000 customers and a longer term vision of millions of customers. Based on existing ARPU this would see a near term revenue figure of $20mill assuming ARPU is able to be maintained. There is no word on ARPU impacts of increasing the customer numbers to this extent
• In its competitive landscape analysis, Xero comments that there are very few startups in the space and only one mid size competitor (NetSuite). While this is true in its home market, in the two other countries it is currently active in (Australia and the UK) and the one country it intends to enter imminently (the US) there are many small startups that have comprehensive offerings (Kashflow, FreeAgent, IAC-EZ, Clarity etc etc) as well as other mid-market competitors (Acumatica, Intacct)
• 47% of new customers have no previous accounting software. (see diagram below). This is a positive sign for Xero so long as they’re able to continue reaching this addressable market

• The path to 100000 customers will be eased by “activating the referral model” no detail is given as to how this will work and specifically if this will impact negatively on ARPU
• Xero will launch an “extra large” package above it’s current highest priced offering. No detail as to what this will entail.
• Xero’s $21mil reserves give it a two year runway based on current expenditure
• Based on annualized revenue, ARPU at $16/month was slightly up on the year previously ($15/month) but still down on 2008 figures ($34)
• Xero is currently at breakeven based on New Zealand direct sales
• Breakeven in the UK is expected in cal Q4 2010 with Australia following in cal Q1 2011
• Overall breakeven is consistent with previous messaging at an expected 2nd half 2011
• Director and shareholder Sam Morgan has reached an agreement with founders Rod Drury and Hamish Edwards as well as COO, Alastair Grigg, to purchase approximately 1.4 million shares from them at a market price of $1.45 per share (today’s closing price was $1.41) 
• Rod and Hamish do not intend to sell down any further shares prior to the Company achieving break-even

There is little unexpected in this report – customer growth levels are perhaps a little disappointing however ARPU (or my rough estimation thereof) is surprisingly good. The big unknown is what potential cloud offerings from Sage, Intuit and MYOB will mean for Xero, if any of those incumbents executes a product well, he competitive landscape for Xero will become significantly more difficult. (Disclosure – I have previous or current consulting relationships with Xero, MYOB, Intacct and Intuit)