In line with its responsibilities as a publicly listed company, Xero is required to release regular market updates about it’s position. It’s most recent update was released today. The most relevant comments are pasted below (with my commentary afterwards);

Xero has doubled the number of customers from 240 to more than 500 in New Zealand during the four month period, 1 October 2007 – 31 January 2008;

The offer document promised 1300 paying customers at an average price of $75/customer/month this equates to $97500/month.

Since listing, pricing has fallen to $50/customer/month This means Xero needs to achieve a customer level of 1950 to achieve the same revenue (not taking into account that subsequent businesses for the same user are charged only half of the $50/month). Given that 260 customers were added in the four month period to date, I wonder how realistic it is to add almost 1500 customers in the next 3 odd months?

In the short time since listing on the NZX in June 2007 the breadth of Xero’s product functionality is already approaching that of the incumbent installed software providers, evidenced by a growing number of migrations from competitive products.

I concur that Xero’s functionality has grown markedly in that time, however there’s still a long way to go before Xero matches the (admittedly most user-unfriendly) MYOB for functionality. I’m looking forward to when Xero does indeed provide all the features that the incumbents do.

In 2007, Xero focused its primary marketing activities on building capability inside the New Zealand accounting community, resulting in an extensive national partner network. Xero expects to see the benefit of that channel with accountants recommending Xero to their customers for the 2008/09 financial year. With this network now in place, marketing activities to small businesses will accelerate this month.

Coolness – the Xero investors will be stoked to see the investment in the accountants network start to yield dividends.

Xero is on track to achieving 1300 customers;
Receipts from customers for the year to 10 May 2008 are likely to be $250,000 – $350,000;

Hang on – the prospectus promised year end 10 May 2008 revenue of $550000 with 1300 customers. The fact that the price per customer has dropped should result in higher customer numbers for the same revenue shouldn’t it?

Xero is pleased to announce that market entry activities in the United Kingdom have progressed more rapidly than expected. The Company is accelerating its UK hosting arrangements and expects to report UK revenue ahead of schedule, this financial year.

This is great news – after all the international market was always where the real revenue was to be earned. It’ll also help to offset some of the lower than anticipated revenue from the domestic market.

All in all it’s an interesting report, perhaps a little disappointing on the revenue and domestic figures but with some promising signs internationally.

So how do the Xero investors out there feel at this point (bearing in mind that Xero was always a long term investment and return aren’t expected for another couple of years) – what do they get as a mid term report card score?

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.

  • Thanks Ben, interesting numbers.
    Why is Xero charging a single subscription cost per Company, is Xero aimed generally at sole proprietors (microbusiness)? It can’t all be one man bands surely?
    $50 per month = $600 a year, is that significantly more or less than MYOB? Does MYOB charge per user license or also have a single site charge.

    It seems like they could generate higher revenue by charging per user (if it doesn’t make them more expensive than the competition)

    ie 1 single user license is $50
    2 Users= $75, 5 Users =$100

    Although I am sure there is good reasons why Xero dropped subscription rate from 75 to 50 dollars.

  • Ben,

    I’ve been a long time Xero advocate as both a user and shareholder, and see no reason to start doubting my investment.

    The company now has 500 + paying users in less than 6 months through pretty much only viral marketing. With the Accountant strategy starting to pay dividends and Xero UK about to be launched (anyone realised the benefits of charging in pounds?)this will be a winner.

    Will Xero make 1300 users by May? Who cares? They’ll get damn close. Think about Xero though in 2, 3 or 4 years, with anywhere from 50,000 to 500,000 users worldwide.
    Big picture thinkers will start to take notice in the next few months as more news comes in, and realise that the current 70 cent share price is nothing short of an absolute bargain.

  • Troy – YOB is an installed app that sells for around $600 once off cost (but bear in mind it’s a dog to use). Xero is fundamentally beter in design and execution – my questions are around revenue generation, not the quality of the product offering

  • Paul – I’m an advocate for Xero myself – however it’s important to flag issues for less observant investors.

    Hell I want Xero to win as much as the next man…..

  • Understood Ben. I think the most important thing for all investors (existing and potential) to realise is that Xero has proven itself to be a credible entity.

    A lot of negativity was displayed around the time of the float, stating that Xero was a dotcom that somehow thought it was still 1998. With 500 users and all six NZ banks on board it is now a real player in the local market – investor focus now needs to revolve not on it’s survival but how much market share it can pick up and how fast.

  • The team at Xero are doing a great job educating the market although I’d challenge the suggestion it has only been through viral given the cash burn. All credit to them.

    Customer numbers vs free users would be an interesting statistic. Same for actual transactions processed. We pass half a billion dollars ourselves last year.

    Cheers, Peter.

  • Peter,

    Interesting points. Assuming Xero reached a fifth of your revenue in say 5 years time what would its value be? At a conservative P/E of say 12 it would be a 1.2 billion dollar company. Divided by its 55 million shares (assuming no splits or need for more equity raising) we’re talking a share price close to $22.

    Projections are are all very well of course and it’s the runs on the board that count, but again the current share price looks to be focused a tad on the short term side.

  • Bonus points for speed go to Paul. Will try to continue the debate in kind within limits.

    I am not going to speculate in this forum on share prices though – sorry. Been around too long to do that ๐Ÿ™‚

    Just a clarification, the half a billion is client transactions processed not revenue.

    Longer term for Xero (and all players) – Customer retention is another key aspect to keep in mind, early days it is often overlooked but mid term it is essential. Would love to see those numbers. Look at our and you get a feel for the trend behind our numbers.

    Short term – personally I believe with a global slow down imminent, Xero’s cash burn is important so there is enough time to allow original goals to be met if not now then later. Few firms really get startup estimates right so they shouldn’t be criticised for that too much, more importantly is if and or when they do meet them. Cash buys time.

    The importance of cash burn applies even more so if client numbers now need to go up (~45% or more ?) to meet original revenue plans (currently falling below by ~50% or more ?) because of the price pressure from competitors which will only continue to grow :-).

    Bold prediction (guess) – 1,500 by Feb 2009 after retention issues is more realistic. This is paying customers at full whack, not freebies or heavy discounts.

    I also believe further market fragmentation (i.e. competition) is highly likely. The cost of some components of market entry are falling, mainly through technology substitution. Smart guys with smarter tools will continue to arrive.

    That said, more rumours of other existing niche players selling out are circling again in the pure net invoicing space. So total number of players won’t grow dramatically but product range will – good for the consumer – but tougher for Xero.

    Cheers, Peter.

  • At least we’re all in agreement that the market doesn’t have another Plus SMS on its hands! ๐Ÿ™‚ Enjoyed the conversation, thanks.

    BTW – Negative line invoicing went live today…….

  • Ben
    Interesting analysis. I was offline so read it in the herald

    My reaction was, hitting your customer numbers is easy. you just give it away…freemium anyone.

    Paul and Peter, great conversation. Love to see it run its course on somewhere.

  • Morning all,

    Just following on from yesterday – a quick observation that Viv Morresey, Xero’s NZ Sales Manager has just aquired 28,000 Xero shares @ .74 as per yesterday’s market announcement. This tells me a couple of things –

    1 The guy obviously has faith in what he is selling and has put his money where his mouth is (whether borrowed from Xero or not).

    2 The fact that a parcel of just 28,000 shares raised the price by 6 cents indicates a lack of sellers in the market. Trades usually sit around 5000 per day meaning the bulk of the original shareholders are also looking at the “big picture”.



  • Good point Paul – I noticed the purchase as well – as you say it’s a good sign

  • Guys. Just to stop any misinformation at source, the customer numbers we report are all paying customers. We have seeded a number of free customers of course but we would never report them as customers.

    I believe we have made it clear that we decided to focus on core accounting and accountants requirements first rather other services that will drive average customer revenue. That will come later.

    We appreciate you all taking an interest in us.


  • Thanks Rod – it’s god to have that clarification


  • actually it’s good to have the clarification

    god’s not involved in this particular startup (although some of the silicon welly crowd might disagree!)

  • Congrats Rod. I think its a good result. Rods point about delays as some wait for NZ year end is correct. Accountants are naturally cautious towards change to protect their customers, which is a good thing. They are also sensible not to create work for the sake of taking on new technology a couple of months earlier than they need to.

  • The increase in customers is a significant jump and a good result.

    What would be interesting is to confirm how these customers are counted given the changes to the Xero user model. Are these customers all paying the $50 per month, or is Xero counting all of those “extended” customers that are paying $25/$10 per month as well?

    From what I can gather on the website, those organisations paying $50 are new sales/customers, whereas the additional organisations are only incremental and may be part of the same organisation, in which case are they _really_ new customers?

    Sounds like some good massaging of numbers has taken place. I wonder how many organisations are paying the full whack of $50?

  • Hi all,

    Looks like people are finally waking up to Xero’s potential! Share price is up 19c (25%)as at 1pm today. There will no doubt be some profit taking in the next week or so, but the share price should start to track (ever increasing) user numbers from now on.

  • Viv Morresey has doubled up her personal investment, which helps explain the increased volumes lately.

  • correction – he

  • Get in quick. Graham Shaw, one of the directors, has been building his holding also.

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