It's fair to say that no one has been covering Xero longer than I have. I first talked to its co-founder and CEO, Rod Drury, long before the company launched a product. Trawling back through my emails and I discovered that we first talked about his vision 10 years ago to the day. (Rod, we really should have a celebratory beer!) I can't imagine he'll be celebrating the milestone, but it does go to show just how long Drury has been on this journey.
When it was founded, Xero took a very unusual path, listing on the New Zealand Stock Exchange before it even had a real product and customers. Backed by some high-profile names, and with Drury's masterful marketing execution, Xero got its IPO away in the nick of time, just before the GFC really took its hold.
Since then, the company has experienced the turbulent ride common to all organizations. The share price has been buffeted by both internal and external factors -- from its listing price of NZD1, it has been as low as 60 cents, as high as $40 and is now around the $23 mark. Xero has raised significant additional funds (from high-profile sources such as Matrix Capital and Peter Thiel's Valar Ventures) and had a public listing in Australia for good measure.
So at the 10-year mark, it is worth reflecting on the full-year operating report that Xero has just released. And the numbers look good. To give some color to that, after reporting breaking through the 1 million-customer mark a few months ago, Xero's metrics are now as follows (all as of March 31 and in New Zealand Dollars):
- 1,035,000 customers, up 44% year-on-year
- Revenue $294.40, up 43%
- Operating cash flow positive $9 million in the six months ended March
- Operating cash outflow for the year to $4.4 million, down from $34.8 million in the previous year
- EBITDA positive $1.6 million in the second half
- Annual EBITDA loss $16.9 million, compared with a $44.8 million loss in the 2016 year
Interestingly, the financial analysts had all predicted Xero not turning cash flow positive until the year ending March 2019, showing, once again, how hit-and-miss financial analysis really is.
Xero is the incumbent player in Australia and New Zealand, where total customers are just shy of 700,000. By way of reference, its key competitor in that market, MYOB, has roughly a third as many customers for its own cloud-based product. In the U.K., the offshore market with the longest Xero pedigree, the company has just over 212,000 customers -- again in this market it is ahead of its main rival, Sage.
North America is a different story, where incumbent vendor Intuit has the lion's share of the market with close to 2 million customers for its QuickBooks Online product. In this market, Xero has just over 90,000 customers (for accuracy's sake, it is worth noting that Intuit’s number is U.S. only, while Xero combined the U.S. and Canada, not yet disclosing U.S.-only customer counts).
This is an impressive result. In the detail to the annual report, Xero details just how much its cost to acquire, sales and marketing as a percentage of revenue, and administration costs as a percentage of revenue are all trending downward -- a natural development as scale kicks in. The cash flow breakeven milestone is a huge one, and will put the company in a good position with regard to capital requirements -- Xero still has cash in the bank and has no real need to fundraise again.
Which leads us to an interesting point: Drury has always admitted to having an ambition to list his company in the U.S. While in the past he has talked about a rough date for this listing, in recent times this discussion has become somewhat muted. The reality is that U.S. investors are parochial, and while the numbers look fantastic for Xero, and the company is almost four times over the generally accepted IPO level of $100 million revenue, its U.S. customer base is still a tiny proportion of total customer count.
What would be fascinating here would be if Xero did try and list. Would U.S. investors look at the overall picture (arguably the right thing to do from an investment perspective), or remain fixated on that U.S. customer count?
All in all it is a great showing, and somehow appropriate on the eve of Xero's 10th anniversary. Something tells me the team will be celebrating the event heartily.
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