Sam Stewart - Latest Comments in Xero Analysis - 2 year review

Re: Xero Analysis - 2 year review

Riald88 — Thu, 29 Jul 2010 21:43:32 -0000

Pity you retired, your writing had promise

Re: Xero Analysis - 2 year review

samstewartnz — Sun, 31 May 2009 06:20:33 -0000

Hi Rod,
Thanks for clarifying my question on the sharing of revenue. Good luck with the strategy.
Cheers
Sam

Re: Xero Analysis - 2 year review

Rod Drury — Tue, 26 May 2009 07:00:42 -0000

Thanks Sam and Lance, that's useful analysis.

Lance's comments on ARPU are correct. We're relaxed about that as we can add further services later and will see more of a price/function mix as the core accounting engine is completed and we can slice and dice further. We are also keen to add 'per employee' type services which move the product from the back to the front office - which will naturally occur as we add features.

We aren't paying an ongoing revenue stream to accountants but have delivered a number of different products that suit the various customer groups they have. Eventually we hope to be a full solution for all of the accountants clients which enables them to turn off spend on other vendors. This is a high inertia market so will take some time but we do seem to be getting traction and seeing an ecosystem develop.

We will be paying an ongoing revenue share to carriers once they spin up later in the year. That seems sustainable model for all and is offset against what we would have had to spend in upfront marketing which is far more risky and expensive.

Clearly we have some options. We could stay a similar size and swim to the side of the pool, but we feel the opportunity is so great we are planning to grow the team a bit more and go a bit faster. With the marketing partnerships we've won we now need to resource those to exploit them. And as the platform is nearing completion we can thicken out our teams slightly and do a bit more in parallel through the api.

So the order is

1: Build the platform
2: In parallel, build customers to validate everything - but ensure we have a good monetization rate
3: Build revenue
4: Then we can decide the mix of growth versus profitability

Committed Monthly Revenue will be the key metric going forward as it captures the balance between customers and price/function which will be more relevant going forward.

While hopefully the strategy appears simple and common sense this is a fairly new model for NZ tech companies (being resourced properly early on) and is certainly new for investors (especially as we doing so much in parallel) so we're trying to be as transparent as possible. Hopefully other tech companies will follow.

We appreciate you taking the time to have a good look. Hope this response is useful. Happy to answer further questions.

Cheers

Rod

Re: Xero Analysis - 2 year review

Boutique Accommodation — Mon, 25 May 2009 01:07:53 -0000

Great article.

From an investors point of view, maybe this company (during its start-up phase) is better for investing in to ride its peaks and troughs??

Its clear that their share price will start to look like a roller coaster as they release periodic press releases full of new deals, markets and services.

During that time, as an investor, you may start to then get a better feel for the direction they are heading.

Re: Xero Analysis - 2 year review

samstewartnz — Sun, 24 May 2009 03:58:04 -0000

Excellent points Lance

I agree that customer growth won't be linear. The 250 per week over the next year is conservative (I would be concerned if Xero could not achieve this) starting point that avoids estimating an S-curve or power law parameters. They still have the end of the Australian financial year ( 30 June) to come.

The interesting observation is that for 47% of Xero's early adopters Xero is their first accounting system (http://blog.xero.com/2009/0.... This suggests Xero have the potential to be a new market disruption.

The 35% EBITDA margin is an estimate at the 5 year horizon that is nearly impossible to make. The majority of SaaS companies that make financial information available are still in high growth phases making it difficult to estimate a steady state EBITDA. The 35% number is based on a Don Dodge blog post (http://dondodge.typepad.com.... I think Xero could achieve a higher EBITDA margin but realistically it is far too early to tell.

So do you think accountants are receiving an ongoing revenue stream for signing clients up to Xero or just pass a discount through to their clients?

Thanks for the comment
Sam

Re: Xero Analysis - 2 year review

Lance Wiggs — Sun, 24 May 2009 01:04:48 -0000

Excellent piece Sam.

The recent 250 customers per week number is skewed due to the end of year rush, so I am not sure that is sustainable this year.

However weekly growth of 250 per week should be steadily rising. It should do so through both organic (word of mouth) and inorganic (salespeople walking into accountancies) methods.
The inorganic growth is a function of how many sales (OK "Biz dev") people that Xero has on the ground, and I would assume that many of the new staff will be in this role.

Let's say Xero is doubling sales people - that means 500 sign ups per week should be attainable in the same period next year.

But far more importantly the number of happy customers is rising - and they tell everyone abut how fun it is to use Xero. That word of mouth growth is subject to a power law, and not a straight line. While Xero has some work to do to improve organic growth (MYOB/Sage import/export, pricing to individuals) this is where the real potential lies.

You are right to show the size of the addressable market, but more interesting I believe is the size of the installed market. How many people are already paying money for competitor software, and how many of those will come over, and when?

Do you think the EBITDA margins will change over time? With a Saas model after all the cost of delivery should decrease over time, while Xero will get smarter about the acquisition cost of customers.

Finally the ARPU, as I understand, has dropped because the model has shifted to sales through accountancies, rather than directly. The accountancies pay a much lower price, but give Xero the opportunity to sell to a whole bunch clients with one hit.