Once again AccMan sponsor Xero put in a solid performance for 2009-2010, closing out the year with revenue of NZ$3.4 million from a final customer count of 17,000. That was up from NZ$1.1 on 6,000 customers in 2009. This was achieved for a final headcount of 90 compared with 56 the previous year. Xero states it is at break even in its home country New Zealand now with the UK to follow in Q4 2010 and Australia Q1 2011. Overall, the company is expected to be at breakeven during the first half of 2011.
Ben Kepes provides a more detailed analysis around the numbers but I want to concentrate on what Xero’s currently articulated strategy means in the medium term.
During the presentation, Xero talked about achieving a customer target of 100,000 in the near term. It also talked about potential customer numbers in four markets: New Zealand, Australia, UK and US. It has yet to make a foray into the US though I know this has been consistently rumoured and in the report, the company said it was readying for such a move later this year. As I have warned before, this could be an incredibly costly move but the company is assessing the risks.
The following graphic shows how Xero sees the market:
At this scale the numbers are a bit difficult to read but the low end of the anticipated total market share number is 260K with the upper number stated at 520K. They sanity check against Sage global customer numbers at 5.8 million, Intuit 7 million.
In his commentary, Ben points out that there is no line of sight into what a growing customer base means for ARPU (Ave Rev Per User). The numbers suggest it is hovering around $200/user pa. That’s far less than the average RSP would suggest but remember this has to be tempered against the fact the final revenue and customer numbers don’t tell us about the churn impact or how the rate of growth impacts the ‘average’ of $200 calculated using this method. But let’s assume the fact we are seeing a relative consistency in how the numbers work (2009 was 7% less at $186/user/pa. Similarly, we don’t know what the average selling price is at any point in time or whether the mix is changing. Any forward calculations get more complicated by the fact that there are three price bands plus a new service ‘Personal’ added into the mix. Plus of course, Xero has not issued a forward looking statement that provides a line of sight into anticipated numbers although it consistently says it is meeting plan.
Bear in mind that elsewhere, I am regularly seeing 10% month on month average growth, meaning that Xero is outpacing the market. Taking all those factors into account it is possible to anticipate Xero hitting its 100K target somewhere in the 2011-12 time frame. Given what we’ve seen, albeit the historical data is a tad limited, that means we can reasonably anticipate what the revenue number might look like excluding Personal.
At the 100K level, I’m reckoning that Xero will be hitting a run rate of around NZ$35-45 million. Ben anticipated a year end result of NZ$20 million because he took the 2010 result and simply applied 100/17. It’s a way to do the analysis given the lack of additional information and the fact Xero is in hyper growth. Now project that forward to Xero’s low end potential customer number of 260K and you could be looking at revenue of NZ$90-120 million. Hardly shabby.
Now let’s do a comparison with Sage UK where Line 50 is its biggest seller.
For the purpose of this argument, I’m going to restrict my analysis to Sage’s subscription revenue and contracts. Taking an average from their accounts I arrive at an annual value per customer of £475 or just a tad over NZ$1,000 per customer pa. Now you can make all sorts of arguments about the difficulty in making direct comparisons etc but even at this crude level, it looks like Xero will have to outrun Sage at least by a factor of two in order to achieve remotely similar gross revenue numbers. Unless of course Sage implodes as these cost differentials start to tighten the screw on its revenue.
Xero – along with others will argue that their analysis of customer pull – 2010 split 47% new and 53% replacement means the mix is OK in order to achieve their goals. I’m prepared to buy that though it makes the pull from new ‘interesting’ and absolutely requiring that Xero actively works with professionals to onboard the shoebox customer. Sage will answer that subscriptions cross all sorts of boundaries and products and that a direct comparison is therefore erroneous. Well – that’s not quite right because as we’ve seen, the SaaS players continue to add product value while maintaining prices at historic levels. On the other hand, we don’t know whether companies like Xero will get more granular in their offerings and ramp up new and premium services. Xero suggests it might go that way. I can think of other ways to go that would add many millions in revenue while leveraging the large customer pool.
That gives you a rough – and I admit very rough – indication, of the task facing SaaS players given that the market is absolutely fixed in size and that incumbents have accumulated huge customer numbers. Conversely, it also gives you an indication how hard it is for incumbents to give up on their existing models. Xero is already diversifying in a move with Personal that looks a bit like what Mint did in the US before being gobbled up by Intuit for US$170 million, having accumulated 1.5 million users.
The market is clearly expecting great things from Xero because it is valuing each of its declared 22,000 customers at roughly NZ$6,540. At today’s low end rate of NZ$29/month, that’s an incredible 18 YEARS revenue. At the mid level of NZ$49/month that’s still a whopping 11 years. I’m reckoning the market has factored in stellar growth.
