Xero 2010-11 half year blows away 2009-10 full year

by admin on November 11, 2010

in Cloud Computing/SaaS

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If anyone needs proof that the SaaS/cloud model is working then Xero’s first half results (PDF) should be a compulsory reading. From the blurbs:

  • Near tripling of half year operating revenues from NZ$1.3m to NZ$3.7m. This compares with 2010 full year revenues of NZ$3.4m. Annualised subscriptions are running at approximately $9.0m.
  • Successful recruitment to resource our operating model in New Zealand, Australia and the UK lifted headcount from 73 to 101 and therefore a planned rise in operating costs to NZ$7.9m – up 59%.
  • Net loss of NZ$4.7m – an increase of 24%, is expected to be the maximum loss incurred as the company drives toward break-even.
  • Cash at bank of $16.6m as at 30 September 2010 – excludes $4m additional monies raised by the Peter Thiel strategic placement in October. Xero anticipates having significant cash reserves at its planned break-even point.

Xero says all other previously stated goals are on target to being reached. Xero’s performance is demonstrating that even as the new cloud players start to scale up, they are continuing to see a doubling of revenue numbers on a year-over-year basis. How long this trend continues remains to be seen but with huge market opportunity, it is difficult to see an end in sight any time soon. That is despite the fact the market is highly fragmented.

A couple of other key indicators. The number of paying customers now stands at 27,000, equating to annual revenue per customer at the stated NZ$9 million run rate of NZ$333 pa or NZ$27 pm. Referring to growth in its home market compared to the incumbents, Xero says:

This disruption is already evident in the New Zealand market where Xero’s strategic accountant channel grew significantly over the period – up 63% to 1500 compared with the six months to 31 March 2010. More than half the accountants in New Zealand have Xero customers. A growing number of early adopter accountants are 100% Xero and mainstream firms are preparing for the transition over the next two years.

This last point is interesting. New Zeland has a tiny population in comparison to the UK so it is relatively easy for it to make a big splash. That however would belie the difficulty in getting professional accountants to make the shift from one technology to another. Unquestionably, the continuing stream of good user experiences is playing a significant role in helping the company further its goals. I’d also argue that the emergence of non-traditional practices as an alternative is making a big difference. These practices do not have the kind of baggage that weigh down other firms. They can afford to be disruptive in their approach to the market. The following video demonstrates how that works in the UK.


The problem comes in how the incumbent professional practices will react. This is something I will be addressing at an upcoming client meeting.

Comments on this entry are closed.

Ben Kepes November 11, 2010 at 6:28 am

Dennis – also important to note that in its home market, Xero has massive brand awareness and it’s executives and board members are all significant names. It’d be dangerous to assume accountant partner growth in NZ will be matched by that in AUS, the UK or (especially) the US.

Interesting also is the fact that the positive feedback that Xero receives about user experience is unlikely to be a factor (in my opinion) in converting accountants, rather this feedback feeds the direct sales pipeline. Accountants still require the grunt work that Xero is investing heavily in…

My 2 cents…

dahowlett November 11, 2010 at 6:52 am

I thought I’d made the 1st point – maybe not. Less convinced on the 2nd point. In the UK we see end users pressuring firms to go the SaaS/cloud route. Firms are shit scared of losing clients so some at least will fall into line. Others are resistant but that usually ends up with them losing the client.

Ben Kepes November 11, 2010 at 7:03 am

Fair enough, I’ll defer to your assessment of your home market. Speaking to accountants here I’m not sensing a huge deal of bottom-up pressure to adopt. Either way the really interesting thing will be to see how they go in a fresh market, post startup and unaffected by externalities

Bob Harper November 11, 2010 at 6:51 am

What happens is price in this segment falls?

Bob Harper November 11, 2010 at 6:51 am

What happens is price in this segment falls?

dahowlett November 12, 2010 at 2:34 pm

If? You seeing any price pressure? I’m not.

Ben Kepes November 12, 2010 at 5:40 pm

Good point Bob, there’s a number of invoicing services that are free (or at least freemium) and I’m seeing indication that those products are broadening into full accounting. However… for an accounting product I believe there will be a disconnect between the price of a free product and the perception of a paid one. As such, while there may be a small amount of downwards price pressure, it won’t be huge.

WRT Xero, the downward price pressure is unlikely to reduce core price, but rather will see them offer a more modularized product that, while dropping ARPU, will see customer numbers increase….

Ben Kepes November 11, 2010 at 6:28 am

Dennis – also important to note that in its home market, Xero has massive brand awareness and it's executives and board members are all significant names. It'd be dangerous to assume accountant partner growth in NZ will be matched by that in AUS, the UK or (especially) the US.

Interesting also is the fact that the positive feedback that Xero receives about user experience is unlikely to be a factor (in my opinion) in converting accountants, rather this feedback feeds the direct sales pipeline. Accountants still require the grunt work that Xero is investing heavily in…

My 2 cents…

dahowlett November 11, 2010 at 6:52 am

I thought I'd made the 1st point – maybe not. Less convinced on the 2nd point. In the UK we see end users pressuring firms to go the SaaS/cloud route. Firms are shit scared of losing clients so some at least will fall into line. Others are resistant but that usually ends up with them losing the client.

Ben Kepes November 11, 2010 at 7:03 am

Fair enough, I'll defer to your assessment of your home market. Speaking to accountants here I'm not sensing a huge deal of bottom-up pressure to adopt. Either way the really interesting thing will be to see how they go in a fresh market, post startup and unaffected by externalities

Andrewgordon78 November 12, 2010 at 9:07 am

Dennis, I think you’re dreaming again. Xero continue to burn money, especially on fat salaries. The fact is that Xero is being used by the majority of Accountants in NZ, but actually how many of their clients? 2%? Xero will only ever be a solution for the tech inclined and the accounting inclined. In my experience teh vast majority of small business owners are neither. As I’ve said before double of nothing is still nothing in terms of NZ growth, and they are burning $50 dollars notes to heat a cave.

dahowlett November 12, 2010 at 2:38 pm

Do you know anything about startup economics or the market opportunity? The company is following a well understood trajectory. They’ve gotten a lot further than many other similar vendors in a much shorter period of time. They are on PLANNED target in each territory. What’s not to like about that?

I will caveat that by cautioning a move to the US but then I’ve always felt that’s a potential graveyard for all but the very best funded operations.

Andrewgordon78 November 12, 2010 at 9:07 am

Dennis, I think you're dreaming again. Xero continue to burn money, especially on fat salaries. The fact is that Xero is being used by the majority of Accountants in NZ, but actually how many of their clients? 2%? Xero will only ever be a solution for the tech inclined and the accounting inclined. In my experience teh vast majority of small business owners are neither. As I've said before double of nothing is still nothing in terms of NZ growth, and they are burning $50 dollars notes to heat a cave.

dahowlett November 12, 2010 at 2:38 pm

Do you know anything about startup economics or the market opportunity? The company is following a well understood trajectory. They've gotten a lot further than many other similar vendors in a much shorter period of time. They are on PLANNED target in each territory. What's not to like about that?

I will caveat that by cautioning a move to the US but then I've always felt that's a potential graveyard for all but the very best funded operations.

dahowlett November 12, 2010 at 2:34 pm

If? You seeing any price pressure? I'm not.

Ben Kepes November 12, 2010 at 5:40 pm

Good point Bob, there's a number of invoicing services that are free (or at least freemium) and I'm seeing indication that those products are broadening into full accounting. However… for an accounting product I believe there will be a disconnect between the price of a free product and the perception of a paid one. As such, while there may be a small amount of downwards price pressure, it won't be huge.

WRT Xero, the downward price pressure is unlikely to reduce core price, but rather will see them offer a more modularized product that, while dropping ARPU, will see customer numbers increase….

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