Last Friday, Xero reported its full year results to 31st March, 2011. Total revenue came in at NZ$9.3 million, with NZ$1.3 million coming from the UK and NZ$1.5 million coming from Australia. The growth in the Australian market is particularly noteworthy given that country has traditionally been dominated by MYOB. Both the UK and Australia were marginally profitable.
The overall growth in revenue was mind boggling at 296% from 2010 and is reminiscent of the mid-1990′s when client/server technology captured market attention. More important, paying customer numbers increased 211% from 17,000 to 36,000. Taken together, Xero is proving that SaaS/cloud based solutions do not necessarily mean a decline in share of wallet as the numbers scale up. Taking the year end figures, ARPU has climbed from NZ$185 to NZ$259. That is not an accurate reflection because numbers change over time but it is a reasonable starting point.
According to the company, current revenue is tracking at more than NZ$1 million per month with projections through to 2012 suggesting total revenue of NZ$14 million. That sounds conservative to me given what we are now seeing in the market. However, as a publicly traded company with ambitions to expand into the US, Xero is maintaining a cautious outlook. Another data point:
Xero has now established itself inside 2,200 accounting firms and continues to develop innovative features to gain broader adoption within the accounting community. A growing number of accounting practices are 100% Xero. The accountant channel provides access to hundreds of thousands of small business customers.
I have always said that the key to success will come from ensuring that professional accountants are well supported both in marketing and product. My only concern with Xero’s firm numbers is that they run the risk of a channel that goes out of control or which they cannot service. Land grab is one thing, but ensuring success is another. Xero estimates that some 322,000 persons are self employed in New Zealand so there is plenty of head room for growth. However, it cannot be long before the company is commanding what would be considered a market leading position. That means it has to aggressively target other markets. Going forward, it will be interesting to see how Xero fares in the US, which has traditionally been a graveyard for incomers. 
In notes sent to me by Gary Turner, Xero’s UK MD, “Our sales operations are all now cash positive, all up we’re on still track to break even this calendar year in spite of continuing to invest in the people and resources we need to build and sustain a world class product.Our UK business turned over £165k in FY10, £630k in FY11 (3.8x YoY.)” Gary believes that as at March 2011, the company was tracking £1 million annualized revenue in the UK.
As Xero scales, its investments in product development continue as do its infrastructure investments. In the accounts, the company dropped NZ$1.8 million net onto the balance sheet for additional capitalized R&D while somewhat strangely it expensed NZ$2 million for infrastructure costs. The two treatments don’t strike me as consistent. What is more important is the scale of required investment, even at these relatively low user count volumes. This is a topic to which I will return later since it is a key metric that requires financing as SaaS/cloud vendors grow.
We are now at a point where not only are the ‘runners and riders’ settling into position but that the shape and value of the overall SaaS/cloud market is coming into focus. As I have said many times before, the new players are eating the incumbents’ lunch and then some. In reality we have seen no discernible response from that segment of competition.
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