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Xero Inc

Xero sees plenty more growth ahead as it cuts swathe through accountancy software market

Xero’s interface can also be accessed by over 700 apps that can build upon what it does or complement it for specific uses.

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All your business finances on your phone

Anyone running a small business will tell you who and what Xero Inc is.

They might not use it themselves, but they will have heard of it, most definitely.

In the space of ten years, the New Zealand-based company has gone from literally zero to become the standard accountancy software package for a rapidly growing number of small firms.

Watch: Xero sustaining 'great levels of growth' and driving up average customer revenues

The likes of Sage might still hold sway among the mid-caps and larger companies, but at the smaller end Xero is tightening its grip believes UK managing director Gary Turner.

The stock market seems to agree.

Following another impressive performance in the year to March, the Aussie-listed shares hit an all-time high of around A$59, valuing the company at more than A$8bn (£4.2bn).

Revenues grew by 36% to NZ$553mln though the group still posted a loss of NZ$27.1mln.

But like Netflix, Facebook and Twitter and other rapidly growing tech businesses, it is subscriber growth and the potential for this to translate into sustained long-term income that drives market sentiment.

On that score, it is hard to argue with Xero’s valuation.

UK leads subscriber growth

Across the group, subscriber numbers rose by 31% to 1.81bn but it was the UK that caught the eye.

Here, there were 151,000 net additions or almost two-thirds of the overall group’s total increase.

Why is the UK so strong?

Turner believes in a sector that traditionally lacked innovation, Xero’s cloud-based product suite has arrived at just the right time.

“The premise behind Xero was a sense that the world of web technology and software applications was beginning to change fundamentally.

“Cloud-based applications made it possible to harness the power of what you would expect to see in desktop software for any mobile or any browser context.

“And Xero was and is a new and fresh product in an area that had not seen much innovation.”

Customers tend to have around a hundred employees, Turner says, as above that level of staff complexities such as operating in different countries start to kick in.

Simplicity and versatility

The appeal of the software is its simplicity and versatility, he says.

Previously, companies had to deal with a hodge-podge of systems but now they have just one cloud-based platform from which they can manage all their business finances.

Xero’s interface can also be accessed by over 700 apps that can build upon what it does or complement it for specific uses.

This is a specific application for equine dentists, for example.

Xero has also made efforts to cultivate the accountancy profession, with the UK’s 9.000 or so accountancy firms now the main ‘influencer channel’ for the software.

Small businesses trust their accountant, says Turner, and if they recommend switching to Xero, businesses usually do.

The success of the approach is reflected in the 45% annual revenue growth the UK side of the operation has notched up in recent years.

45% revenue growth

That has taken revenues to £62mln and the total number of subscribers to about 463,000 but Turner says just in the UK alone the company still has much further to go

A record 600,000 businesses started up here in the tax year to April 2018 and Britain overall now has 5.8mln business classified as small.

That leaves plenty to shoot for says Turner and after last year’s addition of 150,000 new users there is a clear line of sight to get UK subscriber numbers up to one million.

“Around 460,000 subscribers is a great start but we see a huge opportunity to continue to grow, especially as it is unlikely that in another decade businesses will be using desktop applications”

And with the HMRC pushing on all fronts for tax collection to be more digitised, it all plays right into Xero’s sweet spots.

“That is a great tailwind for a business like us.”

Quick facts: Xero Inc

Price: $61.58

Market: ASX
Market Cap: $8.7 billion
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