Fintech, Technology

The 7 things I’m looking for in Xero’s FY results

This coming Thursday the 12th of May will see Xero release its Full Year results for 2015/16. As a shareholder and eager amateur commentator, I’m quite keen to see what they have to say.

Those of you that have read some of my previous articles (like 7 Xero Xero k and Xero+Q3=?), will know that I have raised concerns regarding Xero’s growth trajectory since the release of their Q3 cash flow report.

My current hypothesis is that growth has slowed significantly for Xero and that two key factors are impacting their growth:

1. Churn: at 16% churn (as at 1H results), they either needed to accelerate the rate of acquisition OR reduce the churn else a slow-down was inevitable.

2. Crossing The Chasm: in Xero’s key markets of Australia and possibly the UK, they may have hit saturation of early adopters, and according the Geoffrey Moore’s law of diffusion of innovation, we’ve hit the big scary chasm that precedes adoption by the early majority.

If this is the case:

  • It won’t just affect Xero, listed companies reliant on those markets, like MYOB ($MYO) and Sage ($SGE) will be experiencing the exact same slow down in Cloud subscriber numbers (not good for MYOB particularly with likely pressure on from Bain to exit at year’s end).
  • Whilst I know both MYOB with Essentials + Accountants Dashboard and Sage with SageOne + SageImpact + SageView have technically “caught-up” quite a bit after Xero disrupted their desktop incumbency, I won’t be worried about Xero’s ability to continue to grow market-share, once the early majority jump to Cloud Accounting. Their brand is already so strong.
  • If there is a worry it is that early adoption in other less mature markets, like North America, Asia and Africa aren’t “taking up the slack” a slow-down in Australia and the UK would create.

With this in mind, there are 7 things I’m particularly keen to see in Thursday’s announcement:

1. Subscriber Numbers…I suspect that maybe, just maybe, the magical 700,000th subscriber was to occur so close to the announcement of the full year results, that they have held off until Thursday to make a big deal of it…afterall last year’s full year results were released on April 24, nearly 3 weeks earlier than this year’s…otherwise, I’m desperate to know where the number lies and most importantly, their explanation of the slow down. I’d particularly like a full breakdown by market so we can trend.

2. Churn…I would like to think that the slow down in churn we saw with market maturity in NZ and Australia (12% vs 16% overall on 1H results), is being reflected in other markets, particularly the UK and North America, and starting to bring down the overall churn number. Less than 16% is a move in the right direction. Stagnant at 16% or worse and I’d be disappointed. 

3. What’s Missing – in his book “The Art Of Thinking Clearly” Rolf Dobelli devotes chapter 96 to “Drawing the Bull’s-Eye around the Arrow – Cherry Picking”, with reference to the release of annual reports:

“If goals are achieved, they are talked up; if they falter, they are not even mentioned”

ALL listed companies are guilty of not mentioning stuff. For me the challenge with Xero’s announcement will be to find what have they not mentioned.

But note, in chapter 95  “Why Checklists Deceive You – Feature-Positive Effect”, Dobelli states:

“Absence is much harder to detect than presence”

4. Games – Xero, courtesy of its senior management team, have been quick to highlight on social media when the key competitors (MYOB, Sage and Intuit) have “gilded the lilly” with announcements. From highlighting Intuit’s churn from desktop in QBo subscriber numbers to questioning why MYOB combine figures for Australia and New Zealand. As they say, “what’s good for the goose is good for the gander”…

I’ll be particularly interested to see whether they play any “silly buggers” with language, weak excuses (like say, “results were adversely affected by currency fluctuations”), excessive shifting of expense items to Balance Sheet (particularly capitalised development) or aggregation of markets previously itemised.

5. SaaS metrics – as a lover of SaaS metrics and with Xero being the only player in our industry at this point to be open about SaaS metrics such as CLTV, CAC, ACMR etc, I am very keen to see, by market, how they are trending.

5. Burn Rate – when I questioned Rod Drury on Twitter recently about Xero’s complete lack of debt and whether that was an avenue for future cash over their historic preference for equity, his response was either typical Rod flippancy, or hinted that they were trending toward cash flow positive before cash would run out:

Well Rod, you burned through ~NZ$45m in the first 6 months of the year, after starting with ~NZ$270m. If the burn rate continued on that trajectory, that only gives you enough cash for the next 2 years. So I’m particularly interested in 2H burn rate and the overall trend.

6. Loss – How big? Trending which direction? What did FY revenue look like vs ACMR as at the end of the year, so what can we project for 2016/17?

7. A forecast – to-date, you wouldn’t accuse Xero of being a company that is overly forthcoming about its goals from a numbers perspective. I’d really love to see some stated aims like:

  • What is the target for break-even? Cash and P&L.
  • What’s the subscriber numbers for 2016/17 look like? 1m by YE 2016/17…?
  •  What’s the ACMR number look like this time next year?

Anyway, I’m looking forward to Thursday and the subsequent chats with Xero management. I’ll let you know what I think within a week or 2!


For more commentary by the author on Accounting & Payroll tech:

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Matt Paff (BBus GAICD) is founder of Value Adders and a veteran of the Accounting, Payroll and broader B2B Technology industry. Matt’s resume includes time as GM at Attaché Software, one of the world’s longest surviving accounting software companies, as well as starting, growing and exiting a successful accounting technology & business process consulting firm. Matt has held advisory board positions with accounting firm Imagine Accounting as well as Governance technology start-up GovernRight. In his spare time, Matt also runs a RegTech start-up vSure. Matt is passionate about a practical, plain English perspective. He is known for being a straight-shooter and appreciated for his forthright, researched opinions.

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