XRO forecasts....

I was captured by Xero when I heard an interview with Rod Drury a little while ago. It’s an amazing story - the business plan is to raise money and spend it along with any revenue, on development and marketing. They’re planning to spend (as opposed to ‘lose’) about $20M per quarter for the next few years, which should put them so far in front of the game it won’t be funny.  At some point in the future they will 'swim to the side of the pool' and convert customer cashflow into profit.  But the plan now is to reinvest heavily into the business, with a long term vision.  I like that.

As per some of the posts yesterday here, it seems to be misunderstood by the market (as I initially misunderstood it when I looked at measures like PE ratio!). I am amused by some of the research so have had fun playing around with numbers of my own.

It’s a great stock to analyse. It has 4 main markets of different sizes and different levels of maturity (market penetration). NZ is the ‘test lab’ where it originated and has been incredibly successful, Australia not far behind. Early days in the UK (but promising), and scratching the surface with the biggest market of them all, the US.



Profitability is not useful to look at as there is so much going into marketing and software development. Subscriber numbers is the main indicator of where to company is going. Here is a summary from their releases:



I think its pertinent though to look at this from the perspective of market size and market penetration (market share). Market sizes are (from Xero presentation)
NZ – 450,000
AUS – 2,000,000
UK – 4,300,00
US – 29,000,000
So when you normalise the subscriber numbers above by market size, you get the following chart…



In the early stages it has been possible to get 100% growth in a market (a straight line on a log chart is an exponential curve), then there is a steady period of circa 80% year on year growth during the steep early adoption phase. Then there is a levelling as the market size starts to influence the growth rates (YoY growth is NZ is slowing, but still strong).

The key is really the US – where there exists stronger competition. The question is whether they can penetrate there to the extent that they have in other parts of the world. One would hope that with US backers on board (who paid $20 per share), and massive investment in the software development, XRO has a pretty good chance to make inroads in the US. I will be watching the next set of numbers closely to monitor the trend (target of 590,000 users globally, 50-55,000 users in the US would be excellent).

So far, it is behaving well in the US (good initial growth rate in line with other markets). If they can keep that on track and get to say 30% of all 4 markets in the long term, that would be 10M subscribers in about 8 years, or say >$3B in annual revenue, based on $160M revenue for 500k subscribers as of today.  As Rod Drury has said, he believes there is room for a $100B company in this space and sees no reason it can’t be XRO.  Even if it does not reach this aspirational target, there still seem plenty of room for growth from todays position.

On top of this there is all the research and development they are doing into the financial web (automatic bank reconciliations with accounts, credits checks, insurance, foreign exchange, etc…). All blue sky at this stage, but it’s a new paradigm with cloud computing and processing and prizes are there for those who can think progressively and develop and adapt accordingly – look at AirBnB and Uber.