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237 posts

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Topic # 33976 15-May-2009 00:56
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I hear some people trying very hard to "talk up Xero",   but I do wonder about the viability of the company.

The latest press release I read noted that Xero has posted an annual net loss before tax of $6.75 million, in line with expectations and overtaking the previous year's $4.31 million loss.

The same press release also reported customer revenue was $959,000 from a customer base of 6,000.

A quick calculation shows their revenue is only $159.83 per customer,  on that basis to break even, they would need to increase their customer base by a HUGE amount.

Is that sort of increase achievable ?

[Moderator edit (MF): moved to correct forum]


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  Reply # 214943 15-May-2009 01:14
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I think high investment costs are par for the course for complex business software.  The revenue and customer growth is pretty impressive for such a short period of existence, only 2 years since they started? 

The whole point of software as a service depends on critical mass and economies of scale.

I would suspect they are working on a plan of breaking even within 5 years.  Basically spending a lot of money to create something that will eventually make a lot of money over the long term.

If you have $20 million why not put the money in the bank and retire to a tropical island, I don't think that's Rod Drury's style.

I imagine kiwi office could be negatively affected if they really take off, so you kind of have a vested interest in hoping they don't do well?

I'm not a Xero customer nor investor nor have anything to do with them or the account software industry in case you were wondering.



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  Reply # 214945 15-May-2009 01:58
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Ragnor: I imagine kiwi office could be negatively affected if they really take off, so you kind of have a vested interest in hoping they don't do well?

I'm not a Xero customer nor investor nor have anything to do with them or the account software industry in case you were wondering.


Actually I have some clients using Xero,  I'm definitely not anti-Xero,  while I do not think it is best solution for all clients,  it does suit some and I've recommended it at times as my preferred option for some clients.  

Given Xero is a NZ company, trying to compete in a world market, I would love to see them succeed,  and they've got some impressive runs on the board with signing (as I understand it) Telstra Australia and British Telecom and their reported base of 6,000 customers in three years (they launched in July 2006, going public 12 months later in mid 2007) is quite impressive.

But to go back to my original post, my surprise was their revenue per customer was much lower than I would have expected,  which caused me to wonder whether the required customer base was achievable.

.


 
 
 
 


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  Reply # 214966 15-May-2009 09:28
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I think "average revenue per customer" (let's call ARPU like in the telco world) is a bit misleading. IIRC Xero had a 100% growth in customer base in just a couple of months in the last quarter or so - meaning "ARPU" will be very very low when averaged over the whole 12 months period.

Remember Xero signed an agreement with Telecom New Zealand, last month with Telstra in Australia and this week with BT in the UK. This is huge in terms fo exposure for their business.

You should start looking at those numbers from now that their go-to-market strategy is being backed by "content distribution" partners.

Until now I would say it was more of creating a profile than to effectively making the money.








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  Reply # 215093 15-May-2009 16:44
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From the full year results: 950 customers at March 2008 to 7500 at 10th May 2009

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  Reply # 215103 15-May-2009 17:13
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kiwiscoota:

The same press release also reported customer revenue was $959,000 from a customer base of 6,000.

A quick calculation shows their revenue is only $159.83 per customer,  on that basis to break even, they would need to increase their customer base by a HUGE amount.


There are a couple of factors to take into account here.  Not all that customer revenue is from a 12 month period - some customers may have only been signed up for 6 months.  Like most other successful SaaS offerings Xero will have a hockey stick type growth pattern where it's the reaccuring revenue that is important.

I love what Xero are doing and use them with a couple of businesses that I'm involved with.  My only gripe is their pricing. I don't see why a company that invoices more than $1 million per year should be paying the same monthly fee as a someone who invoices say $50,000 per year.  I reckon they should have a tiered pricing model - possibly on the number of invoices sent out.  This would encourage small businesses or people with part time businesses to use Xero even if they only sent out a handful of invoices each year.




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  Reply # 215255 16-May-2009 16:11
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Hi guys,

@Kiwiscoota Thankfully a few people here have set you straight. If you go back and read all our market releases and the blog you'll get a better picture of how SaaS companies work and the space in general. We did publish our 'committed monthly revenue' which is a more useful indicator for SaaS.

@Ragnor NZ will always be an important market for us as we can get things done here that we can't easily do anywhere else. That helps us everywhere. For example Bank Feeds. Getting most of the NZ banks helped us in Australia.

@redjet thanks for explaining. Yes now the core asset is nearing completing you will see some tired pricing (up and down) so we can fit more of the market. It just takes time to build the core software asset before we can do the slice and dicing.

Xero is different but the model is simple. Create a team of smart people to build software with minimal marginal cost. First priority is to build the platform, then happy customers (with good monetization), then drive revenue growth and then profitability.

Our costs are consistent with our model. That is what 50-60 people operating in 3 countries cost. If you look at our main incumbent competitors you will see we are a low cost operator - by far.

As we are well capitalized we can prioritize growth over profitability. That is pretty rare for a NZ company.

As you know we've done the self funding model before. I can recommend it if you want to build a business for a trade sale and it's what early entrepreneurs have to do.

The SaaS space is very difficult to do under that model. With that previous experience we have a much bigger vision.

Doing startups in NZ is so tough because we are just not used to having resources. Compare NZ startups to ones in Silicon Valley where many have the capital to do things properly.

Hope that helps you understand a bit more. I'm happy to take questions. I'd love to see a lot more NZ companies having a real go like us.

Rod





Xero (The world's easiest accounting system) | Xero Blog | 2009 Success & Survival Guide



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  Reply # 215581 18-May-2009 12:47
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Thanks for the detailed response Rod, is great to see you in these forums!




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