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Australia | Technology | Services
Market capitalisation   AUD 6,007.2m
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Overview

XRO is an information technology provider that specialises in the development and sale of integrated cloud-based accounting software for small businesses and accounting practices around the world.

Business Lines

XRO generates most of its operating revenues from the sale of subscription services across Australasia, the United Kingdom and to a lesser but growing extent, North America and other countries. 48% of the NZD406.6 million it generated in the 2018 financial year came from Australia, 20% from the United Kingdom, 19% from New Zealand, 8% from North America and the rest from other countries.

XRO develops and sells commercial cloud-based accounting software, covering a range of invoice processing, bank reconciliation, general ledger, payroll, tax and other services required by small businesses and accounting practices around the world. It has 1.4 million customers in over 180 countries who pay monthly subscription fees depending on the nature and number of services they require. XRO operates a partnership program with accounting firms that refer or migrate their clients onto its platform in exchange for business support, discounted platform services and marketing materials. It also provides access to some third-party services through its platform, generally mobile applications operating under revenue-sharing agreements.

Strategy, Risks and Opportunities

‘Software as a service’ is often characterised as highly scalable with a low incremental cost to onboard and serve new customers. Companies try to maximise their customer retention and the average revenue per customer by frequently upgrading their platforms, by reducing payment friction, by offering integrated and cross-subsidised services, and by acquiring complementary customer bases to further leverage their platforms. Specifically, XRO has indicated its near-term focus is to: expand its international subscriber base with a particular emphasis on the United States and the recently entered South African and South East Asian markets; upsell existing subscribers by offering a broader range of services including those provided in partnership with complementary software providers; and automate more of its services through the use of artificial intelligence and machine learning technologies [1].

XRO competes directly with other domestic and multinational business software and 'software as a service' companies that are also trying to attract customers through various pricing, quality and other customer propositions. Some of its larger competitors are Sage of the United Kingdom, Microsoft and Intuit of the United States, and MYOB of Australia.

XRO has successfully established a global reputation and scalable software platform in Australia and New Zealand, and to a lesser extent, the United Kingdom and the United States. It also sells its software services to a range of customer segments, giving it some ability to allocate more of its resources to countries and sectors with favourable demand drivers and exchange rates, and vice-versa. Going forward, it should continue to benefit from increased earnings through organic growth, expanding its product suite and geographic presence, optimising its operations and vertically integrating up the supply chain as well as undertaking complementary and value-accretive acquisitions. Its downside commercial risks could however include: a broader economic slowdown, particularly within the commercial sector that could affect the propensity of small businesses to change or migrate their accounting processes; erosion of market share and gross margins by multinational competitors with greater economies of scale and broader service offerings; loss of a key customer, supplier, distributor or employee; changes to the availability, quality and price of third-party hardware and software that cannot be passed on to customers through pricing increases; an appreciation of the NZD, should it wish to expatriate capital generated outside of New Zealand; changes to regulations, tax and accounting standards in the various countries in which it operates, therefore increasing the complexity and cost of maintaining its platform; the commercial and cyber security risks inherent with being a cloud-based software provider; the development and widespread adoption of an alternative, cost-effective technology or application by a competitor; and any inheritance of undue liabilities or commercial risks through new service offerings, as acquisitions and entrances into new markets.

History

2007: Xero was founded in 2006 by Rod Drury and Hamish Edwards as a New Zealand cloud-based accounting software provider. It began piloting its software in 2006 and sold its first subscription services to a limited number of small businesses, accounting firms and banks in 2007. It was listed on the New Zealand Stock Exchange (XRO.NZ) in 2007 with the proceeds used to establish sales teams in Australia and the United Kingdom. At the time, it had 100 paying subscribers in New Zealand

2009: XRO developed Australian and United Kingdom’ compliant versions of its accounting software and established offices in both countries. It undertook another equity capital raising to fund its continued expansion and grow its customer base, which reached 6,000 subscribers in 25 countries

2010: XRO saw a significant uplift in subscriber numbers after launching a partnership program with accounting practices, who were offered discounted access and other benefits in exchange for referring or migrating their clients onto the Xero platform. By the end of the year, its subscribers had increased to 17,000 in 50 countries

2014: XRO undertook three more equity capital raisings and listed on the Australian Stock Exchange (XRO.AX) with the proceeds used to fund its working capital requirements, establish operations in the United States and continue to expand its international presence. By the end of the year, it had 284,000 subscribers in 165 countries

2016: XRO established its first office in Singapore as a base for expansion into South East Asia. It completed the migration of its core platform to Amazon Web Services (AWS) with the aim of lowering its hosting and security costs, increasing its global scalability, and accessing big data algorithms and machine learning technologies. By the end of the year, it had 717,000 subscribers in 180 countries

2018: Founder, Rod Drury stepped down as Chief Executive and Executive Director but remained on the Board as a non-executive Director. By the end of the year, XRO had 1.4 million subscribers in over 180 countries

2019: XRO began to move away from its former strategy of developing most of its software in-house, in favour of acquiring and partnering with third-party providers after it: formed a strategic alliance with a United States' payroll software provider called Gusto ;and acquired a Canadian bookkeeping and data digitisation firm called Hubdocs

Governance

XRO was first listed on the Australian Stock Exchange on 08 November 2012. It had 138.4 million shares on issue at the end of the 2018 financial year, 13% of which were owned by Rod Drury family interests, 10% by Craig Winkler’s interests, 9% by Matrix Capital and the rest by a mix of approximately 19,000 retail and institutional investors. 

XRO has 8 board members who, at the end of last year, collectively owned 32.3 million shares. The board comprises of:

  • Graham Smith has been the Independent Chairman since January 2017 and an Independent Director since January 2015. Graham comes from a software and accounting background, having previously been the Chief Financial Officer of Salesforce. He is also a Director of Citrix, Splunk, Mindbody and BlackLine;
  • Rod Drury has been a non-Independent, non-Executive Director since April 2018.  Rod founded the company in June 2006 and stepped down as CEO and Executive Director in April 2018;
  • Craig Elliot has been an Independent Director since September 2012. Craig is the co-founder and Chief Executive officer of Pertino Networks and a Strategic Advisor to New Zealand Trade & Enterprise;
  • Lee Hatton has been an Independent Director since April 2014. Lee is the Chief Executive Officer of UBank, the General Manager of Direct banking at the National Australia Bank and a Director of the NAB Venture Fund;  
  • Susan Peterson has been an Independent Director since February 2017. Susan is a Director of TrustPower, Vista Group International, Property for Industry, The New Zealand Merino Company and Organic Initiative;  
  • Bill Veghte has been an Independent Director since February 2014. Bill also serves on the boards of Turbonomic and SurveyMonkey;
  • Craig Winkler has been a Non-Independent Director since May 2009. Craig is the founder of MYOB; and
  • Dale Murray has been an Independent Director since  April 2018. Dale also serves on the board of Sussex Place Ventures in the UK.

Steve Vamos has been the XRO Chief Executive Officer since  April 2018. Steve comes from an information technology and digital media background, having previously been the Chief Executive of Microsoft Australia and Managing Director of Apple Computer Australia & New Zealand. He is currently an Independent Director of Telstra and Fletcher Building.

References

Unless otherwise stated, all numbers are based on those reported at the end of the prior financial year.

XRO’s historic Annual Reports, Presentations, Prospectuses and Other Announcements can be viewed below or they can be sourced from its website (www.xero.com) or the Australian Stock Exchange (www.asx.com.au).

XRO.AX Annual Report 2018 - XRO.AX  Annual Result Presentation 2018 | XRO.AX Annual Report 2017 - XRO.AX  Annual Result Presentation 2017  |  XRO.AX Annual Report 2016XRO.AX Annual Result Presentation 2016 | XRO.AX Annual Report 2015 - XRO.AX  Annual Result Presentation 2015 | XRO.AX Annual Report 2014 - XRO.AX  Annual Result Presentation 2014 | XRO.AX Annual Report 2013 - XRO.AX Annual Result Presentation 2013 | XRO.AX Annual Report 2012 - XRO.AX Annual Result Presentation 2012 - XRO.AX Prospectus 2012 | XRO.AX Annual Report 2011 | XRO.AX Annual Report 2010 | XRO.AX Annual Report 2009 | XRO.AX Annual Report 2008 | XRO.AX Prospectus 2007

[1] Refer to pages 6-9 of the XRO Annual Report 2018

Comparative Metrics

Summary Income Statement (NZDm)

FY17AFY18AFY19FFY20FFY21F
Revenue 296.5 408.0 553.5 735.8 929.2
Revenue growth 42.7% 37.6% 35.7% 32.9% 26.3%
EBITDA -31.6 23.7 86.5 178.1 298.3
EBITDA Margin <0.0% 5.8% 15.6% 24.2% 32.1%
NPAT normalised -72.1 -29.8 24.1 68.9 197.4
NPAT reported -69.1 -27.8 2.9 68.9 197.4
EPS normalised -52.5 -21.7 17.3 49.0 140.4
EPS growth 17.6% 58.7% >100.0% >100.0% >100.0%

Summary Balance Sheet (NZDm)

FY17AFY18AFY19FFY20FFY21F
Total assets 293.3 289.1 378.1 428.0 536.8
Net debt -113.7 -80.0 -60.5 -108.9 -211.1
Total liabilities 69.1 65.9 80.8 96.3 106.4
Shareholders' equity 224.2 223.1 297.3 331.7 430.4
ROCE <0.0% <0.0% 7.2% 22.7% 46.2%
WC to revenue -10.3% -5.5% -3.9% -2.8% -1.6%
Net debt to capital <-100.0% -55.8% -25.6% -48.9% -96.2%
Interest cover <0.0 >25.0 >25.0 19.3 >25.0

Summary Cashflow Statement (NZDm)

FY17AFY18AFY19FFY20FFY21F
Operating free cashflow -8.5 35.7 87.6 167.8 285.9
Capital expenditure 66.3 79.1 173.2 85.0 85.0
Distributable cashflow -70.8 -36.9 -90.7 82.8 200.9
Post-tax DPS declared 0.0 0.0 0.0 21.1 59.7
Franking - - - 0.0% 0.0%
Payout 0.0% 0.0% 0.0% 50.0% 50.0%
Dividend cover 0.0 0.0 1.0 2.4 2.0

Summary Discounted Cashflow Valuation (NZDm)

Financial year end31-MarShares on issue140.5
WACC10.2%TV/DCF67.0%
Explicit value5,846.3Terminal value3,919.1
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The Xero share price has increased 5.2% today, compared to 0.9% by the other 23 Technology (Services) companies on Shareclarity.Shareclarity will review all publicly available information and update the DCF valuation accordingly.
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That is in no small part due to Xero, the Kiwi accounting software platform, and chief rival of MYOB, which has emerged as one of the most hyped tech ......Click Here
  0
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The Xero share price has decreased -5.4% today, compared to -2.9% by the other 23 Technology (Services) companies on Shareclarity.Shareclarity will review all publicly available information and update the DCF valuation accordingly.
  2
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Together they service more than 80 per cent of the market, according to Wilsons Equity Research, although the research also shows Xero's growth in ......Click Here
  0
1w
The Xero share price has decreased -5.0% today, compared to -2.0% by the other 23 Technology (Services) companies on Shareclarity.Shareclarity will review all publicly available information and update the DCF valuation accordingly.
  2
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Shareclarity has revised the Xero Limited DCF Valuation down 0% to AUD39.70. The share price is currently AUD48.49 and the value gap is -18.1%.Shareclarity take: "Following our review, we have now included the present value of the NZD accumulated tax loss benefit rather than the future value which is included in other assets and liabilities in the DCF. "
  15
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Tax losses are sometimes hard to value because many are never likely to be realised.  For Xero, those tax losses are captured in the 'other assets, liabilities and investments' section the DCF.  Thanks
  0
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Xero shares fell despite the company successfully raised $US300 million ($413 million) in five-year convertible notes with an exercise price 70 per ......Click Here
  0
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Cloud-based accounting company Xero has backed itself to continue growing strongly, raising $US300 million ($413 million) in five-year convertible ......Click Here
  0
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Shareclarity has revised the Xero Limited DCF Valuation down 2% to AUD39.82. The share price is currently AUD49.69 and the value gap is -19.9%.Shareclarity take: "FY19 EBITDA guidance of NZD66-94m was rather vague and is pre its recent acquisitions. The USD300m note issue to fund acquisitions is viewed cautiously as it moves away from a pure organic growth"
  0
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Information technology is also stronger, with Xero shares pulling up the index, along with Altium, WiseTech and Afterpay, all off-setting declines in REA ......Click Here
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At Xero's annual conference in Brisbane last week, dubbed by the cloud accounting platform as "Coachella for accountants", founder Rod Drury was ......Click Here
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Accounting software platform Xero has enabled its platform to use the Single Touch Payroll system for all its business customers with 20 or more ......Click Here
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Meanwhile, departing Telstra board member Steve Vamos has received possibly the easiest pay rise he will ever get as Xero's new chief executive ......Click Here
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The Xero share price has diverged and is now 12.1% more expensive than its DCF valuation. It has the 16th best financial metrics of the 22 Technology (Services) companies on Shareclarity.1. Kip McGrath Education Centres2. Reckon3. Data#34. New Zealand Exchange5. Trade Me Group6. Australia Stock Exchange7. Finzsoft Solutions8. MYOB Group9. Plexure Group10. Allied Farmers11. SEEK12. WiseTech Global13. REA Group14. carsales.com15. Technology One16. Xero17. Gentrack Group18. Pushpay19. Computershare20. Serko21. Appen22. Alcidion GroupKey financial metrics: value gap, P/E, EV/EBITDA, P/B, dividend yield, debt to capital, Interest cover, WC to revenue, WACC, TV/DCF, 3yr EPS growth, 3yr EBITDA margin, 3yr dividend cover, 3yr cash conversion, 3yr ROCE
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Shareclarity has revised the Xero Limited DCF Valuation down 0% to AUD40.51. The share price is currently AUD44.50 and the value gap is -9.0%.
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Shareclarity has revised the Xero Limited DCF Valuation down 3% to AUD40.53. The share price is currently AUD42.80 and the value gap is -5.3%.Shareclarity take: "XRO makes a USD70m acquisition which is slightly value dilutive "
  4
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Shareclarity has revised the Xero Limited DCF Valuation.
  1
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Tech darling Xero will be holding its first shareholder meeting since ditching the Kiwi bourse, and company founder Rod Drury might be a tad nervous ......Click Here
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Shareclarity has revised the Xero Limited DCF Valuation.Click here to view this change.