Monday, April 19, 2010

Share Investor Q & A: Reader Questions to Xero's Rod Drury

After I wrote this small piece the other day about my interpretation of Rod Drury's interview on Radio New Zealand's Nine to Noon about his company Xero Ltd [XRO.NZ] he left a comment refuting some of what I said.

He kindly mentioned if I wanted to email him about questions I might have that could illuminate my mind on his company I was free to do so.

He also agreed to do a Share Investor Q & A to give his side of the story.

I know little about Rod and where he is going with Xero but he has many fans out there in techland and they are insanely loyal about the company, its products and its people and this will be my chance to get to know him and his company better. I am open to conversion!

I have some questions in mind to put to him but I would like to know what you guys think.

Leave your questions for Rod here, which is the comments part of this post, and I will include the best ones in the Q & A.

Cut-off time for questions is end of Tuesday 20 April, so don't dawdle.

NB - the interview will be posted here shortly so please stay tuned. There are more questions asked than I thought there would be and as Rod is a busy beaver he will need some time to answer in a manner that he sees fit.


Share Investor Q & As


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23 comments:

  1. What kind of profit margins do you expect from each customer when you start to break even?

    ReplyDelete
  2. How is your product different from your competition?

    ReplyDelete
  3. How big is your shareholding in Xero?

    ReplyDelete
  4. Firstly I would like to say well done on the Blog and site. NZ investors need people like you shed some light on the share market - both on the opportunities and the pitfalls.

    Being an accountant, I have been intrigued by the listing of Xero and the stellar share price performance since. I am not a shareholder and wont be at current prices! However I have followed the stock and the company rather closely. There are a number of aspects that don't make sense to me and I have to be honest been appalled at some of the light weight coverage of the company by the established business press.The general consensus is that the company and its founder can do no wrong. I have no personal agenda or ax to grind.

    That said, I see that you are doing an Q&A with Rod Drury and I would like to clarify a few things:

    1. Paying customers:

    How does Rod and the board of Xero reconcile the following:

    MARKET RELEASE
    Xero exceeds 10,000 customer milestone
    23 July 2009
    In advance of the Xero Annual Meeting this afternoon Xero wishes to provide the market with a
    short update of the Company’s progress.
    Xero has now exceeded 10,000 paying customers, which amounts to ten-fold growth since March
    2008. Crossing this threshold two years after the IPO is a significant milestone and positions Xero
    as one of the leading online accounting software providers in the world

    There were a number of similar releases plus the annual report and audited accounts that clearly states that the customer numbers are "paying customers". An assertion that was made repeatedly in various interviews and blog posts that the customers were paying customers.

    With this excerpt from the latest announcement on 1 April 2010, that said:

    In the UK, the sales efforts were re-configured to focus on Xero implementation by accountants and to encourage
    adoption among key individuals within practices. This follows commitments from a number of sizeable UK
    accounting firms for large up-front orders without actual implementation. The re-focus on implementation is
    working. Xero has excluded those unimplemented customers from its customer count to more closely align the
    timing of revenue

    ReplyDelete
  5. What does that really mean?

    Rod clarifies and confirms that the previous numbers were not paying customers on the Xero website:

    http://blog.xero.com/2010/04/happy-new-year/

    Reading the comments and replies between James R and Rod is very interesting.


    2. The Global Market and market share needed:

    When confronted with the market share that Xero would need to gain in New Zealand to even breakeven, the argument has always been that Xero is an international player and the growth will come from overseas. The last set of annual accounts shows that the total revenue for the YE 31/03/09 from the UK was $159,000 NZD, when you consider that according to the same annual report 3,000 of these are in the UK. Looking at the six monthly report to 30 September 2009 the revenue has risen to $143,000 for the six months. If we are to assume that there was no growth in customer numbers from the 3,000 in the six months, this indicates that the average revenue per site per month is only $7.94 (143,000/3,000/6). There is no pricing plan selling Xero in the UK for $7.94 per month. So either there is some deep discounting to boost numbers or the 3,000 paying customer number in the UK is wrong.

    Either way, after two plus years in the UK, there is no significant take up. The revenues from Australia for the six months to September 2009 was only $71,000 and the rest of the world was not even given a mention.

    ReplyDelete
  6. Anon - Part ThreeApril 15, 2010 at 5:04 PM

    The only conclusion that I can draw from that is that the international sales are not going well.

    So how is Xero going to get to breakeven? If the focus is purely NZ, then assuming there are for arguments sake 300,000 prospective customers in NZ, thats a lot of customers to grab from the existing players like MYOB and BankLink.

    3. The personal edition at $5

    Looking back at the Blog entry:

    http://blog.xero.com/2009/11/xero-personal/

    It seems obvious that some of the motivation for the release of the personal version was the acquisition of Mint by Intuit. This sort of goes against the comments about the fact that Xero is a long term play and not a quick flick. These were some of the points that you made in your post yesterday. I have been of the view all along that Xero was purely a play to get acquired. The obvious candidate was MYOB. The subsequent sale and delisting of MYOB was not foreseen. At the moment its hard to see who would have pockets deep enough to buy a business that is losing money and has a turnover of $3 million but is valued at $150 million.

    I cant see the business sense in the personal version. Have a read of the actual comments from users on the Blog site:

    http://blog.xero.com/2010/03/introducing-xero-personal/

    Not universally loved. Limited to BNZ for auto bank feeds means it sucks for everyone else who is not with BNZ.

    Just looks like a knee jerk reaction to the Mint sale to Intuit.




    These are just the top 3 issues that I have with Xero. There is a need for someone to provide an alternative to MYOB. Thats a long term game. It doesn't appear from what I have seen so far that Xero are a long term game. And that is a shame for the many accountants like me who have endured paying absurd money to MYOB as they have been the only game in town. Like you I am a great fan of businesses that grow and make money. Thats the only kind of wealth creation that will have a positive impact for the New Zealand economy in general. Over the last few years we have become fixated with the deal that produces a great win for the founders (42 Below, Orcon and to a certain extent Trade Me) and very little for the improvement of the schools and hospitals of NZ.

    I absolutely hate being negative about anyone who is prepared to get up and have a go. But at the same time I am not afraid to disagree with the commonly held views. My hero's are people like Steven Tindal who built a real business and did something positive with it.

    I also have a great faith in financial statements - the truth is always in the numbers if you bother to read them carefully.

    I think your first impression on what was being said in the radio interview is correct.

    ReplyDelete
  7. Anon - Part ThreeApril 15, 2010 at 5:06 PM

    The only conclusion that I can draw from that is that the international sales are not going well.

    So how is Xero going to get to breakeven? If the focus is purely NZ, then assuming there are for arguments sake 300,000 prospective customers in NZ, thats a lot of customers to grab from the existing players like MYOB and BankLink.

    3. The personal edition at $5

    Looking back at the Blog entry:

    http://blog.xero.com/2009/11/xero-personal/

    It seems obvious that some of the motivation for the release of the personal version was the acquisition of Mint by Intuit. This sort of goes against the comments about the fact that Xero is a long term play and not a quick flick. These were some of the points that you made in your post yesterday. I have been of the view all along that Xero was purely a play to get acquired. The obvious candidate was MYOB. The subsequent sale and delisting of MYOB was not foreseen. At the moment its hard to see who would have pockets deep enough to buy a business that is losing money and has a turnover of $3 million but is valued at $150 million.

    I cant see the business sense in the personal version. Have a read of the actual comments from users on the Blog site:

    http://blog.xero.com/2010/03/introducing-xero-personal/

    Not universally loved. Limited to BNZ for auto bank feeds means it sucks for everyone else who is not with BNZ.

    Just looks like a knee jerk reaction to the Mint sale to Intuit.




    These are just the top 3 issues that I have with Xero. There is a need for someone to provide an alternative to MYOB. Thats a long term game. It doesn't appear from what I have seen so far that Xero are a long term game. And that is a shame for the many accountants like me who have endured paying absurd money to MYOB as they have been the only game in town. Like you I am a great fan of businesses that grow and make money. Thats the only kind of wealth creation that will have a positive impact for the New Zealand economy in general. Over the last few years we have become fixated with the deal that produces a great win for the founders (42 Below, Orcon and to a certain extent Trade Me) and very little for the improvement of the schools and hospitals of NZ.

    I absolutely hate being negative about anyone who is prepared to get up and have a go. But at the same time I am not afraid to disagree with the commonly held views. My hero's are people like Steven Tindal who built a real business and did something positive with it.

    I also have a great faith in financial statements - the truth is always in the numbers if you bother to read them carefully.

    I think your first impression on what was being said in the radio interview is correct.

    ReplyDelete
  8. Has there been a significant jump in customer numbers since March 31st, due to FYE? will these figures be released in May?

    Will the american version of xero be launched this year?

    are there new features on the roadmap that will increase ARPU? (like the multicurrency release)

    ReplyDelete
  9. Thanks for the questions but if you want to get in with yours the time to submit questions finishes at the end of Tuesday 20 April, so don't dawdle.

    ReplyDelete
  10. Do you have any intentions of selling Xero within the next 10 years? All do you have long term vision for Xero beyond 10 years?

    Does Xero have any future plans of going into any other fields of cloud computing beyond accounting or personal finance? If so can elaborate?

    Does Xero have any intention of implementing stock / inventory control? If so can you give a time frame when this feature will be implemented?

    ReplyDelete
  11. Hi Rod, are Asian versions(non-English) of your products in the pipeline?

    ReplyDelete
  12. Rod,

    As the quick flick business model has worked for you so successfully in the past why are you so adamant that you will not being doing it this time?

    ReplyDelete
  13. Rod,

    yes you are increasing revenue fast, you also have a fast increasing headcount. At this rate break even seems along way off.
    What controls are you imposing on keeping costs down.

    You are buying back shares with money raised via capital raisings to use as employee incentives. Please give details of share allocations for employees.

    Please let us know how much you are personally taking out of this business. I am sure you are working hard but you have yet to make a cent of profit. We as shareholders should know how much we are paying for you.

    Thank You

    ReplyDelete
  14. Rod,

    You say you are increasing headcount in setting up sales teams in the UK and Australia.

    As of today, What % of new business is coming from these teams and what % is coming directly from your website?

    As a web based product isn't it odd to have ground based physical sales people? What do they do? Link to your website to show people how the product works?

    Would not advertising that appeals directly to end users be more effective and have greater returns per user signed up?


    Your cost structure worries me.
    You presumably have set up offices in the UK and Australia. This must also have a significant cost.

    Cheers

    ReplyDelete
  15. when i looked a this I couldn't believe with all the HYPE it doesn't have inventory management - will this come?

    ReplyDelete
  16. Question submission closes at 7.30pm tonight.

    Cheers.

    ReplyDelete
  17. I have a concern about focus at Xero at the moment and maybe you can address this in your Q&A. I am concerned about maintaining focus on building the best online accounting system for the SME market. I believe there is a significant opportunity here, but that there is still a lot to do to maintain Xero’s position as a leading SME accounting solution. For example, reporting is still very rudimentary, there is no stock control, the functionality in a number of the modules is quite basic, etc… I have been concerned with the amount of time being spent on building Xero Personal which is a completely different target market. I understand that for many SMEs there is a fine line between personal accounting and their business accounting, but I think that providing a solution to solve this for small business owners doesn’t require all the Xero Personal features. E.g. maybe it just requires an add-on to the Expense Claim module to allow expenses to be pulled out of a personal creditcard statement, etc…

    I am still a Xero investor as well as customer, and I find a number of the features of the product extremely innovative. My only concern is that they do not divide their focus between two very different markets.

    ReplyDelete
  18. I've noted in the questions and discussion of Xero a large focus on Xero reaching break-even. At the same time, an accusation that the company is not focused on a long-term vision. I find these viewpoints incongruent. Since I am a long-term investor I am more interested in Xero establishing a leadership position in the market than in short-term profits. Any software development effort of this nature takes significant investment, but if successful the operating leverage is huge and the leading firm will win a large proportion of the transition in the market. I believe that in 10 years time most SME accounting will be online, and my long-term view is that Xero could win a majority of this in some regions. It is this long term vision that excites me. I would prefer to see them investing as much as possible in establishing a leadership position than worrying too much about keeping head-count down.

    I also think it is interesting to consider what we mean by break-even. A lot of people interpret this as reporting a GAAP accounting profit. If you check the accounting policies adopted by Xero you will find that only a portion of the development costs are capatalised and that the development costs are amortised over an expected lifetime of 3-4 years. This is typical conservative accounting, but the reality is that a greater proportion of their headcount are creating intangible value that will have a life time far greater than 3-4 years. Therefore true underlying break-even will occur before Xero reports its first ever profit.

    ReplyDelete
  19. Thanks for your questions. The Q & A should be up very soon. Subscribe to it in your inbox at this feed:

    http://feeds.feedburner.com/Darrensfeeds

    ReplyDelete
  20. INTERVIEW UPDATE:

    The interview will be posted here shortly so please stay tuned. There are more questions asked than I thought there would be and as Rod is a busy beaver he will need some time to answer in a manner that he sees fit and will hopefully provide satisfaction to the questioners and my readers.

    ReplyDelete
  21. When is the interview coming please?

    ReplyDelete
  22. Rod missed an email from me containing the Q and A. Please stay tuned for the finished product, its coming!

    Regards, Darren

    ReplyDelete
  23. Rod Drury Interview coming early next week - just adding some detail.

    Some great answers...

    ReplyDelete

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