It is bigger now with subscribers passing the 1 million mark in March 2017 but the enthusiasm that Rod Drury had for the company is intact and as they approach the 1.5 million mark it seems to me that it would be a good time to revisit Rod.
It would be a great idea to find out where he sees the company he runs, looks at itself in the next five years.
Well look at the problems, the solutions and all the up and downs of what makes New Zealand’s biggest Tech company tick and what will possibly make one day one of this country’s largest with one of the largest number of employees and employers to the world in general.
Reader Questions
Matt Thomas - How do you plan to penetrate the important US market and respond to major competition in that market as you progress over 5 or so years?
We are a global platform and the US is just one part of this story. Our growth is not dependent on the US market and we can afford to be patient as we invest to extend our leadership outside of North America while we are make considered investments inside the US.
The US is a major english speaking opportunity with a largely unserved market of customers sitting inside accounting firms. These potential customers are not and have never used an incumbents product. Our aim is to win a share of these by executing the playbook proven in NZ, AU and UK - product fit, build the accountants channel and connect the banks.
We know from experience that the accounting channel is the pathway to success, as accountants and bookkeepers become advocates for Xero, they add customers and over the long-term this lowers acquisition costs, increases lifetime value and minimises churn. We’ve launched partner products, including Xero HQ and continue to build differentiating accounting partner integrations through our API, and have begun integrating the major banks. This along with the accountant feedback indicates the US market is about investing time and being patient as we scale the channel.
Evan Wilson - There appears to be a lot of opportunity in SE Asia, and I’ve heard of great awareness in Singapore. What are the plans to accelerate growth in this region? Previously the model was to employ a leadership team in-country, is this a likely scenarios (if not already in place)?
We’re making great progress in South East Asia. In 2016 we opened our Singapore office and are opening in Hong Kong around the end of March. Alex Campbell our Asia managing director is there on the ground with a sales team doing a fantastic job. Our most recent Asia roadshows took place in January and they were all sell out events.
We are continuing to advance in localising the product for Singapore and in talks with the Government there as they push cloud initiatives in the compliance space, for example. Globally, tax platforms are being re-platformed to the cloud and Asia are looking at Australia as an example. We’ve been really successful in building our cloud tax solution in Australia - we’re the market leader with the only online comprehensive solution - so we’re best placed to leverage this experience in a place like Singapore and further drive growth and enhance experience for our partners. We also connect with HSBC, CIMB, DBS and other financial institutions in Asia which is core to our strategy.
The UK (finally) seems to be performing well, what are the conditions that have most contributed to this?
The UK is a really exciting market for us. We have strong UK subscriber growth with quality revenue growth of 49% in the last interim period and in September 2017 we hit 250,000 UK subscribers. We are the leading cloud accounting software provider for small businesses in the market and we have the highest number of banking and fintech integrations versus our competition. Our UK managing director Gary Turner has built a strong partner channel working with 45 of the 50 largest accounting firms in the UK. The regulatory environment is changing in the UK too which excites us with Making Tax Digital, the digitisation of tax, which kicks in from April 2019, and PSD2. The acceleration in market adoption of cloud is well in our favour in this region. This is down to the fact that it’s the same playbook as the AU and NZ markets, being product fit, accountants channel and banking connections. It’s important to note that the UK was delayed by the Global Financial Crisis which impacted on banks investing to connect however that’s now done and we have the scale in the accountants channel that you can see the compound growth coming through.
Share Investor
When will we see a really big push into non-English speaking places, India and China two obvious examples or are they not on Xero’s radar or are Xero efforts focused on Britain and the US or are you well established everywhere now and its just a case that each country has its own problems and its just a case of ticking them off as they come up?
We’re focusing on Commonwealth countries first and then when multilingual kicks in, focusing on areas such as Canada and Western Europe. Xero is already used in more than 180 countries and there are opportunities beyond geographical expansion that are on our radar which will help Xero’s growth trajectory.
With refreshment in business an ongoing thing - changes in management - How long will you stay as CEO?
We’ve built up an exceptional globally distributed leadership team, which allows me to be able to focus on driving our strategic goals rather than being so much in the day to day activities. This means I’m constantly working on different projects, allowing me to be to focus on what’s over the horizon. I’m still having fun.
What do you see as the major driver of business now that you have passed the 1 million customer mark in 10 years and when do Xero as a whole see the 2 million mark passed?
Xero is a multidimensional business and a global platform, we have many drivers of the business growth. We’re expecting further geographical expansion as we introduce multilingual capabilities in the next few years. As well as continuing to build our platform and the network of connecting our small businesses to banks, advisors and each other.
We’ve revitalised our employee expenses and reimbursement product redesigning it for the front office, taking advantage of AI and machine learning to make the entire expense process easier and more automated than ever, ensuring employees file their expenses more frequently and directly into Xero
We believe that the future of finance is collaboration. The market is growing and diversifying (both domestically and through international connections) too quickly for any one company to provide all services. Working together through partnerships, information and data sharing, and integration of new products and services is the only way to provide the right experience for a customer, and the best outcomes for banks.
Given our scale, we are now a major conduit for economic activity globally. Particularly in markets where we have a strong presence such as Australia. With the aggregated, anonymous data from our more than 500,000 Australian subscribers we were able to get a snapshot of the sector’s health. We’ve called this the Australian Business Insights. With this scale of data there are huge growth opportunities for us as we are the only truly global small business platform.
I personally would like to see a listing within 5 years, when will we see a listing on the Nasdaq?
Another listing is not something we are considering at this time. We’re focussed on our sole ASX listing completed on 5 February and delivering on our milestones.
Besides turning up at work every day what gives you that kick in the pants to go that little bit further. Basically what gets you motivated?
We get to build software that makes a difference to millions of people. It’s taken us 11 years to build an awesome accounting tool, now we can now start doing the fun stuff with AI and Machine Learning and build all sorts of new applications over our platform. The sky is the limit.
Do you still have that competitive edge over your competition or have you found others have caught up to you or even passing you in this highly competitive industry?
We are the leading global small business platform, we’re moving beyond accounting. We have been in the cloud since day one and since replatforming on AWS, our single code base has allowed us to maintain a competitive edge and move even further beyond our competitors globally - building the next generation of tools and the power of the Xero platform, connecting a network and ecosystem around Xero. The competition is a few years behind us and still trying to migrate parts of the customer base from desktop, their focus is fragmented compared to Xero which was born in the cloud and built on a single code base. We think the category changes massively over the next few years.
The US market was brought up earlier. I just wanted to ask is this market going to be a tough one - meaning will you have to raise more capital or can you rest somewhat knowing you have the best goddamn software on the block and it is just a case of getting that message out there?
Xero is managing the business to cash flow break-even within its current cash balance The US market is a key part of our strategy and but a single market doesn’t determine the success of the Xero story. We have been open that we have moderated investment and not invested ahead of the curve there. We have a lot of growth opportunities we are leveraging and other key regions that are really taking off. Focus is on the three pillars in our playbook: banks, the partner channel and product market fit.
Once a person has migrated all their business over to Xero from the competition is it hard to go back to the competition. What I’m saying is what sort of things are you doing to make customers loyal?
Yes accounting products are very sticky - the churn levels in the established ANZ markets are well under 1% and lower than natural death rates of small businesses (around 15%). We liken it to transactional banking, as in you rarely move between banks. Once the customer has their data in the Xero ledger, real time visibility on incomings and outgoings, making payments and doing payroll on the software, they’re more unlikely to move.
You mentioned when we did a Q & A back in 2010 that you were a big fan of Apple and their strategy but their secrecy and arrogance was wrong do you still think that? If you do fine but they would be a great formal partner for Xero don’t you agree and what sort of other partnerships with like minded companies perhaps even Google or Amazon could we see with Xero in the future?
We definitely see the benefits of partnering with big global players like these where appropriate as it gives us greater exposure and we can develop innovative solutions for our users. For example, we worked with Apple on an integration that gives Xero customers that use Stripe as a payment service the ability to pay Xero invoices with Apple Pay.
Xero has subscribers in more than 180 countries and many of these are now doing business across borders not just in their home countries. This is made possible through advances in online technology and global marketplaces like Amazon and Facebook.
This has allowed for the globalisation of small businesses which have grown up without the need to operate within the confines of a single country’s borders.
Only a global platform – on a single global code base like Xero – can offer the opportunity for small businesses and their advisors to expand their businesses offshore, connect to banks in multiple countries.
It also allows small businesses to use Xero’s platform and payment partnerships with Google, Apple, Square, Paypal, Stripe and others to do business seamlessly all over the world. It sets in motion a global network effect as small businesses expand their trade between countries.
Our experience has shown that partnerships are no substitute for the hard work you need to do to build a market.
With the above in mind could you perhaps give my readers a current partner and how you interact with them? Because we had big growth ambitions from day one we had to think globally from the beginning. Which is why our whole company operates on G-Suite. We have Google Chromeboxes in every meeting room, we work out of Google docs which are great for collaboration and I’m reachable by anyone in our organisation by Hangout. We partnered with Google early on and linked Xero to a number of Google features which keeps us on their radar for new product announcements.
What do you think about the recent increase in “internet chatter” and what I would call hype on the topic of crypto currencies and do you think crypto currencies have a future somewhere within the Xero model?
Governments are unlikely to allow an unregulated currency over time so we don’t see a big future for crypto currencies. We are interested in blockchain for when you have multiple strong actors in a network and see opportunities in banking we are looking at.
I left Hawkesbay in the early 80's and keep going back. What keeps you in New Zealand/Havelock North when you could live in the thick of it all in silicon valley?
I travel to the big global centres frequently and have no desire to live in any of them. I find the combination of living in New Zealand and operating globally is pretty special. I think we have an advantage of being outside of the US bubble which has allowed us to build a truly global company.
Rods grit, nerve, tenacity and personalty are ingrained into the Xero culture.
You can feel his imprint over everything and that's not a bad thing.
He has an answer for any question you put to him. Tis a damn shame there were not more questions for him from my readers.
The above really encapsulates where the company is heading, how its going to get there and what may happen once there.
I believe in, for want of a better phrase, the cult of Rod Drury/Xero. I haven't really been convinced from the start but now Im totally sold.
If I had a business I would definitely buy Xero.
And the stock?
Well at $32.00 odd dollars ill wait until a profit is announced.
I want to end on an upbeat note except to say it was a pleasure dealing with him and wish him well for whatever the future brings.
I see big things in store for Xero. If Rod stays and even if he goes his personal convictions are strong and that is one element of Xero success. The other factor is the people that Rod has around him. From his peers within Xero to his partners around the world.
He certainly has put the right people together to form a cohesive Global unit.
c Share Investor 2018
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Xero's Rod Drury
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c Share Investor 2018
