Love Xero?

Scott Manages a website development business in London and answered a few questions for me about the recently listed software company Xero [XRO.NZ]and what its prospects might be for the future. He is not affiliated in any way with the Xero company.




About the software


Powerful connections. With Xero, you can access your accounts and run your business from anywhere in the world, 24/7. And your trusted adviser's can login and view your accounts too, providing valuable real-time advice when you need it most. No more confusion, no more delays. Say goodbye to barriers. Xero's intuitive work flow makes painful data entry a thing of the past. Seamless bank integration allows your statements to be loaded daily without even clicking your mouse. And Xero's powerful Dashboard gives you a real-time snapshot of your business at a glance. Peace of mind. Xero takes care of your data security and privacy, so you don't have to. Your data is stored on our secure servers and backed up every day, so even if your computer is lost or stolen your data is safe. You control who has access. The only people who can see your personal data are those you choose.


The Questions

To answer your questions, most of which require some degree of speculation...

Share Investor: How much market share, given time, do you think Xero can take away from traditional off-line providers?

Scott: Plenty, with time. Initially people like myself will become the early adopters, and if it really is as good as it potentially can be, word of mouth will spread it far. The advantage for Xero, what harm can there be paying a couple of hundred dollars to test it out for a few months, indeed they could easily offer a free month or two, once you are hooked (or you get to the point that it's easier to persevere than change accountancy systems) then you have a customer for a very long time.

I can see growth potential with payroll integration also, email payslips, the whole thing. Too many companies use a different piece of software for every different tasks. Then licensing fees, upgrade costs, etc.

One of the biggest costs with traditional accountancy systems is multiple users on multiple PC's. This cost is gone with Xero.

S.I. Is the Xero product so superior that it will take users away from other online providers such as Quicken and MYOB?

Scott: I think yes, eventually. So it is a long-haul investment. MYOB and Quicken will respond, Quicken already has an online model in the US. But they rely heavily on what I outlined above, once a user has coughed up the $ and implemented their business on a system, they aren't going to change in a hurry. Give them a compelling and easy change though, and who knows?

Xero's advantage here is they can make changes, fixes and upgrades quickly and efficiently, Change a few lines of code and instantly fix a bug or small problem. Spend a day programming a new feature, test it, and it's online two days later.

S.I. The costs to the end-user, are they lower than online software?

Scott: I think if you looked at the OVERALL cost it would be competitive, compared to the features and abilities available. Sure, you can spend $400-600 on MYOB or Quicken and use it for 5 years - or spend $600 a year on Xero. But what are you missing out on that your competitors will have over you during that time? Quicken and MYOB still have issues emailing a frieken invoice! Xero will probably be able to integrate into your company website... it wouldn't surprise me if they implement a Credit Card payment module for you to use...

S.I. Margins for the company, how good could they be once initial establishment costs are factored in and then overcome over time?

Scott: Fantastic. SaaS is a wonderful business model. If things are done properly you could have a handful of people run the entire company (as it is). They will have to hit the right mix of features, price etc and I think that they will. It will be very interesting to see what offers they come up with, really I should email Rod Drury to see if some of the things I have mentioned here are on the cards.

S.I. Is the only point of difference between competitors off and online products the fact that Xero is online?

Yes, and No. Being online does lean toward a whole other set of advantages, a few of which I outlined above. There are certainly advantages to having offline software, if you are stuck somewhere with a laptop and no internet connection, but is that the way of the future? No, I didn't think so either.

S.I. Will it be horrendously expensive and or technically challenging for prospective clients to switch from their current provider to Xero?

Scott: I hope not. There are several options, either you keep your existing accountancy software around, but stop using it on a certain day and transfer balances, stock levels etc to the new system. Or Xero can come up with a migration tool. Or simply target NEW businesses first or those without an existing system.

They would be smart to sell this to the accountants, who will then recommend it to their clients as a system they can easily access as well. The possibilities are limitless, but no changeover will ever be VERY easy... or, it could be, who knows?

S.I. What is the main reason why you want to use this software and why not shift your current business accounts to Xero as well?

Scott: I sold both of my businesses before leaving for London, and my Trust accounts are so pathetically easy I do them in Excel. However, When I return to NZ my next business will be Xero based. I will use it to eliminate the frustrations I experienced with other accountancy software I used, mainly user limitations, bank reconciliations, expense management, jeepers almost everything!

The value I see in Xero is that if a feature ALMOST works the way you'd like, theoretically they can have change online within hours after a response to user feedback. This will happen thick and fast on startup, as they vie to impress...

S.I. Are any competitive differences easily overcome by Xeros rivals?

Scott: If Xero's rivals are well aware of their weaknesses, why haven't they done anything about them by now? I think they have underestimated the online market, to be honest, as have many people in the past - I can see Xero's advantages, and have watched them closely since listing. Maybe there will be rumblings, who knows? I am willing to bet the people behind Xero intend to stay ahead of the pack no matter what, and they are off to a good start.

S.I. How will the likes of giants such as Google online apps affect Xeros entry into the marketplace?

Scott: Hard to say, multinationals often forget New Zealands special needs in these areas, so Xero may rocket here but find it hard to break the US and UK. A tough call.

S.I. What are the costs of continuous development of this software to stay ahead of the pack?

Good question, although I don't have the answer I would say they are attractive compared to version updating, releases and distribution from the big two...

To put it in perspective, I work for a company in London that uses a SaaS model, they don't really even realise it. The IT Dept consists of 5 staff, which is more than sufficient to manage the website and support new development. The online model is worth hundreds of thousands of pounds to their business.

They developed it themselves to replace the offline model, shooting themselves in the foot? No. Because they have happier and more dedicated customers, spending more money with them!

S.I. Given mostly positive answers above how long do you think Xero could take to become a market player of some substantial nature or even a dominant player in this sector?

Scott: I will get onto the Xero bandwagon soon, I think their listing price could still drop a little more while they are quiet and people get itchy feet, or don't really understand what they have bought into... Xero will show it's results when it is ready, I get the feeling it will have VERY rapid growth, next year(2008) should be an interesting year.

End.


Xero @ Share Investor

Share Investor Interview: Xero's Rod Drury
Xero Ltd: Download full Company Analysis
Share Investor Q & A: Reader Questions to Xero's Rod Drury
Rod Drury on Xero and Growing Business
Xero set for surprise to the Market?
Love Xero?
Share Investor's 2010 Stock Picks
Stock of the Week: Xero Ltd

Discuss XRO @ Share Investor Forum

Download XRO Company Reports
Listen to Rod Drury Interview




c Share Investor 2007

Competing With Style

Ain't Competition Nasty!!

I just want to relay my thank you to those of you who have bothered to contact me over the demise of the old Share Investor Forum. It has taken a lot of work to get it going and it was getting a couple of thousand of visitors a day. Not big, but it was growing.

It seems I have now been relegated to the realms of blogging. Here I shall stay and I hope some of you will join me.

The main thrust of this post has been spurred on by the nastiness that has come from individuals and those connected with http://www.sharetrader.co.nz/ . They are responsible for informing my host, http://www.jconserv.net/, that I was "violating copyright" on my site and thus here I am now.

I'm not sure what the "violation" was for but suffice it to say Share Trader has a wealth of material on it that infringes copyright. I am not about to inform the owners of copyrighted material of such.

The nastiness started soon after I opened the site last September, with subterfuge related to the owners of Share Trader, re-directing my URL to a porn site and an attack on its content in early 2007.

For the life of me I don't understand why Share Trader may be afraid of a little competition. They are in a monopoly position, so perhaps they want to maintain it anyway they see fit?

Competition is really what today's piece is about and I can relate my recent experience to the business world in general and specifically to New Zealand business and its listed companies.

Perhaps the most glaring example of recent occurrence when it comes to tough competition is the stoush between New Zealands two major supermarket players, Foodstuffs and Progressive, over the battle for control of The Warehouse [WHS.NZ] Foodstuffs and Progressive currently dominate the supermarket sector with duopoly pricing but want to take out a fledgling player in the supermarket industry simply because they fear what a bigger third player might do to corporate profits.

These two players are not interested in competing at the shop floor with a new entrant, they simply want to eliminate this competition before it starts.I am not against competition but surely if Progressive and Foodstuffs want to expand their empires why don't they duke it out with the minnow fair and square, compete on price and service and open some additional outlets of their own?

It is interesting to note that Progressive have stopped one of Foodstuffs outlets from opening on Auckland's North Shore for more than 10 years and the market has lain idle for more than two years as empty as it was when first built. Legal action has also been taken(and failed) by Progressive to shut down an outlet mall in the same area for dubious reasons.

The fate of this stoush is now in the hands of New Zealand's Commerce Commission.

Monopolies in New Zealand are very common. This is mainly because we are a small market. The consumer clearly must be protected to some extent from these giants.

Telecom [TEL.NZ]and its dominance in the tel co sector for the last 20-30 years has had a negative effect on New Zealand, its economy and the consumers back pocket. The technology that Telecom customers must use is never up to date with overseas tel cos and most communication is still being done with the use of copper wire. True enough Telecom has been a good business for its early investors and many have made plenty of moola but as time has gone on the refusal by management to invest back in the business has cost Telecom ,its current shareholders and customers dearly. New Zealand is currently at the back end of the line when it comes to broadband and its products are expensive. Its current shareholders have lost big time.

Vodafone, similarly, seems to have adopted many of the traits that Telecom has had as a Telco monopoly and its mobile service and prices reflect the duopoly structure that co-exists with Telecoms mobile network.

It is a human trait to be confidant when one is in a good position in life and one could be forgiven if one was even a little cocky and boastful at times but some of the leaders of our monopolies take this position to levels of arrogance that seem to mock and deride their customers.

The recent case of Teresa Gattung is a well known one. She professed in 2006 in a Telecom shareholders meeting that "...the tel co business model, using "confusion" as a "marketing tool to maintain prices and margins" and that Telcom had been using this model for years wasn't really a shock to consumers but what was a slap in the face was the fact that she actually said it with impunity!!

Perhaps the funniest use of arrogance and disdain for consumers of recent times by the CEO of Auckland Airport [AIA.NZ] was his contention that narrowing the duty free retailers from two down to one at Auckland International Airport would "...give consumers more choice and the same low prices that they have always had..." now I didn't graduate from university with honours but even I can fathom that Don Huse might be pulling on something more malleable than a duty free wine cork. This individual is currently telling AIA shareholders to sell their shares to Dubai Aeronautical Enterprise for a measly $NZ3.80. Would you trust him? I don't.

Even my favourite topic of discussion of listed companies on the NZX, Restaurant Brands[RBD.NZ] have displayed some of the qualities of a monopoly over its last 10 years as a listed company without actually being one as such-to be fair though its Pizza Hut and KFC divisions were very dominant. Vicki Salmon, its most recent CEO, was blind in the face of reality when every time there was a poor profit announcement(which was most often the case) she continued to trot out the mantra "...we expect to see an improvement in the coming months..." The real arrogance of Vicki and her predecessors though was the fact that they had two dominant brands, KFC and Pizza Hut and much like Teresa Gattung RBD management neglected those brands simply because of their dominant positions and the thought by management that these brands were bullet-proof. Those two brands currently wallow in mediocrity in the face of real competition from the likes of Dominoes and Nando's Chicken.

Sky Televisions [SKT.NZ] position as the only player in the pay TV market in New Zealand makes its clients shake in their boots every month when their account arrives. Monopoly pricing rules and the arrogance of management when consumers complain is almost on a par with Telecoms head honchos. Perhaps they all went to the same charm school but I detect a pattern with management reaction to customer complaint when you are the only big kid on the block.

A dominant player that must be admired is Coca Cola. The focus on their product is fanatical and every aspect of marketing and selling is expertly crafted and nurtured from upper management all the way down to the fridge in the corner store. Coke ignored their consumers in the mid-1980s when they changed the formula of Coke without consulting consumers and had to back peddle when a backlash by consumers saw sales volumes fall in the USA. Their dominance of the caffeinated fizzy beverage market gave management the belief that they could mess with their leading product without a consequence. How wrong they were. They did learn from their mistake though and that is to be admired.

What can happen when a company or individual has a dominance in its field-and clearly they have got that way because they have been enterprising, hard working and clever-is that its position as the only or biggest player can be undermined by the tunnel vision that often comes about when one doesn't have to look over ones shoulder at the ankle biter running behind you. When suddenly that ankle biter starts nipping at your heels your reaction to the competition is a very important pivotal position for your company or product. What you do next, whether it be competing on a level playing field in your market or trying to undermine the newbie in any way you can , can have a negative perceptional outlook on your company from its consumers and ultimately a material effect as you lose the vision you once had when you initially set out to conquer your entrepreneurial goals.

There are countless monopolies that have fallen because of lack of care, they shouldn't have simply because they were in the dominant position, but the lack of care for the consumer and or the product or service they sell can even bring a dominant player to its knees. Management simply can't overlook basic business acumen simply because they "own the market."

Competition is essential to life, in business, on the sports field and life in general but ultimately if you play with a loaded deck and cards up your sleeve you , your company and your product or service just may be the loser in the end.

Related Amazon Reading



On Competition, Updated and Expanded Edition by Michael E. Porter
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Copyright Share Investor 2007, 2009

Burger Fuel Listing 27th July 2007 (NZ time)

The story below from the NBR confirms that Burger Fuel is listing on Friday July 27.

After the big top up from its present owners and founders one can only guess that its appearance on the NZX today is going to be somewhat of an anti-climax.

It is a great little company but has been repeated often by myself and others, it overvalues itself and this overvaluing has led to the low interest in the IPO.

Had it been a lower valuation the market could have taken this IPO seriously and backed it fully.

As it is BFW is going to struggle today SP wise and will continue to struggle in the weeks and months to come.

Management have overestimated their abilities in a financial sense when it comes to the IPO, lets hope they havent done the same when it comes to future financial management projections.

Readers will have to ask themselves if founders have only managed to raise at best $5m NZ dollars of a sought after 15m, then the original plan is going to be somewhat constrained.

The reported $1.5m cost of the IPO is a laugh and there is no report yet as to whether that cost comes off the $5m raised. In the absence of further info we will be generous here and give them the benefit of the doubt until told otherwise.

With such a shakey start to its public life, Burger Fuel is going to struggle right from the get go. Not a good omen for its future.


The NBR Story

BurgerFuel to list after $2.7m top-up
NBR Staff


BurgerFuel will list on the NZAX on 27 July following a $2.75 million top-up from founders Chris Mason and Josef Roberts.

$5.25 million was raised from 2380 shareholders - although that also included shares bought by the founders from the public pool - making up the minimum $8 million equity sought.

The company originally hoped to raise $15 million for 26.7 percent of the company but the response to its "would you like shares with that?" campaign was unenthusiastic and the offer had to be extended.

The capital will be used to pay the upfront costs of more stores before these were on-sold to franchisees.

In Australia, BurgerFuel has one franchised store and hopes to franchise more as well as operating its own store due for construction soon in Sydney's Kings Cross.

Chairman Peter Brook said the company would look to roll out stores in other countries with local partners to reduce capital investment costs.

BurgerFuel is due to open in Tauranga and Napier soon to take the total store numbers to 24.



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Discuss Burger Fuel @ Share Investor Forum




c Share Investor 2007

But wait there’s more: How I’m learning to love Kiwisaver

For selfish reasons, I have been thinking lately. What I have been mulling over is Kiwisaver and its relation to the NZX and what it might mean for its future. The stocks in my portfolio and yours are going to benefit.

Let’s get this straight, I am dead against Kiwisaver. It is compulsory, inefficient, costly, enormously complex, will have low returns for its participants and is damaging for business.

The big winners will be the Kiwisaver providers, the IRD, who have hired 400 more drones and other government lackeys and the recipients of our largess.

The NZX could be the big winner if overseas experience has anything to go by.

The US and most recently the Australian stock market have benefited greatly from the retirement schemes that run in both those countries. The companies on those countries listed indexes have performed consistently better than our listed companies simply because of the large amount of retirement money sloshing around with no place to go but investment.

True, a lot of retirement funds will be inefficiently filtered through fund managers before reaching the NZX and much of the Kiwisaver proceeds will go offshore to other exchanges but there will clearly be billions going into our stock market.

In the USA their 401ks have helped push stock fundamentals to levels above the Kiwi NZX and in Australia multiples are similarly higher.

The extent of many countries super funds and its contributions to their local economies cannot be understated but as these funds have gotten bigger they have even stretched their economic tentacles abroad, US funds through private equity have bought companies in Australia and New Zealand and other countries while Australian funds have bought up large in New Zealand. The biggest retirement money buyout in New Zealand being the Canadian teachers fund buyout of Telecom New Zealand Ltd [TEL.NZ] Yellow Pages for over $2 million NZ dollars.

How long it will take for the New Zealand super funds proceeds to have an effect on our market depends on the uptake of Kiwisaver by its citizens of course and the impact will also depend on whether Kiwis who start a new job opt out of the conservative 6 providers that are the default ones and whether current employees decide to open themselves up for more risk and more return by going with a provider such as Fisher Funds which is likely to focus on the NZX and ASX and its smaller growth companies.

Certainly there is already evidence that these types of funds have had an impact on our market. Government and quasi Government institutions through agencies such as the ACC and the Government super fund for state employees have helped bolster our market and its listed companies. Mostly the blue chips but also a few middle to smaller cap stocks have been targeted by these funds.

Our market has mostly been a disappointment over the years compared to foreign bourses and the absence, up till now, of retirement funds bolstering the NZX will put our market on more of an even footing, help stimulate IPO’s and channel funds away from the over inflated and the tax friendly property market.

Even though our market has done well over the last few years don’t imagine that it is overvalued as a whole. When you include the extra funds from retirement money that are to come on-stream over the coming years you could be forgiven for doing cartwheels if you are already in the market at the prospects of fund managers pouring mum and dads money into the NZX.

Kiwisaver isn’t a perfect tool or even close to a perfect tool for helping kiwis save retirement money, tax cuts would be a far better and cheaper solution and then we could put those funds directly where we like.

Having said that there are always winners and losers when it comes to Governments meddling in its citizens business and for those that are already invested in the NZX and its fund managers of course, they are the big gainers.


Kiwisaver @ Share Investor

Kiwisaver mediocre substitute for real saving





c Share Investor 2007