Xro - xero

[peat]

I assume you haven't bought any then.

his analysis suggests they are overvalued in the current mkt by 37%

[gregrday]

I did buy some but have since sold them, based on the analysis I did. Which beats my normal practice of seeing if I like the sound of the name, or "they can't go down any more" telecom type purchases. So I'm pretty happy with the decision. I'll be watching Xero closely over the next 6 months, to see how they're tracking. But the numbers I did were reasonably optimistic, so I couldn't really find any margin of safety at all. Happy to revisit if anyone disagrees with anything...

cheers
Greg

[Stranger_Danger]

http://www.nbr.co.nz/article/myob-ships-liveaccounts-under-cutting-xero-127909

Optimist view : MYOB's product will be bad, but the fact they're doing SaaS validates Xero. Good for Xero.

Pessimist view : MYOB's product will be good or good enough, pricing cheaper, cheaper to market to existing client base. Xero ends up having to reduce pricing. Bad for Xero.

I don't have a strong view either way, but MYOB don't have a good track record at producing software that makes you go "wow".

[CJ]

It seems as if MYOB is only going for new customers, and not trying to transition existing clients over (they are targeting small excel users). Until they offer a full product for more than a 1-3 person business, xero has nothing to worry about.

Once they lock in existing users however, that eats into a lot of Xero's target market.

[CJ]

Has anyone looked into http://www.actionstep.com/ . Just saw it mentioned in the NBR article comments. Looks like it provides a wider product range than Xero.

[Stranger_Danger]

I suspect a vast majority of Xero's customers are 1-3 employee businesses.

Off their own figures, something like half their clients hadn't previously had a computerised accounting system (other than Excel or similar).

[Xeroxyz]

Looked at ActionSteps. Talked to the CEO Ted Jordan. Seems to be a VERY switched on outfit but is not competing in the same market as XERO at all. Targeting companies of 10 - 300 employees. Cost $60 per month PER USER. Not an accounting centric system. IN NZ there are 477,000 businesses. 90% (430,000) employ less than 5 people - this is XERO's target market. Its like comparing apples with combine harvesters. XERO is at about break even in NZ now with 22000 users. I am a bookkeeper - MYOB Approved and XERO Certified - and have many clients on both systems. I have tried MYOBs Live Accounts released last night. Its not really a patch on XERO - yet. XERO is really light years ahead of them at this stage. Still you don't need the best product to succeed - MYOB has already proven that. IMO they have been flogging a very second rate product for a decade or more without making any effort it improve it because they make all their money from the help desk. I have noticed a significant improvement since they went private equity though. It will be very interesting to see who wins - hopefully the best software will and you know who that is...

[gregrday]

Hi guys, 'final' post on Xero based on some feedback I had, up at http://gregnz.wordpress.com.
Discusses the $1.12 share price I forecast, and the reasoning and some evidence around some of the important numbers (Operating margin and marginal sales/capital ratio), with implications.

let me know what you think.
cheers
Greg

[gregrday]

Hey guys

just revisted Xero valuation, and worked out I stuffed up the terminal value calculation, missing out around 200,000,000 from the bottom line. Which means, revised share price from $1.12 to $3.55. A beginners mistake, so humblest apologies... check out the new writeup (and more apologies) at gregnz.wordpress.com.


cheers
Greg

[percy]

Hey guys

just revisted Xero valuation, and worked out I stuffed up the terminal value calculation, missing out around 200,000,000 from the bottom line. Which means, revised share price from $1.12 to $3.55. A beginners mistake, so humblest apologies... check out the new writeup (and more apologies) at gregnz.wordpress.com.


cheers
Greg
Greg Love your posts.Am enjoying your learning proccess.At least you are giving it a go and trying to work out value.I just find it hard to believe the numbers have grown so quickly,and the good comments from users. I brought a few for the wife as a spec and have been pleasantly surprised.Look forward to your next valuation.

[gregrday]

Thanks Percy. The valuation process is pretty 'valuable' (stock pun there!), since now I actually have some numbers to track against. If everything goes as I forecast (it won't), then I will have some idea if the price is under or overvalued. So I'm really looking forward to the next earnings release to see how they're doing. I'll be looking to do this in other NZ stocks, so suggestions welcome, but I prefer companies that only do one thing, and that I can more or less understand. So... restaurant brands maybe? or Michael Hill?

cheers
Greg

[buns]

So you are into 3 peice quarter packs and Diamond rings?

Good work on that DCF. As well as tracking the XRO earnings reports, look at the rest of the DCF as well, for instance the WACC (cost of equity/debt) which drives the whole thing.

[gregrday]

thanks buns. re: Restaurant brands, I did pretty well out of them recently before selling a month or so ago. Its a company I can understand, so follow reasonably closely. re: MHI, another company I understand, and hold a position in, mainly because of management and international exposure. But I'm happy to look at other simple, one trick companies.

re: WACC, yes next one will go into more detail on this. Xero was a special case since it was such an early stage, and everything was a guesstimate.

cheers
Greg

[Sauce]

Hi Gregday,
Nice work on on the DCF valuation.
Perhaps you could help us get to the bottom of the numbers for RYM on the owner earnings vs free cashflow thread. I'm not sure it meets your definition of a one trick company, and it may be a bit harder to get to the bottom of the numbers (but not impossible). but considering its been the best performing NZ company over the last decade, growing entirely from its own cashflows with little debt, my thoughts are that its a business worth understanding!
Regards,
Sauce

[gregrday]

Thanks Sauce, I havent really looked at the owner earnings concept, although I understand the idea. I have looked at Ryman, and ... well, got confused about just about every aspect of the business. I didnt really understand how they made money, how it was booked, and how the properties were owned. All in all, it just confused me (which is not that hard), so looked for easier pastures! Most of my stocks are US-based, and theres a good supply of 1-trick, simple companies there.

cheers
Greg

[Sauce]

Thanks Sauce, I havent really looked at the owner earnings concept, although I understand the idea. I have looked at Ryman, and ... well, got confused about just about every aspect of the business. I didnt really understand how they made money, how it was booked, and how the properties were owned. All in all, it just confused me (which is not that hard), so looked for easier pastures! Most of my stocks are US-based, and theres a good supply of 1-trick, simple companies there.

cheers
Greg

Hi Greg,

Your not wrong about confusing! The accounting has been doing my head in. However the business model and their cashflows are actually very easy to understand. If you ever do decide to look at it, I suggest reading through their investor center online, and then checking out the 2007 Annual report first. The reason is that their accounting is so confusing from 2008 - now is the change in accounting from GAAP to IFRS.

However, the reason I suggested them is twofold. They benefit from enormous positive cashflow, and they managed to grow those cashflows throughout the GFC. Something very good is going on within this business and I think it would help any investor to better understand it.

Interesting that you invest mostly in the US. I can see a lot of benefits to that. Its hard to find companies with the potential for secular growth in small markets like AU and NZ for starters!

Cheers
Sauce

[Lizard]

Hi Greg,

I really enjoyed reading your valuation. Nice work. :)

Clearly, picking something like XRO to value in public is a pretty challenging. Since DCF's are going to multiply and compound the errors and biases in any assumptions, your chances of getting within a factor of 10 of reality on a high-growth, embryonic business is umm, well I guess you know that...

To get even close, I would suggest you need to scrutinise your assumptions a bit harder. The most crucial one first up is that sales growth %. You've gone from noting that the % growth is falling (on two data points) in one post to assuming that it continues. Realistically, I think another 2 years of 200% growth is very unlikely. To get a better trend, maybe try converting the quarterly customer no. chart in the agm back to an approximate set of customer numbers and turn it into a log-plot, then extrapolate etc?

The next big factor to consider is scalability - what proportion of costs are fixed vs what proportion can achieve efficiency of scale. A fair mix of both in this case I would think. I would try and separate and extrapolate separately.

Finally, any valuation of a growth business probably needs to consider cash demands - does the business have sufficient cash and profits to cover the remaining period of losses plus investment cashflow requirements plus a proportional increase in working capital? If not, then at some point, some of the returns will go to the new money that finances that growth. If it does require this, then, even after accounting for a cost for this, the margin-for-error around your valuation will probably have trebled, since it will depend heavily on how well management negotiate this step.

Probably sounding impossibly pernickety, but unless the underlying figures have all been thought through, I reckon you are probably better in a DCF to just "intuit" a few cashflows for the next 5 years. Or maybe just toss the "company" dcf altogether and go for some other rough & ready estimates (probably equally inaccurate, but less time consuming). Though, as you pointed out, it doesn't hurt to have some forecasts you are measuring the company against either in terms of sales and margins - at least you'll probably be quicker than most to pick changes in trends.

[gregrday]

Hey Lizard,
thanks for the pointers. XRO was the first early-stage valuation I've done, so it was pretty interesting. Because it was early stage, I didn't want to go down the route of analysing everything and pretending the numbers meant something. I really just tried to base Xero estimates on things that have already happened in the SaaS space. Probably the most interesting thing from the whole valuation exercise was the realisation that none of the SaaS players are really doing well. Salesforce being some weird exception based on their stockprice (i mean a 160+ PE?!?).

re: Cash demands, yes, this is a very good point. My spreadsheet has them breaking even in 2011 (as per the AGM), and carry forward 20million in operating losses. Given their current cash situation, they should be able to live with that, but any deviation will mean going back to market or hooking up some debt, either one of which would be pretty hard on the share price I think.

Time to think about the next valuation I think...
:-)

Greg

[Peitro]

Must be near the 25k mark now.

Wish the Yodlee feeds would get up and running....

[gregrday]

Hi guys,

following up on the XRO valuation I did a month or so ago, I've done a new summary and valuation of Michael Hill.

I've changed the format, added in the summary section, and performed a simple growth discounted cash flow to produce a per-share value. I'm really interested in getting feedback about this doc, ie, is this useful? Any thoughts for improvements appreciated too.

check it out at http://gregnz.wordpress.com, let me know what you think (and all my mistakes of course)

cheers
Greg

[Raven]

Sounds like a good person to have on board. I know he must have a huge amount of money to throw around but must believe in the product to some degree to invest $4 mil. I'm looking forward to seeing how things go when they finally start having a serious go at the US.

http://www.nzx.com/markets/NZSX/XRO/announcements/4262838/US-Technology-Guru-Peter-Thiel-to-Invest-in-Xero

[CJ]

Sounds like a good person to have on board.A very good person. Will help them get coverage, especially in the small business IT market.

[Peitro]

Xero release half a dozen Australian bank feeds today, over the next few weeks Xero are expected to release "thousands" of more bankfeeds across Australia, the UK, Canada and the US.

Exciting times. Growth in the UK especially should take off with the release of more feeds.

Half year results should be out in the next week? will be interesting to see the latest customer numbers and projections on break-even.

[_Michael]

Xero release half a dozen Australian bank feeds today, over the next few weeks Xero are expected to release "thousands" of more bankfeeds across Australia, the UK, Canada and the US.

Exciting times. Growth in the UK especially should take off with the release of more feeds.

Half year results should be out in the next week? will be interesting to see the latest customer numbers and projections on break-even.

Amazing the progress they are making in the last 12 months.

My guess for the interim announcement is 27,000 paying small business customers, but the growth for next couple of years should get exponential.

The thing is they are signing up relevant partner channels in all markets, and this network is growing. W

I would be amazed if these guys are not in the nzx50 in the next 18 months which could put them on radar of institutional investors.

Really incredibl story really, while the world was going into gloom and doom over last couple of years this little kiwi company was taking developing a new market and adding new customers at a breakneck pace. NZ needs more of these ideas....

[_Michael]

Rod has told me that he will not sell Xero. He wants to show that, with the weightless economy, NZ can produce and sustain a world class multi-national company from a base here.

Good call.

[Peitro]

_Michael on the button... will be interesting to see once NZ institutional investors get on board - quite possibly the demand will initially come from overseas...

"Xero struggles to get NZ investors onboard

Online accounting software firm Xero, whose stock has soared to a record high, is struggling to get New Zealand's fund managers and analysts to buy into its "success story'', says founder Rod Drury.

Shares in the technology startup rose to $1.81 last week, the highest since the company listed on the NZX in mid-2007. Under Xero's growth strategy, the business isn't forecast to break even until the second half of next year and it burned through $12.9 million in the financial year to March 31, when sales amounted to just $3.4m.

Xero is betting on demand for its cloud-based accounting package aimed at small and medium businesses to win sales in New Zealand, Australia, the UK and the US, The company's CEO and biggest shareholder, Drury says there's a niche worldwide for a low-cost service that can link a company's bank transactions to its accounting platform and handle invoices but institutional investors don't understand its business model.

Despite a stellar line-up of big-name investors in the IT sector, including Trade Me founder Sam Morgan, MYOB founder Craig Winkler and most recently PayPal co-founder Peter Thiel, institutional investors rank low among Xero's biggest shareholders. Bank of New Zealand is listed with a 2.5 per cent holding and the Accident Compensation Corporation, which typically allocates a portion of funds to smaller equity investments in New Zealand, had 0.8 per cent, according to the 2010 annual report. Drury's interests hold 27 per cent.

"We talk to [the New Zealand investment community] quite a bit, but they haven't invested any money in us, Drury said. "They've yet to understand the cloud-based model."

By contrast, "we are getting is a lot of broker demand out of Australia where they are now comparing us to Reckon and MYOB [accounting software firms]," he said.

Thiel, who bought $4m of new shares in Xero in late October at about $1.49 apiece, has seen his investment jumped about 22 per cent since then. Thiel, who was one of the first external investors in Facebook, may have helped fan the stock's advance, given his track record backing IT start-ups.

Xero can afford to burn cash a bit longer. Of the total $50m it has raised since inception, it still has around $21.3m in the bank at March 31, which excluded Thiel's $4m contribution last month. It reported a net loss of about $8.45m last year and is scheduled to release its first-half results for the current year this week.

In his presentation to shareholders at the annual meeting in July, Drury said Xero has a "highly scalable" platform that could cater for "hundreds of thousands" of customers and it had a longer-term vision of "millions of customers". As at June, the company had 22,000 customers worldwide.

Ad Feedback "We get approached by these companies all the time and I tell them to come back when they've got three years of cash flow positive operations under the belt," said Paul Robertshawe, a fund manager with Tower Asset Management. "Early stage companies are a dream and most of the dreams fail," he said, making clear he wasn't specifically alluding to Xero.

The company sold shares in its 2007 IPO at $1 each. At the time, one of the sale organisers, First NZ Capital CEO Scott St John, said he was hopeful the IPO "will act as a catalyst for more New Zealand companies to experience the benefits of a public listing and a broad investor base."

Since then, companies attempting to go public have had mixed fortunes. South Island milk processor Synlait abandoned a public sale and ended up selling shares to China's Bright Dairy. BioVittoria, which was bringing a natural sweetener to market, withdrew its sale after failing to reach the minimum target.

"There is blue sky in the share price, but the New Zealand market is hungry for companies that have the upside potential that Xero is seen to offer," said an investment adviser who asked not to be named. "You can pick holes in it and say the market is getting carried away a bit, but some people are prepared to take that journey."

[Stranger_Danger]

I remember the last time tech people were telling me I "didn't understand".

It was in 1999.

[zs_cecil]

http://www.xero.com/downloads/pdf/announcements/111110-xero-interim-announcement.pdf

Half year result is out. it says that its lost has reached the maximum point and turning to be reduced in the following months towards to break-even.

[Nigel]

http://www.xero.com/downloads/pdf/announcements/111110-xero-interim-announcement.pdf

Half year result is out. it says that its lost has reached the maximum point and turning to be reduced in the following months towards to break-even.

Market responding well, buyers at $1.90. Good to hear they're expecting to still have lots of cash in the bank at break-even.

[nwood]

Running a public company you think in 6 monthly increments. All the work during the period ends up in black and white and out in the market. There is no hiding and it’s not for the faint hearted. There is no getting off the merry-go-round.

But in today’s 1/2 year results I think we’ve demonstrated that our strategy is working. Here are the highlights …

Near tripling of half year operating revenues from $1.3m to $3.7m. This compares with 2010 full year revenues of $3.4m. Annualised subscriptions are running at approximately $9.0m.
Successful recruitment to resource our operating model in New Zealand, Australia and the UK lifted headcount from 73 to 101 and therefore a planned rise in operating costs to $7.9m – up 59%.
Net loss of $4.7m – an increase of 24%, is expected to be the maximum loss incurred as the company drives toward break-even.
Cash at bank of $16.6m as at 30 September 2010 – excludes $4m additional monies raised by the Peter Thiel strategic placement in October. Xero anticipates having significant cash reserves at its planned break-even point.
You can read the full announcement here: Xero half year announcement (http://www.xero.com/downloads/pdf/announcements/111110-xero-interim-announcement.pdf)

All looks on the up and up

[zs_cecil]

zc_cecil ... Ultimately its about profit growth :)

:cool: ... Yah...... will see an exciting 2011...

[zs_cecil]

Market responding well, buyers at $1.90. Good to hear they're expecting to still have lots of cash in the bank at break-even.

Hope the volume of trading on this stock will be raised next year too...

[Stranger_Danger]

Belgarian - profit growth is the LAST thing they want.

If they managed to earn a million bucks after tax, at $1.90 a share the P/E ratio (this means Price/Earnings for those likely to be buying Xero shares at this valuation) would be 172.9.

Best to have the valuation based on potential than have to clarify things with a pesky profit!

And yes, yes, I get the growth story, I get that P/E, P/S, NTA etc isn't everything.

The key problem I have is that virtually without exception whenever I have witnessed large profits, they tend to have been preceeded by small profits - NOT by large losses.

This is especially true in industries which involve lots of IP and not a lot fixed assets. I get that Xero is trying to do it real fast, which costs money, but yeah.....a lot of money...

The simplest way I can put it is this. If a kid came to me and said "look, I have this one little lemonade stand that is making great profits. If you give me money, we'll be able to create heaps of lemonade stands just like this one, and make heaps of profits!" then, yeah, I'm listening.

If the kid says "look, I have this one little lemonade stand, and its losing a fortune. If you give me money, we'll be able to create heaps of lemonade stands but because of this and that and this, they'll actually be real profitable and we'll make heaps of profits!" then my bulls*** detector rings out real loud.

[gregrday]

Hey guys, commentary on Xero half year results up on http://gregnz.wordpress.com... summary, things going quite well, and previously model (which I posted in this thread) is tracking pretty well. 2011 and 2012 are the interesting times.

cheers
Greg

[Peitro]

Except the lemonade customers are subscribing to pay for lemonade monthly, which is probably the most important fact

[Stranger_Danger]

Except the lemonade customers are subscribing to pay for lemonade monthly, which is probably the most important fact

You mean like they do at Telecom?

And yes, I get that I'm being cheeky and XRO and TEL are at totally opposite points in their useful lives, but just having a subscription model does not a good business make.

[gregrday]

One general comment I have, as part of my research into Xero for my previous blog posts on Xero, publicly traded SaaS firms generally have pretty high (you can substitute 'ridiculously' for pretty if you like) P/Es. There seems to be a lot of positive spin (you can substitute 'whacked out hype' for positive spin...) regarding how cost effective the SaaS model is. So... theres a lot to be proven here. I hope Xero is the company to do it!

cheers
Greg

[gregrday]

Hey Belgarion,
cheers for that. A couple of comments... SaaS hasnt really proved to be a low-cost model. Its touted as that, but theres not really a lot of difference between producing CDs (a la MYOB) and Xero. Internet distribution costs may narrow the gap further. Evidence? Check out the financials of Salesforce (CRM), Taleo (TLEO), NetSuite (N). These are the best-of-the-best public SaaS companies, and all are characterised by very low operating margins.

Second, the model was originally done based on 'industry-best' projections (based on numbers from Salesforce and Intuit primarily). Sure, the market is large, but theres some pretty powerful (and VERY well funded) competition (such as Intuit, which are a pretty well-run company). Any or all of them could purchase XRO without any difficulty at all. Also, their selling proposition is hard. Everyone can already do what Xero does, Xero are just offering a better hammer. However, their channel partnering seems to be working really well, so thats a huge plus.

So... I'm not sure the growth models are out-of-whack. They do tail off, but on the theory that low-hanging fruit will run out. I try and be conservative in my valuations, so.... 6 years to 1.5 million customers? Hard to tell. Seems ok to me, but possibly could be 10 million. Or 100,000. The good thing about the model is we can see how they're tracking, so come 2011 we'll have a pretty strong datapoint. And come 2012, I think we should have a clear idea whether they are conquering the US.

cheers
Greg

[futurist]

Hi. I don't own any share of XRO but I do like the company for the fact that we have very few of these in the stock market. However I don't think XRO is comparable with Facebook and TradeMe. The other two are true Web 2.0 companies, in which the quality and the value created by their product/service are directly dependent on the number of users. The SaaS model that XRO is based on belongs to Web 1.0, very similar to the old days when you need to pay to gain access to some websites or some web services. Of course they must have their unique strength in the software itself, but that is again the very traditional thinking of a software business and it is doubtful if that could be "the future" again.

Microsoft still makes very good money, but there must be reason why its share price hasn't changed much for the last decade.

[zs_cecil]

Hi. I don't own any share of XRO but I do like the company for the fact that we have very few of these in the stock market. However I don't think XRO is comparable with Facebook and TradeMe. The other two are true Web 2.0 companies, in which the quality and the value created by their product/service are directly dependent on the number of users. The SaaS model that XRO is based on belongs to Web 1.0, very similar to the old days when you need to pay to gain access to some websites or some web services. Of course they must have their unique strength in the software itself, but that is again the very traditional thinking of a software business and it is doubtful if that could be "the future" again.

Microsoft still makes very good money, but there must be reason why its share price hasn't changed much for the last decade.

I personally think that Xero is more than a Web 2.0 or traditional web 1.0 companies. Indeed, Its profit relies on the headcount of customer who are willing to pay the monthly fee to use the system. But its revenue sources are various. Its business model is all about education, partnering and integration.

Education

I am not sure whether education is a right word to use. But I think Xero does focus a lot on making
people and especially those accountant consulting companies to understand what Xero is and why it is worth to use. These consulting companies are the key to educate more end users and convince them to pay for a new system like Xero because the end users would get lots of supports from them.

Partnering

Xero has developed a lot of partnership with other companies besides the accounting companies that I mentioned above. For example, it established partnership with telecommunication companies like Telecom. Many telecommunication companies nowadays want to enrich their service and participate in the race of cloud computing. They want to become an IaaS and SaaS providers to both individual customer and business. These partners can provide strong customer sources to Xero in different ways.

One thing for sure is that bank feeds are the most important part of the services. The more bank feeds supported means the more potential customers. That's why Xero is partnering with many banks and the online banking solutions Yodlee to provide more bank feeds access for customers.

Integration (through web API )

Now this is key web2.0 feature allowing other companies custom their development with Xero using their Web API through web services. Through web api, other companies can integrate xero as part of their own service to customers. These integrating services can add a lot of indirect customer sources for Xero.

To summerise it, Xero only focuses on its core business and make it simple, which is to providing online accounting services in technical way. Xero is a red dot in the middle of a big web. It constantly develop its network and utilise the network as customer sources rather than sit and wait for the paying customers.

[futurist]

I personally think that Xero is more than a Web 2.0 or traditional web 1.0 companies. Indeed, Its profit relies on the headcount of customer who are willing to pay the monthly fee to use the system. But its revenue sources are various. Its business model is all about education, partnering and integration.

Education

I am not sure whether education is a right word to use. But I think Xero does focus a lot on making
people and especially those accountant consulting companies to understand what Xero is and why it is worth to use. These consulting companies are the key to educate more end users and convince them to pay for a new system like Xero because the end users would get lots of supports from them.

Partnering

Xero has developed a lot of partnership with other companies besides the accounting companies that I mentioned above. For example, it established partnership with telecommunication companies like Telecom. Many telecommunication companies nowadays want to enrich their service and participate in the race of cloud computing. They want to become an IaaS and SaaS providers to both individual customer and business. These partners can provide strong customer sources to Xero in different ways.

One thing for sure is that bank feeds are the most important part of the services. The more bank feeds supported means the more potential customers. That's why Xero is partnering with many banks and the online banking solutions Yodlee to provide more bank feeds access for customers.

Integration (through web API )

Now this is key web2.0 feature allowing other companies custom their development with Xero using their Web API through web services. Through web api, other companies can integrate xero as part of their own service to customers. These integrating services can add a lot of indirect customer sources for Xero.

To summerise it, Xero only focuses on its core business and make it simple, which is to providing online accounting services in technical way. Xero is a red dot in the middle of a big web. It constantly develop its network and utilise the network as customer sources rather than sit and wait for the paying customers.

Fair points of what they do more than software, but isn't that make them look even more traditionally oriented than futuristic? The power of Web 2.0 model is that you don't need to teach your potential users to use your service. They come to you with curiosity, and once they use your service they become part of your service as well. Surely Web 2.0 companies also educate, partner and integrate with others, but they focus on the tails rather than the heads and the only way you can do that is to let people come to you on their own rather than you go and search for them. Otherwise the cost would be too high, and traditional thinking will kick in to make the company to target the heads first. Finally, Web 2.0 companies start to make a difference when they migrate from being a product/service to a platform. Then the API makes sense to target basically all kinds of developers (e.g. Facebook games, Twitter apps etc). At some point those Web 2.0 companies could share the cost and workload to innovate with their collaborators. So if a company needs to actively look for partners and collaborators to integrate with, that is hardly a sustainable competitive advantage these days.

Without a doubt we need more listed IT companies in NZX. If the market thinks Xero is doing great right now then this is good news to all of us. But whether it is a good business in general or a good software business; for now or for the future, it really depends on how we measure it. I guess that's why different people sees different things.

[Lizard]

This "letstrade" looks interesting. Put together by Peter Montgomery/MSL. Integrates with Xero:

http://www.nbr.co.nz/article/montgomery-launches-new-business-trading-software-133537

http://www.letstrade.co.nz/

Might list it too:

http://www.stuff.co.nz/business/small-business/4370595/Entrepreneur-might-seek-listing-for-firm

[Cannibal]

Wellington based online accounting company Xero has become the first Kiwi business to make it into Deloitte Technology Fast 500's top 10 fastest growing companies in the Asia Pacific.

The index ranks the top 500 tech businesses according to their revenue growth over the past three years and sets the standard for high growth businesses in the Asia Pacific region.

Xero came in at eighth on the list with 2,250.26 per cent growth.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10691744

[CJ]

Wellington based online accounting company Xero has become the first Kiwi business to make it into Deloitte Technology Fast 500's top 10 fastest growing companies in the Asia Pacific.

The index ranks the top 500 tech businesses according to their revenue growth over the past three years and sets the standard for high growth businesses in the Asia Pacific region.

Xero came in at eighth on the list with 2,250.26 per cent growth.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10691744That is great news for xero, but I really to question the worth of the fast 50/500. I think I would much prefer a company with profits rather than a company which can grow its revenue (and expenses) fast.

Having said that I am interested in investing in Xero and am very annoyed I missed out by 1c on the morning that US investor was announced.

[Silverlight]

XRO now has a market cap of $200 mill ... Bigger than some in the NZX50 :)

Free float is only 100m though, still, you have to say that NZX will remove PRC at some point, are XRO the next inline?

[zs_cecil]

XRO now has a market cap of $200 mill ... Bigger than some in the NZX50 :)

I would like to ask a question as a beginner. What is the benefit for a stock if it is chosen as one of NZX 50?

[CJ]

XRO now has a market cap of $200 mill ... Bigger than some in the NZX50 :)That is quite high considering they still haven't made a profit. If they can break the US market though may be warranted. Having said that, Mint sold for US$170m late last year and it had 1 million unique users a month (now 2.5m). While it has a different model (ie free) it receives revenue from commissions so was profitable. Mint is US only (expanding to Canada) and I assume will only expand to countries where it can get sufficient commissions (for recommending products) unless it decides to go to a paid model like Zero personal.


I would like to ask a question as a beginner. What is the benefit for a stock if it is chosen as one of NZX 50?Funds that follow an index(ie passive funds), or lazy active fund managers buy a companies in proportion to their index weighting. So when one enters one exits so fund managers buy the one entering (pushing up price) and sell the one exiting.

[CJ]

anyone seen this:

http://www.acclipse.co.nz/for_businesses/products/online_accounting/feature_comparison

Looks like it doesn't have bank feeds but coming shortly. Could be interesting.

[zs_cecil]

anyone seen this:

http://www.acclipse.co.nz/for_businesses/products/online_accounting/feature_comparison

Looks like it doesn't have bank feeds but coming shortly. Could be interesting.


Seems Saasu has a delay on bank feed feature rolling out till next year. I think the bank feed is one of the key feature to be successful. Xero is a little bit ahead in the game I guess. Plus, Saasu doesn't seem to have Web APIs that allows software developers to integrate Xero function to their own software. This is another advantage Xero has in the market. But both features are not hard to realise. Xero may still have some time to grab as much customers as possible. However, it is actually not a bad thing to see competitions. In my point of view, the more competitions may prove that the more online accounting market potential out there. :D

[Everwood]

http://www.theaustralian.com.au/business/xero-on-track-for-dual-listing-nasdaq-presence-on-the-cards/story-e6frg8zx-1225972769784


NEW Zealand's Xero plans to dual-list on the Australian stock exchange, and potentially the Nasdaq index, the web company said today. Xero joins a growing number of companies attracted by Australia’s buoyant economy and larger capital markets.
The company, which provides internet accounting services to small and medium-sized businesses, has grown rapidly since its establishment in 2006 and now has more than 1000 customers in the US and a market capitalisation of $NZ217.5 million ($162.6m).I saw this article and I thought it might be worth posting.

[Rocketman]

I like the Xero business model.

Maybe it could be compared to business like Blizzard's World of Warcraft instead of Facebook etc. WOW now takes US$15 per month off 11 million people.

They need to have a good product plus a ground swell of personal referals occuring to grow to massive scale.

[winner69]

Pretty spiirited buying this week and XRO up to 315 at the mo

Soembody pretty keen on them for this time of the year .... more good news after in the New Year?

[winner69]

Hey guys

just revisted Xero valuation, .......revised share priceof $3.55.
cheers
Greg


Might be spot on ... hope you bought heaps and made zillions

[Felix]

Wow a $273m market cap at share price of $3.01. The share price rise of the past six weeks seems a bit overdone doesn't it? They are running at annualised subscription revenue of $9m, haven't posted a profit yet and are burning through cash at a reasonably large rate so will no doubt need to issue more shares in the future.

If their business model succeeds and subscription revenue continues to grow at a rapid rate then the current market cap will be justified, but surely their current market cap now assumes the best outcome for the company in terms of market share and growth into the US? Anything else will see the price get hammered.

Disc - couldn't hold my nerve and sold last week at $2.70. Good luck if you still hold - it is an awesome ride.

[_Michael]

Wow a $273m market cap at share price of $3.01. The share price rise of the past six weeks seems a bit overdone doesn't it? They are running at annualised subscription revenue of $9m, haven't posted a profit yet and are burning through cash at a reasonably large rate so will no doubt need to issue more shares in the future.

If their business model succeeds and subscription revenue continues to grow at a rapid rate then the current market cap will be justified, but surely their current market cap now assumes the best outcome for the company in terms of market share and growth into the US? Anything else will see the price get hammered.

Disc - couldn't hold my nerve and sold last week at $2.70. Good luck if you still hold - it is an awesome ride.


I know what you mean. I am still holding after a 80% gain in around two months but also asking myself the same question... is this getting ahead of itself!?

Think I may do pull out 100% of the investment I made and leave the profit component in, as Cramer says then you playing with the house's money!

[gregrday]

Might be spot on ... hope you bought heaps and made zillions

Actually I sold at $1.55 after my first (slightly erroneous!) valuation and didn't get back in!
The $3.55 I originally valued Xero at is valuing Xero as an excellent company, basically best-of-breed SaaS (with about 2,000,000 customers by 2018). I'm not sure it will get there, and I'm not following what is driving the run-up. Its either a) someone knows something we don't (buyout talks?), or b) someone is more enthusiastic that I am.

Love to hear from someone buying now, what is the rationale?

Don't get me wrong, I love the Xero product, and how they are executing. I just don't believe its a realistic valuation at this point in time with so much uncertainty.

If you don't agree with my reasoning, you could always sell a partial portion, lock in some gains and let the rest run...

cheers
Greg

[gregrday]

just noticed on stuff, evidentally there is no news.... http://www.stuff.co.nz/business/industries/4506329/Xero-surge-within-rules

cheers
Greg

[gregrday]

Hey guys, just wrote a first round blog post (http://gregnz.wordpress.com) of my 2011 'battle of the startups', a comparison between Xero and Ecoya. Would love to know what you think, since I've only just started looking at Ecoya.

Quick excerpt:
"So how much is Xero’s cash and celebrity valued at? In a startup, cash is worth much more than the face value. Cash in startup land = ability to survive another few months = not having to go back to market or raise debt = much less risk. If we do a quick market cap comparison, Xeros cash and celebrity are valued at approximately… $235 million! (thats the difference in market caps between Xero (270million) and Ecoya (33million).

Which… is quite a lot. Justified? Hmm. Ecoya will have to raise debt or go back to the market for more cash (unless Trilogy is an undisclosed cash machine)."

Have posted this on the Ecoya board too, although its a lot less active than this one!

cheers
Greg

[percy]

I would like to thank posters for their comments on XRO.I brought 3500 at $ 1.40 on 11/5/2009 for the wife.Sold 1500 at $3.06 this morning,so she is left with 2000 owning her very little.That market cap is getting very high.Will be interesting to see where SP goes from here.Very hard to figure what the SP or m/c should be.

[Felix]

I'm actually surprised to see that the share price recovered from an intraday low of $2.75 to close at $2.90. I had thought that when the price started to dip the selling would accelerate due to profit taking, and that seemed to happen today until buyers came back to support the share price.

When I sold at $2.70 I believed that whilst the share price could continue to rise and I might miss out on some additional gain, eventually it would retract to somewhere around the $2.00-$2.20 mark (i.e. where it sat between mid-November and mid-December). That was just a gut feel given the rapid share price increase.

[MPC]

I just sold some (my daughters little long term holding) at $2.99.
Great profit and if it retraces I will look at buying back in. I think also that it has gone a bit too far, too fast. So naturally It will probably gain another dollar now.

Cheers,
MPC

[Stranger_Danger]

I'd be interested at $1.20 but I'm far too cheap so 9/10 times I don't end up owning these sort of stocks.

The pullback is healthy though and I doubt many holders will be worried, it was starting to feel really bubbly.

[gregrday]

Hi Turmeric

good effort on your trades! I have a pretty detailed evaluation of Xero on my blog (along with quite a few comments), check out: http://gregnz.wordpress.com
including a DCF analysis. I value a "everything goes pretty well by 2018" Xero at about $3.75. Is everything going to go well? hmm... ;-)

cheers
Greg

[Nigel]

20% down from recent highs - that's a pretty sizable discount. The stock was probably getting ahead of itself, but looking at the chart it's now back at a reasonable level and ready to resume a steady climb north. Sell depth also thinning - now at 2.68 (only 869 on offer) then up to 2.75. VWAP for today at 2.71, so looks oversold on light volume to me.

[Toulouse - Luzern]

Noted that the Loss for six months exceeds the Revenue:

XERO LIMITED (web site)
Results for Announcement to the Market
Reporting Period
6 months to 30 September 2010
Previous Reporting Period
6 months to 30 September 2009
Amount (000s) Percentage Change
Revenues from Ordinary Activities
$NZ 3,727 193%
Profit / (Loss) from Ordinary Activities after Tax
attributable to Security Holder
$NZ (4,726) 24%

[CJ]

So revenue of $3.7m and expenses of $8.4m. I thought they were meant to be close to break even?

[gregrday]

I think the estimated breakeven point is 4th quarter 2011. So still quite a lot of time to go. Next results and AGM will be very interesting.
:-)
I'd better by some shares back to get an invite!

cheers
Greg

[CJ]

Agree Belgarion but does revenue of $3.7m justify a $200m+ valuation.

[CJ]

On a side note or a bit of history from the .Com boom days if you like ... The theory for companies like XRO is that the expenses should start to reduce once XRO has their "system" finished. However, systems are seldom "finished" and expenses prove stubbornly hard to pull back. We'll see.they should decrease as a percentage of revenue, not in absolute terms. Remeber hosting costs are proportional.

I did try to get in when I heard that Theil had invested but missed out by 1c and didn't up my bid. Seems stupid now. Missed out at $1.51 but didn't want to buy in at 1.7 I think it was - now it is $2.8???

My concern is that this is going to be a crowded market. Xero definately seems to be the in front in terms of offering for a SAAS but how long before someone else catches up. I dont think peopel are facting in risk into the price.

[Toulouse - Luzern]

Agree Belgarion but does revenue of $3.7m justify a $200m+ valuation.

During the height of the dot com boom with hockey stick valuations and revenue projections one researcher got total employees (including tea ladies and cleaners)and divided it into the valuations. They had a rule of thumb as to how hi was likely to be too high ...

[winner69]

If Groupon is worth US$15 billion Xero must be worth NZ$1 billion .... at least it does something constructive for people

[The BOWMAN]

If Groupon is worth US$15 billion Xero must be worth NZ$1 billion .... at least it does something constructive for people

You can't compare them. Web sites like Groupon or Facebook is the similar sort of deal in terms of value. They collect a vast amount of human information, i.e. a massive user base. The value lies within the data. They may not be able to make money directly out of their web site today but all that is required is to come up with ideas to make massive amount of money based on the data.

On the other hand, Xero is very limited and straight forward. Cost of building and maintaining the application against the revenue collected from the small number of clients using the service. Maybe more tangible business model but not much potential really. It is one of those High Tech ideas that may become successful but will never become miracle.

[Stranger_Danger]

Remember when eforce, advantage, commsoft, IT Capital (enjoying the trip down memory lane?) etc etc were "worth" XXX because Amazon and Yahoo were worth many times XXX?

What a bull**** way of "valuing" things.

[CJ]

You can't compare them. Web sites like Groupon or Facebook is the similar sort of deal in terms of value. They collect a vast amount of human information, i.e. a massive user base. The value lies within the data. They may not be able to make money directly out of their web site today but all that is required is to come up with ideas to make massive amount of money based on the data.

On the other hand, Xero is very limited and straight forward. Cost of building and maintaining the application against the revenue collected from the small number of clients using the service. Maybe more tangible business model but not much potential really. It is one of those High Tech ideas that may become successful but will never become miracle.Xero also has a large amount of data. Mint was profitable even with no subscriber fees because of the way it mined its data (and got referal income)

[Stranger_Danger]

Yeah but does data mining/targeted ads work with paid accounting software?

Do I want a banner ad promoting my competitor who is trying to sell me the same product as one I sell, who by placing the ad clearly has a relationship with the person who holds my accounting data and, when I'm doing my accounting?

Playing devils advocate as always, but you'd want to do it carefully.

[winner69]

The point of bringing Groupon into the discussion was to say (like 10 years ago) the traditional valuation methods don't apply anymore

Groupon revenues less than $500m and punters saying it is worth $15 billion .... 30 times sales .... and some of you guys say that it could be all over for them in a year or so when the next social media fad comes along

Never mind .... if punters think Groupon is worth that and that XRO is worth nearly $300m than they must be right .... who i am to question the masses

[CJ]

Yeah but does data mining/targeted ads work with paid accounting software?

Do I want a banner ad promoting my competitor who is trying to sell me the same product as one I sell, who by placing the ad clearly has a relationship with the person who holds my accounting data and, when I'm doing my accounting?

Playing devils advocate as always, but you'd want to do it carefully.I am not sure exactly how Mint worked but I beleive it offered recommendations (ie. if you change to this credit card, you would save $x on fees and $y on interest). It didn't recommend changing to MYOB. This is obvoiusly an ability Xero would have as it is not tied to a bank (exept BNZ with their personal product) wheras you would be sincial if Heaps (Kiwibank) or ASB's version gave a similar recommendation.

So a company (Contact energy) could go to Xero and say if you have any customers that pay more than $x for a product (electricity), it could get Xero to offer it at $x-1. The company (Contact) wouldn't get the details unless the Xero customer responded to the ad. Xero customers would go to the 'deals page' as they know that any ad in there has already been pre-screened to ensure that it is actually a discount to the customer. It doesn't sell anything additional, just a product or service that the customer already buys and is paying to much for.

[futurist]

It is quite surprising the level of understanding about software business differs so much these days. To put it in the simplest way, Xero is an online service which does not benefit from network effect as much as Google Search, Facebook, Twitter or Groupon, even though it was developed around the same era.

If you look at the history of software business, service-oriented software exists for a very long time and so moving it from desktop to cloud does not change its nature and certainly it is not a new idea at all. Web 2.0 beasts are no longer new neither but they have more potentials because at the core they are designed to become better by just having more users.

Another important point is that most successful Web 2.0 companies were started and are still run by technologists. Of course they get the help from VC in terms of fundings and business strategies but it is never the other way round. Money is not and should not be the issue to begin with, it is all about solving problem. Therefore it is more common for them to become a listed company only after they become successful in terms of adoption. It is because when you get certain millions of users, it is harder for your competitors to compete with you because you get help from those million of users for the ongoing innovation and development of the product/service as well. For example, Twitter's usage of @ and # are all user innovations, not originally designed by the company.

Okay let's go back to Xero. Maybe it is really useful and valuable to some people, but in its current format it is not a Web 2.0 company. What about the software itself? It is not complex enough that could monopolize the market I guess. Also I could understand about having personal data being mined when I am using some free services like Google Search and Facebook, but I am not sure if I would agree to that if I am paying for a service to deal with my accounting needs.

What is good about Xero in my opinion is its publicity right now, and apparently many people believe in it enough to invest. So there are potentials for it to change. However if all their efforts are spent on marketing the software to more countries but not on R&D, then they are just waiting for the day when two dropouts from university decide to build a similar service and just let people use for free to come.

[gregrday]

Hi guys, my 2c...
@Stranger_danger, comparitive valuations is a recognised method of valuing companies. Its up to you to work out exactly how apple and orange-like everything is and weight the valuation accordingly.

@futurist, I agree with most of your points, particularly, network effect, and SaaS not being such a 'new' beast. However, I think you are selling Xero a little short in that I very much doubt '2 dropouts from uni could build a similar service...'. Software is much more complicated than that, so I think there is a bit of moat that Xero has, assuming it can beat the competition, who will have a similar moat.

I think the Peter Thiel investment is incredibly important for Xero, but there is still a massive way to go. At the moment, @winner69 has it right in that its hard to argue with the masses! My own feeling is that Xero is significantly overvalued right now (although obviously better than last week!).

cheers
Greg

[futurist]

@futurist, I agree with most of your points, particularly, network effect, and SaaS not being such a 'new' beast. However, I think you are selling Xero a little short in that I very much doubt '2 dropouts from uni could build a similar service...'. Software is much more complicated than that, so I think there is a bit of moat that Xero has, assuming it can beat the competition, who will have a similar moat.

I think the Peter Thiel investment is incredibly important for Xero, but there is still a massive way to go. At the moment, @winner69 has it right in that its hard to argue with the masses! My own feeling is that Xero is significantly overvalued right now (although obviously better than last week!).

cheers
Greg

I agree that some software could be complex, like the infamous ERP system could take hundreds of consultants working on it for years. But when I was talking about Xero I implicitly take the view that Xero is no where near that kind of complexity, or it needs to be. Don't underestimate what 2 dropouts from uni could do - Microsoft DOS, Google Search etc, because they see the world of IT very different from the rest. Statistically speaking amazing software innovations are mostly created by relatively young technologists, not mature business savvy people (with only very few exceptions). Academically this is called learning bias, when some expert is too good at what they know, they couldn't really learn anything new outside their domain and so at best they could only achieve incremental innovation, not the game changing radical innovation.

Could anything accurately describe or define what Google, Amazon, Facebook or Twitter is? The reason we find it difficult is because they could always be more than what we think based on their technological potentials. What about Xero? Maybe the first thing in their CEO's mind is to make sure people know exactly what Xero is, and that is exactly why it is not amazing at all.

[gregrday]

The complexity I'm talking about is not the convoluted complexity of ERP systems, but the complexity of making good software work really well. Im not exactly a uni-dropout, but this is what I do. And making a software system like Xero is hard, particularly the security and scalability factors.

And... I don't know about you, but .. its not really... well... sexy? I suspect the uni-dropouts in their bedrooms are working on something more interesting than small-business accounting! So I don't think theres much of a risk from that point of view. The risks for Xero are much more concrete, namely very large, funded businesses already in the market, along with a number of other players. My suspicion is Xero will be bought by one of them, although that goes against Rods desire to run a NZ-based international business.

cheers
Greg

[futurist]

The complexity I'm talking about is not the convoluted complexity of ERP systems, but the complexity of making good software work really well. Im not exactly a uni-dropout, but this is what I do. And making a software system like Xero is hard, particularly the security and scalability factors.

And... I don't know about you, but .. its not really... well... sexy? I suspect the uni-dropouts in their bedrooms are working on something more interesting than small-business accounting! So I don't think theres much of a risk from that point of view. The risks for Xero are much more concrete, namely very large, funded businesses already in the market, along with a number of other players. My suspicion is Xero will be bought by one of them, although that goes against Rods desire to run a NZ-based international business.

cheers
Greg

Yes security and scalability are always tricky, but that almost apply to all websites (i.e. web applications) these days before or after they are launched.

Ha you are absolutely right, accounting software is not sexy nor interesting from a general perspective. But small biz apps are, because it blurs the thin line between personal and business when the company has only a handful of people (or sometimes just one). Therefore a small biz accounting software can still be fun and interesting to use, and that's what they should pursue to be differentiated with the heavy-weighted accounting software.

I just think this is not the time for companies to build yet another average software just like twenty years ago Microsoft built Windows. Being an accounting software to serve business is not an excuse for not being creative and innovative, given we are all living in the same era witnessing how fast things are changing everyday. Having said that, maybe comparing with other accounting software Xero has been doing pretty well already.

P.S. Before Google exists there were like dozens of search engine available online and no one, even Jerry Yang himself, thought providing a search result in 0.03 seconds made any sense at all. Search was not sexy, and hardly being seen as interesting too.

[CJ]

Having said that, maybe comparing with other accounting software Xero has been doing pretty well already.Xero marketing is based around easy of use and time saving. They get testimonials from customers who now do their own accounts in less time and 'enjoy' the experience. They do this by the automated bank feeds and automatic coding. So in a way, they are reinventing the way accounting software works - less data input, more automation.

[futurist]

Xero marketing is based around easy of use and time saving. They get testimonials from customers who now do their own accounts in less time and 'enjoy' the experience. They do this by the automated bank feeds and automatic coding. So in a way, they are reinventing the way accounting software works - less data input, more automation.

Thanks for bringing that up. Automated bank feeds and automatic coding have existed for at least 10-15 years if not more, mostly used by business trying to keep track of the usage of their company credit cards via their employees. Even the crappy first version of Microsoft Money could handle automated bank feeds.

I guess your have proven an interesting point - sometimes people just don't know how old some ideas really were, and of course then they couldn't really see the new one neither. Having said that, diffusion is as important as innovation itself, and maybe that's what Xero is doing right now.

[maddog]

There is certainly nothing new about automatic bank feeds. A very large number of New Zealand small businesses have for many years been getting their accounts processed using the BankLink service. The reason most people hear little about BankLink is that it is promoted solely via accountants rather than direct to end-users like Xero. I understand it has many more users than Xero.

I want to address an issue raised a couple of days ago - that is whether accounting products can earn revenue from recommendations made to users a la Mint.com. There is a Canadian company that has just launched an online accounting product that is doing just that. Wave Accounting is providing a free online accounting service. They earn revenue from targeted advertising - say if you spend over $200 a month on mobile phones you may be targeted by a offer to change networks.

Whether this is good or bad for a company like Xero I'm not sure. It certainly won't be for everyone but the lure of a free product will have appeal to others.

It suggests to me this is a very fluid market with rapidly changing dynamics - and one where there is likely to be ongoing and downward pressure on pricing.

[CJ]

A new competitor has emerged : http://techcrunch.com/2011/01/19/zoho-debuts-online-accounting-and-invoicing-service-zoho-books

This is becoming a very crowded space. It is a very big market but it is looking like it will become very fragmented.

I think Xero is being clever by targeting the accounting profession.

However, at some stage an established player will enter the SaaS market in a big way (MYOB is pretty halfhearted at the moment) so it will be interesting to see if they do it via acquisition or internal development.

[maddog]

If you're looking for new emerging competitors for Xero take a look at www.sageone.com (http://www.sageone.com). Sage's new online product has just been launched in the UK. Sage is the leading provider of accounting products in the UK. While their record in the online space is patchy to say the least they are a very serious player in the market.

By the way there is nothing clever about Xero targeting the accounting profession. That's what most of Xero's competitors already do. Rather than being clever to target accountants you would be dumb not to.

[h2so4]

If you're looking for new emerging competitors for Xero take a look at www.sageone.com (http://www.sageone.com). Sage's new online product has just been launched in the UK. Sage is the leading provider of accounting products in the UK. While their record in the online space is patchy to say the least they are a very serious player in the market.

By the way there is nothing clever about Xero targeting the accounting profession. That's what most of Xero's competitors already do. Rather than being clever to target accountants you would be dumb not to.

Absolutely, every time I have taken my books to the accountant there would be a new accounting software package that I should be using.

[h2so4]

During the height of the dot com boom with hockey stick valuations and revenue projections one researcher got total employees (including tea ladies and cleaners)and divided it into the valuations. They had a rule of thumb as to how hi was likely to be too high ...

Revenue per consultant. Nothing wrong with that, last time I did it with XRO = $42000. Not very exciting, I'm happy to wait until sales increase further.

[CJ]

By the way there is nothing clever about Xero targeting the accounting profession. That's what most of Xero's competitors already do. Rather than being clever to target accountants you would be dumb not to.Yes but the new start-ups dont seem to be. As I said it is only a matter of time before the big boys enter. Sage's prices look pretty good - dont know if their offering is as good but it can only be a matter of time.

Theil needs to get this going big time in the US quickly

[Toulouse - Luzern]

Revenue per consultant. Nothing wrong with that, last time I did it with XRO = $42000. Not very exciting, I'm happy to wait until sales increase further.

what if you divide the employees into the market cap = if revenue = $42k then just what is the market cap per employee ...

[h2so4]

About $2.8m.

Looking at the interim report unless consultant numbers have increased from 2010revenue is now aprox $82800 per consultant annualized.

[maddog]

I just read a fascinating article from the UK's Guardian http://www.guardian.co.uk/business/2011/feb/20/is-this-the-start-of-the-second-dotcom-bubble. It is mostly about Facebook, Twitter, Groupon etc but there are some very interesting comments about the first dotcom bubble. The article suggests that we may be in a second dotcom bubble at present. According to the article:

"there are 10 tell-tale signs that a bubble is being blown:
■ 1. The arrival of a "New Thing" that cannot be valued in the old way. Dumb-money companies start paying over the odds for New Thing acquisitions.
■ 2. Smart people identify the start of a bubble; New Thing apostles make ever more glowing claims.
■ 3. Startups with founders deemed to have "pedigree" (for example, former employees of New Thing companies) get funded at eye-watering valuations for next to no reason.
■ 4. There is a flurry of new investment funds catering for startups.
■ 5. Companies start getting funded "off the slide deck" (that is, purely on the basis of their PowerPoint presentations) without actually having a product.
■ 6. MBAs leave banks to start up firms.
■ 7. The "big flotation" happens.
■ 8. Banks make a market in the New Thing, investing (http://www.guardian.co.uk/business/investing) pension money.
■ 9. Taxi drivers start giving you advice on what stock to buy.
■ 10. A New Thing darling buys an old-world company for stupid money. The end is nigh."
I can't help thinking that the Xero share price is in part at least caught up in this sort of hype.

[Stranger_Danger]

A good portion of it, but not all of it. I believe we are in the beginnings/heading towards the middle of a bit of a tech bubble. Thanks Bernanke.

I don't think we're near a bubble bursting and I don't think it will get as big this time, but there is definitely some "irrational exuberance" in prices. Check out Netflix for exhibit A.

[Stranger_Danger]

Belg - fair point, but I'm not talking about how Microsoft is valued now vs how it was valued then. I'm talking about how companies that didn't exist then are valued now based on their current and prospective results.

I'm not saying we are in for a crash or that the whole market has gone mad, but, there are a lot of companies I cannot buy in this sector and this was not the case a couple of years ago.

[Roadrunner]

Is the sleeping giant Xero about to wake up?I`m presuming the results are out this week or next.Break even in NZ,Oz and the UK already announced and prestigious new offices in Welly CBD to cope with future demand!I`m optimistic that things are going in the right direction and the share price will ignite again if that is the case :confused:

[nwood]

Xero Full Year Results - Market release

Xero Triples Revenue

20 May 2011

Full year results to 31 March 2011

• Operating revenues of $9.34m up from $3.15m
• Operating expenses of $18.0m as the company invested in growth
• Net loss after tax of $7.5m reduced from $8.4m
• Cash at bank of $16.9m

On track and growing rapidly
Xero is now one of the leading global online accounting software companies, tripling its revenues in the 2011 year.
From February, Xero has exceeded $1m per month of revenue and the annualised subscription run rate is approximately $14m. Revenue is expected to continue to grow strongly.
Paying business customers have doubled from 17,000 to more than 36,000 across 100 countries as at 31 March 2011. Xero has now processed in excess of $35 billion of customer transactions. This signifies the quality of Xero’s Software as a Service model and its growing importance in the Financial Services industry.
Xero has now established itself inside 2,200 accounting firms and continues to develop innovative features to gain broader adoption within the accounting community. A growing number of accounting practices are 100% Xero. The accountant channel provides access to hundreds of thousands of small business customers.
Xero continues to carefully balance investment in its existing business operations and the pursuit of growth opportunities as the Company drives toward monthly break-even. The Company retains a strong cash position as it refines its US strategy and it begins to create a presence in the vast US market.
Markets
The Company’s sales operations in all countries are now covering their direct costs.
The New Zealand operation continues its rapid momentum. Signs of a similar success pattern are apparent in the UK and Australian markets, giving the Company confidence to further build its teams in these markets.
In Australia, a Head Office has been established in Melbourne and a Managing Director appointed to take the business to the next level. In the UK, Xero is now regarded as an established and leading brand.
The Company has taken a measured approach to the US market as it refines the US version of the software. Xero’s product innovation provides real competitive advantage and this will favourably position the Company to realise the significant opportunity available to it in the US market.
Xero is making good progress building key partnerships in the US and is leveraging the connections and advice provided by its advisors and strategic investor Peter Thiel. Several key Xero staff are in the process of relocating to the US and the Company is also recruiting in that market to engage talent with specialist knowledge and experience.
Product development
There have been more than 60 software releases since Xero was established. During the period new product innovations have included Payroll for small business, Custom Invoice Templates, Enhanced Annual Reporting, Simple Inventory and enhancing the Xero user experience on smart phones.
Another milestone has been extending the integration with data gathering service Yodlee to enable bank feeds in the UK, the US and beyond, providing more than 11,000 global account sources.
In the 12 months since Xero Personal was launched, the feature set has advanced over six software releases and the product continues to attract new customers and favourable media reviews.
The Xero solution partner ecosytem has continued to grow strongly and there are now over 40 online solutions that integrate seamlessly with the software, with a considerable number in the process of integration.
Competition
Four years on, Xero has a proven global online accounting platform that provides significant first mover advantage. Xero is the leading challenger to the global incumbents MYOB, Sage, and Intuit. The incumbents’ lack of operational experience in the new online market has meant they are yet to deliver a competitive global solution.
Xero is disrupting the traditional accounting software market in two areas:
1. Combining both small business accounting and accountant processing software into one solution. This is a natural evolution of cloud software and one which is a huge challenge for the incumbents as they try to maintain revenues from their accountant software divisions.
2. Working with Microsoft and other providers, Xero has established ‘The Modern Practice’ initiative - a suite of integrated cloud solutions that allows accountants to run their entire practices without installed servers.
The year ahead
Xero’s focus is to keep innovating and delivering a best in class product. The Company will continue to execute its sales and marketing strategies in regional markets, while positioning itself to take advantage of the massive opportunities in the US.

[buns]

The Company’s sales operations in all countries are now covering their direct costs."

Is this the break even statement? I thought Break even would include opex directly allocated from Xero's overhead functions?

Seems they are taking it as acheiveing a Contribution Margin?

[CJ]

Buns - the sales operations first have to cover their own direct costs, then derive enough income to cover head office costs which include the development team. Therefore I dont think it is the breakeven announcement which I think they said they need an extra 6,000 customers for.

[Nandi]

No, this is not breakeven:

"Next up is the loss. Over the last four half years our loss has decreased which is what you’d expect as we drive to break even. This was what we said we’d do which I hope gives investors confidence we are carefully managing our spend – large as it is."

(from Rod's post on the Xero blog today)
Did anyone else notice the changes to the accounting policy and the resulting impact on the bottom line?

2011 full-year results commentary
20 May 2011


Operating revenues of $9.34m up from $3.15m
Operating expenses of $18.0m as the company invested in growth
Net loss after tax of $7.5m reduced from $8.4m
Cash at bank of $16.9m

(from Xero.com blog posting today)


*** The Group took the decision to change the amortisation rate from 3-4 years to 3-5 years as it considers this period to better reflect the period over which the capitalised development costs will generate future economic benefits. The impact of the change in the useful life of capitalised development costs from 3-4 years to 3- 5 years is a decrease in the amortisation cost for the year of $880,000.

(from condensed financial statements filed with NZX today)

[winner69]

Nothing like a good**** fight between the believer and his mates and the knockers

Better than Coro St with accusations of telling porkies (about the accounts) and one guy saying Rod is only make himeslf look like a jerk

And nobody has replied to Blondie who wants to bang Rod

http://www.nbr.co.nz/article/xero-triples-revenue-still-bleeding-cash-mn-93622#comments

[winner69]

XRO on their blog says that the value of transactions processed by their clients is SO BIG that that value could buy Linkedin several times over

Good story all adding to the hype eh ... so lets compare Linkedin market value with XRO market value seeing XRO like to use Linkedin as a benchmark of sorts

Linkedin actually makes a profit (about $15m a year) and floated at $45 which is about 15 times sales - making it the most expensive stock in the US (and that is forgetting it closed day 1 at $100)

XRO has a market cap of $223m which is about 23 times sales ..... even more expensive than Linkedin

But then we all know that XRO has much greater growth potential than Linkedin ... yeah right

Good on Rod ... his 26% or whatever share is worth over $55m and he didn't put anything like that in to start with did you

Methinks we will never see XRO reach breakeven .... that elusive number that seems to be getting bigger every day ..... instead they'll be taken out and everybody will live happily ever after ... and Rod can go and invent something else to keep him occupied

[ratkin]

Nothing like a good**** fight between the believer and his mates and the knockers

Better than Coro St with accusations of telling porkies (about the accounts) and one guy saying Rod is only make himeslf look like a jerk

And nobody has replied to Blondie who wants to bang Rod

http://www.nbr.co.nz/article/xero-triples-revenue-still-bleeding-cash-mn-93622#comments


If this was coro, xero would be Gails old boyfriend Richard Hillman (the one who pretended to be an airline pilot) Or maybe the bloke who recently ran off with Rosies money

[CJ]

Methinks we will never see XRO reach breakeven .... that elusive number that seems to be getting bigger every day ..... instead they'll be taken out and everybody will live happily ever after ... and Rod can go and invent something else to keep him occupiedI think XRO is like 42Below. They could breakeven if they wanted to by dialing back on the sales and marketing. But they spend on those to be even bigger.

Hopefully it pays back.

[Stranger_Danger]

Xero is exactly like 42 Below, which would probably be broke today if Bacardi hadn't bought it.

42 Below was run in a gungho, all or nothing way, and whether they admitted it or not, they were always gonna try and flick it and get rich. I think Xero is the same, I think they've been fairly open about this from the beginning and I suspect most shareholders are very much in for that ride.

It definitely isn't for little old ladies, but they never said it was. I suspect in a few years it'll be seen as a triumph or a disaster - these guys aren't going for "inbetween".

[winner69]

And these guys have a significant rack record in triumphs.

Going from memory the founders only put in a couple of million in ..... and even after the 15m
IPO still held a disproportionate share of the company .... and even after more cap raisings they still hold a decent chunk of the company .... even Rod with his modest investment still has 26% or so and with the market cap about $225m done very OK .....and better still if he hocks it off for $300m plus ... even half a billion has a nice sound to it

[Nandi]

Finally sense prevails - this is just like 42 Below, sadly MYOB went private, otherwise we won't be having this discusion. Part of Rod's problem is that he may have been too "successful" as at the market cap of 225 mil currently the potential suitor pool is very shallow. He is having for the very first time to deal with creating true value and actually running a successful business in the old fashioned sense of the word.

The other thing that he will be battling is the dread of all recurring revenue businesses - churn. In the SME world for a company like Xero with a customer base that's now starting to get to it's third and fourth year, churn will be running at around the 20% mark. That means on 1 April 2011, the clock starts at minus 7,000 sites. That's material when you consider that the net gain for the year just completed was 18,000 sites in total. The higher the base the higher the churn is in absolute numbers. To get even more customers you need to spend even more money, break-even gets that much further away. It's a vicious cycle that needs to be controlled to win the SaaS battle. Xero are not going to take a step back and spend less, new premises in Wellington, Melbourne and the US roll out will continue to add pressure on the cost side.

[Nandi]

The other thing is where are the new customers going to come from? 65% of the sales come from NZ, and they have 2,000 accountants who give them clients. Simple math tells me that it must be hard going as 65% of the last years sales amount to say 10,000 sites and lets assume 80% came from accoutants (that's where most of the marketing and sales effort is going into) that's 8,000 sales from 2,000 accountants. That says that the Banklink/MYOB hold on the accountants has not been totally broken or accountants hate change. I guess the truth must be somewhere in the middle. Either way its going to be hard going to ramp up the sales in the face of these factors.

That leaves the US of A. The 225 million dollar question is it going to be possible to extract enough paying customers from that markets to cover costs and churn in the next 7 months to get to break-even. I dont think so. My guess is that if there is a potential suitor with deep pockets who loves a great story, then he or she will in all probability be in the States. So it makes so much sense to put all your efforts into getting noticed in that market, that's a much better outcome and path that Rod has been down before. Hence the three trips so far, basing the CTO in the states, the road trip etc is the best thing Xero can do. Forget about Blondie and the other chick at the Viaduct and raise that Star spangled banner!

Rod is a success because he has been able to convince enough people to put up enough cash to do this properly, you have to admire the guy for that.

[Gardener]

Going from memory the founders only put in a couple of million in ..... and even after the 15m
IPO still held a disproportionate share of the company .... and even after more cap raisings they still hold a decent chunk of the company .... even Rod with his modest investment still has 26% or so and with the market cap about $225m done very OK .....and better still if he hocks it off for $300m plus ... even half a billion has a nice sound to it

That's one expensive tea lady.

[winner69]

........ He is having for the very first time to deal with creating true value and actually running a successful business in the old fashioned sense of the word.

Interesting comment Nandi

[winner69]

I see Rod was pretty quick to join in a discussion on the Comments section of NBR the other day but now he is refusing to answer questions around the change in accounting policy because the question was asked by an unknown person .... and now he is calling the NBR the wild west and that they are doing a disservice to NZ business

So we won't be seeing Rod posting on Sharetrader

[Stranger_Danger]

I must say, people who only wanna talk good news, and to friendly people who agree with them, worry me a bit.

[Nandi]

Just check out the Rod's bio and you will see that he does have a very special talent and skill set (www.drury.net.nz/bio/)

Its all short time frame stuff, take an idea or concept and bring it to the brink of becoming a commercial success before handing over to someone else who can run it. After his time at EY/Arthur Young, he became the CTO at Advantage Group. From there he went on to form Glazier which got bought out. Then the biggest success was Aftermail that was bought by Quest when it had just signed some big deals and got its turnover to around the 1 million dollar mark.

The point I am making is that with Xero now becoming a mature orgernisation with over 100 staff in three significant overseas markets and having a turnover of around 10 million, its a very different ball game needing a very different skill set.

When you look through Rod's CV it is clear that this is the first time he has got this far into the life cycle of a business that he started.

The question that needs to be asked is "Is breakeven the holy grail?" if the answer is yes, then focus needs to go on both the cost as well as the revenue side of the equation. My read is that Rod is great at driving up the revenue side of the equation but may not be the best person at managing the cost side of the equation. The devil in the SaaS industry is churn of which we hear nothing about from Xero. For example if you read the Sky TV financials you will see that they deal with it very openly and you will also see how much of an impact it has on the business. The harder you drive up revenue and the more successful you are, the further you get from breakeven. You can see that clearly in the recent Xero result. When you take out the accounting slight of hand, the loss this year is the same as the loss last year, despite a three fold increase in revenues. Welcome to the wonderful world of SaaS economics! Its to do with the cost of acquiring each new customer is fixed and these costs are recovered over time. But the impact of churn is such that if your cost of acquisition is relatively fixed, breakeven becomes an elusive target.

(Disclaimer - I am not a Xero shareholder or ex or current employee of Xero. I don't know Rod personally, all of my views are formed on the basis of publicly available information. I have worked and continue to work in the SaaS industry and have extensive experience on the subject. I have followed and studied Xero very closely)

[Stranger_Danger]

Confusing. You seem to argue that the economics of SaaS completely suck, then disclose you are in the industry?

How does that make sense? If the economics suck, why not get out?

[CJ]

I see Rod was pretty quick to join in a discussion on the Comments section of NBR the other day but now he is refusing to answer questions around the change in accounting policy because the question was asked by an unknown person .... and now he is calling the NBR the wild west and that they are doing a disservice to NZ businessI think Rod has commented to the NBR more recently in a separate article but it is behind the paywall so dont know what it states.

[Nandi]

Confusing. You seem to argue that the economics of SaaS completely suck, then disclose you are in the industry?

How does that make sense? If the economics suck, why not get out?

Sorry to confuse the issue. I am not saying the economics completely suck. All I am saying is that it is a lot harder than you would think. You can't simply expect to sell your way to success. At some point in the evolution, you need to focus on the cost side of the business, like driving down your customer acquisition costs and or reducing the overall cost of delivery. If you can do that, then you have a very successful business. That is something that some of us have been able to do. The revenue/cost relationships in a SaaS business are not linear as most people think they are. Hope that clarifies?

[Stranger_Danger]

I happen to agree with you on the cost side.

I do - sort of - understand why Xero spend so much money, but I do struggle to relate to it.

I'm not in the SaaS business so don't know the economics as you do, but what I do know is that in any business there is massive difference - day and night - between a frugal, cost management culture, and the spend like a drunken sailor types.

For example, I have seen the exact same computing problem solved by 3 different organisations. One spent $30, another $500 and the other over $100,000.

This was the direct technology cost.

The really scary thing is you'd hope the $30 fix was an utter fudge that led to lots of future spend on wages, whilst the $100,000 went on sleek automation which allowed 5 jobs to vanish.

Alas, the opposite.

The $100,000 actually created make-work jobs, eliminating low level low paid grunt work and replacing it with expensive, "planning" and "analysis" related fudgery, all highly paid, good for the CEO's ego, and utterly pointless.

I remember Warren Buffett saying once that a good manager doesn't wake up one morning and decide to save money any more than he wakes up and decides to breathe. It is just part of his makeup.

I agree with you that if the Xero culture is one of excess and spending (Note : I'm not saying that it is, I don't know) it will be really hard to change that later. It tends to feed right through an organisation and result in waste everywhere you look, which is why it is so important to lead frugally.

[winner69]

I think Rod has commented to the NBR more recently in a separate article but it is behind the paywall so dont know what it states.

I think Rod has given up on the NBR as a sounding board .... won't even answer their questions

The 'official' story is through the Xero blog on their website

[CJ]

I think Rod has given up on the NBR as a sounding board .... won't even answer their questions

The 'official' story is through the Xero blog on their websitehttp://www.nbr.co.nz/subscribe?return=93899 <- if anyone has a subscription.

[winner69]

http://www.nbr.co.nz/subscribe?return=93899 <- if anyone has a subscription.

Its the we won't respond to your questions trick ..... and then said what he thought of the NBR

The NBR did quote something the ZRO finance man posted on XRO blog about the shenanagins around the change in accounting policies

[Nandi]

I hadn't heard of that Buffett quote before, but I absolutely love it! It is so bloody true.

Like you I don't exactly know what the spending culture is at Xero. But when I read things like this, I start to form a picture of what the priorities are at the place:

MARKET RELEASE
New premises for Xero in 2012

9 May 2011
Having outgrown its existing premises, online accounting software provider Xero (XRO) has signed to lease the
John Chambers building near the Wellington waterfront, making this the company’s new global headquarters.
The building situated on Jervois Quay is the former home to the New Zealand Film Commission and the Rialto
Theatre and is in the same precinct as NZX and Trade Me.
Xero will take level 2 and half of level 1 of the building, which will also be tenanted by Morrison & Co, the
investment bank behind infrastructure group Infratil.
Xero CEO Rod Drury says the company is thrilled to be involved in rejuvenating a landmark Wellington building into
a creative environment that will help the company attract further talent from around the world.
Xero has already created more than 100 new jobs serving customers in over 100 countries.
The John Chambers building is being earthquake strengthened and renovated before Xero moves in around March
2012.


and this from November last year:

"As the take-up of Xero ramps up in Australia we’ve been feeling the need to establish a base. Melbourne was an obvious choice because it’s the home of our marketing partner ANZ and carrier partner Telstra. The city’s also got a great culture too which makes it easier to do business.

The move has been noted by the Victorian Government as it rolls out its ICT Plan of Action. This includes a push to position the state as a leader in cloud computing.

While we’ve got people on the ground and covering every state, there’s nothing like building team spirit when you can come together under one roof. Table tennis, pool anyone?"

[maddog]

Interesting to see that Drury won't talk to NBR but is quite happy to talk to his mate Lance Wiggs:

http://lancewiggs.com/2011/05/23/xero-cops-the-flak-but-is-doing-things-well/ (http://lancewiggs.com/2011/05/23/xero-cops-the-flak-but-is-doing-things-well/)


Interestingly, Drury acknowledges the question about the changed amortisation rate was a good one.

Unfortunately he repeats his attack on Ben Kepes - Drury's approach to people who disagree with him appears to be to attack them and discredit them, rather than addressing the issues raised. I guess that's why he doesn't like anonymous posters - nobody to attack.

[Roadrunner]

We were promised a strategic update by Xero at the end of May,regarding the US market.It`s all gone a bit quiet and the SP could do with a kick-start!

[Everwood]

We were promised a strategic update by Xero at the end of May,regarding the US market.It`s all gone a bit quiet and the SP could do with a kick-start!

I just looked at the Xero Blog http://blog.xero.com/2011/05/xero-triples-revenue-again/ and someone asked that question yesterday. Rod Drury said "wouldn’t believe everything you read in the NBR"

[winner69]

I just looked at the Xero Blog http://blog.xero.com/2011/05/xero-triples-revenue-again/ and someone asked that question yesterday. Rod Drury said "wouldn’t believe everything you read in the NBR"

Believe everything Rod says - he's a guru

Whatever - the way the shareprice is lookign Rod better tell another story to get things moving again ...

must look in on the xero blog more often to get more insights

[Nandi]

Ahhem, Its fine to say "wouldn't believe everything you read in the NBR"

But what about your own Investor Presentation? http://www.xero.com/downloads/pdf/reports/070311-Xero-Investor-Presentation-2011.pdf

The key slide there is: Titled "US Strategy"

So what, Don't believe everything we tell investors?

[Roadrunner]

Ahhem, Its fine to say "wouldn't believe everything you read in the NBR"

But what about your own Investor Presentation? http://www.xero.com/downloads/pdf/reports/070311-Xero-Investor-Presentation-2011.pdf

The key slide there is: Titled "US Strategy"

So what, Don't believe everything we tell investors?

Thanks Nandi,knew I`d read it on a Xero document somewhere but couldn`t find the link!........Nevertheless I`m a fan of the ambitious plans the company has.Hopefully it will not spread itself too thin regarding investment in the US market,where the rewards could be huge.Sticking my neck out but I`m confident the SP will be back nearer $3 than $2 before the year is out:)Hoping the AGM on 21st July starts the ball rolling and the Google info today was interesting.

[kiwi_on_OE]

A couple of things that have me a little worried about Xero ie. are they possibly symptoms of bigger issues?

1) googling 'xero UK' comes up with a 'paid for' link to uk.xero.com/AccountingSoftware - which doesn't exist, that's wasting them money (I've tried it a few times, sorry Rod), if not customers.
2) according to their help system they only have HSBC setup as a direct feed partner, that's gotta be impact on their potential customer base in the UK. Although this is in contrast to media releases late last year saying they had 55+ banks in the UK.

[maddog]

Kiwi on Oe you are correct that Xero do only have HSBC set up as a direct partner feed in the UK. This involves getting the data direct from the bank with the signed permission of the account holder and the full co-operation of the bank. This is the way Xero gets most of its data in New Zealand and Australia. Direct data feeds are viewed as the best (reliable, accurate and secure) method of obtaining quality bank data. The downside is that they are hard work to set up and maintain.

The alternative which Xero has chosen to implement is to obtain data from other banks via a third party data aggregator - Xero use a company called Yodlee. Much of the data Yodlee obtains is gathered via a process commonly called "screen scraping". This involves the Xero customer and bank account holder giving their internet banking log on and password details to Yodlee. Yodlee then regularly logs on to the internet banking site and copies the data which is then supplied to Xero. In most cases this is done without the involvement or approval of the bank - and indeed most banks explicitly forbid an account holder to supply their log on and password details to a third party - clearly stating they are not liable if any fraudulent activity occurs and details have been passed on.

Yodlee does have a good reputation and I am not aware of any data breaches involving its service. Nevertheless I am nervous about a system which requires any customer to hand over such vital details to a third party in a process which is in clear breach of most customers internet banking agreements. If anything were to go wrong with Yodlee and details were accessed by another party it would be major egg on the face for Xero.

There has been plenty of debate over the Yodlee service (including on the Xero blog) and there are plenty of people uncomfortable over using the service including accountants unwilling to recommend Xero to their clients - while many other appear very relaxed.

The other issues from using a data aggregation service are that the data quality is not as good as that received via a direct feed from the banks core transactional platform, and if the bank changes any details of its internet platform a data aggregation service may fall over and be offline until a new link is set up.

The key advantage is that it enables Xero to quickly obtain data from a much wider range of banks. Xero obviously believe this advantage is enough to make up for the other shortcomings of using such a service.

[Nandi]

@Roadrunner, how is that neck feeling? Six months to go and 50% to get... I think with your view the current SP at 2.04 is great buying, if you thought it was a winner at 2.50 then its time to bet the farm!

Its amazing how announcements generate so much excitement such as the Google one. The interesting thing is to ask what happened to all those great and exciting announcements that were made in the last 24 months? How did the the tie up with Telstra in Australia do? What about the efforts with Telecom in NZ? Or the tie up with ANZ in Australia? Was it some deal with HSBC in the UK? What happened to the whole BNZ relationship and the Xero personal venture? How much of these things are generating any revenue and profits? Why do we get so excited about the deal that has just been announced and not care at all about all those deals that we cheered in the past?

I was a fan of the company and I am still a fan of the product. I have however lost faith in the management and leadership of the business. I think its a shame that a fantastic chance has been blown due to ego's getting in the way of business.

But then all of the above is just one man/woman's view

I am sure the AGM will be an exciting one, full of new and exciting ventures that will see Xero take its place in history. I am sure you will get confirmation that the promised break even by the 31st of December 2011will happen. Yeah right!

Here is my prediction for the Xero and its share price:

1. The panic button must have been pressed by now as the SP approaches the $2.00 mark, so the spin department will be going into overdrive.
2. Anticipate great announcements of tie up's with great names like Google, Microsoft etc. I suspect that there could be at least one acquisition, like we had last year on the eve of the AGM.
3. The spin will be enough to breathe life into the SP that has been steadily heading south, so a small rally will bring cheer to the loyal supporters
4. Expect another big name buyer or some of the existing stable of big name buyers stepping up to the plate and buying some decent chunks of the company
5. Rod will probably be knighted in this years New Year's honours list
6. Xero will not break even by the 31st of December
7. The great leap into the US market will cost lots of money for little return, but the promise of hitting pay dirt will be enough to keep the faithful faithful

[Stranger_Danger]

Nandi - thought you may enjoy the following extract from the Berkshire Hathaway annual report, year 2000. Note that I am NOT saying Xero is a "birdless bush".

The problem with these types of companies is that it is only a "birdless bush" in hindsight - at the time, a "birdless bush" and a "future multi billion dollar company" actually look very similar and both will be being promoted as a future multi billion dollar company. It is really hard to know which is which and I have no conclusive view on Xero.

It must also be said I was equally undecided about Charlies and was not a holder - money talks in that case ey.

--
Leaving aside tax factors, the formula we use for evaluating stocks and businesses is identical. Indeed, the formula for valuing all assets that are purchased for financial gain has been unchanged since it was first laid out by a very smart man in about 600 B.C. (though he wasn’t smart enough to know it was 600 B.C.).

The oracle was Aesop and his enduring, though somewhat incomplete, investment insight was "a bird in the hand is worth two in the bush." To flesh out this principle, you must answer only three questions. How certain are you that there are indeed birds in the bush? When will they emerge and how many will there be? What is the risk-free interest rate (which we consider to be the yield on long-term U.S. bonds)? If you can answer these three questions, you will know the maximum value of the bush and the maximum number of the birds you now possess that should be offered for it. And, of course, don’t literally think birds. Think dollars.

Aesop’s investment axiom, thus expanded and converted into dollars, is immutable. It applies to outlays for farms, oil royalties, bonds, stocks, lottery tickets, and manufacturing plants. And neither the advent of the steam engine, the harnessing of electricity nor the creation of the automobile changed the formula one iota nor will the Internet. Just insert the correct numbers, and you can rank the attractiveness of all possible uses of capital throughout the universe.

Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business. Indeed, growth can destroy value if it requires cash inputs in the early years of a project or enterprise that exceed the discounted value of the cash that those assets will generate in later years. Market commentators and investment managers who glibly refer to "growth" and "value" styles as contrasting approaches to investment are displaying their ignorance, not their sophistication. Growth is simply a component usually a plus, sometimes a minus in the value equation.

Alas, though Aesop’s proposition and the third variable, that is, interest rates, are simple, plugging in numbers for the other two variables is a difficult task. Using precise numbers is, in fact, foolish; working with a range of possibilities is the better approach.

Usually, the range must be so wide that no useful conclusion can be reached. Occasionally, though, even very conservative estimates about the future emergence of birds reveal that the price quoted is startlingly low in relation to value. (Let’s call this phenomenon the IBT Inefficient Bush Theory.) To be sure, an investor needs some general understanding of business economics as well as the ability to think independently to reach a well-founded positive conclusion. But the investor does not need brilliance nor blinding insights.

At the other extreme, there are many times when the most brilliant of investors can’t muster a conviction about the birds to emerge, not even when a very broad range of estimates is employed. This kind of uncertainty frequently occurs when new businesses and rapidly changing industries are under examination. In cases of this sort, any capital commitment must be labeled speculative.

Now, speculation in which the focus is not on what an asset will produce but rather on what the next fellow will pay for it is neither illegal, immoral nor un-American. But it is not a game in which Charlie and I wish to play. We bring nothing to the party, so why should we expect to take anything home?

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.

Last year, we commented on the exuberance and, yes, it was irrational, that prevailed, noting that investor expectations had grown to be several multiples of probable returns. One piece of evidence came from a Paine Webber-Gallup survey of investors conducted in December 1999, in which the participants were asked their opinion about the annual returns investors could expect to realize over the decade ahead. Their answers averaged 19%. That, for sure, was an irrational expectation: For American business as a whole, there couldn’t possibly be enough birds in the 2009 bush to deliver such a return.

Far more irrational still were the huge valuations that market participants were then putting on businesses almost certain to end up being of modest or no value. Yet investors, mesmerized by soaring stock prices and ignoring all else, piled into these enterprises. It was as if some virus, racing wildly among investment professionals as well as amateurs, induced hallucinations in which the values of stocks in certain sectors became decoupled from the values of the businesses that underlay them.

This surreal scene was accompanied by much loose talk about "value creation." We readily acknowledge that there has been a huge amount of true value created in the past decade by new or young businesses, and that there is much more to come. But value is destroyed, not created, by any business that loses money over its lifetime, no matter how high its interim valuation may get.

What actually occurs in these cases is wealth transfer, often on a massive scale. By shamelessly merchandising birdless bushes, promoters have in recent years moved billions of dollars from the pockets of the public to their own purses (and to those of their friends and associates). The fact is that a bubble market has allowed the creation of bubble companies, entities designed more with an eye to making money off investors rather than for them. Too often, an IPO, not profits, was the primary goal of a company’s promoters. At bottom, the "business model" for these companies has been the old-fashioned chain letter, for which many fee-hungry investment bankers acted as eager postmen.

But a pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street a community in which quality control is not prized will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest.

At Berkshire, we make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We’re not smart enough to do that, and we know it. Instead, we try to apply Aesop’s 2,600-year-old equation to opportunities in which we have reasonable confidence as to how many birds are in the bush and when they will emerge (a formulation that my grandsons would probably update to "A girl in a convertible is worth five in the phonebook."). Obviously, we can never precisely predict the timing of cash flows in and out of a business or their exact amount. We try, therefore, to keep our estimates conservative and to focus on industries where business surprises are unlikely to wreak havoc on owners. Even so, we make many mistakes: I’m the fellow, remember, who thought he understood the future economics of trading stamps, textiles, shoes and second-tier department stores.

Lately, the most promising "bushes" have been negotiated transactions for entire businesses, and that pleases us. You should clearly understand, however, that these acquisitions will at best provide us only reasonable returns. Really juicy results from negotiated deals can be anticipated only when capital markets are severely constrained and the whole business world is pessimistic. We are 180 degrees from that point.

[Nandi]

Hey Stranger, I certainly enjoyed that post. It is one that I hadn't seen before. I appreciate your comment re:Charlies as I had some of those purely on the basis that there was a reasonable chance of an offer coming along.

The thing with Xero is that its sort of a victim of its own SP success. An offer will have to be greater than its current market cap of $200Mn from a much smaller group of potential suitors. So the current share price decline could work in its favour!

Its all good fun as we try to estimate the number of birds in the bushes around us. I personally believe that Xero could be a very successful player in the space, if they just focused on building the business. The humility of Warren Buffet is apparent when he says "Even so, we make many mistakes: I’m the fellow, remember, who thought he understood the future economics of trading stamps, textiles, shoes and second-tier department stores." You wont find statements like that in any of the communications from Xero

BTW as anticipated there was a PR release from Xero today to announce that they have added a number of senior execs in management positions to the company, two more General Managers and a new CFO etc. The interesting part was there are no appointments in the area of Sales and Marketing.

http://www.nzx.com/markets/NZSX/XRO

[winner69]

Rod must read here - right on cue some new appointments and a bit of a rave - just to keep you guys quiet - he hasn't forgot you

[winner69]

I'm sure there was a post here yesterday about Drury and Hubbard ..... deleted?

Must have known something as I see a Ms Hubbard is the new HR guru at Xero

[CJ]

How have they grown into a $200m multinational business without a CFO??

Since they are trying to crack the US, that is where their success lies. They will either burn all their cash trying or be successful. They have decided not to be a small player.

[Nandi]

Hey Winner, just wait and see how Rod will follow through on my list. Watch this space - next will come either another big time investor taking a small stake in Xero or Xero buying one or more SaaS related players in either the UK, Australia or the US. This announcement will be before the AGM. I have worked out that the Xero share price and the rate of PR releases have a very strong inverse co-relationship.

I can't remember seeing anywhere about Xero ever wanting to be a small player... (Promise I will work on being less cynical in future).

[Roadrunner]

Haha!the neck is fine thanks but hopefully that`s as close to the chopping block as I get!!No doubt,I`m in the minority regarding my optimism for the future of the company.The feedback that I`ve heard from family,friends and aquaintances regarding the Xero product has been really good.I`m far from starry-eyed regarding the spin and promises made but the company have been calling break-even by the year end for a long time now and I`m prepared to give them the benefit of the doubt......unless they let me down.I guess a lot of people are sceptical as to whether Xero`s revenues will balloon and that $7m of debt will be cleared,this is understandable.I think the trading update on July 22nd will shed some light on this and be positive.Nandi,I do agree with your predictions....well 1-4,at least!I believe that in the not-to-distant future Peter Thiel will considerably increase his shareholding.He was at a conference in Auckland last week and made some very positive noises about how Xero was operating.I will be going to the AGM in Welly next week and I guess,like others,will be looking for a bit of reassurance that things are on track.DISC ....yes I`ve been buying more shares recently because I think they are cheap(just my opinion!)and already hold a decent batch!
@Roadrunner, how is that neck feeling? Six months to go and 50% to get... I think with your view the current SP at 2.04 is great buying, if you thought it was a winner at 2.50 then its time to bet the farm!

Its amazing how announcements generate so much excitement such as the Google one. The interesting thing is to ask what happened to all those great and exciting announcements that were made in the last 24 months? How did the the tie up with Telstra in Australia do? What about the efforts with Telecom in NZ? Or the tie up with ANZ in Australia? Was it some deal with HSBC in the UK? What happened to the whole BNZ relationship and the Xero personal venture? How much of these things are generating any revenue and profits? Why do we get so excited about the deal that has just been announced and not care at all about all those deals that we cheered in the past?

I was a fan of the company and I am still a fan of the product. I have however lost faith in the management and leadership of the business. I think its a shame that a fantastic chance has been blown due to ego's getting in the way of business.

But then all of the above is just one man/woman's view

I am sure the AGM will be an exciting one, full of new and exciting ventures that will see Xero take its place in history. I am sure you will get confirmation that the promised break even by the 31st of December 2011will happen. Yeah right!

Here is my prediction for the Xero and its share price:

1. The panic button must have been pressed by now as the SP approaches the $2.00 mark, so the spin department will be going into overdrive.
2. Anticipate great announcements of tie up's with great names like Google, Microsoft etc. I suspect that there could be at least one acquisition, like we had last year on the eve of the AGM.
3. The spin will be enough to breathe life into the SP that has been steadily heading south, so a small rally will bring cheer to the loyal supporters
4. Expect another big name buyer or some of the existing stable of big name buyers stepping up to the plate and buying some decent chunks of the company
5. Rod will probably be knighted in this years New Year's honours list
6. Xero will not break even by the 31st of December
7. The great leap into the US market will cost lots of money for little return, but the promise of hitting pay dirt will be enough to keep the faithful faithful

[maddog]

I've no doubt at all that the update at next week's AGM will be positive. It wouldn't be Xero without the spin.

I agree that it is likely that there will be some upcoming statements about further injections of capital. Xero has been very open about its plans to target the US market and take on Quickbooks. Xero has so far raised around $47 million and has spent much of it. As at 31 March 2011 Xero had $16.9 million left in the bank - and that will have decreased further since then. To me this simply doesn't look enough to enter the US market - so big exciting targets will be set and more cash will need to be raised from the believers.

It is interesting that the appointment of a CFO was announced last week. I presume a key role of that person will be to raise more funds.

[Nandi]

Roadrunner I admire your honesty and courage to put your money where your mouth (and neck) is. I think that there is more short term upside than downside risk. Btw I never disagreed that Xero is a good product. Its just the execution that frustrates me.

Having been to one of the Xero roadshow's I was struck by the focus on Microsoft Office 360 as part of the presso. This makes me think that Microsoft could be a potential buyer or is being courted actively as a buyer.... (just speculating) I don't own any Xero shares and even if I could I wouldn't sell them short either. If I was a gambler I would possibly buy some, but I am not and so wont be. Diligent is an interesting contrast to Xero, specially the share price action of recent.

The pricing for any new issues by Xero could be very interesting. Cash is going to be the key, the new exec appointments will increase the burn rate by at least another $100k as a ball park. new sites seem to be stuck at around 1500 to 2000 per month, which is not going to be enough.

Intuit is a big beast and Xero will need one hell of a pebble to knock them over.

[maddog]

Likewise I agree Xero is a good product. But the conversion rate from desktop accounting software to online software remains very slow - plus there is rapidly increasing competition from other online products for the portion of the market that is converting - and many of those other products are also very good and cheaper than Xero (eg Saasu).

While Xero has been well resourced it is spreading itself very thin - and that is only going to increase with its entry into the US market. I doubt it currently has the resources to successfully exploit the US market.

Considering these issues Xero seems way overpriced for a company that continues to produce losses - and will be an unlikely takeover target. I would be amazed if Microsoft were interested as they exited the desktop SME accounting market not so long ago. I got the impression they had decided accounting wasn't for them. Nevertheless Drury will probably persuade another investor to put money into the company.

BTW the new appointments will increase burn rate by a lot more than $100k - it will be in the high hundreds of k's.

[Nandi]

Sorry maddog - I meant $100k per month. 4 very senior execs - base salary, benefits, overheads plus employee share scheme bonus will probably add up to $300k per head = 1.2 Mn pa.

I agree that they are spreading themselves too thin, the acquisition rate is too slow, cost of acquisition is too high and the churn must be kicking in now plus the overheads not being controlled is a rather lethal cocktail, leaving no margin for error.

The medicine is working on the SP that ticked up 5 cents. Now wait for the big announcements pre the AGM. I am still picking that Xero will buy something or another investor will step up or both.

[dumbass]

i find the most difficult aspect of TA is posting the charts.
living up to the moniker.
why is it so small ? and its not very sharp
and my charts not much better!
metastock to photbucket to here ?? any help much appreciated

[Hoop]

i find the most difficult aspect of TA is posting the charts.
living up to the moniker.
why is it so small ? and its not very sharp
and my charts not much better!
metastock to photbucket to here ?? any help much appreciated

Hi Dumbass.
I couldn't solve my size problem with photobucket...so I eventually waved the white flag and went here to http://www.imageurlhost.com

[dumbass]

thanks for that hoop but i will try a few things first

3477

[dumbass]

http://i183.photobucket.com/albums/x107/joicey9999/XRO.jpg

[chippy52]

You may wish to read this thread http://www.sharetrader.co.nz/showthread.php?1201-How-do-you-post-a-chart&highlight=how+to+post+charts. It helped me heaps.

[Roadrunner]

Roadrunner I admire your honesty and courage to put your money where your mouth (and neck) is. I think that there is more short term upside than downside risk. Btw I never disagreed that Xero is a good product. Its just the execution that frustrates me.

Having been to one of the Xero roadshow's I was struck by the focus on Microsoft Office 360 as part of the presso. This makes me think that Microsoft could be a potential buyer or is being courted actively as a buyer.... (just speculating) I don't own any Xero shares and even if I could I wouldn't sell them short either. If I was a gambler I would possibly buy some, but I am not and so wont be. Diligent is an interesting contrast to Xero, specially the share price action of recent.

The pricing for any new issues by Xero could be very interesting. Cash is going to be the key, the new exec appointments will increase the burn rate by at least another $100k as a ball park. new sites seem to be stuck at around 1500 to 2000 per month, which is not going to be enough.

Intuit is a big beast and Xero will need one hell of a pebble to knock them over.

Nandi, it was interesting that you mentioned Microsoft.A colleague and I were discussing the same scenario the other day and it would obviously be a great boost for Xero if that was the case.As Maddog mentioned it looked like Microsoft were not really that interested in the desktop accountancy side of things but I guess we will will have to wait and see!Netherless I`m hopeful of a major announcement at the agm(whatever it is!),an improvement in revenues and a decrease in the debt situation by a couple of million would be encouraging too.My own feeling is that this is just a stage of development for Xero.When more and more countries improve their revenues substantially and one by one they break even the situation will look a lot rosier.Obviously this isn`t going to happen overnight but I suspect that you will see the momentum snowball over the months to come.You mentioned an old favourite of mine Diligent.I bought a lot of shares and was sitting on a big paper loss for many months.I was pleased to take a nice profit at 80 cents but admit to feeling a bit gutted when the SP soared!With the benefit of hindsight we would all be zillionaires eh!Diligent have gone from strength to strength,are market leaders in what they do and look a sound longterm investment to me as they push into new markets.Maybe I was crazy to sell out and buy Xero but time will tell.................................

[Nandi]

Hey Roadrunner I think you are crazy!

In my very humble opinion, the chances of Xero trading out of this by way of improving revenues and profitability is next to slim. All you have to look at is what has been done in the past, the UK was going to be the market, the co-founder went over and spent a year and bit there and what do they have to show for it? The accountant channel has about given all it can give in NZ, the momentum is going in the wrong direction. For all its faults, Diligent executed much better - a tight focus on the Fortune 500 companies to get momentum is a great plan and they have stuck to it and made it work.

Xero is a speculative play and that's cool. As the quote from Buffet a few posts ago said "Now, speculation in which the focus is not on what an asset will produce but rather on what the next fellow will pay for it is neither illegal, immoral nor un-American."

Btw what do you think of SPY?

[Nandi]

Guys, am I hot or what????? Hope some of you made some quick bucks on the rally, I don't need any thanks, just applause. Now wait for the next announcement regarding an investor. This is such an easy play to read

[CJ]

They probably dont need a new investor just yet
last 3 months were cashflow even
though they have signalled a growth strategy so breakeven maybe further out following all the new hires.

[Nandi]

Hi CJ not sure where the "last 3 months were cashflow even" info comes from. Was that something from the AGM? All the numbers I have seen show that the cashflow deficit is running at between $500,000 and $750,000 a month.

All that I have seen from the public info is that promised breakeven by the end of this year is not going to happen. Its great that they have come out and said it for the first time.

They will need more cash within the next 12 months

[janner]

Hoops 436 posting is X rated :-))

Glad my Dragon lady was not watching when i opened it .

[CJ]

Hi CJ not sure where the "last 3 months were cashflow even" info comes from. Was that something from the AGM? All the numbers I have seen show that the cashflow deficit is running at between $500,000 and $750,000 a month. might have my facts wrong. it was from the slide pack from the AGM (avaliable at http://file.nzx.com/000/576/5321576.pdf) where they had a graph of their cash balance on pg 29. They must have had a share issue in the last 6 months.

[Nandi]

Yes:

US Technology Guru Peter Thiel to Invest in Xero
22 October 2010


Leading online accounting software provider Xero Limited [NZE:XRO] today announced that Peter Thiel, the San Francisco based investor and Silicon Valley authority, has agreed to invest NZ$4 million to support Xero’s expansion into the US market. He will also join Xero’s US Advisory Board.

[Roadrunner]

Hey Roadrunner I think you are crazy!

In my very humble opinion, the chances of Xero trading out of this by way of improving revenues and profitability is next to slim. All you have to look at is what has been done in the past, the UK was going to be the market, the co-founder went over and spent a year and bit there and what do they have to show for it? The accountant channel has about given all it can give in NZ, the momentum is going in the wrong direction. For all its faults, Diligent executed much better - a tight focus on the Fortune 500 companies to get momentum is a great plan and they have stuck to it and made it work.

Xero is a speculative play and that's cool. As the quote from Buffet a few posts ago said "Now, speculation in which the focus is not on what an asset will produce but rather on what the next fellow will pay for it is neither illegal, immoral nor un-American."

Btw what do you think of SPY?
Hi Nandi,Well it has been good to see a nice recovery in the share price from the 2.07 low. Last week, I attended the AGM and, to be honest with you, I was very impressed. First of all, the presentation ... it was good to see that the company was committed to improving the user-friendliness of its systems. The acquisition of Paycycle was an example of this and, no doubt, will contribute to increased growth in what is already a booming Australian market ... the improvement of integration with Microsoft products is an on-going improvement which will add credibility too ... Sam Morgan mentioned a client he had talked to who had one thousand customers on the books, thirty of whom were at present using the Xero software. When he asked how many of those customers would be using Xero in a year's time, he said "all of them." When the topic of the promised break-even (promised in 2009) was discussed, I thought "oh no, here we go." However, the general consensus was that the market was so hot at the moment that growth should be the priority, and after examples were given this made sense to me. Yes, as expected, there was some hype, and some flashy presentation, but this was balanced by a lot of factual information, e.g. the 25% increase in customers since the end of March to 45,000 at present. After the presentation, and no doubt due to my group being sat at the front, Rod Drury came over and chatted to us. I was very impressed with how he came across and the fact that he answered all the niggly questions that we had to offer satisfactorily. On balance, we also had the opportunity to chat with Graham Shaw, the company accountant. He gave us a very practical 'nuts-and-bolts' explanation as to how the company proposed to meet its financial targets, and was extremely confident that they would do so. In conclusion, I believe, if it had been possible for every shareholder to have attended the meeting, they would have seen a genuine committment and depth of talent on the Board to Xero meeting the ambitious goals and achievements that it had set itself. The tide has turned!!

[Roadrunner]

By the way re SPY a friend of mine has a small number of shares.I thought they were an interesting company and were signing up some well-known customers.Unfortunately they went through quite a carry on with regard to financing and this seemed to be holding them back.Now they have secured cheaper borrowing,are targeting Australia more aggresively and have posted a profit I think they look a lot more attractive.

[The Rocket]

Roadrunner there you are I brought Diligent shares way back when they were 60 cents and you were telling everyone to get them you said $1.00 by Christmas. I brought all I could afford and some I couldn't. In less than 12 months you know what happened. Well I sold them all when I saw you at Xero(for $1.25). Thank you. Then I took your advice again and put all the money in Xero at $2.10 I went to the meeting in Wellington. Great people a good mixture of go ahead people with a mix of diligent people with our funds. They keep each others idea's Balanced. Now they are $2.48 just thought I would say thanks. Nandi has been giving you a hard time.about Xero. But I agree with you after going to the road show they are about to turn the corner and I will stick with them like I did with Diligent. They will be $3.00 plus by Christmas. Keep up the good work Xero. Thanks again Roadrunner the fun has just begun.:D

[Roadrunner]

Roadrunner there you are I brought Diligent shares way back when they were 60 cents and you were telling everyone to get them you said $1.00 by Christmas. I brought all I could afford and some I couldn't. In less than 12 months you know what happened. Well I sold them all when I saw you at Xero(for $1.25). Thank you. Then I took your advice again and put all the money in Xero at $2.10 I went to the meeting in Wellington. Great people a good mixture of go ahead people with a mix of diligent people with our funds. They keep each others idea's Balanced. Now they are $2.48 just thought I would say thanks. Nandi has been giving you a hard time.about Xero. But I agree with you after going to the road show they are about to turn the corner and I will stick with them like I did with Diligent. They will be $3.00 plus by Christmas. Keep up the good work Xero. Thanks again Roadrunner the fun has just begun.:D
Well thankyou very much Rocket,glad you are doing well!!As you know the sharemarket can be a bit of a rollercoaster and I`ve had my fair share of dud shares too but fortunately of late things have been going very well.It has taken me a while getting to know the NZX,having been an investor on the UK market.I respect the fact that Nandi questions certain areas of Xero`s strategy/management coming from that industry.I also think that THE major announcement has not been made yet.Reading between the lines of the conversations at the agm the directors were having to stop themselves spilling the beans regarding some upcoming news.Just speculation(as always!)but as Nandi highlighted some tie-up with Microsoft would not surprise........exciting times ahead!

[Nandi]

Hey Roadrunner, its so nice to see that you have taken my comments in the spirit that they were meant to be taken. There is so much bloody personal attacks whenever an opposing point of view is expressed. I have no personal axe to grind, I have a view based on what I have seen, read and what I "feel" about various companies. My view on Xero is based on my own personal experience of being in the SaaS space, which is a damn exciting place to be right now. Yes, deals will get done and there will be a whole bunch of people who will make some serious money in the short term and there will also so be whole generation of new companies that will produce wealth for a long time from cashflows for their shareholders, employees and suppliers. I just would hate to see the whole SaaS industry get judged by what Xero may or may not achieve. The NZ SaaS industry is much bigger than just Xero and there are a whole bunch of companies doing great stuff and making money. Once again thanks for being reasonable, its becoming a rare virtue in the whole social media world where everything is becoming personal and there is very little objectivity or willingness to be challanged. I certainly hope you do well with your share trading - NZ Inc needs more investors prepared to invest in our local market.

[CJ]

The NZ SaaS industry is much bigger than just Xero and there are a whole bunch of companies doing great stuff and making money. As an aside, I think the SAAS space is huge and will see lots of future growth. Not many investment options at the moment though.

[Nandi]

As an aside, I think the SAAS space is huge and will see lots of future growth. Not many investment options at the moment though.

Yes, other than Xero there is very little public investment options. I guess as the industry matures there will possibly be a number of companies that come to the market to raise funds for expansion/growth etc. That is why it is critical the Xero succeeds. But then going the public route has its own challenges. If I was the CEO of my business would I be pushing my board for a public listing? Don't think so, as we have enough money of our own and are very profitable. But as an area its huge and will certainly be one of the biggest area's of future growth. Just look at what the behemoth Microsoft is doing with Office 365. For example as a provider we are seeing a huge increase in demand for SaaS services in Chch for obvious reasons.

[CJ]

If I was the CEO of my business would I be pushing my board for a public listing? Don't think so, as we have enough money of our own and are very profitable. But could you scale quicker and get market share if you had more cash in the bank (re IPO or Venture funds) such that you could focus on growth and not profitability. If you move to slowly, could a US based, venture fund backed startup come and steal your market share.

Because Xero could be profitable if it stay in the NZ market only.

[Nandi]

But could you scale quicker and get market share if you had more cash in the bank (re IPO or Venture funds) such that you could focus on growth and not profitability. If you move to slowly, could a US based, venture fund backed startup come and steal your market share.

Because Xero could be profitable if it stay in the NZ market only.

In our particular case additional investment will not translate into sufficient growth due to the nature of our market to justify the downside of the listing path. There are a finite number of customers in our segment and the point of sale is dependent on when the prospect is in a position to change. Sort of what Xero is up against - its hard to get a SME to change from MYOB to Xero. In the end there is only so much of influence that you can have your growth rate. Each market will only go as fast as it can go.

[CJ]

In our particular case additional investment will not translate into sufficient growth due to the nature of our market to justify the downside of the listing path. There are a finite number of customers in our segment and the point of sale is dependent on when the prospect is in a position to change. Sort of what Xero is up against - its hard to get a SME to change from MYOB to Xero. In the end there is only so much of influence that you can have your growth rate. Each market will only go as fast as it can go.Back onto Xero, I agree. the jump in new customers from March to June should be no suprise given NZ has a standard 1 April start of year which is where a lot of that growth would have come from I expect (I could be wrong). Changing over at a start of year is a lot easier than part way through. Australia has a standard June balance date so would expect a pick up on 1 July and US a December balance date?.

Note: I converted my Brothers business over on 1 April from MYOB. Seeems to be running smoothly now.

[nwood]

Xero has taken a sizeable hit today, overreaction to general market?

[Blendy]

i'm hoping that's all it is. But took the opportunity to top up - hope that works out!

[nwood]

i'm hoping that's all it is. But took the opportunity to top up - hope that works out!

I've been out of Xero for a while now but watching closely. Back in at $2.27 as I think 10% down for the day is overdone.

[maddog]

At some stage in the next year Xero will want a further cash injection - or it will need to significantly lower costs. The maths is simple.

It finished the previous financial year with around $16.9 million in cash. Last year it spent over $7 million in cash and it is increasing its spending this year - employing more people and targeting the US market. At the same time its sales have increased helping make up for some of the shortfall.

Will that increase in revenue continue at a rate that makes up for the also increasing outgoings?

Breakeven has been forecast several times but keeps getting put back - which means it is getting more and more likely that further investment in the company will be required. While the money may not be needed for up to two years, Xero and investors will want that confirmed much sooner than that.

Just a few short weeks ago sourcing that investment would perhaps not have been too much trouble. But throw in the rapidly developing economic and financial crisis into the mix and suddenly investment for a reasonably risky software company in New Zealand will be much harder to source and confirm.

It will be very interesting to see how this plays out.

[CJ]

They could very quickly slow down their cash burn by cutting staff costs and just relying on organic growth.

But agree, their current business plan seems to be to push agressively into the US which will chew through the cash - hopefully they have the sales people on the right contracts so they can terminate at short notice.

[nwood]

GENERAL: XRO: Xero to use R&D grant to accelerate exports

Online accounting software provider Xero (XRO) is one of 19 businesses to
receive a Technology Development Grant from the Ministry of Science and
Innovation.

The Technology Development Grant supports firms with a proven track record in
research development (R&D) and which spend a significant proportion of their
revenue on R&D. A total of
$50 million will be allocated in the investment round just announced.

Xero will receive up to $$4,040,000 (excl. GST) over the next three years.

R&D investment has been key to Xero since it was established in 2006,
ensuring the company acquires new customers, reduces product service delivery
costs and keeps existing customers by continuing to innovate.
"R&D is a big part of our growth strategy over the next 3-5 years and the
grant allows us to go even faster," says Xero CEO Rod Drury.
He says a commitment to R&D has allowed Xero to successfully build specific
features for the New Zealand, Australian, UK and US markets. Adding to the
company's R&D capacity allows it to innovate faster and service more
customers globally. Xero is also reversing the trend to sell New Zealand tech
companies by recently acquiring an Australian R&D company innovating in
online payroll.
For the year ended 31 March 2011, 36 percent of Xero's revenue came from
offshore sales. After recently announcing a 25% increase in customer growth
for the last four months, the company expects revenue from overseas to exceed
New Zealand revenue in the not too distant future.
"Xero contributes significantly to New Zealand exports," says Rod Drury. "The
majority of our future growth will come from customers in Australia, the UK,
USA and new territories. This grant helps speed up our export drive into
these territories and beyond. "

Xero has a product development and global support team of over 100 people
based in Wellington and is in the market for significantly more R&D staff.
The company has already created skilled jobs for more than 130 employees
worldwide.

[Roadrunner]

Great news............well done Xero.A nice bonus to help things along!

[Nigel]

And from their Facebook page...
Xero now supports over 5000 bank feeds.
- another nice milestone.

Progress is steady, but high NZ dollar won't be helping the bottom line.

[CJ]

GENERAL: XRO: Xero to use R&D grant to accelerate exportsGreat win for Xero. Should do good for the share price as it will slow the cash burn. I dont think it requires additional R&D to be done, just that they match whatever grant money with their own investment.

but not sure what the R&D that they are doing is. R&D normally requires a scientific element to it. Software development doesn't normally cut it. What they are doing isn't 'new', all they are doing is putting a desktop product onto the web. Compare to the 2 F&P that actually lead the world in technology and secure patents. Does anyone have insight into this or has the govt just propped them up.

[Nandi]

Great win for Xero. Should do good for the share price as it will slow the cash burn. I dont think it requires additional R&D to be done, just that they match whatever grant money with their own investment.

but not sure what the R&D that they are doing is. R&D normally requires a scientific element to it. Software development doesn't normally cut it. What they are doing isn't 'new', all they are doing is putting a desktop product onto the web. Compare to the 2 F&P that actually lead the world in technology and secure patents. Does anyone have insight into this or has the govt just propped them up.

CJ you make a very valid observation and ask a great question. All governments have "causes" that they support. This is the same National govt that scrapped the R&D tax credit, so we can all make our own judgements. I don't think you will have anyone who will offer you a clear insight into this.

[Halebop]

...but not sure what the R&D that they are doing is. R&D normally requires a scientific element to it. Software development doesn't normally cut it. What they are doing isn't 'new', all they are doing is putting a desktop product onto the web. Compare to the 2 F&P that actually lead the world in technology and secure patents. Does anyone have insight into this or has the govt just propped them up.

I'm not really commenting on Xero as I have no idea what they plan to do, however...

...By the same argument F&P aren't doing anything "new", they just invented a different way to wash dishes, wash clothes, breathe... Software developers can indeed register patents, as Samsung has just discovered to it's cost. Think of something as simple as the single click purchase process - every time someone buys something on Apple's I-tunes, Amazon earns some money from it's "1-click" patent. Purchasing something isn't exactly a new concept either but Amazon monetized the concept of an easy purchasing process via a patent.

http://worldwide.espacenet.com/publicationDetails/biblio?CC=US&NR=5960411&KC=&FT=E&locale=en_EP

[Nandi]

In case the followers of Xero missed it, there was some interesting developments:

Sam Morgan bought some shares at 2.40, not many just a hand full

The new CFO, bought 40K shares around the same time

and finally we know the price that Rod wants for Xero - anything, as long as its more than the Trade Me deal - as per last weeks interview in the NBR when talking about the MYOB deal and the possibility that Sage may come knocking on Rod's door.

[Roadrunner]

In case the followers of Xero missed it, there was some interesting developments:

Sam Morgan bought some shares at 2.40, not many just a hand full

The new CFO, bought 40K shares around the same time

and finally we know the price that Rod wants for Xero - anything, as long as its more than the Trade Me deal - as per last weeks interview in the NBR when talking about the MYOB deal and the possibility that Sage may come knocking on Rod's door.

Thanks Nandi,that was very interesting.I was away on holiday and although I saw the share acquisitions I missed the NBR report regarding Sage`s billion dollar offer for MYOB.Rod did comment at the agm that he wanted to surpass Sam Morgan`s Trade Me success and turn XRO into a billion dollar company........a buyout would be very nice by Sage,Microsoft or anyone for that matter haha!Did you get the impression from the interview that this was a possibility or that the company was focused on getting there under it`s own steam?

[Nandi]

Thanks Nandi,that was very interesting.I was away on holiday and although I saw the share acquisitions I missed the NBR report regarding Sage`s billion dollar offer for MYOB.Rod did comment at the agm that he wanted to surpass Sam Morgan`s Trade Me success and turn XRO into a billion dollar company........a buyout would be very nice by Sage,Microsoft or anyone for that matter haha!Did you get the impression from the interview that this was a possibility or that the company was focused on getting there under it`s own steam?

Man, I wish I knew for sure! I have always had a very strong sense that Xero for Rod was always a another step towards becoming a master of the universe (I mean that in the nicest possible way). All the talk of building an enduring business etc in MHO is just PR talk. I think initially MYOB would have been the target buyer of choice but then they went and got bought out themselves, which has meant that Xero have had to go through the pain of becoming a proper business under Rod's leadership - as the results show, its been a bit of a mixed bag. Go back and read the prospectus and then you will see my basis for making that comment. Xero have no other choice but to do its level best to "get there". I have always been a believer of the need for something better than MYOB. The Cloud space is getting interesting, so anything can happen.

[maddog]

One of the funny things about Archer was that back in 2008/09 they took over MYOB for around $450 million. This resulted in Craig Winkler being kicked out of his own company. Winkler left with a pocketful of cash, some of which he put into Xero. If he hadn't done that Xero was well on its way to running out of money. Xero probably would have got someone else to stump up the cash - but who knows? Archer may have saved Xero.

On the other hand Winkler left MYOB and three years later his company gets sold to Bain for $1.2 billion. You could argue Winkler's inability to maintain control of his own company and the faith of his shareholders has cost him and those previous MYOB shareholders $750 million. That's a huge amount of value to miss out on. This man who cost his investors $750 million is now on the board of Xero, making strategic decisions for the company and for some reason presented as an astute investor. Go figure!

I'm guessing Winkler's pretty peeved over the whole Archer-Bain deal and Drury's jealous because they didn't come offering real dollars for Xero.

I agree with Nandi that Rod views Xero as another step on the way to somewhere else. The problem he has is that the sharemarket has overvalued Xero. Its capitalisation make no sense based on its performance, the significant challenges it faces in its markets and the ongoing investment it requires.

[Roadrunner]

Man, I wish I knew for sure! I have always had a very strong sense that Xero for Rod was always a another step towards becoming a master of the universe (I mean that in the nicest possible way). All the talk of building an enduring business etc in MHO is just PR talk. I think initially MYOB would have been the target buyer of choice but then they went and got bought out themselves, which has meant that Xero have had to go through the pain of becoming a proper business under Rod's leadership - as the results show, its been a bit of a mixed bag. Go back and read the prospectus and then you will see my basis for making that comment. Xero have no other choice but to do its level best to "get there". I have always been a believer of the need for something better than MYOB. The Cloud space is getting interesting, so anything can happen.
Yes,fair enough!It`s hard to fathom how this will all pan out re XRO.It will be interesting to see how quickly Bain Capital(the company which has taken over MYOB) capitalizes on the considerable customer base of it`s acquisition in Australia and NZ,whether it develops new products and if this impacts on the progress XRO are making there longer term.Come results time I will be interested to see if XRO`s own aquisition has had the desired effect in Aussie re the number of sign-ups.

[maddog]

This morning Rod has posted a link on the Xero blog to a very interesting article:

http://www.crn.com.au/News/271290,myob-heads-offshore.aspx

This article suggests MYOB will be targeting the USA, UK and Asia following the Bain purchase. Very interesting considering MYOB exited the UK and US markets in recent years.

[Nandi]

One of the funny things about Archer was that back in 2008/09 they took over MYOB for around $450 million. This resulted in Craig Winkler being kicked out of his own company. Winkler left with a pocketful of cash, some of which he put into Xero. If he hadn't done that Xero was well on its way to running out of money. Xero probably would have got someone else to stump up the cash - but who knows? Archer may have saved Xero.

On the other hand Winkler left MYOB and three years later his company gets sold to Bain for $1.2 billion. You could argue Winkler's inability to maintain control of his own company and the faith of his shareholders has cost him and those previous MYOB shareholders $750 million. That's a huge amount of value to miss out on. This man who cost his investors $750 million is now on the board of Xero, making strategic decisions for the company and for some reason presented as an astute investor. Go figure!

I'm guessing Winkler's pretty peeved over the whole Archer-Bain deal and Drury's jealous because they didn't come offering real dollars for Xero.

I agree with Nandi that Rod views Xero as another step on the way to somewhere else. The problem he has is that the sharemarket has overvalued Xero. Its capitalisation make no sense based on its performance, the significant challenges it faces in its markets and the ongoing investment it requires.


Hey Maddog, I had never thought of the Archer buyout of MYOB in those terms before! You are spot on with your observation that if not for Archer buying MYOB, Xero would possibly have been in strife, as they were just about out of cash. They had to get some cash urgently to cover costs before the Winkler deal settled. I know for a fact that when Xero were looking at where to raise cash from, Rod went through the MYOB shareholders list and started at the top and as luck would have it Winkler who was at the top of the list said yes. I suspect part of his motivation was revenge on the company, the company that he had started, that turned around and "shafted" him. GPG were part of a vocal group that fell out with the management and there was a very public falling out and there were some benefits that were taken away from Winkler etc. It was all to do with the fact that he had been instrumental in turning down a much richer offer less than a year earlier.

Mate, you need only one big win to be considered an astute investor. Look at track record of Sam Morgan post Trade Me, in an interview sometime back he said that Xero was his most successful investment out of 15 or 20 so far.

[Everwood]

Good to see they have now got 50,000 customers.

http://blog.xero.com/2011/09/50000-customers/

[maddog]

Fascinating article in today's Herald:

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10760507

[zs_cecil]

No matter if Xero is profitable or not this year, the corner investors 's investment has already been doubled in 2 or 3 times in number in the past 2 years... I guess they are still very comfortable about the progress of Xero so far.

[CJ]

Fascinating article in today's Herald:

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10760507
All been said before but a good summary. I like that fact that Morgan Sr is quesitoning Morgan Jr (ie Director) when they are going to be profitable. Doesn't he know that with internet businesses, users are more important revenue.

[maddog]

It is a mistake to think different rules apply to internet businesses compared to any other type of business.

What is most important is cash flow. That is the oxygen of a business. A business is not sustainable without positive cash flow. Lots of capital can sustain a business while it is establishing cash flow and that is what Xero has relied upon. My bet is they will need more capital in the next year.

If you have enough capital to survive upon it is then growth rates that become important. Are you growing fast enough to build cash flow before your capital runs out? While Xero is growing it is not yet growing fast enough to build positive cash flow. That's why they will need more capital.

And then it become an issue of whether your growth rates are sustainable? This comes down to issues of marketing, technology and people - brought together in the phrase "competitive advantage". Does Xero have a competitive advantage? They jury is still out on that one. They have many competitors doing much the same thing as well as strong competition from traditional software.

[Everwood]

Does anyone know when the half yearly result will be coming out? It is usually out by now.

[Toasty]

I bumped into Rod in Wellington last night and he said it was today. He seemed happy so hopefully a good sign...

[Nigel]

Results on NZX now. Growth not as much as I would have expected, but decent growth nonetheless. Positive sentiment as always :)

[zs_cecil]

I think the result is not that bad even if it is not able to reach break-even. But it seems the US market is still a tough way to go. I guess a lot of $$$ is spent in kicking the door to the US. Maybe Xero can survive without the US market anyway. What do you guys think?

[winner69]

Cash burn momentum still building - last 4 years cash flows (-ve) have been $5.8m $6.7m $8.8m and $8.6m last year with this H1 this year $5.5m

H1 saw receipts up $3.9m on last year while outgoings were up $3.7m - so almost a buck needs to be spent to make an extra buck

But the big plan isn't about these sort of numbers - its finding that outfit who wants to fork out a billion for them eh ... hope it comes soon else might have to go to shareholders again next year

Go XRO

[CJ]

They have been pushing hard into the US this year. The litmus test for me therefore is how many new sign ups they get for Jan 2012 (ie. the start of the US financial year which is when most companies would change over). NZ is March and Australia June - not sure how hard they have been pushing in these markets compared to previous years.

[maddog]

Now that Xero has abandoned any targets for getting to breakeven as announced at the July 2011 Annual Meeting I thought it would be interesting to review the various announcements made by various parties associated with Xero.

1 In the 2007 IPO document breakeven was estimated to occur at 8,000 customers
2 By May 2009 Drury was quoted in NBR as saying "the company will hit profitability when its customer base reaches somewhere between 15,000 and 30,000"
3 Only two months later Chairman Phil Norman said at that year's Annual Meeting that "at our current monthly cost levels breakeven for Xero is, therefore, around 30,000 customers"
4 In the same month of July 2009 Drury was interviewed in the DominionPost and said "Based on current cost levels, the breakeven estimate of 30,000 customers was expected to be reached within two years, but that was a moving target"
5 In May 2010 Drury was interviewed by Share Investor. He commented "At our AGM last year we predicted monthly breakeven in Calendar 2011. That is still our plan."
6 In July 2010 Chairman Phil Norman said “The company remains on track to reach monthly break-even in the second half of the 2011 calendar year. We will continue to manage the business to reach this objective as quickly as possible”
7 In November 2010 Xero's market announcement for that year's Interim Results said "The UK operation is on target to achieve monthly break-even in the fourth quarter of calendar 2010 . . . The Australian operation will follow in the first quarter of calendar 2011. Company break-even remains on track for the second half of calendar 2011 as per previous guidance.”


Customer numbers are now up to 50,000 and breakeven (originally forecast for 8,000 customers) is still no closer. Xero has shown it can pick up customers and increase revenue. The problem appears to be that its costs are higher than revenue and keep on going up at much the same rate. It can't keep on doing this forever.

Drury's comment on breakeven being a moving target was prophetic. Its a shame he isn't more accurate with a few of his other forecasts.

[winner69]

Long list eh maddog .... breakeven even further away judging from the last cash flow report ..... spending an extra buck to make a extra buck doesn't improve the cash flow does it

Just as well that isn't the game -- one day the billion will come through ... or maybe half a billion to make XRO a strategic fit for somebody

[Stranger_Danger]

The market doesn't care though - shares up again.

Businesses like this can be really hard to evaluate, which is why I tend to be lazy and avoid them.

I remember laughing at all the 99 dot coms, and being proved right on most of them. However, I also remember laughing at Amazon, and people calling them the "Unicef of books", but they've ultimately built a real and dominant business.

An uncharitable person could say that Xero is the "Unicef of accounting software", but, maybe, just maybe, thats the right strategy at this point?

That is the only rationale for the current share price - that ultimately they're gonna win a land grab and it'll all be worthwhile in the end.

[Nandi]

Yes, ultimately that is the punt.

There is a lot of talk about the US market. The numbers in the 6 month result show that from all of the world markets including the US but excluding the NZ, AUS and UK markets was just $400k. So, the US contribution will need to come in hard and fast.

There are two numbers in the 6 month result that are "interesting":

1. Debtors - Xero as a practice bill in advance, so the trade receivables of just over a $1,098,000 and income in advance whatever that is of $506,000 is
around 1.5 months of income, is a bit confusing

2. There was no mention of cash in the bank which stood at $11,383,000. At the current burn rate of around $1 million a month that's another years cash in the, now probably like 10 months. As the cash burn rate is not abating but in fact probably increasing with all the spending planned, there will have to be a further issue of shares. I am sure there will be enough investors lining up, but the guys who got in early will continue to dilute and some of the earlier punters must be getting a tad titchy.

With the state of world markets as they are today, its not going to be easy to produce that billion or half billion dollar buyer. Not out of the question but just a tad harder.

[CJ]

It will be interesting to see how many US subscribers they pick up on 1 Jan 2012, the start of their financial year - the natural time to change over. That will be the test of how their push in the past 3-6 months has been.

[Lizard]

Overdoing the announcement headlines a little...


Xero announces President for USA

[buns]

Ha, this one always makes me laugh

They haven't overdone it at all, thats just what Americans label there GM's or Exec.

On XRO and its value. I welcome the people on this thread to have a cold shower, and stand back and review this one with a clean sheet.. I can't find anyway to value these start ups as the assumptions are to iffy, however even applying some of these getting to a $240m odd value is impossible.

You dont need to be a valuation whizz to think about this - Xero will always only be worth its profits, its not capital intensive, its assets are intangible. So you pay for its profits, at this stage they are negative and equity is negative in a way because they take more money (capital raisings) of you than they return. As it stands you are giving them money, for the right to take more money off you.

Most won't think about this, the value - instead see Xero as returning them 'value' as the share price is going up. They aren't any more valuable than they were years ago, its just a price change.

You are punting they do build an competitive advantage in a game the whole word is playing. You can take more realistic bets on lots of other start ups on the ASX at better prices however being close and attached to Xero you always have a bias and will talk yourself into it. Do you think you would be this interested if it was an Aussie company? The other thing which makes these kinds of prices act so irrational is the excitement around the underlying product, it quite often invites the un educated. I very much doubt this company would be $240m + if the product was toilet rolls (assuming the market/growth = the current cloud one) - actually, have a look at the DMX thread in the ASX section (I don't own it, far to risky, but probably a 1/10th of what XRO is)..

On the 'punt' - Yes these others are more boring, not in front of us bets and might not have the huge upside of Xero, however the punt has better odds because you are placing it on a lower priced bet.

Think about XRO as the rugby team coming to the world cup with a whiz bang game plan which is different, exciting and has all your fave players in it. You can talk your self into picking them as a small $5 side bet in the office, but if looking for value and putting serious money down, you would probably look at one of the favourites who drop below there normal odds. These favourties drop below there normal odds because of the hype, and irrational market looking at XRO.

I worry people have to to deep into this they haven't stopped to think clearly, it is very hard to do after reaping the rewards (from price changes) XRO has for many.

I could be very wrong, however over the long term, taking these bets constantly will most probably leave you worse off.

[CJ]

Buns, there are two ways the company is worth its market value.

One, as you point out, is if it makes profits and pays dividends. If they get enough customers to justify that price, then arguably they are worht more it is unlikely the number of customers will stop there.

Second is they get bought out for their IP. MYOB realises their current cloud product sucks and think it would be cheaper, at say $500m,to buy Xero than try to develop themselves. The market it put this at a 50% chance.

[Stranger_Danger]

I rate the odds of MYOB buying Xero for $500m as very low indeed. I don't think the new PE owner of MYOB really knows what they've bought, the roll out of their new version In Australia is a mess, and they really need to focus on the basics, customer support and retention being top of the list.

The truth is, there are lots of people quite happy using MYOB's desktop software, and not paying a monthly fee for it. If these people move to Xero, it won't be because of the cloud per se - it'll be because they're done with price increases, bugs and bad service.

The last thing MYOB, especially with all of the debt they hold, need to do is pay $500mil for a startup that is burning cash, and, in my opinion, has probably built a culture which would result in all the good staff leaving straight after the sale to join the founder in his next business.

[CJ]

MYOB apparently spent $70m on that mess of a roll out.

A lot of MYOB desk top users also pay a monthly 'maintenance' fee which is the help desk which costs the same as Xero anyway.

Maybe not MYOB but maybe the company that bought Mint. If they can roll out to all their customers in us, a $500m investment is probably reasonable. I wouldn't put it at 50% either (and probably less than $500m) but I would put it higher than very low.

[PJK]

I can't shake the feeling that XRO is the emperors new clothes. I just do not get the massive P/E premium being applied for a company that simply offers accounting software. That is a competitive field.

They play a lot on the concept of cloud computing - but frankly I do not care whether the data is stored on a cloud - or within my own computer - it's the software and reporting that are important to me.

I run a small business - perhaps 300 annual entries with significant foreign exchange dealings - and found Xero's offering lightweight and without the functionality that I needed.

They still can't make money - they're not even close to break even- despite passing the customer numbers that they said they needed - and I'm doubtful that they ever will they way the headcount seems to need to keep expanding in order to supprot customers.
http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=XRO:NZ

Xero is the internet variant of 42 Below - lots of hype and a competitive product - but absolutely no record profitability - last year Xero had $9.3m reveunes and lost $7.5m?!! The only way that money will be made for the initial investors seems to be if it's sold to someone with more money than sense?

But 42 Below was lucky they sold pre-2008's GFC to Bacardi that bought the "Brand story" despite the string of losses. Does anyone really see that occuring today simply because Xero has a "cloud computing" app?

[maddog]

Any ideas on what is shappening with the Xero share price? Its drifted down 30c or around 10% during January.

[CJ]

there has been no "spin" recently to drive up price.

Maybe optimism by shareholders taht new customers wont be that high. Dec is the US year end so they should have signed a lot to start Jan. US has been their big push so it will be interesting to see if they have pulled it off.

[winner69]

Any ideas on what is shappening with the Xero share price? Its drifted down 30c or around 10% during January.

There you maddog .... right on cue ..... another bit og good news .... doubling revenues

So no need to worry ..... shareprice will recover now


well done .... they just needed a reminder eh

[Stranger_Danger]

20 mil divided by 170 staff = $117,000 per staff member. As they say, they're still hiring, they've rented the flash building on the waterfront, etc etc.

I'd definitely expect a loss.

That said, I think they're probably at the point where they could be profitable in theory, but management have now made it clear thats not what they're doing for.

If anything, expenses may be about to skyrocket as they have a crack at the USA, but at least they have decent locked in revenue as a buffer before attempting the big game hunting.

[maddog]

Yes, interesting timing - and interesting that the share price started moving back up a day ahead of the release. However, you do wonder why the share price has shot back up again as there is nothing new in the release. It largely repeats what was said last year.

The key issue Xero fails to address in the release and will have to address this year is funding - as on current trends and with its focus on growth ahead of profit it will most likely run out of cash either later this year or early next year. Depending on how quickly it ramps up its US expenses that funding issue could well come even earlier.

[CMo]

XRO now up to 2.80... up 9.8% on the day.

[zs_cecil]

XRO now up to 2.80... up 9.8% on the day.

It is actually more than that. It was closed at 2.41 yesterday. It is actually 16% percents for the day comparing yesterday's price. Good profit for those people who get in early today. The trading volume for this stock is still very low though.

[Everwood]

Xero has raised $20m in new capital.
https://nzx.com/companies/XRO/announcements/219110

[CJ]

Xero has raised $20m in new capital.
https://nzx.com/companies/XRO/announcements/219110

Anyone willing to do a sneaky off-market transfer for 1 share before 14 Feb. Willing to pay twice current SP! ;)

Seriously now, I haven't done the maths but with the shareprice now above $3, is there an arbitrage opportunity with the SPP?

[Everwood]

Anyone willing to do a sneaky off-market transfer for 1 share before 14 Feb. Willing to pay twice current SP! ;)

Seriously now, I haven't done the maths but with the shareprice now above $3, is there an arbitrage opportunity with the SPP?

Last time they did SPP, you needed to have a minimum of 500 Shares to purchase more shares in SPP. I'm assuming after the new shares get issued, they will drop in value the same day they appear on the shareholders register. I don't remember if they drop in value the last time they did SPP after they appeared on the shareholders register.

[CJ]

Last time they did SPP, you needed to have a minimum of 500 Shares to purchase more shares in SPP. I'm assuming after the new shares get issued, they will drop in value the same day they appear on the shareholders register. I don't remember if they drop in value the last time they did SPP after they appeared on the shareholders register.So for $1,500 (currenlty priced at $3), you have the option to purchase 10x more shares at $2.75.

No doubt the price will go down but it shouldn't go down less than the combined purchase price.

DIL is my current Tech play but have always been interested in Xero (I am a very happy user of their product)

[ratkin]

System working well , can you send us more money?

[Nandi]

Sure say the investors and want to know if 20 million is enough or do you want us to send more this time?

[Stranger_Danger]

Glass half full = more smart people buying in.

Glass half empty = the smartest people (founders) selling a few more shares.

[Nandi]

What wonderful spin! What a fantastic garment that the emperor is wearing, look at the weave of that fabric as it wafts in the gentle Wellington breeze. Man I have not see such exquisite workmanship on a garment like this in my life. The emperor's designer needs to be inducted to the Fashsion Designers hall of fame. Where can I get a garment like this????


http://www.scoop.co.nz/stories/BU1202/S00313/xero-founders-sell-5-million-of-shares.htm (http://www.scoop.co.nz/stories/BU1202/S00313/xero-founders-sell-5-million-of-shares.htm)

[winner69]

I think it very noble of Rod et all to see to ikeminded punters who wanted a share of the cake ..... no dilution for them and existing shareholders .... good eh .... and everybody wins

[Nandi]

I just remembered that the same three who made the recent share sale had sold before and this is what they said at the time:"The shares were sold at $1.45 each, a 4c premium to last night's closing price. Both Mr Drury and Mr Edwards have indicated that they will not sell any more shares until the company reaches financial breakeven, which is forecast to be in the second half of 2011. Mr Drury said Mr Morgan's investment was "a huge endorsement" of the company's progress and strategy."


http://www.stuff.co.nz/business/industries/3948853/Trade-Me-founder-ups-stake-in-positive-Xero (http://www.stuff.co.nz/business/industries/3948853/Trade-Me-founder-ups-stake-in-positive-Xero)

[CJ]

It is a bit unusual. Why didn't these know (but not current) strategic investors take place in the placement they just did???

Th upside is that Xro are offering current investors to purchase in at the same price (upto $15k) and if they want to get out, like Rod has, the market price is currently above the placement price so they can (depending on the size they want to ofload).

My veiw is they need to take off in the US/UK very quickly. They currently have a technology advantage but the other big plays will catch up fast if they choose to.

I note SAP and Oracle are currently buying up SaaS HR products at large prices. That is probably the ultimate exit strategy.

I am watching from the sideline but am a happy user of their product.

[Everwood]

I'm long term shareholder and I hope they do well in United States. I'm still skeptical on how well they will do in U.S Market, hopefully they will give as update in Full Year result which should be out in mid / late May.

[Everwood]

Has anyone received SPP documents in the mail yet?

[nwood]

Got my SPP forms via email yesterday

[Toasty]

Me too. I'm going to grab the full allotment. I would have thought that the share price would take a dip after the record date but it is still up around $3.05. Should we expect a drop towards the $2.75 level?

[Everwood]

My forms haven't arrived yet, what is the final date the money for the allotment will need to be paid by?

[Toasty]

6th March at 5:00pm. SP now $3.10....why? Just sold a few and was going to buy back on the inevitable dip.....

[CJ]

6th March at 5:00pm. SP now $3.10....why? Just sold a few and was going to buy back on the inevitable dip.....
Given you can buy $15k worth for $2.75 it makes sense to sell on market now and buy back in with the SPP if you dont want your holding to increase.

Due to this, I would ahve expected them to have dropped now that they have gone ex-rights to the SPP. Then another small drop once the new shares are issued.

Therefore it seems weird that someone would push the price up today.

[zs_cecil]

Given you can buy $15k worth for $2.75 it makes sense to sell on market now and buy back in with the SPP if you dont want your holding to increase.

Due to this, I would ahve expected them to have dropped now that they have gone ex-rights to the SPP. Then another small drop once the new shares are issued.

Therefore it seems weird that someone would push the price up today.

The share purchase plan last time at 90c resulted a record high price above $1. Maybe people are eager to get on the bus of growth and repeat its trajectory. Xero's story still attracts good will buyers.

[CJ]

The share purchase plan last time at 90c resulted a record high price above $1. Maybe people are eager to get on the bus of growth and repeat its trajectory. Xero's story still attracts good will buyers.no doubt. But the the value of the shares pre-rights to SPP should be worth more than the value ex-rights to SPP. All other things being equal, I would have expected the movement noted above.

Similar to when a share goes ex-div. IN theory the price should go down by the amount of the dividend but it doesn't always.

[Silverlight]

Great little stag again for those in the SPP, 40 cents on the max shares 5455, easy $2,000+ profit. Almost as much as profit as the 90 cent SPP, however you had to outlay 3 times as much this time, still worth it.

[Toasty]

Great little stag again for those in the SPP, 40 cents on the max shares 5455, easy $2,000+ profit. Almost as much as profit as the 90 cent SPP, however you had to outlay 3 times as much this time, still worth it.

I know I should get excited about $2000+ bonus but my guilty little secret is that I am all or nothing on this one. I really like the product but I am more invested in the characters and the story and I avidly chase down all the news and blog articles, good or bad. Probably one of the few times I have become emotionally attached to a share.

Hoping for good news in the next full year results and for some reason I am really hung up on the 100,000 customer mark coming up asap. I sold a few at 3.03 thinking that the price would drop after the spp and I could get a few more at a discount. No luck there but happy to have released a bit of profit. But really holding the bulk for a decision at 5.00 and then 10.00.

I am probably a bit beyond optimistic (psychotic?) but I really feel that as a punt this is one of the few NZ companies that has a market that could literally run into the millions of customers if executed correctly. I am a happy consumer of all the expansion stories etc. I know not everybody is happy with the direction or even the product but the sheer volume of positive feedback gives me plenty of hope.

I leave my self open for criticism but I am going all out greedy on this one.

[modandm]

I know I should get excited about $2000+ bonus but my guilty little secret is that I am all or nothing on this one. I really like the product but I am more invested in the characters and the story and I avidly chase down all the news and blog articles, good or bad. Probably one of the few times I have become emotionally attached to a share.

Hoping for good news in the next full year results and for some reason I am really hung up on the 100,000 customer mark coming up asap. I sold a few at 3.03 thinking that the price would drop after the spp and I could get a few more at a discount. No luck there but happy to have released a bit of profit. But really holding the bulk for a decision at 5.00 and then 10.00.

I am probably a bit beyond optimistic (psychotic?) but I really feel that as a punt this is one of the few NZ companies that has a market that could literally run into the millions of customers if executed correctly. I am a happy consumer of all the expansion stories etc. I know not everybody is happy with the direction or even the product but the sheer volume of positive feedback gives me plenty of hope.

I leave my self open for criticism but I am going all out greedy on this one.

Diversification is the only free lunch in investing. Manage your risks. XRO is a high risk stock. Thats all I would say. Look at what happened to PRC shareholders.

[Toasty]

Diversification is the only free lunch in investing. Manage your risks. XRO is a high risk stock. Thats all I would say. Look at what happened to PRC shareholders.

To clarify: This is not my only investment or even a significant percentage of my assets. However what I have put in I am prepared to stake until company flies or ...other...

[Everwood]

Does anyone know why Xero has risen so much over the last several days? I'm happy a shareholder, but without any news it doesn't seem to add up.

[Blendy]

don't know either... maybe a good time to cash up and buy back in when it calms down in a week or so?

[CJ]

When is there next customers announcement. I dont think we have heard there 1 Jan 2012 signups which is the US start of year. NZ start of year is this weekend.

The NZVF just did a terrible deal taking 50% of the risk of Theils investment in Xero but giving him (almost) 100% of the upside but that shouldnt have effect the price.

[Everwood]

don't know either... maybe a good time to cash up and buy back in when it calms down in a week or so?

I have no intention of selling my shares. I will take the ups and downs over the next 3 to 4 years.

[Everwood]

When is there next customers announcement. I dont think we have heard there 1 Jan 2012 signups which is the US start of year. NZ start of year is this weekend.

The NZVF just did a terrible deal taking 50% of the risk of Theils investment in Xero but giving him (almost) 100% of the upside but that shouldnt have effect the price.

The uptake in Australia seems to be going well. http://www.xero.com/advisors/ They only had 362 Accountants & 156 Bookkeepers in November last year. They now have 508 Accountants and 216 Bookkeepers.

The United States uptake is slowly taking off. They had 5 Accountants in November last year. They now have 18 Accountants. 11 of those of been added since February 1st

[Toasty]

don't know either... maybe a good time to cash up and buy back in when it calms down in a week or so?

I sold a few at 3.03 for that reason but they never went down.... I would be inclined to wait until the next shareholders meeting.

[Toasty]

Good news this morning with the exception of no earnings guidance which will annoy a few people I guess. As an investor from the start I am not really worried about this as I believe in the foregoing profit for growth strategy. People seem to get quite bitter about this but most don't appear to hold any shares. How do the actual investors feel about the direction the company has taken. I am quite excited at the numbers particularly if they keep climbing at this rate.

http://www.nbr.co.nz/article/xero-doubles-annual-sales-grabs-more-customers-ck-115677

[Blendy]

have i missed some critical news with Xero today? Up 21c to $4.25!

[Toasty]

Not sure whats going on. Back to $4.30 already this morning and the next ask is $4.65. Probably a billion dollar takeover offer on the way....

[Blendy]

Probably a billion dollar takeover offer on the way....

It's up to $4.49 - do you think your rumour has sparked a frenzy? or is there some truth to it and people who are in the know are buying up??

[Toasty]

It's up to $4.49 - do you think your rumour has sparked a frenzy? or is there some truth to it and people who are in the know are buying up??

$4.50 now. Its obviously a $2 Billion dollar offer....

[CJ]

Someone obviously knows something or maybe each buyer thinks the previous buyer knows something. Volumes are tiny though - less than $50k traded from what I can see. Market cap now above $400m so maybe in preparation of an entry to the index (two many big shareholders I would have though to have sufficient free float)

I wish I had bought prior to the rights issue now - did consider it but ruled out as looked fully priced and have DIL as my tech play. Reconsidered 2 days ago when it was at $4 and still thought it looked fully priced. Xero catching up DIL for current year annual return with DIL having a bit of weakness at the moment.

[brucea]

Thanks Sparky, yes being an astute investor I always thought Xro had a potential great product (ahem .....a confession....but then I felt the same way about Blis (BLT) as I believed strongly in their product too, but boy I have taken a bath there!!!!)
Congrats to those who invested in Xero, you've done very nicely. Wish I had some stock here too.

[Dentie]

Hi all - I'm trying to learn why the share price in this company is skyrocketing ... all I see is no net earnings - thus no dividends, no tangible assets ...NTA at about 14c per share, no volume trades, CEO Drury saying no NP for a couple of years yet, Drury & Co selling down, monopoly position, revenue doubles in last 12 mths etc etc..... does anyone know what is keeping the XRO bubble from bursting? Can someone please educate me?

[CJ]

does anyone know what is keeping the XRO bubble from bursting? Can someone please educate me?100% growth per year in all the markets the are targeting (NZ, AUS, UK and US).

WHile I think they are overvalued (depends on levels of growth you factor in), looking at their NTA is irrelevant.

Look at facebook. It had NO revenues for its first few years, would have next to no assets. It is all about number of users where youcharge them directly (eg. Xero) or through advertising (eg. Facebook).