Xero's chase for the 'right customers' boosts operating revenue by 67 percent

Xero has reported that for the 2016 financial year it has achieved operating revenue of NZ$207.1 million and increased global subscriber numbers to 717,000.
Written by Aimee Chanthadavong, Contributor

Xero has reported that in the last 12 months the company has processed over NZ$1 trillion worth of transactions, which has contributed to the company posting operating revenues of NZ$207.1 million, a 67 percent year on year increase, for the full year to March 31, 2016.

According to the company, the increase in total operating revenue was due to the 67 percent increase in subscription revenue to NZ$202 million, primarily driven by year on year global paying subscriber growth of 51 percent from 475,000 to 717,000. Specifically, ANZ grew by 157,000 subscribers representing 46 percent growth during the year, while international subscribers grew 63 percent to 219,000.

Of total operating revenue, international growth was the strongest. Total international revenue increased by 95 percent year on year to NZ$63.6 million, and Australia and New Zealand increased by 57 percent to NZ$143.4 million.

Xero CEO Rod Drury said on Thursday that strong subscriber numbers in all markets is indicative of the company's progressive global expansion, highlighting in particular that in the United Kingdom the company has more cloud customers than its incumbents.

During the year the company opened an office in Singapore, which Drury said is just the start of the company's plans for the South-East Asia region.

"You really have to have a global platform to win and if you look at us, and how we're achieving this on a single global code base we feel very positive about what we're doing," he said.

The cloud accounting firm also reported net loss of NZ$82.5 million for the year, an increase of AU$12.9 million over the previous year, which the company said reflects the ongoing investment it makes in scaling its global business.

"This is a global greenfield opportunity; there are no fast followers to us in the global space, so what this means is it allows us the time to execute in a sustained fashion, and we do not see this as a compromise to our long-term growth and impairing on our market share globally," Xero CFO Sankar Narayan said.

Meanwhile, cash usage from operating and investing activities improved from NZ$88.2 million recorded last year to NZ$86.1 million in FY16. The company said it had NZ$184m of cash, cash equivalents, and short-term deposits available.

"We have enough cash to do what we need to do, which is exciting, and people have been really impressed by the focus we've had on putting operating discipline inside the business, showing we're not a one trick pony on growth ... which has really seen a significant increase in margin," Drury said.

At the same time, EBITDA margin in the second half of FY16 improved to -23 percent, from -36 percent in 1H16 and -53 percent in 2H15.

Drury also noted the company was fairly conservative in marketing spending during the year, saying that because there are no close following competitors, the company was able to focus on "attracting the right customers", reflected in the life-time value (LVT) ratio, which increased by 83 percent to NZ$823 million.

"We're getting value added subscriber growth; we're not just chasing numbers," he said.

In addition, Drury said the company increased its prices, but noted there was little push back from the market as a result of the move.

He also provided an update on the company's migration to Amazon Web Services, which has been two years in the making. He outlined how the decision will provide the company the opportunity to enhance automation, such as the ability to automatically code 90 percent of the 50 million bank transactions it processes every day, as well as set the company up for its next focus of machine learning, artificial intelligence, and big data.

"This will transform the way accounting software works," he said.

In February, Xero teamed up with Microsoft to provide an avenue for its customers to collect and collate its own big data across Xero's software and other integrated business applications, via Microsoft Power BI.

Another point Drury discussed was how during the year the business addressed escalating security concerns through "massive investments" by building security into its platform, such as the introduction of anonymous log-in, two-factor authentication, and alerting customers when bank numbers are changed.

Looking ahead, the company has estimated operating metrics will continue to improve in FY17, while cash usage in FY17 will reduce from FY16, with expectations that cash flow will break-even within its current cash balance.

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