Xero : Annual Meeting 2019 Chair CFO CEO Addresses to Shareholders

Annual meeting

15 August 2019 Auckland, New Zealand

WELLINGTON | NEW ZEALAND

Important notice

This presentation is given on 15 August 2019 on behalf of Xero Limited (Xero) (ASX:XRO) (Company number NZ 183 0488, AU ARBN 160 661 183)

Information in this presentation:

• is for general information purposes only, and is not an offer or invitation for subscription, or purchase of, or a recommendation to invest in, securities inXero Limited
• should be read in conjunction with, and is subject to, Xero's latest and prior interim and annual reports, including Xero's annual report for the period ended 31 March 2019, and Xero's market releases on the ASX
• includesforward-looking statements about Xero and the environment in which Xero operates, which are subject to uncertainties and contingencies outside of Xero's control - Xero's actual results or performance may differ materially from these statements

•

•

includes statements relating to past performance, which should not be regarded as a reliable indicator of future performance

may contain information from third parties believed to be reliable, but no representations or warranties are made as to the accuracy or completeness of such information

• includesNon-GAAP measures as we believe they provide useful information for readers to assist in understanding Xero's financial performance. Non-GAAP financial measures do not have a standardised meaning and should not be viewed in isolation or considered as substitutes for measures reported in accordance with NZ IFRS. These measures have not been independently audited or reviewed
• includes comparative period results that have been restated to reflect the effect of three new accounting standards. See page 23 for more information

All information in this presentation is current at 31 March 2019, unless otherwise stated

All currency amounts are in NZ dollars, unless otherwise stated

Due to rounding, numbers in this presentation may not add up precisely to the totals provided and percentages may not precisely reflect the absolute figures

See page 36 for a glossary of the key terms used in this presentation

2

Board of Directors

Graham Smith

CHAIR OF THE BOARD

INDEPENDENT NON-EXECUTIVE DIRECTOR

Nominations Committee (Chair) Audit and Risk Management Committee

Lee Hatton

INDEPENDENT NON-EXECUTIVE DIRECTOR

Audit and Risk Management Committee (Chair)

Susan Peterson

INDEPENDENT NON-EXECUTIVE DIRECTOR

People and Remuneration Committee (Chair)

Bill Veghte

INDEPENDENT NON-EXECUTIVE DIRECTOR

Retiring 15 August 2019

Rod Drury

XERO FOUNDER

NON-EXECUTIVE DIRECTOR

Dale Murray, CBE

INDEPENDENT NON-EXECUTIVE DIRECTOR

Audit and Risk Management Committee

David Thodey, AO

INDEPENDENT NON-EXECUTIVE DIRECTOR

People and Remuneration Committee Nominations Committee

Craig Winkler

NON-EXECUTIVE DIRECTOR

People and Remuneration Committee Nominations Committee

3

Agenda	Chair's	Financial	CEO	Q&A
	address	overview	update

Graham

Smith

Kirsty Godfrey-Billy

Steve Vamos

CHIEF EXECUTIVE OFFICER

CHAIR OF THE BOARD

CHIEF FINANCIAL OFFICER

4

Chair's address

Graham Smith

CHAIR OF THE BOARD

LONDON | UNITED KINGDOM	5

Resolutions

XEROCON | SAN DIEGO, US	6

RESOLUTION 1

Fixing the remuneration of the auditor

That the Board is authorised to fix the remuneration of the auditor for the ensuing year

For

91,335,072

96.96%

Against

2,774,653

2.95%

Discretionary

86,088*

0.09%

• 43,772 of which are held by the Chair of the Meeting who intends to vote in favour of the resolution

7

RESOLUTION 2

Re-election of Susan Peterson as a director

That Susan Peterson, retiring from office as a director of Xero at the meeting by rotation in accordance with Xero's Constitution, be reelected as a director of Xero

For

93,391,971

99.15%

Against

715,217

0.76%

Discretionary

83,434*

0.09%

• 42,718 of which are held by the Chair of the Meeting who intends to vote in favour of the resolution

8

RESOLUTION 3

Election of David Thodey as a director

That David Thodey, appointed by the Board as a director on 27 June 2019, and who will retire at the meeting in accordance with Xero's Constitution and the ASX Listing Rules, be elected as a director of Xero

For

94,096,987

99.90%

Against

7,814

0.01%

Discretionary

87,353*

0.09%

• 45,037 of which are held by the Chair of the Meeting who intends to vote in favour of the resolution

9

RESOLUTION 4

Increase cap on non-executive director remuneration

That, for the purposes of ASX Listing Rule 10.17, the maximum annual remuneration able to be paid to all of the non-executive directors of Xero taken together be increased by NZ$800,000 from NZ$1,400,000 to NZ$2,200,000 with immediate effect

For

65,315,557

99.61%

Against

171,636

0.26%

Discretionary

82,078*

0.13%

• 41,962 of which are held by the Chair of the Meeting who intends to vote in favour of the resolution

10

RESOLUTION 4

Target director fees

Target Xero director fees

New Zealand Dollars

Country		Chairman		Director		Audit Chair	Remuneration Chair	Nominations Chair
	FY19	FY20-21	FY19	FY20-21	FY19	FY20-21	FY19	FY20-21	FY19	FY20-21
NZ	$180,000	$358,000	$90,000	$145,000	$20,000	$30,000	$15,000	$30,000	-	-
AU	$180,000	$358,000	$90,000	$145,000	$20,000	$30,000	$15,000	$30,000	-	-
US	$310,000	$358,000	$226,000	$252,000	$21,000	$30,000	$14,000	$30,000	-	-
UK	$260,000	$373,000	$115,000	$145,000	$19,000	$30,000	$19,000	$30,000	-	-

11

RESOLUTION 4

Director fees

Director fees - by individual

New Zealand Dollars

		Previous Fees			Actual @ 27 Jun 2019		Proposed @ 1 Sept 2019
	Director	Committee		Director	Committee		Director	Committee
Name	Fees	Chair Fees	Total Fees	Fees	Chair Fees	Total Fees	Fees	Chair Fees	Total Fees
Graham Smith	$310,000	-	$310,000	$342,000	-	$342,000	$440,000	-	$440,000
Rod Drury	$90,000	-	$90,000	$127,000	-	$127,000	$145,000	-	$145,000
Lee Hatton	$90,000	$20,000	$110,000	$127,000	$28,000	$155,000	$145,000	$30,000	$175,000
Dale Murray	$115,000	-	$115,000	$127,000	-	$127,000	$145,000	-	$145,000
Susan Peterson	$90,000	-	$90,000	$127,000	-	$127,000	$145,000	$30,000	$175,000
David Thodey	-	-	-	$127,000	-	$127,000	$145,000	-	$145,000
Bill Veghte/TBD	$226,000	$14,000	$240,000	$240,000	$27,000	$267,000	$252,000	-	$252,000
Craig Winkler	$90,000	-	$90,000	$127,000	-	$127,000	$145,000	-	$145,000
Total	$1,011,000	$34,000	$1,045,000	$1,344,000	$55,000	$1,399,000	$1,562,000	$60,000	$1,622,000

12

RESOLUTION 4

Increase cap on non-executive director remuneration

That, for the purposes of ASX Listing Rule 10.17, the maximum annual remuneration able to be paid to all of the non-executive directors of Xero taken together be increased by NZ$800,000 from NZ$1,400,000 to NZ$2,200,000 with immediate effect

For

65,315,557

99.61%

Against

171,636

0.26%

Discretionary

82,078*

0.13%

• 41,962 of which are held by the Chair of the Meeting who intends to vote in favour of the resolution

13

RESOLUTION 5

Approval of the issue of shares to a director - Lee Hatton

That, for the purposes of ASX Listing Rule 10.11 and for all other purposes, approval is given for Xero to issue shares to Lee Hatton in lieu of her remuneration on the terms and conditions set out in the Explanatory Notes of the Notice of Meeting

For

94,045,433

99.85%

Against

54,438

0.06%

Discretionary

90,575*

0.10%

• 45,859 of which are held by the Chair of the Meeting who intends to vote in favour of the resolution

14

Financial overview

Kirsty Godfrey-Billy

CHIEF FINANCIAL OFFICER

CBD | SINGAPORE	15

Proof points of a strong business model

Annualised monthly recurring revenue

$154m
added in 12 months
$638m
Annualised monthly
recurring revenue
Mar 11	Mar 19

Free cash flow1as % of revenue

10%			1.2%
0%	FY16	FY17	FY18	FY19
FY15
-10%
-20%
-30%
-40%
-50%
-60%
-70%

Xero subscriber growth

432,000

added in 12 months

1,818,000

subscribers

Mar 08

Mar 19

1See glossary for definition

16

Global growth and major cash flow milestone

1See glossary for definition

AMRR

$638.2m

• 32% YOY(32% in constant currency1)

SUBSCRIBERS

1.8m

+ 432,000 YOY

OPERATING REVENUE

$552.8m

• 36% YOY(34% in constant currency1)

FREE CASH FLOW

$6.5m

+ $35.0m YOY

ARPU

$29.25

• 0.4% YOY(0.8% in constant currency1)

EBITDA

EXCLUDING IMPAIRMENTS

$91.8m

+ $42.0m YOY

17

Positive LTV trends plus strong subscriber growth

March 2019 Progress from

March 2018

ARPU	$29.25

Churn %1.10%

Gross margin	84%

LTV per subscriber	$2,398	+4%1

Total subscriber lifetime value (LTV)

>$1.1badded in 12 months

$4.4b

$3.2b

1Constant currency based on FX rates 31 March 2018. 3% increase in nominal terms.

Mar 18

Mar 19

18

Positive EBITDA momentum

EBITDA margin

30%

Continued scale and efficiency progress contributed to FY19 performance:

EBITDA margin improved modestly due to $18.6m of impairment costs, relating to costs associated with our change in US payroll strategy, and acquisition related costs of $1.3 million, relating

20%

10%

13.2%

to the acquisitions of Hubdoc and Instafile

Gross margin improved by 2pp to 84%

CAC (customer acquisition costs) improved by 2pp to 45% of revenues

Product costs, including opex and capex, improved by 4pp to 31% of revenues

0%

-10%

-20%

FY17	FY18	FY19
EBITDA margin	EBITDA margin excl. SBP and impairments

19

First positive free cash flow result

Movement in net cash position

Significant milestone passed with first positive free cash flow result in FY19 of $6.5m, equivalent to 1.2% of FY19 operating revenues

Net cash position at 31 March 2019 was $100.6m (comprising cash and short-term deposits less term debt) compared to $80.0m at 31 March 2018

Cash and cash equivalents

Short-term deposits

Total cash and short-term deposits

Convertible notes - term debt liability

Net cash

FY18	FY19	YOY
($000s)	($000s)	change
		($000s)

20,955 121,527100,572

59,000

336,819

277,819

79,955	458,346	378,391

-

(357,731)

(357,731)

79,955	100,615	20,660

20

Beauty of Xero's SaaS model

Generate long- term value

Acquire
subscribers	Grow revenue
economically	per subscriber
at scale

Grow gross	Retention at
margins	scale

21

Unit economics and track record of value

Value of a Xero subscriber

$2,000	LTV/CAC					Compelling SaaS
$1,500		6.0						unit economics
$1,000							LTV	CAC months 13.6
	$500							$2,398	MRR churn 1.10%
								LTV/CAC 6.0
CAC	$0
							LTV $2,398
$397	$-500
	Year 1	Year 2 Year 3	Year 4	Year 5	Year 6	Year 7	Year 8

creation

Total lifetime value

$5b	International			4.4b
$4b	ANZ			3.2b
$3b			2.2b
		1.5b
$2b
$1b	0.8b
$0b	FY15	FY16	FY17	FY18	FY19

Strong track record of value creation

>$1.1 billion in LTV added in FY19 LTV doubled in last two years ANZ: FY15-19 LTV CAGR 48% International: FY15-19 CAGR 65%

22

New accounting standards

Xero adopted three new accounting standards from 1 April 2018

IFRS 15

Revenue from contracts with customers

• Xero's commission costs will be capitalised and expensed over time
• This standard also changes the classification and timing of when revenue is recognised

IFRS 16

Leases

• The majority of Xero's leases will be recognised on the balance sheet, with the expense moving from operating expenses to depreciation and finance expense

IFRS 9

Financial instruments

• Amends the classification and measurement of Xero's financial instruments and simplifies its hedge accounting model to align more closely to risk management strategies and objectives

23

CEO update

Steve Vamos

CHIEF EXECUTIVE OFFICER

XERO UNDER | MELBOURNE, AU	24

OUR PURPOSE IS

"

Makelifebetter forpeople in small

business, their advisorsand communities around theworld

OUR MISSION IS

"

Rewire the world of small business, making it seamless, simpler and smarter

25

Social and environmental impact

26

Strategic priorities

Drive cloud	Grow small	Building
accounting	business	for global
	platform	scale and
		innovation

27

Drive cloud accounting

1Estimated adoption rates across English speaking addressable cloud accounting markets, based on publicly available data

Cloud accounting adoption1

FY19 subscriber additions by geography

AU

		ANZ
>50		193,000
%	NZ

Australia and New Zealand

UK

North	International
America	239,000

<20%	RoW
0k 40k 80k 120k 160k
Global	28

Grow small business platform

For small business

Small businesses can manage their day-to-day finances with software that's smart and easy-to use, having instant access to their data and files

For accounting partners

Accounting partners can connect to their clients' data and work efficiently, bringing various work streams of their practice on to one platform in the cloud

App Partners / Ecosystem		Xero solutions	Xero products
700+ connected apps		Gusto (US Payroll)	Bank feeds	Projects
>50,000 users of Xero's API			Payroll	Hubdoc
developer tools			Expenses	WorkflowMax

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App Partners / Ecosystem	Xero Partner products
Partner-specific tools and apps	Compliance	HQ apps and explorer
	Workpapers	Practice Manager
	Tax solutions	Reporting	29

Grow small business platform

Revenue composition

Revenue growth YOY

			128%
Group
operating revenue
$552.8m
	91%	34%				42%	36%
						Group
							operating
1% 3%	5%			16%			revenue
				growth
Core accounting	WorkflowMax2	Core	Platform			Non-
Platform revenues1	Non-recurring3	WorkflowMax	2
accounting	revenues1		recurring3

1. Platform revenues include revenue derived from related services, including adjacent products (such as Hubdoc),add-ons with incremental revenue (such as payroll and expenses modules) and revenue share agreements with partners
2. Revenues relating to WorkflowMax, online workflow and job management software
3. Non-recurringincludes revenue from events (such as Xerocons and roadshows), and other non-subscription or

platform services

30

Building for global scale and innovation

Leading data capture service

Drives productivity for both partners and small business

Innovative capital raise

US$300m convertible notes offer demonstrates investor confidence in the business

Provides flexibility to execute acquisitions & investments that extend and enhance Xero's small business platform and ecosystem

UK focused tax filing and compliance tool

Completes Making Tax Digital compliance stack

31

Xero

Leadership

Team

Steve Vamos	Anna Curzon
CHIEF EXECUTIVE OFFICER	CHIEF PRODUCT OFFICER

Craig Hudson

MANAGING DIRECTOR, NEW

ZEALAND AND PACIFIC ISLANDS

Rachael Powell

CHIEF CUSTOMER, PEOPLE AND

MARKETING OFFICER

Chaman Sidhu

CHIEF LEGAL OFFICER

AND COMPANY SECRETARY

Gary Turner

MANAGING DIRECTOR,

UNITED KINGDOM AND EMEA

Kirsty

Godfrey-Billy

CHIEF FINANCIAL OFFICER

Trent Innes

MANAGING DIRECTOR,

AUSTRALIA AND ASIA

Mark Rees

CHIEF TECHNOLOGY OFFICER

Damien Tampling

CHIEF STRATEGY AND CORPORATE DEVELOPMENT OFFICER

Tony Ward

PRESIDENT OF AMERICAS

32

Outlook

Xero will continue to focus on growing its global small business platform and maintain a preference for reinvesting cash generated, subject to investment criteria and market conditions, to drive long-term shareholder value

Free cash flow1in the financial year to 31 March 2020 is expected to be a similar proportion of total operating revenue to that reported in the financial year to 31 March 2019

1Free cash flow is defined as cash flows from operating activities less cash flows used for investing activities excluding cash used for acquisitions of, and investments into, businesses and strategic assets

33

Q&A

HUNT & GATHER BEE CO. | WAIKATO, NZ	34

Appendix

LUNE | MELBOURNE, AU	35

Glossary

Subscribers

Subscriber means each unique subscription to a Xero-offered product that is purchased by an accounting partner or an end user and which is, or is available to be, deployed. Subscribers that have multiple subscriptions to integrated products on the Xero platform are counted as a single subscriber

AMRR

Annualised monthly recurring revenue (AMRR) represents monthly recurring revenue at 31 March, multiplied by 12. It provides a 12 month forward view of revenue, assuming any promotions have ended and other factors such as subscriber numbers, transaction volumes, pricing and foreign exchange remain unchanged during the year

ARPU

Average revenue per user (ARPU) is calculated as AMRR at 31 March divided by subscribers at that time (and divided by 12 to get a monthly view)

Churn

Churn is the value of monthly recurring revenue (MRR) from subscribers who leave Xero in a month as a percentage of the total MRR at the start of that month. The percentage provided is the average of the monthly churn for the previous 12 months

Constant currency

Constant currency comparisons for revenue are based on exchange rates for the 12 months ended 31 March 2018. Comparisons for ARPU, AMRR and LTV are based on exchange rates at 31 March 2018

Lifetime value (LTV)

LTV is the gross margin expected from a subscriber over the lifetime of that subscriber. This is calculated by taking the average subscriber lifetime (1 divided by churn) multiplied by ARPU, multiplied by the gross margin percentage. Group LTV is calculated as the sum of the individual segment LTVs, multiplied by their respective segment subscribers, divided by total Group subscribers

CAC months

Customer Acquisition Cost (CAC) months are months of ARPU to recover the cost of acquiring each new subscriber. The calculation is sales and marketing costs for the year excluding the deferral and amortisation of commissions paid to sales people, less conference revenue (such as Xerocon), divided by gross new subscribers added during the same period, divided by ARPU

Free cash flow

Free cash flow is defined as cash flows from operating activities less cash flows used for investing activities excluding cash used for acquisitions of, and investments into, businesses and strategic assets

Finweb	GAAP	SBP
Financial web	Generally accepted	Share-based payments
TAM	accounting principles
Total addressable market

36

xero.com/investors