Xero : Investor Presentation H1 FY20

Investor briefing

Half year results to 30 September 2019

7 November 2019

Third Drawer Down |AUSTRALIA

Important notice

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

Information in this presentation:

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is for general information purposes only, and is not an offer or invitation for subscription or purchase of, or a recommendation to invest in, Xero securities

should be read in conjunction with, and is subject to, Xero's latest and prior interim and annual reports, including Xero's interim report for the period ended 30 September 2019, and Xero's market releases on the ASX

includes forward-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

includes Non-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

All information in this presentation is current at 30 September 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 34 for a glossary of the key terms used in this presentation.

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Agenda	Business	Financial	Outlook	Q&A
	update	results

Steve Vamos	Kirsty Godfrey-Billy
CHIEF EXECUTIVE OFFICER	CHIEF FINANCIAL OFFICER

3

Business update

Steve Vamos

CHIEF EXECUTIVE OFFICER

Moovaz|SINGAPORE 4

2,057,000	478,000
added in 12 months

subscribers

Sep 07

Sep 19

5

$	175m
$764m	added in 12 months

Annualised monthly recurring revenue

Sep 11					Sep 19
						6
	Sep 11

Global growth with strong

financialSUBSCRIBERS

indicators 2.06m

+ 478,000 YOY

ARPU

$30.96	TOTAL
	LIFETIME VALUE
- 0.4% YOY (- 0.1% in	$5.4b
constant currency1)
	+ $1.4b YOY

1See glossary for definition

AMRR

$764.1m

+ 30% YOY

OPERATING

REVENUE

$338.7m

• 32% YOY(33% in constant currency1)

FREE CASH FLOW

$4.8m

+ $14.6m YOY

EBITDA

EXCLUDING IMPAIRMENTS

$65.9m

+ $31.4m YOY

7

Executing on strategic priorities

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

8

Cloud accounting adoption1	H1 FY20 subscriber additions by geo
Drive cloud
accounting		AU	114,000
								ANZ
>50	%				130,000
NZ	16,000

Australia and New Zealand

UK73,000

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

<20%

Global

North	20,000	International
America	109,000

RoW16,000

0k

30k

60k

90k

120k

9

Australia and New Zealand

Australia

• 28% subscriber growth YOY to 840,000 subscribers.Revenue growth of 26% YOY (29% constant currency)
• Single Touch Payroll legislation extended to all employers from July 2019, helping to encourage cloud accounting adoption through digitisation of payroll compliance
• Partnership with GreatSoft to help harness the power of cloud accounting for large accounting practices

New Zealand

• 13% subscriber growth YOY to 367,000 subscribers.Revenue growth of 22% YOY
• Positive ARPU trends driven by increasing emphasis on additional platform solutions including payments and Xero Payroll which benefited from introduction of Payday filing by Inland Revenue

Subscribers 1.2m

1,250k

1,000k

750k

500k

250k

0k
H1 FY17	H1 FY18	H1 FY19	H1 FY20

Revenue$211m

$240m
$180m
$120m
$60m
$0m
H1 FY17	H1 FY18	H1 FY19	H1 FY20

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United Kingdom

51% subscriber growth YOY to 536,000 subscribers

HMRC's Making Tax Digital legislation continued to contribute to performance throughout H1 FY20

56% YOY AMRR growth (57% constant currency) driven by accelerated subscriber additions and ARPU trends. Revenue growth of 51% YOY

(52% constant currency)

New Manchester office to complement London and Milton Keynes locations

Invested heavily in readiness for Open Banking

Subscribers	536k
600k
400k
200k
0k
H1 FY17	H1 FY18	H1 FY19		H1 FY20
Revenue		$	80m
$80m
$60m
$40m
$20m
$0m
H1 FY17	H1 FY18	H1 FY19	H1 FY20

11

North America

21% subscriber growth YOY to 215,000 subscribers. Revenue growth of 34% YOY (29% constant currency)

Community partner strategy showing good progress with more than 40% YOY uplift in partner channel capacity

Novo became the first US-based digital bank (supporting small business and entrepreneurs), to integrate with Xero's global bank feeds API

Localisation of product with improved compliance functionality including GST returns in Canada and tax mapping in the US

Xerocon San Diego was attended by more than 1,000 people

Subscribers
300k		215k
200k
100k
0k
H1 FY17	H1 FY18	H1 FY19	H1 FY20
Revenue		$ 27m
$30m
$20m
$10m
$0m
H1 FY17	H1 FY18	H1 FY19	H1 FY20

12

Rest of World

52% subscriber growth YOY to 99,000 subscribers. Revenue growth of 43% YOY (37% constant currency)

Asia

• Bank feed integration launched with Hang Seng Bank in Hong Kong, a leading SME bank

South Africa

• Great traction across Johannesburg and Cape Town roadshows
• Launched three new alternative lending integrations

Subscribers	99k
100k
75k
50k
25k
0k
H1 FY17	H1 FY18	H1 FY19	H1 FY20
Revenue		$ 19m
$20m
$13m
$7m
$0m
H1 FY17	H1 FY18	H1 FY19	H1 FY20

13

Our platform strategy

App Partners/ Ecosystem	Xero solutions	Xero products
800+ apps	Stripe	Bank feeds	Projects
>50,000 users of Xero's API	(invoice payments)	Payroll	Hubdoc
developer tools	Gusto (US Payroll)	Expenses	WorkflowMax
Financial web services	Figured (Agri vertical)

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

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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 Partner products
Partner-specific tools and apps	Compliance	HQ apps and explorer
	Workpapers	Practice Manager
	Tax solutions	Reporting	14

Driving growth through the platform

H1 FY20 revenue composition

Core accounting

Platform revenues1

WorkflowMax2

Non-recurring3

		H1 FY20		116%
		revenue
		growth
Group		YOY
operating revenue
$338.7m
		32%
		Group	29%
		operating
				20%
		revenue				19%
	89%	growth
	6%		Core	Platform	WorkflowMax	2	Non-
2% 3%		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), payments and revenue share agreements with partners
2. Revenues relating to WorkflowMax, online workflow and job management software

3Non-recurring includes revenue from events (such as Xerocons and roadshows), and other non-subscription or platform services

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So what, now what?

Data is at the heart of Xero

Leveraging our machine learning and AI capabilities, we can support small businesses to use their data to drive simpler and more seamless workflows and surface powerful human insights

Workflows

Human Insights

Data

Apps

Machine Learning

AI

16

Progress on workflows and data integrations

Bringing Xero and Hubdoc closer together Marked improvement in the speed and accuracy of data ingestion and coding

Looking to bring Hubdoc's data capture and automation smarts closer to more Xero users

Stripe invoice payment integration Small businesses get paid more quickly when attaching an invoice payment option

Workflow integration enables more convenient Stripe account provisioning, sign-on and enhanced end customer features

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Xero

Leadership

Team

Steve Vamos	Anna Curzon
CHIEF EXECUTIVE OFFICER	CHIEF PRODUCT OFFICER

Craig Hudson	Trent Innes
MANAGING DIRECTOR, NEW	MANAGING DIRECTOR,
ZEALAND AND PACIFIC ISLANDS	AUSTRALIA AND ASIA

Mark Rees	Nicole Reid
CHIEF TECHNOLOGY OFFICER	ACTING CHIEF PEOPLE OFFICER

Damien Tampling	Gary Turner
CHIEF STRATEGY AND CORPORATE	MANAGING DIRECTOR,
DEVELOPMENT OFFICER	UNITED KINGDOM AND EMEA

Kirsty Godfrey-Billy

CHIEF FINANCIAL OFFICER

Rachael Powell

CHIEF CUSTOMER OFFICER

Chaman Sidhu

CHIEF LEGAL OFFICER

AND COMPANY SECRETARY

Tony Ward

PRESIDENT OF AMERICAS

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Social and environmental impact

Reduce Xero's impact on the environment by offsetting our carbon emissions to zero - Net Zero @ Xero

Support our employees and the for-purpose sector to make a difference in the community

Ambition to enable our customers to be more socially and environmentally conscious

With people at the heart of what we do - we will continue to embed diversity and inclusion initiatives with our employees, who will support the diverse needs of our customers

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19

Financial results

Kirsty Godfrey-Billy

CHIEF FINANCIAL OFFICER

X	KARVD Walls|UNITED STATES 20

Maintaining strong top-line momentum with improving free cash flow

Annualised monthly recurring revenue	Free cash flow	$4.8m
$800m	+30%YOY	$5m

$600m

$-5m

$400m

$-15m

$200m

$-25m

$0m	H1 FY18	H1 FY19	H1 FY20	$-35m	H1 FY18	H1 FY19	H1 FY20

21

Contribution margins positive in both segments

Australia and New Zealand contribution improved 34% YOY, exceeding revenue growth of 25% YOY due to continued operating discipline and scale benefits

International contribution positive for the first time as scaling and CAC efficiencies offset continued investment to drive strong subscriber additions

	Australia and New Zealand
	contribution	131m
$150m	$

$100m

$50m

$0m	H1 FY18	H1 FY19	H1 FY20

International segment contribution

$20m			$ 11m
$10m
$0m
$-10m
$-20m	H1 FY18	H1 FY19	H1 FY20

22

Significant lifetime value uplift

September 2019	Progress from
	September 2018

ARPU	$30.96		1

Churn %	1.10%

Gross margin	85%

LTV per subscriber	$2,619	6%2

1. ARPU decreased $0.13 from 30 September 2018
2. LTV per subscriber growth in constant currency based on exchange rates at 30 September 2018. 5% increase in nominal terms

Total subscriber lifetime value (LTV)

>$1.4b

added in 12 months

$5.4b

$3.9b

Sep 18

Sep 19

23

Unit economics and track record of value creation

Value of a Xero subscriber

$2,500	LTV/CAC						Compelling SaaS
$2,000		6.9							unit economics
$1,500
							LTVCAC months 12.3
$1,000
	$500								$2,619	MRR churn 1.10%
									LTV/CAC 6.9
CAC	$0
								LTV $2,619
$382	$-500
		Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8

Total lifetime value

$6b	International		5.4b
	ANZ			3.9b
$4b
		2.8b
$2b	1.1b	1.7b
$0b	H1 FY16	H1 FY17	H1 FY18	H1 FY19 H1 FY20

Strong track record of value creation

>$1.4 billion LTV added in 12 months LTV almost doubled in last 2 years

H1 FY16 to H1 FY20 CAGR:

• ANZ: 47%
• International: 55%

24

Financial performance

Operating revenue growth of 32% YOY (33% constant currency) driven primarily by subscriber growth across all markets

EBITDA improved $48.1 million YOY, resulting in a 12.6pp increase in EBITDA margin over the period as the business continues to benefit from scale and efficiency improvements

EBITDA excluding impairments increased by 91% YOY while EBITDA margin, excluding impairments, increased by 6.0pp

First time interim net profit of $1.3 million and second consecutive net profit for a six month period following H2 FY19 net profit of $1.4 million

Total operating revenue

Gross profit

Gross margin

Sales & marketing costs

Product design & development

General & administration

EBITDA

EBITDA excl. impairments

EBITDA margin

EBITDA margin excl. impairments

Net profit/(loss) after tax

Net profit/(loss) after tax excl. impairments

H1 FY19	H1 FY20	YOY change
($000s)	($000s)	(%)
256,527	338,658	32%
212,277	288,517	36%
82.8%	85.2%	+2.4pp
115,747	146,072	26%
68,866	85,297	24%
31,093	41,138	32%
16,759	64,850	287%
34,516	65,921	91%
6.5%	19.1%	+12.6pp
13.5%	19.5%	+6.0pp
(28,565)	1,336	NM
(10,808)	2,407	NM

25

Further gross margin improvement

Gross margin improved by 2.4pp over the prior period to 85.2% for H1 FY20. Both the Australia and New Zealand and International segments saw positive gross margin trends

Gross margin improvement powered by

efficiencies in cloud hosting and other platform- related benefits driving further improvements to customer service quality at a lower cost

Gross margin

90%

85.2%

85%

80%

75%
H1 FY18	H1 FY19	H1 FY20

26

Continued focus on CAC and product efficiency

Sales and marketing costs increased by 26% YOY which was lower than growth in revenue in H1 FY20. This resulted in a 2pp improvement YOY in CAC as percentage of revenue

Product costs including opex and capex as a percentage of revenue increased 1pp to 31% in H1 FY20

Product investment targeted a range of initiatives that will support near term product and customer objectives as well as longer-term strategic and technological needs

CAC as % of revenue

70%

55%

43%

40%
H1 FY18	H1 FY19	H1 FY20

Product costs including opex and capex as % of

50%revenue1

31%

35%

20%
H1 FY18	H1 FY19	H1 FY20

1Net of government grants

27

Strong capital position with

Movement in net cash position

positive free cash

Positive free cash flow result in H1 FY20 of $4.8m, equivalent to 1.4% of operating revenues in the period

Operating cash flow increased 99% to $71.5m for H1 FY20, an improvement of $35.6m from $36.0m in H1 FY19

Net cash position at 30 September 2019 was $101.4m (comprising cash and short-term deposits less term debt) compared to $45.3m at 30 September 2018

Cash and cash equivalents

Short-term deposits

Total cash and short-term deposits

Term debt

Convertible notes - term debt liability

H1 FY19	H1 FY20	YOY
($000s)	($000s)	change
		($000s)

21,187

110,898

89,711

55,000

385,130

330,130

76,187	496,028	419,841

(30,850)

-

30,850

-

(394,631)

(394,631)

Net cash	45,337	101,397	56,060

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Outlook

X	Orenda Tribe|UNITED STATES 29

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	30
into, businesses and strategic assets

Q&A

X	Nubian Skin|UNITED KINGDOM 31

Appendix

X	Farmit|NEW ZEALAND 32

SaaS metrics summary

	ANZ		International	Group
	H1 FY19	H1 FY20	H1 FY19	H1 FY20	H1 FY19	H1 FY20
ARPU	$31.95		$31.64	$29.68	$29.98	$31.09	$30.96
CAC months	8.4		8.6	18.2	16.0	12.9	12.3
MRR churn	0.87%		0.82%	1.55%	1.58%	1.10%	1.10%
Subscribers	981,000		1,207,000	598,000	850,000	1,579,000	2,057,000
LTV per sub	$3,064		$3,362	$1,558	$1,563	$2,494	$2,619
LTV/CAC	11.5		12.3	2.9	3.3	6.2	6.9
Total LTV	$3.01b		$4.06b	$0.93b	$1.33b	$3.94b	$5.39b

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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 30 September, 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 30 September 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 average exchange rates for the 6 months ended 30 September 2018. Comparisons for ARPU, AMRR and LTV are based on exchange rates at 30 September 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
	accounting principles
TAM
Total addressable market

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Beautiful business

xero.com/investors