Xero : Investor presentation - FY19 annual results

Investor briefing

Full year results to 31 March 2019

16 May 2019

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 annual report for the period ended 31 March 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

includes comparative period results that have been restated to reflect the effect of three new accounting standards. See page 34 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 35 for a glossary of the key terms used in this presentation.

2

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

Sidonie Warren | London

OUR PURPOSE IS

"

Makelife betterfor people in small

business, their advisors andcommunities around the world

OUR MISSION IS

"

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

5

$638m	$154m
added in 12 months
Annualised monthly
recurring revenue
Mar 11	Mar 19	6

Free cash flow1as % of revenue

10%					1.2%
0%
FY15	FY16	FY17	FY18	FY19

-10%-20%-30%-40%-50%-60%-70%

1See glossary for definition

7

1,818,000	432,000
added in 12 months

subscribers

Mar 08	Mar 19
	8

Global growth and major cash flow milestone

AMRR

$638.2m

+32% YOY(32% in constant currency1)

SUBSCRIBERS

1.8m

+ 432,000 YOY

FREE CASH FLOW

$6.5m

+ $35.0m YOY

ARPU

$29.25

+0.4% YOY(0.8% in constant currency1)

	OPERATING REVENUE	EBITDA
	$552.8m	EXCLUDING IMPAIRMENTS
	$91.8m
1See glossary for definition	+ 36% YOY(34% in constant currency1)	+ $42.0m YOY

9

FY19 Progress

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

•On average, 1,000 subscribers joined Xero every day in FY19

•Digitisation of small business compliance driven by:

-UK: Making Tax Digital

-Australia: Single TouchPayroll

-NZ: Payday filing

•More than 700 connected apps in the ecosystem, backed by a communityof more than 50,000 users of Xero's API developer tools

•Platform revenues increased 128% YOY

•Continuing to scale while building capabilities across:

-Product

-Technology

-Strategy and M&A

10

Xero Leadership Team

Steve Vamos

Anna Curzon

Kirsty

Keri Gohman

Craig Hudson

Trent Innes

CHIEF EXECUTIVE OFFICER

CHIEF PRODUCT OFFICER

Godfrey-Billy

CHIEF PLATFORM BUSINESS

MANAGING DIRECTOR, NEW

MANAGING DIRECTOR,

OFFICER

ZEALAND AND PACIFIC ISLANDS

AUSTRALIA AND ASIA

CHIEF FINANCIAL OFFICER

Rachael

Mark Rees

Chaman Sidhu

Damien

Gary Turner

Tony Ward

Powell

CHIEF TECHNOLOGY OFFICER

AND COMPANY SECRETARY

Tampling

UNITED KINGDOM AND EMEA

PRESIDENT, AMERICAS

CHIEF LEGAL OFFICER

MANAGING DIRECTOR,

CHIEF CUSTOMER, PEOPLE AND

CHIEF STRATEGY AND

MARKETING OFFICER

CORPORATE DEVELOPMENT

OFFICER

11

Australia and	Subscribers	1.08m
New Zealand	1,200k
Australia	800k
•	25% subscriber growth YOY to 726,000 subscribers.
	Revenue growthof 33% YOY (33% constant currency)	400k
•	Single Touch Payroll legislation introduced, extending
	coverage to all employers from July 2019. Accelerated	0k
	digitisation of payroll expected to drive further cloud	FY16	FY17	FY18		FY19
	accounting adoption
New Zealand	Revenue
•	17% subscriber growth YOY to 351,000 subscribers.			$	359m
	Revenue growth of 24% YOY
	$400m
•	Launched Hubdoc into NZ market, complementing
	existing emphasis on platform products and deeper
	customer relationships	$300m
First cloud accounting business to exceed one million subscribers	$200m
in ANZ
		$100m
		$0m
		FY16	FY17	FY18	FY19

12

United Kingdom

Subscriber growth of 48% YOY to 463,000. New record net subscriber additions over six and 12 month periods (108,000 in H2 2019 and 151,000 in FY19). FY19 performance underpinned bystrategic positioning and investment ahead of HMRC's 1 April 2019 Making Tax Digital deadline

46% YOY AMRR growth (48% constant currency) driven by accelerated subscriber additions and stable ARPU trends. Revenue growth of 50% YOY

(45% constant currency)

Attendance at Xerocon London in November 2018 increased by more than 50% to over 3,000

Instafile acquisition completes Xero's UK tax compliance stack, helping to drive partner market penetration in the same way as in ANZ

Finweb partnerships announced with innovative neo-bank and fintechs including Starling, Tide and Transferwise

Subscribers	463k
500k
250k
0k
FY16	FY17	FY18	FY19
Revenue			$120m
$125m
$100m
$75m
$50m
$25m
$0m
FY16	FY17	FY18	FY19

13

North America

48% subscriber growth YOY to 195,000 subscribers. Revenue growth of 39% YOY (33% constant currency). 33% subscriber growth YOY excluding Hubdoc acquisition

Community-focused partner strategy continues to show promise with strong uplift in partner channel capacity, which now exceeds one million small businesses. In addition, we signed agreements with Chase, Citi and BBVA Compass during the year

In Canada, launch partner on CIBC's SmartBanking for Business platform. Local accounting partner presence boosted by agreements with mid and large size accounting firms

Exploring vertical strategies with initial focus on agriculture, offering tight integration of Xero with lending and tailored app partner technology

Subscribers	195k
300k
200k
100k
0k
FY16	FY17	FY18	FY19
Revenue			$44m
$50m
$40m
$30m
$20m
$10m
$0m
FY16	FY17	FY18	FY19

14

Rest of world

43% subscriber growth YOY to 83,000 subscribers. Revenue growth of 55% YOY (48% constant currency)

Asia

•Enhanced partnerships with DBS and OCBC, two of Singapore's largest banks

•Announced payment service API integration with NETS, a major electronic payment service provider in Singapore

•Bank feed integration announced with Neat,a leading neo bank in Hong Kong

South Africa

•Bank feeds announced with ABSA, one of South Africa's largest banks

Subscribers		83k
100k
50k
0k
FY16	FY17	FY18	FY19
Revenue			$30m
$30m
$20m
$10m
$0m
FY16	FY17	FY18	FY19

15

Xero 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	16

Growing the small business platform

Revenue composition

Core accounting

Platform revenues1

WorkflowMax2

Non-recurring3

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

1Platform 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

2Revenues 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

17

Strategic initiatives

Acquisitions

Hubdoc is a leading data capture service that drives significant productivity improvement for both partners and small business owners

Instafile is a tax filing and compliance tool that completes our UK compliance stack and enhances readiness for Making Tax Digital

Innovative capital raise

US$300m convertible notes offer demonstrates investor confidence in the business. Funds raised provide flexibility to execute acquisitions and investments that extend and enhance Xero's small business platform and ecosystem

18

Financial results

Kirsty Godfrey-Billy

CHIEF FINANCIAL OFFICER

The Mindful Company | Singapore

19

Strong top-line momentum with significant

free cash flow milestone

Annualised monthly recurring revenue	Free cash flow
$750m	+32%YOY	$25m	$6.5m

$0m

$500m

$-25m

$250m

$-50m

$0	FY17	FY18	FY19	$-75m	FY17	FY18	FY19

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Contribution margins driven by further scaling

Australia and New Zealand contribution improved 39% YOY, exceeding revenue trends and highlighting continuing efficiencies and operating leverage

International contribution loss improved on further scaling and efficiencies but remained negative due to continuing preference for growth investment to drive strong subscriber additions

	Australia and New Zealand
	contribution	219m
$300m	$

$200m

$100m

FY17	FY18	FY19
$0m

International segment contribution

$0m
FY17	FY18	FY19
$-10m			$(4.7m)
$-20m
$-30m
$-40m

21

Positive LTV trends with strong subscriber growth

March 2019 Progress from

March 2018

ARPU	$29.25

Churn %	1.1%

Gross margin	84%

LTV per subscriber	$2,398	+4%1

Total subscriber lifetime value (LTV)

>$1.1b

added 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

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Financial performance

Operating revenue growth of 36% YOY (34% constant currency) driven primarily by subscriber growth in all markets with Australia and New Zealand segment growth of 30% and international segment growth of 48%

Positive ARPU contribution to both AMRR and operating revenue

EBITDA improved by 52% YOY, despite $18.6 million of impairments. Excluding impairments and non-cashshare-based payments, EBITDA climbed 81% YOY as the business continues to extend its track-record of scale and efficiency improvements

Reported net loss for FY19 also impacted by impairments in addition to higher finance costs but 2H FY19 saw a first time net profit of $1.4 million

Total operating revenue

Gross profit

Gross margin

EBITDA

EBITDA margin

Net loss after tax

Net loss after tax excl. impairments

EBITDA excl. SBP1and impairments

EBITDA margin excl. SBP1and impairments

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

406,659

552,819

36%

331,310	461,904	39%

81.5%83.6%+2.1pp

48,197	73,171	52%

11.9%13.2%+1.3pp

(24,914)	(27,143)	9%

(23,364)

(8,539)

-63%

66,751

120,721

81%

16.4%21.8%+5.4pp

1SBP is a non-cash cost to Xero

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Continued gross margin improvement

Gross margin of 83.6% for FY19, +2.1pp over prior year with positive gross margin trends across both Australia and New Zealand and International segments

Gross margin improvement powered by incremental cloud hosting cost efficiencies combined with launch of Xero Central which utilises machine learning to drive further improved customer service quality at a lower cost

Gross profit as percentage of revenue

83.6%

85%

80%

75%

70%
FY171	FY18	FY19

1Includes duplicated costs due to transition to AWS

24

Positive EBITDA momentum

Continued EBITDA momentum over FY19

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 to the acquisitions of Hubdoc and Instafile

EBITDA excluding SBP and impairment costs increased by $54.0m to $120.7m, 81% YOY, in FY19

EBITDA margin

30%

20%

10%

13.2%

0%

-10%

-20%

FY17

FY18

FY19

EBITDA margin	EBITDA margin excl. SBP and impairments
	25

Continued drive for CAC and product efficiency

Sales and marketing costs increased at the same rate as the 31% growth seen in subscribers in FY19. Offsetting efficiencies saw a 2pp improvement YOY in CAC as percentage of revenue

Product investment spend grew 22% YOY supporting a range of new global features and more specific functionality to support areas of strategic focus such as Making Tax Digital in the UK and Single Touch Payroll in Australia

Scale benefits continued to emerge with product costs including opex and capex, as a percentage of revenue, improving by 4pp YOY to 31% FY19

CAC as % of revenue

70%

55%

45%

40%
FY17	FY18	FY19

Product costs including opex and capex as % of revenue1

50%

31%

35%

20%
FY17	FY18	FY19

1Net of government grants

26

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

Operating cash flow of $114.2m for FY19, was an improvement of $53.0m from $61.2m in FY18

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

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Outlook

Unit economics and track record of value

Value of a Xero subscriber

$2,000								Compelling SAAS
$1,500	LTV/CAC						unit economics
$1,000						CAC months 13.6
6.0						LTV
	$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%

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 into, businesses and strategic assets

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Q&A

Appendix

New accounting standards

Xero adopted three new accounting standards from 1 April 2018

Prior year comparatives have been restated with the impact on restated net loss and EBITDA outlined on the next page

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

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Impact of new accounting standards

Impact of accounting standard changes on restated FY18 net loss

$0m

-$5m

-$10m

Impact of accounting standard changes on restated FY18 EBITDA

$50m

10.8 48.2

$40m11.4

-$15m

-$20m

-$25m
		(0.7)	(24.9)
-$30m	(27.8)	3.6

$30m

$20m

$10m

$0m

26.0

Reported	IFRS 15	IFRS 16	Restated
	Impact of

Reported	IFRS 15	IFRS 16	Restated
	Impact of

Note: Impact of IFRS 9 adoption excluded from above charts. Adverse impact on restated FY18 net loss is $42,000

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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 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
	accounting principles
TAM
Total addressable market

35

Beautiful business

xero.com/investors