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 | ||
y | |||||||||||||||
S | s | ||||||||||||||
t | |||||||||||||||
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g | r | o | |||||||||||||
d | f | ||||||||||||||
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L | R | ||||||||||||||
c | |||||||||||||||
e | e | ||||||||||||||
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g | o | ||||||||||||||
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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 |
20
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 | 22 |
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 | 23 |
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 |
27
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
30
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
33
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 | 34 |
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
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Xero Limited published this content on 16 May 2019 and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on 16 May 2019 07:42:07 UTC