Xero : Annual Report FY21 (PDF)

XERO LIMITED

Annual Report

2021

1

ANNUAL XERO

REPORT

Contents

Highlights		2
About Xero		3
Chair's Review		5
CEO's Review		9
Xero's response to COVID-19		19
Social and environmental impact		23
Key Risks		33
Our Performance		36
The Board of Directors		55
Corporate Governance Statement		57
Remuneration Report		73
Independent auditor's report		94
Financial Statements		99
Notes to the Financial Statements		103
Directors' Responsibilities Statement		138
Disclosures		139
Corporate Directory		147

Highlights

$848.8m

Operating revenue

Up 18% YOY

2.741m

Subscribers

Up 456,000 YOY

$963.6m

Annualised monthly recurring revenue Up 17% YOY

$7.6b

Total subscriber lifetime value

Up $2.1b YOY

86.0%

Gross Margin Percentage

Up 0.8PP YOY

$56.9m

Free cash flow

Up $29.8m YOY

$1.3b

Total available liquidity

Cash on hand, short-term deposits and undrawn committed debt facilities

$191.2m

EBITDA

Up $53.5m YOY

2

A global		300+
ecosystem		connections
of 1,000+		to banks
connected		and financial
apps		service
		partners

Xero was included in the

2021 Bloomberg Gender- Equality Index as one of only 13 companies headquartered in Australia or New Zealand

Xero was certified carbon neutral by the Australian Government's Climate Active program

Total value		Total value of
of invoices		transactions
raised via		through Xero
Xero during		platform in
FY21 -		FY21 -
$984.9b		$4.2t*

*Incoming and outgoing transactions

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REPORT ANNUAL XERO

About Xero

In this Annual Report, we showcase inspiring stories from Xero customers, partners and our people. We recognise that Xero would not be the company it is today without these communities. They share the world seen through their eyes, both during the past year, and as they look ahead to the future.

Xero is a cloud-based accounting software platform for small businesses with more than 2.7 million subscribers globally. Through Xero, small businesses and their advisors have access to real-time financial data any time, anywhere, and on any device.

Founded in 2006, Xero is a global business, domiciled in New Zealand and listed on the Australian Securities Exchange (ASX: XRO). Our team of more than 3,600 employees is driven by our purpose to make life better for people in small business, their advisors and communities around the world.

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THROUGH THEIR EYES

Real-time data key to supporting clients

The relationships we have with our partners in the accounting and bookkeeping communities are part of what makes Xero unique. Xero's platform allows accountants and bookkeepers to collaborate with their small business clients on a single, up-to-date general ledger and manage their finances, including invoicing, payroll, tax compliance, cash flow, and much more.

Xero has built a thriving ecosystem of over 1,000 connected apps and more than 300 connections to banks and financial service providers. With apps that support everything from inventory and logistics to point of sale and project management, the Xero App Marketplace empowers small businesses to build their own toolkit to run all aspects of their business, and have them all work together seamlessly.

We are dedicated to building a socially conscious and environmentally sustainable business, benefitting the millions of customers we serve, their advisors, communities, and the shareholders and employees of Xero. We are committed to reducing our impact on the environment. During the year ended 31 March 2021 (FY21), Xero was certified carbon neutral by the Australian Government's Climate Active program.

Our commitment to gender diversity and inclusion was recognised with Xero's inclusion in the 2021 Bloomberg Gender-Equality Index.

Pamela Phillips | Xero Partner | de Jong Phillips | United Kingdom

When COVID-19 hit, the de Jong Phillips team in Epsom, UK, was on the front foot. Instead of needing to spend time navigating working from home or figuring out how to embrace the cloud, director and co-founder Pamela Phillips and her team were straight on the phone with their clients, offering a much- needed listening ear and, in time, financial advice.

"With Xero, our clients' numbers are always up to date. The minute the pandemic happened, we could look into our clients' Xero accounts and see whether they had a cash flow issue, which enabled us to quickly advise if they needed to secure funding, or consider if they needed to access the furlough scheme or make redundancies. If we didn't have these quick insights, we would have had to spend months to get client files up to date. But we could help straight away

• that was a massive help to our clients and made a huge difference to their stress levels at the time."

As the pandemic continued to dominate the business landscape, Pamela and her team realised they needed to streamline their client communication. "Those conversations evolved into Zoom webinars, many inspired by resources on Xero's Business Continuity Hub on Xero Central. We would follow up off the back of those with anyone who wanted a one-on-one conversation. This approach enabled us to reach more clients, and we also invited non-clients to our webinars, too."

de Jong Phillips' tech-savvy approach to business has played a key role in the survival of their clients' businesses. As UK businesses start to recover, the support Pamela and her team provide will continue to be invaluable.

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REPORT ANNUAL XERO

Chair's Review

Dear shareholder,

Small businesses are seeking services beyond cloud accounting, and we are responding to this with continued investment in our platform and products, and by making targeted acquisitions of additional services

and capabilities.

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REVIEW CHAIR'S

David Thodey AO

Chair of the Board

We are seeing a significant shift in the way business is conducted around the world as digitisation accelerates across industries, and small businesses adopt cloud technologies. Operating at the intersection of technology and accounting, Xero is in a strong position to support our customers as they tackle these changes and realise the benefits of doing business in the cloud.

zero-coupon convertible notes. We were able

to raise an additional US$408 million of capital, after associated transaction costs and early repayment of the majority of the existing 2023 convertible notes.

The new capital provides Xero with greater financial flexibility to pursue strategic investments and

This year we enhanced our platform's security infrastructure and laid the foundations for greater

At the same time, we acknowledge that for many people around the world, this year has been disruptive and even tragic, as nations, families and communities grapple with the impacts

of COVID-19.

As a director of Xero, I am encouraged to see first-hand how small business owners have navigated their way through constantly changing market conditions and customer demands - in some cases entirely revising their business models, and adopting new technologies and ways of serving customers.

Against this backdrop, our business continues to grow strongly. Xero's 2021 financial year (FY21) began on 1 April 2020 just as COVID-19 was escalating around the world.

Our teams at Xero have remained focused on responding to changing customer needs and introducing new products and services, while at the same time executing our growth strategy, completing a significant capital raise, and making three strategic acquisitions.

We are seeing small businesses turn to cloud- based tools such as Xero to inform and guide their business decisions. From forecasting cash flow to tax compliance and running payroll, Xero's small business platform continues to create value for our customers in today's operating environment.

We are pleased to report strong subscriber growth during FY21, as we welcomed new customers and churn rates remained low, demonstrating the value of a Xero subscription to our new and existing customers. After a first half challenged by COVID-19, we added new subscribers at a record rate in the second half of the year, highlighting the continued demand for cloud-based tools across all our markets.

Today, more than 2.7 million subscribers use Xero globally. They have access to Xero's ecosystem of more than 1,000 connected apps and over 300 connections to banks and financial service providers.

Looking ahead we are optimistic as new

digitally native businesses are being launched, and existing businesses switch to online tools. More economies are reopening, or preparing to reopen, and small businesses are adapting their business models in preparation for a post-pandemic world.

Focus on strategic investments

Small businesses are seeking services beyond cloud accounting, and we are responding to this with continued investment in our platform and products, and by making targeted acquisitions of additional services and capabilities.

We were pleased to see significant confidence in Xero and our strategy when we undertook a successful capital raise of US$700 million, via

deliver ongoing innovation and support to our customers and partners. This includes the acquisitions completed recently, including Waddle, a cloud-based lending platform; Planday, a workforce management solution; and Tickstar, an e-invoicing infrastructure business.

Responsible data use, security and trust

Our vision for Xero is to be the most insightful and trusted small business platform. Customer data is at the heart of this, and we are committed to ensuring that the data we hold is secure, used responsibly, transparently, and with consent.

We invest heavily to protect data on the Xero platform, and encourage our customers to adopt practices that help keep their accounts and data safe.

We continue to review and enhance our data governance, as well as provide policies and education to guide Xero employees on responsible data use - whether that is in designing products, developing features for customers, or entering into partnerships.

We also know that security is integral to building and operating a trusted platform. To better safeguard our customers, in March we began the implementation of multi-factor authentication (MFA) globally, which provides an extra layer of protection during login.

automation and an improved operating model for our security services.

Xero's social and environmental impact

Xero was recognised with carbon neutral certification by the Australian Government's Climate Active program in February. The certification is the culmination of almost two years of work by our teams following our commitment to be carbon neutral across all areas of our business as part of our environmental sustainability program, Net Zero @ Xero.

From the beginning of our carbon neutral program, we have offset our calculated emissions through the purchase of carbon certified offset projects in Indonesia, India, and New Zealand.

In FY21, we expanded our sponsorship of the Fishermans Bay Conservation Project near Akaroa in New Zealand. More information about Xero's FY20 carbon disclosure, emission reduction plans, and projects in place to offset our emissions can be viewed on the Climate Active website.

We remain focused on reducing Xero's impact on climate change. We intend to report on our response to climate change, in alignment with the standards of the Task Force on Climate-related Financial Disclosures. More information about our social and environmental impact program is on page 23.

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REPORT ANNUAL XERO

In 2021, Xero earned a place in the Bloomberg Gender-Equality Index for the second consecutive year.

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REVIEW CHAIR'S

Right: Xero team members, New Zealand

Risk management

As a high-growth company, we recognise that managing risks and opportunities is critical to the execution of our strategy and maintaining the trust of all stakeholders.

The Board takes this responsibility seriously, and Xero has a risk management framework in place that includes regular updates to the Board. Further information on our approach is on page 33 of this report.

Diversity and inclusion

At Xero, diversity means acknowledging, appreciating, and celebrating all the many ways we are different in all its forms, both visible and not. It includes differences that relate to gender, age, culture, ethnicity, race, disability, family status, language, religion, sexual orientation, gender identity, as well as differences in background, skills, work styles, perspectives, and experiences.

We are focusing on racial equality and diversity through several initiatives and partnerships. The global Black Lives Matter movement reinforced the need for everyone to tackle racism and racial inequality, a responsibility we take seriously

at Xero. Recently, our team in the US entered a partnership with the National Association of

Black Accountants to bring greater parity for Black accounting and finance professionals through technical training, networking, and career opportunities.

Also paramount, is broad representation that reflects the diversity of the customers and communities we serve. We are taking steps so that, over time, our Board and leadership team better reflect this diversity.

Last year, we set numerical targets for representation of women at Xero. For our leadership team and across the company, we took a 40:40:20 approach - at least 40% women and 40% men, with the remaining 20% unspecified to allow for flexibility and to recognise that gender is non-binary.

For our Board, our target gender balance is at least three female directors and at least three male directors, with an intended Board size of seven to nine directors.

As of 31 March 2021, 63% of our leadership team and 42% of our employees were women, and we had three female and five male directors. More information about our initiatives in this area

is in the corporate governance statement on page 57.

In 2021, Xero earned a place in the Bloomberg Gender-Equality Index for the second consecutive year. Xero is one of just 13 companies in the index headquartered in Australia or New Zealand.

At the same time, we recognise there is more to do, and we look forward to creating a more diverse and inclusive organisation.

Our focus on developing people leaders at Xero aims to ensure we create and lead diverse teams, where each person feels they belong. In support

of this, we recently launched a leadership training program for all managers to equip them with tools to create and support an environment that is psychologically safe and inclusive.

Board update

As Chair of Xero's Board, I could not have navigated this year's challenges without the support and guidance of our experienced team of directors. With COVID-19, we had more frequent Board meetings as we worked with the management team to navigate the challenges of the pandemic. I would like to thank our directors for the extra time and counsel they have provided.

We were pleased to welcome Steven Aldrich, who joined the Board in October 2020. Steven is US-based, and his technology and product development expertise in small business services is proving invaluable as we execute our strategy in North America.

On behalf of the Board, thank you to Xero's leadership team and to all our Xero people for their exceptional efforts this year.

Conclusion

Looking ahead, we expect digital transformation to continue to accelerate around the world.

As a company born in the cloud, Xero is well positioned to support our customers as they adapt to these digitally driven ways of working.

We are seeing small businesses turn to cloud-based tools such as Xero to inform and guide their business decisions. From forecasting cash flow to tax compliance and running payroll, Xero's small business platform continues to create value for our customers in today's operating environment.

As the world moves toward a post-pandemic state, all of us at Xero remain focused on our purpose of making life better for people in small business and their advisors and communities around the world.

The Board remains committed to supporting the business to invest in the growth of Xero as we see the significant global market opportunity for our products and services.

Sincere thanks to our customers, partners, and shareholders for the trust you place in Xero.

Xero Chair