Cloud accounting company Xero revealed at its annual meeting earlier this month that it was fast approaching the 200,000 customer mark and with $64 million in annualised revenue. The company had sunk money into development, marketing and staff to drive the growth, spending up to a net loss of just under $15 million.
CEO Rod Drury used the results to convince shareholders to make a bigger loss this year to maintain a 100 percent growth rate, grow to a global scale and win market share. Xero has published Drury’s 26-slide deck which gives an overview of the company’s plans and performance.
Last week Drury spoke to BoxFreeIT about Xero’s plans to move into other business services once it had finished the core accounting engine early next year.
BoxFreeIT: You compared Xero’s growth to that of enterprise cloud software companies such as Salesforce.com. What point did you want to make?
Rod Drury: It showed we are world class in the business SaaS (software as a service) space. While we are a bit odd in the NZ market we are benchmarked really well against the big companies.
There are two positive takeaways. Salesforce.com reached $20 million in four years by making large enterprise deals. We use lots of small deals. That gives us confidence that our sales process is world class – and we did it in New Zealand, not the US.
After these businesses get to $20 million in revenue they jump quickly to $100 million. In terms of our annualised revenue run rate we must be getting close to $100 million. We finished last year with annualised revenue of $50 million and now it’s just over $64 million, so you can start to see that $100 million is not too far away.
At our current growth we should cross the $100 million annualised run rate sometime next year. The only other software company in New Zealand at that size would be Orion Health.
BoxFreeIT: You made a bigger loss this year to achieve that growth. Is a loss planned for next year too?
Drury: We can choose to slow down and swim to the safety of the side of the pool, but we signalled to the shareholders that we were going to invest for growth. We don’t just get to the end and make a loss, we say this year we are going to increase our costs and our loss will be larger and we have the capital to do that.
BoxFreeIT: What will you spend the capital on?
Drury: We are putting country management teams in place who could handle triple the staff now. We don’t raise the money to put it in the bank, we raise the money to grow the business as fast as I can.
BoxFreeIT: I was surprised that the opportunity in New Zealand was still so large. Is that just for accounting software?
Drury: There is incredible opportunity in New Zealand. That graph is just showing the potential accounting software on the client side.
We see all sorts of revenue opportunities once you have the base. We had always only thought of online accounting software as a temporary product category. We would move more towards general business management once you get the accounting done. But it’s just a big investment to do the full accounting engine.
Most people think we have just built accounting software but we have fully invested in the accountant side as well. That’s been a major investment with buying practice management and buying workpapers. It’s a very broad business now – we think that’s what wins in the small business market.
BoxFreeIT: Broad in what sense?
Drury: Broad in the accounting software market. Why would an accountant only recommend small business accounting software that only the small business can use without the accountant features connecting to the same data? That’s one of the big changes in the industry with the cloud, that the data sits in one place and you have the accountant’s application fully connected. It is one of the big fundamental industry re-architectures that happens in the cloud. We’ve been betting on that for the last three years and it’s clearly working.
That’s why we’re building Australian tax. That will allow Australian accountants to turn off (MYOB) Accountants Enterprise and Accountants Office next June. The same with Reckon and APS – that old model of having separate accountant-side software that you charge separately for has just gone away in the cloud. that’s why Intuit has bought the workpapers product.
The reason Intuit are in Australia is because we are here. They talk about us in each board meeting and their strategy to compete with us in the US is to compete with us in this part of the world. That’s why they’re here and phoning up all our sales staff, it’s good fun.
BoxFreeIT: It’s interesting to see where you’re hiring staff. How does a cloud software company hire differently to a desktop software company? You’d expect less people in support, right?
Drury: I would love to see that (a desktop company hiring breakdown). I’ve got no idea. What is different is that we think our customer care team are almost our sales people because they create the great experience which generates the word of mouth effect. And with SaaS you have your customer care people very close to your development team and they have a big input into the prioritisation list.
We have a lot of people say, Why don’t you have a toll-free number for people to phone in? That’s because it delivers a really crappy support experience. You end up with someone who has no idea what the problem is.
With us people log through the application and then we can triage it and make sure the right person has looked at what’s going on. We have KPIs on the number of support tickets we close on the first call. That’s very important to us because it means we’ve done the research before we’ve done the call and the small business owner isn’t on the phone through three or four stages. We try to do that in a very quick way and it’s all part of the price. We’ve found our model works really well and we have very high customer satisfaction for support.
BoxFreeIT: But don’t you make outbound calls to users?
Drury: We do outbound calls all the time. We’re not scared to talk to customers, you just don’t want to have people waiting on the phone to get to someone who’s then got to triage on the phone. If you log it through the app we know where you were, problems in the past, we know the area so the right person can call you. We triage it all so without wasting any time, and we can call them back if we need to. The model works really really well. if you see your customer satisfaction or time is getting worse then you know to put more resources and hire, otherwise you’re trying to guess how many people are going to call the next day and you’ve got no idea.
BoxFreeIT: The roadmap shows the accounting software is almost finished. What happens after that?
Drury: Nothing’s ever finished. Once we finish stock towards the end of the year then we’ve ticked the boxes of most of the horizontal features that the desktop accounting programs have. Then it feels like we don’t have one arm tied behind our back. You think about all the accountants that say yeah it’s great but I can’t use it for all my customers so I think I’ll wait. And even though we probably cover 70-80 percent of the market, having stock just ticks all the boxes and says you’re a full accounting engine.
On the accounting side we’ve done a massive investment over the past two years taking everything we’ve learned about reporting for accountants. We took all the criticism and feedback from reports when we started six or seven years ago and we’ve engineered an incredibly powerful reporting engine which hits nearly all the comments and ideas from our accounting partners over time.
We’ve already delivered some of it in the Xero Payroll application but the really sexy stuff gets delivered between now and March. We will have a really compelling product. That should make us next generation on from MYOB Accountants Office and (Reckon-owned) APS.
BoxFreeIT: What are the connected business services in the roadmap?
Drury: Accounting software records what things happened. But there are lots of other things we can do to help the business provide a better experience to their customer and all sorts of things to help them improve their revenue.
We’re not just building the best accounting software. That’s why we’ve been building this big team so that we can build things in parallel. As we finish the accounting software we have a whole lot of new things we want to push out into the market during calendar 2014.
BoxFreeIT: What’s happening with these bank initiatives such as sending payments from within Xero? How close is all this to reality?
Drury: That’s very close. We have several banks committed to do this and they will go live this year. What’s great in doing this in a small market like New Zealand is that you can have the conversation with the banks. We just passed 80,000 customers in New Zealand which is right up there with the large banks. And we presented 8 million invoices in New Zealand out of Xero. We can use that scale in a small market to get the banks to build these next generation services. A lot of these banks are owned by Australian banks so that new stuff is really starting to domino across.
We have identified some core next generation services and we have a pretty broad agreement from the banks that the industry will implement those. Individual banks have other cool ideas that they’re working on. So we will see a bit more differentiation among the banks but definitely the entire bank offering will start to move forward.
A big part of it is making it easier for agents like bookkeepers and accountants to do more of the small businesses’ work. For example preparing the payment batches and loading them into internet banking so the biz owner just has to approve them rather than load them themselves.
BoxFreeIT: Is that similar to M-Powered business services in MYOB?
Drury: No – no-one has done this before. This is more next generation BankLink stuff. BankLink is a one-way push but it’s the end of the era of that stuff. We’re now working on being fully connected to the bank with a two-way relationship.
It’s not just bank feeds, we’re getting up to 200,000 customers and we’re effectively becoming an electronic data interchange of scale. We’re seeing large businesses take costs out of their supply chain because they can interact with 100,000s of businesses.
The large billers in a country should be able to send invoices electronically to accounting software without small suppliers having to retype the data, and that makes their relationship stronger. So now that the small businesses are online how do we connect them to each other and to the big businesses, which includes the banks?
This is not just theory, this is all in play. We already have direct host to host connections to banks, we’re making them two-way connections and we already have businesses sending invoices between each other and a lot of interest from large businesses wanting to send data through our engine as well. So it’s really exciting on a whole lot of fronts.
BoxFreeIT: Isn’t it hard to maintain focus with so many opportunities?
Drury: Well we have lots of small teams. we have teams in Canberra, Auckland, Melbourne, Wellington, San Francisco, New York. But we’re still pretty lean. We’re only 500 people servicing four major geographies. MYOB is 950 people servicing New Zealand and Australia. So we’re very efficient but we’re still sub-scale so we’re still growing. For comparison, Intuit is 8,000 people and Sage is 13,000 people.