In the keynote for Xero’s second Australian user conference in July, Craig Winkler compared MYOB’s surf to prominence on the back of the Windows operating system in the 1990s to Xero riding the technology wave in cloud software today.
Winkler is in a good position to know. The MYOB founder sold out of the company years ago and is now a director of Xero and, with a 20 percent stake, its second largest shareholder.
But how are the two companies performing relative to their first seven years?
A quick Google search revealed a 2006 annual report from MYOB which listed annual revenue going back 10 years. MYOB was founded in 1991 and within seven years it was making $24 million a year in 1997.
Xero was founded in 2006 and was taken public in 2007, raising $15 million. Seven years from founding, the company was on track to earn $30 million (NZ$38.7 million), based on projections of annualised recurring revenue in this interim report released at the end of September.
A fascinating comparison is the rate of revenue growth. Taking the earliest four-year snapshot of MYOB from 1996 to 1999 when its revenue was $45 million, it grew on average 140 percent. Xero’s average growth from 2009 until 2012 is 230 percent. Although the respective ages of the companies are different in this comparison, their revenues are quite similar (within their respective currencies).
(I’ve had a crack at graphing the numbers in Excel, had to estimate a number for MYOB 1995 to get the graphs to line up. If you can do a better job please help!)
Xero had 111,000 paying business customers and 278 staff by 1 August. It would be interesting to know how many customers MYOB had in 1997 – if any long-term MYOBers know the answer, please share.
A couple of accounting considerations: Xero’s revenue for 2012 is an “annualised run rate” and its financial year ends in March.
And some interesting parallels. Both companies acquired payroll software in their six year of operation. MYOB snapped up Datatech in 1996 and Xero acquired Paycycle in July 2011.
In their seven years, both companies acquired tax lodgement software. MYOB made a second acquisition, Teletax, in 1997 while Xero bought Workflow Max, which lodges tax electronically in New Zealand and will form the basis of its Australian tax platform. It also provided Xero with its nascent practice management system.
Some differences between the businesses:
Xero’s income is recurring. The $39 million it earns this year should swing around next year as long as it maintains the software. Accounting software is “sticky”, to use an IT term. Unless something goes wrong or a much better product comes along you’re likely to keep paying the monthly fee.
There must be a lot less pressure on sales to bring in money to cover costs, and further sales should result extra revenue, allowing for churn.
MYOB’s support costs would grow faster over time in line with number of users and number of software versions. Each year it released a new version of its software which differed slightly in some way to the last (more features, different interface).
Xero’s support costs should grow in line with number of users only as there is only one version (or more accurately, one version per country).
Given the advantages Xero enjoys with the software-as-a-service model, it’s pretty remarkable to look back at MYOB’s performance selling shrink-wrapped boxes (filled with either 5 ¼” or 3 ½” floppies back then). But it demonstrates how cloud software companies can grow much faster given the superior distribution model of internet browsers versus stocking shelves.
And just for fun, on page 22 of the report: in 2006 MYOB’s top two execs, Craig Winkler and Chris Lee, were paid $324,000 and $175,000 in salary (plus another $40k-$110k in options, super, etc). Another five received salaries over $200,000.
Xero was a little more shy in its 2011 annual report (page 39). The man at the top took home around $420,000 and the next seven execs earned between $200,000 and $379,000.