10 Questions to Xero’s Rod Drury

Rod kindly offered to answer some questions about Xero during this earnings release phase, so here they are. My questions are in Bold, Rod’s answers in Italics. Rod notes that

we are trying to be as open as possible so I’ll try to give you as much info as I can and explain where we can’t.

Basic Data
Rather than attempt to reconstruct your half year numbers, it would be useful to have some facts that can be used to reconstruct your P&L:

1: How many new customers are you signing up per month – i.e. in September and October?

[Rod]Too early to provide any meaningful numbers.  We will provide the customer numbers as soon as we can after the reporting period. (Hopefully the day after as we did on 1 October).  If we provided numbers each month externally at this early stage it would drive the wrong behavior and put the whole company on a short term focus.  So for now we are reporting operational metrics each half.  It’s a simple model though, customers * price paid * months.

2: What is the split between new NZ and foreign customers?

All NZ right now.  We are planning to have Australian and UK Customers next year.

3: What sort of churn has there been – what % of customers have dropped out so far? how long do they last?

Too early to be meaningful yet but so far churn has been surprisingly low.  We have observed that there is a status of ‘paid but not engaged’. That is they have paid but not really used the software.  Once we get customers actually using the software then churn drops right away.  So we measure activity and have strategies to get customers engaged after purchase.

Key Features
There are three main features I believe would boost Xero’s value – Seamless import/export to MYOB et al, Offline capability and pricing that will attract meaningful trial.

4: (When) are you planning to release MYOB import/export functionality?

We are progressively making it easier to convert from other systems with each new release.  Right now we have a fairly manual but not onerous process and that is easing the process with each release. We do however think that people should stand back and relook at their chart of accounts when they do a conversion so that their accounting system gives them the information they need to drive their business.

When you start interacting with your accounting system daily and it becomes a real management tool you want to be measuring the right things.

5: (When) are you planning to provide Xero offline functionality?

It hasn’t been a request we’ve heard loudly yet from customers but of course we are following closely the offline capabilities of the standard browsers due next year, so it may make sense do do something then.  Expense claims might be a good scenario where offline capability makes sense.

6: (When) are you going to introduce discounted/free pricing for new adopters?

Right now we have built a good product company.  Over the next year we need to build a great sales and marketing company and there will be lots of techniques that will drive new customers and revenue.  A key focus will be communicating how much time and money you save with Xero.  We save hours each week and days a month. We’re not seeing a huge push back on cost at this stage.

With each new version we are delivering more functionality which makes it even better value. We have also identified parts of the market where we may be a too high a price point and over time we may go down there.  There may also be markets that we go up too as well.

We have a lot of options and as the product broadens over the next 6 months we will look at where we are positioned but for now we’re comfortable.

Forecasting
Xero is best able to project Xero’s future earnings  – while we outside must struggle with vague assumptions. What are you seeing ahead?:

7: How many customers do you forecast Xero will have in 1, 2 and 3 years?

The nature of SaaS is that it is hard to predict future numbers.  We can manage our costs, we can build great products, and we can do clever marketing.  We have targets that we manage the business to.  With SaaS we seek to minimise the relationship between our largely fixed costs  and revenue.  We know the minimums we need to get to, to deliver a return to our shareholders – as laid out in our offer document.

8: Where will those customers be?  geographically and verticals?

Our initial focus is NZ, UK and Australia.  Service based businesses are a great early vertical that match our current feature set. This will broaden quickly over time.

9:  When are you forecasting to reach profitability?

We committed to 3 years in the offer document.  If we found that revenues accelerated faster than plan we would invest faster.  We have put ourselves in front of the small business SaaS wave and it’s all about speed right now.

Information release
By your audio release shortly after the half-year finished, it seems clear that you believe in providing more rather than less information. This is particularly important for such an early stage company, as there are few other indicators that investors can rely on:

10: While NZX requirements may not dictate frequent releases, are you planning to move to more frequent earnings/KPI releases? What will your information release approach be?

At this stage each half and we will release operational metrics as soon as possible after the end of period.  Doing it more frequently would drive the wrong behavior in the company and investors at this early stage but our philosophy is to be very open with the numbers, as we have been.

Hope this is useful and sets our approach to market communications.