As Gary Turner, MD Xero proudly showed me the empty auditorium for an expected 800 person crowd at Xerocon London, we both reminisced about the first Xerocon a couple of years ago at which the company was hard pressed to get 120 people into Chartered Accountants Hall.
Growing the event to this size is a staggering achievement as is the participation of 40 add-on partners who were clearly pumped at the prospect of getting more users onto things like receipt handling, debt chasing, farmer specific functionality – the list goes on. A couple of years ago, Xero squeezed five partners into an ante-room to the main hall.
None of this matters if the audience isn’t engaged or enthusiastic and to that extent I learned of entire practices of professional accountants shutting their offices to attend this paid for event. That’s right. You had to fork over money to attend what is arguably the largest fintech event in the UK and some chose to give up a billing day as well. I met colleagues who’ve attended Xerocon each year and are just as enthusiastic as they were the first time around. The partner booths were all busy – always a good sign. In short – the buzz was evident.
But what really happened?
Payroll and platform
Xero announced UK payroll. A big deal? Normally I’d say, so what? but on this occasion my eye was caught by the fact this is directly integrated back to the accounting system and that they’re designing for mobile first. No more running separate systems for payroll and accounting. That’s badass enough in its own right but it’s the promise for the future that caught my attention. Things like vacation and sick day requests are coming.
Onboarding is in the wind and a slew of other HR related functions normally associated with much larger systems are all in the roadmap. Again, I’d normally shrug given that SMEs don’t usually require this kind of functionality but here, Xero is firmly of the belief that if there’s the sniff of a regulatory requirement, then why not try make it a smooth part of what you already do?
Elsewhere, Xero talked about the solution becoming much more of a platform. While that may have been lost on the professional accountants in the audience, this is a very big deal.
I have long argued that in the current world of cloud solutions, it is the platform that wins. Globally Xero counts 350 partners, of which 40 were showcased at the London event. And while Xero’s marketers might angst over growth and how they can push past the projected 80% number Rod Drury CEO floated, I view the current iteration of Xero’s system as having clear water ahead of them. There just isn’t another vendor in a position to deliver the collective functionality that Xero and its partners are able to offer for the very small business.
Analytics for the SME
And now that the company is pushing business analytics, the story gets more interesting again. Xero and I have gone back and forth on this topic over the years and they will be the first to admit that getting analytics done well has been a serious challenge. It wasn’t part of their original design thinking and yet this is one area where I have always felt that SaaS vendors can score big time.
For example, it must have been something of a shock for the representatives of Barclays, Santander and the like in the audience to learn that Xero knows how many of its customers run multiple bank accounts. It must also be a concern that Xero knows which of its customers appear to be under insured. And then there is the whole business of knowing how you’re performing among your peers. This is tough to do when the analysis is based upon SIC codes. Xero is overcoming this by building its own business classifications.
There is so much to come in this arena it is hard not to get excited about the possibilities.
US remains a challenge
During the financial analyst day which took place prior to Xerocon, the company conceded that it’s not had the best start in the US. In the US customers are accustomed to buy online. Most do their own taxes via something like Turbo Tax or use a service like H&R Block.
The nexus between accountants and clients is not as strong in the US as it is in the UK and other English speaking countries. Much of that comes down to the fear of litigation by the professional community but also the fact that in the US, the various state wide CPA organizations act independently of one another. That means Xero has to find a few heroes among the state organizations that can make the case for Xero in much the same way that happened in New Zealand, Australia and the UK.
Analysts focus upon the strong grip that Intuit has on the US market but as Xero executives pointed out, Intuit only has 2 million out of potential market of 29 million small businesses. That leaves a lot on the table for Xero to scoop up. But success is far from guaranteed. The company has to scale marketing operations significantly and in new ways.
To that extent, CMO Andy Lark said they are investing heavily in Hubspot. Xero claims it can be a lot more agile on deploying things like billboard adverts on US101 out of San Francisco than competitors who need weeks to get things moving. That may be so but it doesn’t get away from the fact Xero has to spend massively. The $171 million cash it holds on its balance sheet might sound impressive but it likely won’t be enough.
In response, Drury signaled the company launching on NASDAQ in the next 6-12 month with an additional funding round a possibility in the interim. From a high of just nudging NZ$45 this time last year, Xero currently hovers around NZ$16, giving it a modest (by today’s standards) market cap of NZ$2 billion.
While Xero continues to run like crazy for market share it’s going to burn cash at an accelerated rate. Detractors will worry about this. I am more concerned about its ability to fully understand the US market and have the breadth of strategies in place needed to win there. While the company is confident, it hasn’t gone well with some poor management hires. As I’ve seen over the years, it is all too easy to crash and burn in the US so Xero needs to act with care and not get sucked into the Silicon Valley distortion field view of cloud software and what it can achieve based upon that self contained bubble experience.
The good news is that Xero has a competitive offering that is rounding out all the right spots like payroll and analytics in a way that makes buying from them an easy decision. While you can wonder why anyone would build this extended functionality for very small businesses, the Xero approach and way they explain it makes enough sense for any buyer to understand the benefits.
I’d like to hear more on the analytics front. I see the data Xero holds as a pot of gold they’ve barely started to exploit and which is worth many millions to interested parties. Unsurprisingly, Xero is remaining tight lipped on that topic.
The fact that 50% of Xero’s new business comes from no software or spreadsheet users and the fact that it can show 25% penetration in its home market are solid indicators of where this can go. To give an indication. If Xero only captures 5% of the US market, then it is still looking at a near $700 million revenue number for that market alone. Add in other markets it is already winning and you can envisage a $1 billion business in the medium term.
But…in the UK, Sage remains a strong competitor in its ability to hang on to customers while the Intuit story in the US has proven consistently compelling. Whether that remains true given the FBI are said to be investigating alleged tax fraud from some Turbo Tax filings remains to be seen. If Intuit is found to have suffered a data breach then it knocks a huge hole in the trust they’ve built up with customers.
While we tend not to offer a lot of coverage for the very small business, Xero is one of those vendors that is having a profound impact on the landscape. There is much that larger vendors can learn from this business and so we will be keeping a close eye on what they’re up to.
Disclosure: We are Xero customers.