Rod Drury

Alan Kohler: So Rod, this is the 10th anniversary this year of you starting Xero. It probably started in your garage?

Rod Drury: That’s right.  Actually we started in a small apartment in Wellington, with about four people. We’ve been a listed company for nine years, so we’ll celebrate our 10th anniversary next year when we’ve been listed for ten years. But yeah the business started about ten years ago.

AK: So isn’t it about time you started making a profit?

RD: I think we’ve got something much better than that.  We’re just shown this amazing growth.  We’ve proven that we can execute and we have the capital, the shareholders want us to invest that capital, and what we’re demonstrating is we’re getting these fantastic growth numbers, we’re winning in the markets we’re playing in and we’re also showing the financial disciplines. So we do need to spend that money, shareholders don’t want us to give it back and we’re creating this amazing long term value and we’re certainly seen as the best in the world at what we’re doing.

AK: The latest year you increased your loss… you’re making 207 million, more than 200 million in revenue. When do you think you’ll make a profit?

RD: We’re planning to fly into break-even in the next 18 to 36 months. We have a lot of flexibility, we’ve got over 180 million dollars in cash. What we’ve been demonstrating is that we’re using less cash each half so that people can see those financial disciplines, and that’s really showing through in the numbers, and all of the key metrics for SAS… we’re increasing our lifetime value by increasing our customer counts and increasing our ARPU and reducing churn and all of those good metrics. That builds us a very significant long term business. We are now the global leader outside of the US and the business is absolutely trucking along.

AK: You’ve got seven hundred and seventeen thousand subscribers, now, and you’re saying that in the next 12 months you’ll go to a million subscribers…

RD: Yeah

AK: How much of that increase will go straight to the bottom line?

RD: It all goes to the top line, and what we’re doing is we’re using less cash. The beautiful thing of these subscription businesses, we passed the hundred million milestone around 2 years ago. This financial year to March we passed over two hundred million full year revenue. But if we take the revenue we did in March multiplied it out for 12 months, our annualised monthly revenue what we start the year off was a quarter of a billion dollars, so that’s the beauty of these businesses we’re actually funding most of the growth through customer receipts rather than shareholder funds. We’ve actually earned more revenue in total than the investment money taken in, and what we’ve got to do is balance this amazing growth opportunity that we have, get to break even within the cash that we have which we’ve signalled that we’re able to do, and it was only four years ago when we had about 50 or 70 thousand global customers when we said imagine what our business looks like with a million customers – we’ll do that with the next 12 months, and if we get to a million customers we certainly see two million customers and at that level we’re about a billion dollars of revenue, so I think we’ve earned the credibility with our shareholders.  Back in those early days… look at us we’ll get to a million customers, that looks like that will happen soon, then you can see now we’re generally kicking the year off with a quarter of billion dollars of revenue.  It’s just so neat to be part of an Australasian company which is able to grow that fast and build such great business.

AK: I’ll get on to the growth vision in a minute, but I’m just interested in the in the metrics, in the financial metrics. Your gross margin has increased from 70 to 76 percent in the latest 12 months but it seems to me the focus could be, and perhaps should be, the avenue average revenue per user of thirty dollars per month, which is up two dollars over the latest 12 months.  It just seems to me that because of your, most of your costs are fixed aren’t they?  So most of the thirty dollars from here on goes straight to the bottom line.

RD:  That’s exactly what the margin equation means. What is interesting looking at those figures on every key metric for SAS – we’ve improved them because we’ve been putting in operating discipline inside the business.  We’re the only really pure cloud accounting provider; most have legacy products and they’re being judged on their migration from legacy desktop products to the cloud and how they’re competing with pure bred cloud products like ours.  It’s very hard to see the numbers which our major national competitors have.  So we have a very clean set of numbers: you can see our revenue, you can see all of our customer so you can easily calculate our average revenue per customer.  So we’ve been very, very transparent about that and we’ve been educating the market into, if you’re going to drive a successful SAS business, you have to look for high value customers where you can grow all of those factors. The first 9-10 years of our business have been doing the massive investment to build the global accounting platform, so we have to build a general ledger, fixed assets, bank reconciliations and reporting, in Australia we’ve done tax and BAS all of those services. That’s just a major investment.  While we’ve been doing that the real focus has been on our subscriber growth – adding more subscribers – because we can put other services to those subscribers bring them in over time.  That’s already been proved out. We’ve got over 500 companies that connect to us, building a great business putting other solutions into our Xero eco systems. As we’re completing that sort of mandatory global feature set, and we’ve also talked about today we’ve been doing a two year project to move our platform onto Amazon web services, which allows us to further increase margin by lowest cost to serve, but also positions us for machine learning and artificial intelligence. We processed a trillion dollars of data on our platform last year and now in the Amazon environment we can do a whole lot of really neat machine learning and AI and just change the product category globally. We can move from the back office application, which a few people in the business use, to much more employee consumed services.  We’re doing a lot of work with the banks on our financial web. We just have all sorts of new vectors to drive revenue now that we have this fantastic global platform and eco system.

AK: And will that increase your revenue per user…

RD: Yeah, we see that growing.  We have customers with no employees, many customers with ten employees, even some with a few hundred employees.  So while we’re a back office accounting application, on average people pay us about 28 – 30 bucks a month. As we start doing some front office services like payroll, like we do in Australia, expense claims, jobs costing, other workflow applications that the sales people or the customer facing people of an organisation use, we can start adding these new services of a few employees – a few dollars per employee per month per service and what that allows us to provide is really high value products and services to our small business market at a really cheap cost, but quite materially grow our revenue per customer at a very low cost for us, ‘cos we already have the customer. What’s different with this small business space from the enterprise computing market is under the small business, the small business owner is actually doing everything, so having tightly integrated software either provided by our eco system partners or by Xero itself gives us a massive opportunity to further monetize our space.  So we’ve delivered these massive revenue growth numbers just on adding subscribes; now that we’re getting through building the kind of boring accounting stuff, we’ll drive new revenue from all sorts of new services.

AK: In that context, can you explain the deal you’ve just done with Commonwealth Bank, and then explain how that refers to what you’re calling the ‘financial web’?

RD: We wake up in the morning thinking about how we can make life better for millions of small businesses owners all over the world.  It’s interesting: I spoke in Sydney at the B20 conference 2 or 3 years ago and the number one issue was youth employment that was coming through and we thought OK, that’s a bug issue – how do we help the government, how do we help the country solve this youth employment issue? We realised that there’s very few companies like Xero that have graduate programs and internships and all those all those things which get young people into the work force; we actually don’t move the needle even if we hire 500 people a year. what we want to do is to work through our, well over seven hundred thousand small business customers, and we can educate them about hiring young people, what minimum wage is what living wage is, how you manage young people and all those all those sort of things.  Some of the stuff we’re working on now is we’re building calculators in our software so small businesses can see the impact of hiring half a young person to create a job. So the importance of getting small businesses all connected is really quite purposeful. What also small businesses tell us is that their number one issue is access to capital and access to debt.  While the small business market is vast, banks have trouble lending to small business, usually its securitised lending based on equity you have in your house – that’s because it’s so expensive and the deals are quite small. Now that we’ve got this aggregation of so many hundreds of thousands of customers and we’re digitally connected to the banks, we’re seeing this financial web where data is flying without human hands touching, which allows banks now to open up debt and equity type investments into small business, and this could be the biggest stimulation we’ve seen to small business in years.

AK: Are you saying this is a going to be a way for you to get into America in a bigger way? I noticed you’re doing something with Wells Fargo.

RD: Yes, so in each of the markets, like in New Zealand. We’ve been working you know with all of the major banks that led to the Australian banks that own New Zealand banks, so we’ve worked with all of the major banks here. What we’ve done with CBA is the next generation of work where they’re investing inside their firewall to connect to our services, and two-way connectivity between banking and small business accounting, that’s led on to the UK so we’re working with all the major banks up there. And of course the great banking system we have in New Zealand and Australia is watched very keenly by those in the US, so and we’ve been working with Silicon Valley bank for quite a while, City First National and we announced just recently a big deal with Wells Fargo who, I think about a third of all New Zealand and all American households bank with Wells Fargo, so there’s a massive endorsement for what we’re doing in the States.

AK: Would you go after the 3 million business customers? Are you saying that you’re going to through Wells Fargo get those customers?

RD: Well we’re yet to talk to those customers, but these are long burn things.  We’ve been doing this as you say almost ten years now and it’s incredibly hard work. We’ve worked with Apple, with Google, with Microsoft, you know working with all of the major banks and it’s not one thing, it’s getting this exposure. I think what Wells Fargo does is gives investors confidence that things are going really well, and it gives us a low cost way to talk to millions of US small businesses. But the US is quite different from the commonwealth countries, it has a much slower adoption to cloud.  It’s a very well-known thing in our industry as we compare ourselves with all our peers that we’ve really focused on diversifying our business. we’ve added an office in Singapore to service that area, and in Hong Kong, and an office in South Africa; we are now the global leader in this space now.

AK: Thanks very much Rod.

RD: Brilliant Alan. Appreciate your interest.