Australian (ASX) Stock Market Forum

XRO - Xero Limited

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FxTrader said:
Just working from a subset of SKCs list (all from recent highs)...

XRO -32%
REA -13.6%
TPM -11.7%
FLN -29%
IPP -33%

What exactly do you consider a significant fall then? All these stock's were on "stupid valuations" as are most in the sector and have been for some time as partially evidenced by their steep falls. I call it a stampede, call it what you like. :2twocents
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Maybe a totally different perspective and timeframe but I would call it opportunity. I hold IPP and picked up a small parcel of ICQ today...
 
Social media 'froth off' global ETF chart retracement -

Social Media froth off.JPG

Volume comes in as it hits the technical retracement level
 
robusta said:
Maybe a totally different perspective and timeframe but I would call it opportunity. I hold IPP and picked up a small parcel of ICQ today...
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Robusta,

I can't find a valuation technique of any kind that justifies the current price unless you make some very generous assumptions - and that's after the recent hammering it has taken.

Not sure if you're in XRO, but if you are, what are you basing this investment on?

Thanks.
 
Well here's a sensational model that has grown it's customer base phenomenally over the past 2 years or so.
Just tremendous until you realize that it is losing money on every customer it has.:blover:
The more customers the bigger the losses!
So Guess it depends on whether you are a bottom line or a top line kind of guy.
Growth v's Profit.
They will do very well if they can continue to grab market share as a sale pitch to shareholders.
They being - the ones paying themselves to run it.:22_yikes:
 
When I questioned Xero (management). I asked basically their view on increasing prices to eventually turn customers into not just customers, but revenue earning customers.

Essentially they didn't agree with my assumption that they needed to increase prices in order to become profitable. They did later mention though that it is an option to increase ARPU (average revenue per user) and is a possible tactic in the SaaS playbook. "There focus is still on customer growth rather than rapidly heading to break-even" - As said by them. - This was in May 2013.

How long can this sustainably continue and how long will this line of credit last before they run dry of cash? I'd also be weary if customers would be willing to cop price increases.
 
Klogg said:
Robusta,

I can't find a valuation technique of any kind that justifies the current price unless you make some very generous assumptions - and that's after the recent hammering it has taken.

Not sure if you're in XRO, but if you are, what are you basing this investment on?

Thanks.
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Hi Klogg

No I don't have any XRO and like you I have trouble finding a reasonable valuation... If I thought they could become the clear market leader worldwide... maybe but how can anyone be sure the competition let them take the lead?
 
Klogg said:
I can't find a valuation technique of any kind that justifies the current price unless you make some very generous assumptions - and that's after the recent hammering it has taken.
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Happy to explore this one. I admit I was very hasty at making a judgment on this company earlier in the thread.

Ignoring share price for a minute, the business model looks really top notch to me. Recurring revenue combined with customer capitivity, no real competition in sight at the moment (first mover advantage at least) and a low capital model with returns compounding with each customer added.

Put it this way each customer they add costs them less and less to maintain, to a point where returns rapidly increase when critical mass is reached - why do you think they are chasing customer growth rather than profitability initially? Because once they are captured they don't cost much to maintain, you can strip a lot of the marketing and sales teams out of the business and focus on cost management and margin efficiency. They are really throwing themselves at the long-term opportunity whilst the competition is twiddling their thumbs and sticking to the old-world (non cloud approach to accounting software).

If they end up with 1 million customers (which is their initial goal) the competition will find it hard to claw these off them and there will be plenty of opportunities to cross-sell and diversify into other revenue streams.

With $100m of revenue they do not look that far off being profitable if you strip away of the staff costs they are carrying to grow fast.

How much revenue do you think 1 million customers will net them? Do you not think they can achieve this number, perhaps? Do you think pricing will be static forever? Yes management have not indicated that they will rise prices in the near future, but when they have a captive audience and achieved their initial target goals they will consider it. What margins do you believe they will be able to maintain if and when they have reached their target customer base? (because that's a massive part of the assumptions in XRO's valuation, and my impression is that these are being under-estimated in this thread) How many variable costs are in this business currently? If it was not trying to grow what does the P & L look like?

And remember, they have $210m cash. How long will that last at the current rate of cash burn? Will this accelerate or decline in the medium term?

Keep in mind that Intuit's market cap is $20B. If this company becomes a world leader $4B is chicken feed. At the moment that is still a "big if" but the probabilities are starting to grow a little with each report.
 
@Ves - thanks for the response.

In regards to competition, there is also Quickbooks online from Intuit. I've used Xero, but not Quickbooks online, so I can't comment on the differences between the two.

As for customer growth, my reluctance here is that many of their target small-to-medium business customers are happy with their clunky, thick client software. I know it's not logical, but many of them can't be bothered 're-learning'. You see many of them unwilling to upgrade because they know the process, know the software provider and would take a very long time to convert (includes MYOB and Reckon's Quickbooks).
Of course, the reverse of this is will occur - once Xero get their customers, they WILL keep them.


I'm only playing out a possible scenario here, but it helps me think.

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Using the last set of accounts, 70.6m revenue ('Annualised Committed Monthly Revenue') is coming from ~211k customers. That's $335 per customer.

If you do reach the 1million customer mark, which is some 3-4years away, you hit approximately $335m in revenue. Let's add 20% for an increased price tag for the service, leaving you with ~400m.

I'll prefix this by admitting I haven't look at the cost base in detail - but assuming they achieve a 50% profit margin (I don't know if it's possible), which is very generous, you end up with $200m earnings. At a $4bn market cap (which was much higher a few days ago), that's not exactly cheap - and that's years away!
----------

I realise that my assumptions around expenses could be way off, simply because I'm being somewhat lazy. But there are many generous assumptions in my scenario above and it still does not come off looking particularly cheap, after waiting years for growth.


Very interested in your thoughts!
 
Thoughts on them wanting to be bought out? Much like Silicone Valley stories? ie - Instagram for example. Of course Xero is actually generating money etc though.
 
Klogg said:
Using the last set of accounts, 70.6m revenue ('Annualised Committed Monthly Revenue') is coming from ~211k customers. That's $335 per customer.

If you do reach the 1million customer mark, which is some 3-4years away, you hit approximately $335m in revenue. Let's add 20% for an increased price tag for the service, leaving you with ~400m.

I'll prefix this by admitting I haven't look at the cost base in detail - but assuming they achieve a 50% profit margin (I don't know if it's possible), which is very generous, you end up with $200m earnings. At a $4bn market cap (which was much higher a few days ago), that's not exactly cheap - and that's years away!
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The latest annoucement has them with 284k current customers @ annualised revenue of $93m, that's still $330 per customer unchanged. They are planning to grow customers at ~80% per year. So they will get to 1m customers in a bit over 2 years if things go according to plan.

What we can't see yet, however, is the scale benefits. On 31 Mar 2014, head count is 758 serving 284k customers... so 1 staff per 375 customers. On 31 Mar 2013, that ratio is 410. Another way to look at it... annualised revenue / staff = $122.7k for XRO in 2014, $135k in 2013. Intuit has $4.17B revenue and 8200 employees, or about $508k / staff. So XRO is going backwards on that measure and is no where near Intuit. I think a fair bit of that headcount is to acquire new customers and go to battle in the USA, so it's a bit hard to draw conclusions on it.

At market cap of $4B, with 10-15% growth, they only need ~$200m "underlying" earnings to justify that. 3 million odd customers should do the trick. And that's probably only 3-5 years away, IF they maintain current growth.

XRO has probably won in NZ and looking likely to win in Australia, but these are tiny markets and won't support 3m paying customers. The biggest issue I see is that existing players in the US will not sit there idle when their market share falls. They may have dropped the ball in fringe markets like NZ / Aust, but if they are not shoring up their major market now with innovation (i.e. look at what XRO is doing and copy it) then they are not doing their job.
 
Thanks SKC, that all seems reasonable enough to me (a viable scenario to consider at the very least).

Klogg, I believe you might be overlooking something in the business / marketing model of XRO that may help you. Xero is fairly revolutionary in the accounting industry in that it changes the relationship between the accounting firm and the client. It changes the way that information is collated and exchanged between the two parties. I believe that you need to look at it in this fashion - most of the transactions on the client side are automated within it, from quarter to quarter, year to year. It is both more efficient for the client and the accountant at the same time. They are creating a win-win situation, most unlike most of what is currently on the market in my experience.

The accounting firms themselves are the marketing target. "Hey, go get your client to use this new software, it will greatly improve the efficiency of your firm and their businesses." Look at some of the recent announcements of alliances they are making with some of the bigger accounting firms. That appears, from their experience, to be much more successful than marketing direct to small businesses and hoping they will sign on without the nudging of a trusted adviser like their accountant. Some of the other big firms do this, but not on the level as Xero, and certainly not in a way so automated.

As SKC said the US and European / UK expansion and its success will be crucial in the current market valuation of Xero being justified in the long-term.
 
skc said:
They may have dropped the ball in fringe markets like NZ / Aust, but if they are not shoring up their major market now with innovation (i.e. look at what XRO is doing and copy it) then they are not doing their job.
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Nail meet head.

Sticky customers suit the incumbent, not the upstart. They have probably been a bit blindsided by how quickly XRO has taken over AU/NZ. I doubt the response will be the same in their core markets.
 
McLovin said:
Nail meet head.

Sticky customers suit the incumbent, not the upstart. They have probably been a bit blindsided by how quickly XRO has taken over AU/NZ. I doubt the response will be the same in their core markets.
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i get max steady state earnings at around $50-100m per annum. I have have included only medium success in the USA due to Intuit and other future competitors.

applying a 8-9 p/e to a steady state earnings company, i get valuations between $400 to $800m. Present value is about $300 to $600m as that steady state earnings is 3 years away+

Its current market value is $3600m which is 12x to 6x where it should be.

One of the most overvalued companies on the ASX...

its only worth about $2 or $3 per share if u factor in future dilutions...
 
I saw a demonstration of Xero's software last week. I came away very impressed with the power of the software. The sales manager undertaking the demonstration stressed how cheap the software is to license. My uneducated view is that XRO is effectively buying market share through loss-leading and as subscriptions come up for renewal either after 12 months or a longer time-frame, XRO will be counting on the stickiness of subscribers to slowly increase licence/subscription fees, akin to the proverbial frog in the slowly boiling water.
 
After being in the wilderness for three years, XRO is re-appearing on the break-out traders radar.

xro1704.PNG
 
That's a really interesting chart, great comparison - how many applications/developers is it measured against? How are their share prices affected exactly? Absolute newbie who's been dipping his toes the past few days.
 
peter2 said:
After being in the wilderness for three years, XRO is re-appearing on the break-out traders radar.
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Good call. One year on and Xero has doubled in price and has been hitting new highs almost daily for the last month. An outstanding performer.

big.chart-XRO.gif
 

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