New Zealand based online accounting software provider Xero has announced 2,200 customers at 30 September 2008. Assuming average revenue per customer of $54 this equates to annualised customer revenues of $1.4 million.
Xero is a ~2 year old software startup that bypassed the traditional venture capital funding path and raised $15 million in an IPO on the New Zealand Stock Exchange (NZX) in June last year. The disclosure requirements of being a listed company and Xero’s open approach to communications have provided an interesting insight into the mechanics of a startup.
Mainstream media have focused again on accounting profit numbers and meaningless % growth rates. Despite their relatively high media profile and listed status Xero is a startup company. When assessing the status of early stage companies the key metrics are customer/revenue growth (gross not just percentage), cash burn and cash position/runway.
Customer/Revenue Growth
In their prospectus Xero forecast 1,300 customers by 11 May 2008 and profitability within 3 years based on break-even at 8,000 customers. Xero achieved there first milestone with 1,406 customers in May this year and have continued their strong growth. Since listing Xero have revised their pricing structure ($75 per month reduced to $50 per month) increasing the number of customers required to break-even.
It is difficult to accurately predict Xero’s growth profile (but it will probably fit a S-curve). Given this uncertainty it is important to follow Xero’s information releases on customer numbers and understand the revenue implications. Based on the $54 average revenue per customer assumption each customer represents $650 revenue per annum. The focus over the next 12 months should be on whether New Zealand growth continues to accelerate and if Xero can gain traction in Australia and the UK.
Cash Burn
Monitoring cash burn is crucial for any company that has yet to reach profitability. It is perfectly acceptable for high growth companies to burn cash. Understanding the cash burn provides an insight into the breakeven point of the company and the potential future profitability. In the six months to 30 September Xero had operating expenses of $3.85 million ($7.7 million annualised). Based on an average revenue per customer of $54 per month Xero will need 12,000+ customers to break even (at the EBITDA line). This break even calculation is subject to the accounting treatment of development costs and does not include the $673k that Xero capitalised in the six months to 30 September. In the six months to 30 September Xero’s net cash position decreased $3.25 million.
Cash Position/Runway
Given that Xero has not yet reached profitability it is important to understand their cash position. At 30 September Xero had cash and cash equivalents of $6.3 million. Based on the current cash burn and annual revenues of $1.4 million (and growing) Xero appears to have sufficient funding to operate for the next 12 months (assuming no extraordinary increases in expenses). Looking beyond 12 months will depend on the level of customer growth and costs associated with expanding into new markets. There is a real possibility that Xero will need to raise additional capital in the next 2 years. This is a common practice for growing companies and to be expected for early stage enterprises.
Xero have achieved all of their stated targets since listing and have a growing base of paying customers. Over the next 12 months it will be interesting to observe how the ground work they have put in developing partnerships will translate into scalable customer growth. It will also be interesting to see how this model can be replicated in the larger Australian and UK markets.
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Previous commentary on Xero on Valuecruncher
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