Roy Davidson, 26 September 2019



Xero (XRO) provides an online accounting solution for small businesses and consumers primarily in New Zealand, Australia, the UK and the US. The company offers Xero software for online accounting, including general ledger, bank reconciliation and invoicing, and a growing number of adjacencies as it builds out its platform.

Attractive product offering

One of XRO’s key innovations has been to use accountants as the key sales channel. XRO has enticed accountants with great success in Australia, New Zealand and the UK by enabling them to offer better value services to clients, and providing cloud based software that is fully integrated with the end user software. This allows the accounting practice to move fully into the cloud, while also providing the software at no cost.

Software as a Service business model provides significant operating leverage

XRO recently moved into a position of profitability and gross margins continue to improve as revenue growth builds. We expect these trends to continue as XRO benefits from the operating leverage inherent in its business model - as revenue grows quicker than costs, margins will improve over time. This leverage, which is due to relatively fixed product development and marketing spend, has begun to develop in XRO’s more mature markets of New Zealand and Australia, while newer markets have the potential to be highly profitable over the long-term.

US opportunity still exists, but new strategy lowers risk

XRO’s entry into the US has not gone as smoothly as the company would have liked. XRO has invested heavily in sales and marketing in this region, although Intuit has proved a tough competitor. Intuit has been able to successfully transfer its existing Quickbooks customers onto its online offering, Quickbooks online, with tax being a key advantage. XRO recently announced that it will dial back its direct sales and marketing efforts and focus on selling through the accountant partner channel which has worked well in other geographies. We view the change favourably as it will limit US losses. Meanwhile, XRO has recently entered new markets (e.g. Singapore and South Africa) and continues to build out its product ecosystem which creates multiple growth opportunities for the company.

High growth tech exposure

XRO has created a strong brand presence in the New Zealand, Australia and UK accounting markets, leaving it in a position to build and strengthen its position and improve its profitability. XRO’s growth and market share in New Zealand is beginning to mature but the opportunities to grow in Australia, the US, the UK, and other markets, along with its growing ecosystem of products, are substantial. XRO provides an exposure to the technology sector and adds a growth angle to portfolios.


  1. security breach
  2. economic downturn
  3. increased competition