Xero valuation part 2-1: Revenue

In part 1, we looked at a sanity check type valuation for Xero, the most exciting company on the NZ sharemarket. Xero does SaaS accounting, and their software rocks. And, world domination is the goal. I like that.

But whats a share worth?

In this part of the valuation, we need to start looking at projections. In particular, revenue projections. What is Xero going to earn in the future? Who the hell knows? Well, no-one really knows, but we will try and do a best guess exercise to find out.

The first step, particularly with fast-growing companies is: get the most recent data you can. The latest annual report came out in June 2010, and covers the period up to March 31, 2010. Which is cool. Or would be if it wasn’t bloody July! But at this point, its the best we can do. I firmly believe the next 6 month report, due I think in December, will be a crucial data-point in Xeros history, so we will revisit this valuation again then.


One of the keys for valuing startups is… pretty obviously, working out how much revenue they are going to get in. This is hard. But there are some pretty key things to keep in mind:

  1. What do past growth rates look like?
  2. Size and growth rate in target market?
  3. Competitive advantages

Past growth rates. The tendency is, as startup companies gobble up all the low-hanging fruit (which is probably NZ for Xero), revenue growth rates begin to tail off. And we have seen some evidence of this at Xero, where revenue from ops looks like:

2010 2009 2008
Revenue from ops 2851 959 134
Growth rate 197% 615%

so… hmm. Ok, theres only a couple of data points, but the trend line looks unhealthy. Mark as a fail. But thats why I think the next 6 month report will be fascinating. But anyway, 200% is still nothing to sneeze at, because as revenues increase, the compounding effect of those multipliers gets big. So its not just the growth rate thats interesting, but how long Xero will be able to maintain those rates. The key for Xero is, how long before it runs out of cash?

Size and growth in target market

This one is difficult to estimate. The size of the market is enormous, since every SME needs to do its books somehow. Growth in the market? This is probably best estimated by viewing growth in Xeros competitors. MYOB is the main one that springs to mind, but unfortunately has been delisted, so details are scarce. So lets look at Intuit in the US for some growth figures. Unfortunately, Intuit is a bit of a different beast than Xero, in that it gets revenue from several different sources, including payroll and payments applications, tax, and a few other things I don’t really get. But a reasonable chunk just comes from QuickBooks, which is basically playing in the same sand pit as Xero, so I’m going with that.

Q1 ’09 Q2 ’09 Q3 ’09 Q4 ’09 Full Year 09 Q1 ’10 Q2 ’10 Q3 ’10 Q4 ’10 Full year ’10
% change YOY 7% (1%) (9%) (5%) (2%) (7%) (3%) 16% 2%

Hmm. So thats about as clear as mud. No idea what happened in Q4 ’10, but I think the story here is that there is not a huge amount of growth happening in the market as a whole, at least from the Quickbooks example. Maybe there are other players growing fast, but… mark that a fail.

Competitive advantage

Theres not too much doubt that Xero is the coolest piece of accounting software around, and it would be (and is) difficult for competitors to move into this space. People think that you just need to chuck up a few servers and a web-page, and its all done, but the high-volume SaaS space does not work that way. The difference between a crap piece of software and a user-friendly loved product can be very subtle. And I think Xero have done an excellent job.

So there is some competitive advantage there. But that assumes that you are in the market to ‘buy’ accounting software. Everyone who currently needs one has some form of solution to this problem, so there is a built in anti-competitive advantage for Xero, namely resistance to change. So each sale has to be earned.


So what have we learned? Well, we’ve learned that the market for accounting software is probably not booming, Xeros revenue growth is trending down with no big markets coming on board in the near future, and that, while some competitive advantage exists simply because Xero is excellent, making new sales is probably pretty hard.

Its not a great story so far for Xero. In the next section, I’ll stuff some arbitrary revenue numbers into a completely falsified spreadsheet, add a couple of decimal places to everything, and pretend the revenue projections obtained are as factual as a Oprah show. And probably start to look at operating margin. Which, while not the mostest fun you’ll ever have, is at least better than a root canal.

Xero valuation part 2-1: Revenue

6 thoughts on “Xero valuation part 2-1: Revenue

  1. Tim says:

    Hi Greg,
    I like that you’re posting your thoughts on Xero valuations, as I’m too lazy to think much about it myself, but still I’ll be a critic – is this thinking quality enough to stand on its own?

    Where you say ‘revenue growth is falling off’ you draw the conclusion ‘fail’, but why?
    – No company can sustain 600% growth forever
    – The trend may be down, but probably not a straight line, i.e. next year is not -200%
    – More likely the trend down is a curve down, and that curve may have a limit. One possible limit is growth of the underlying market. Maybe that is what you want from the Intuit figures. You seem close to using that result but then… (end of article)

    1. Hi Tim,
      I think your comment got cut off? Not sure. Anyway, no company can sustain 600% growth forever, but if you’re a young start up, you certainly want those levels to be maintained as long as possible. So its not a good sign for Xero this early on. If the trend was the other way, even at lower multiples, it would be more positive.

      The rest seems to get cut off. The Intuit figures are an approximation of growth for the market. The market doesnt seem to be growing, so Xero appears reliant on grabbing people from other systems. This can work, but its harder work than in a fast growing market.

      re: is this thinking quality enough? No idea! Once I get through the whole valuation, let me know 🙂

  2. Sam says:

    Yodlee is the key, if they get this link up and running the floodgates will open. How many feeds do they have at the moment 15? 11,000 more bank feeds will cause some amazing growth

    Bankfeeds are what change Xero from being a ‘cool’ variation in accounting software, to being a gamebreaker…

    1. Hi Sam, thanks for the comment. But can’t anyone get access to Yodlee? Not too much advantage there then. So its going to be a quick land grab for Xero, and I hope it goes well. We use Xero for getstaffed.com, and its excellent. But will see, and in particular, will see what it is worth today.

  3. Tim says:

    @Greg No, I wasn’t cut off, that’s the whole comment, including the bit in brackets, I guess I should have left the brackets out, as its confusing. 🙂

    The thing about 600% growth is I see it not as a useful indicator, but as an outlier, or a mathematical fluke. The reason it’s not indicative of much real: anyone can have 600% growth in a year by gaining just 6 customers – just as long as they start the year with the right number of customers! Anyway, I will now read the follow up article. 😀

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