Xero 2018 Annual Report Interpretations

I covered my interpretation of Xero’s 2017 Annual Report last year, and by and large, not much has changed. In this review, I explore the numbers from Xero’s 2018 Annual Report (PDF of annual report).

Instagramification of Annual Report

2017’s report has a reasonable total of three image—two hipsters and a picture from a live event. 2018’s looks like it was designed by an Instagram addict, with 31 images of trendy people before you get to any real numbers. And even the numbers try to obscure the reality, that Xero’s growth rate is falling, ARPU has stagnated, and they have no concrete plan to change either of these.

Amazingly, the 2018 report shows bad JPEG distortion on the graphs. This isn’t a petty complaint — it’s representative of the fact that Xero is becoming a company that puts more time and energy into showing pictures of hipsters than it did preparing the graphs in its Annual Report.

Xero’s growth is slowing

Xero’s global growth rates have strongly tracked their NZ growth rates from three years ago, largely because Xero launched in NZ first, and Xero’s market saturation challenges in NZ are predictive of its global market saturation.

To put this another way, if you want to know how Xero will be growing globally in the future, just look at their NZ growth numbers three years prior to that year.

Here’s a graph of their global annual subscriber growth (in blue), against their NZ annual subscriber growth which has been shifted forward three years (NZ in green).

If global growth continues to track NZ like this, then their global subscriber numbers will be around 1.9 m next year, then 2.5m, then 3m.

Not Approaching New Markets

Falling subscriber growth numbers are a problem that will eventually face all SaaS businesses, but Xero is pigeon-holing itself to just four English speaking countries. They touch on this in the annual report, saying

…our geographic market strategy, continuing our near term focus on English language markets…

Which means, “we have not even started to think about translating Xero”.

Compare this to Facebook, which since 2017 has used AI to dynamically translate individual user posts. If Facebook can do this, then Xero can at least produce a Spanish language translation.

Xero’s excuse is that it’s not just a matter of translations, because

The needs of business in a foreign-language market is sometimes very different from what we’re used to in NZ, Australia, the UK and the US. Often translation is not enough to have a suitable product — in most cases it’s a much bigger commitment.

This is not only a poor excuse but is flat out wrong. They could start a Spanish translation for the US market and offer Xero US in English and Spanish. This would allow them to work out the kinks in their translation architecture without having the challenges of an additional country’s regulatory or tax framework, or needing to build a partner program in a new country. And, it would seed Xero into the Latin American market, as many people in the US who prefer their software in Spanish will likely have close ties to Latin America.

Xero’s ARPU is flat

Xero’s global subscriber count grew 34% and their revenues grew 38% (and only 37% in constant currency). So revenues are effectively tied to subscriber count.

Their ARPU tells the same story. They can’t figure out how to steadily increase their monthly revenue per subscriber.

Credit Due…

It would be mean not to give Xero credit where it’s due. They have gone through some huge infrastructure projects recently, such as moving onto AWS (completed two years ago).

They have made some strides in resolving the crushing backlog of API feature requests. And Xero has also started replacing its painfully outdated support site with a vastly improved support site.

These behind the scenes have no doubt taken thousands of staff years, and helped them prepare for future growth.

And, if you ignore the falling growth numbers and flat ARPU, they are performing well in areas they can control. For instance, Xero is benefiting from economies of scale. Operating costs and operating expenses are growing slower than their revenue growth, and they are steadily becoming a more profitable company.

Lackluster Attempts at Pricing Tweaks

Yet Xero’s attempts to upsell still lacks creativity. The best they have done is hidden their Premium package on the US website (which is still available on their Singapore site for $40 USD) and instead Xero is forcing US customers who need Multi-Currency to also take a package with Payroll for 10 staff at $70 USD. Confusingly, Xero Payroll in the US is being retired in 4 months as they partner with Gusto.

Nothing has Moved the Needle Since Last Year

In my review of 2017’s annual report, I stated that

If Xero wants to change its trajectory, it has to either A) reverse its falling growth numbers and start to accelerate its subscriber growth, or B) significantly increase its per-customer revenue. Either of those will require substantially different action that what Xero has done so far.

Neither A or B happened, and until one of those two changes, we can expect Xero’s company-wide growth to track its NZ growth three years ago.

Xero Going Forward

The only way to delay market saturation is for Xero to open new markets in new countries. This will require translation, at the very least to Spanish for Xero US, which Xero has shown no interest in.

And the only way to significantly increase ARPU is to move into the mid-market. The playbook for this is simple: take on Netsuite, which is where customers using Xero gravitate to once they reach 100–200 staff. Xero should have a skunks-work team developing a $1000-plus per month package, tailored to companies in the 100+ staff size. This suggestion isn’t arbitrary, we see companies begrudgingly leave QuickBooks Enterprise and Xero at between 100–200 staff, and they often chose Netsuite as the replacement.


However, my prediction is that in 12 months, when the 2019 Annual Report is released, Xero will not mention translation, their API will still not create repeating Invoices, their ARPU will still be stuck around $29 per subscriber, and their subscriber numbers will have grown 35% to 1.9 million subscribers.