Xro - xero

[zs_cecil]

zc_cecil ... Ultimately its about profit growth

... Yah...... will see an exciting 2011...

[zs_cecil]

Market responding well, buyers at $1.90. Good to hear they're expecting to still have lots of cash in the bank at break-even.

Hope the volume of trading on this stock will be raised next year too...

[Stranger_Danger]

Belgarian - profit growth is the LAST thing they want.

If they managed to earn a million bucks after tax, at $1.90 a share the P/E ratio (this means Price/Earnings for those likely to be buying Xero shares at this valuation) would be 172.9.

Best to have the valuation based on potential than have to clarify things with a pesky profit!

And yes, yes, I get the growth story, I get that P/E, P/S, NTA etc isn't everything.

The key problem I have is that virtually without exception whenever I have witnessed large profits, they tend to have been preceeded by small profits - NOT by large losses.

This is especially true in industries which involve lots of IP and not a lot fixed assets. I get that Xero is trying to do it real fast, which costs money, but yeah.....a lot of money...

The simplest way I can put it is this. If a kid came to me and said "look, I have this one little lemonade stand that is making great profits. If you give me money, we'll be able to create heaps of lemonade stands just like this one, and make heaps of profits!" then, yeah, I'm listening.

If the kid says "look, I have this one little lemonade stand, and its losing a fortune. If you give me money, we'll be able to create heaps of lemonade stands but because of this and that and this, they'll actually be real profitable and we'll make heaps of profits!" then my bulls*** detector rings out real loud.

[gregrday]

Hey guys, commentary on Xero half year results up on http://gregnz.wordpress.com... summary, things going quite well, and previously model (which I posted in this thread) is tracking pretty well. 2011 and 2012 are the interesting times.

cheers
Greg

[Peitro]

Except the lemonade customers are subscribing to pay for lemonade monthly, which is probably the most important fact

[Stranger_Danger]

Except the lemonade customers are subscribing to pay for lemonade monthly, which is probably the most important fact

You mean like they do at Telecom?

And yes, I get that I'm being cheeky and XRO and TEL are at totally opposite points in their useful lives, but just having a subscription model does not a good business make.

[gregrday]

One general comment I have, as part of my research into Xero for my previous blog posts on Xero, publicly traded SaaS firms generally have pretty high (you can substitute 'ridiculously' for pretty if you like) P/Es. There seems to be a lot of positive spin (you can substitute 'whacked out hype' for positive spin...) regarding how cost effective the SaaS model is. So... theres a lot to be proven here. I hope Xero is the company to do it!

cheers
Greg

[gregrday]

Hey Belgarion,
cheers for that. A couple of comments... SaaS hasnt really proved to be a low-cost model. Its touted as that, but theres not really a lot of difference between producing CDs (a la MYOB) and Xero. Internet distribution costs may narrow the gap further. Evidence? Check out the financials of Salesforce (CRM), Taleo (TLEO), NetSuite (N). These are the best-of-the-best public SaaS companies, and all are characterised by very low operating margins.

Second, the model was originally done based on 'industry-best' projections (based on numbers from Salesforce and Intuit primarily). Sure, the market is large, but theres some pretty powerful (and VERY well funded) competition (such as Intuit, which are a pretty well-run company). Any or all of them could purchase XRO without any difficulty at all. Also, their selling proposition is hard. Everyone can already do what Xero does, Xero are just offering a better hammer. However, their channel partnering seems to be working really well, so thats a huge plus.

So... I'm not sure the growth models are out-of-whack. They do tail off, but on the theory that low-hanging fruit will run out. I try and be conservative in my valuations, so.... 6 years to 1.5 million customers? Hard to tell. Seems ok to me, but possibly could be 10 million. Or 100,000. The good thing about the model is we can see how they're tracking, so come 2011 we'll have a pretty strong datapoint. And come 2012, I think we should have a clear idea whether they are conquering the US.

cheers
Greg

[futurist]

Hi. I don't own any share of XRO but I do like the company for the fact that we have very few of these in the stock market. However I don't think XRO is comparable with Facebook and TradeMe. The other two are true Web 2.0 companies, in which the quality and the value created by their product/service are directly dependent on the number of users. The SaaS model that XRO is based on belongs to Web 1.0, very similar to the old days when you need to pay to gain access to some websites or some web services. Of course they must have their unique strength in the software itself, but that is again the very traditional thinking of a software business and it is doubtful if that could be "the future" again.

Microsoft still makes very good money, but there must be reason why its share price hasn't changed much for the last decade.

[zs_cecil]

Hi. I don't own any share of XRO but I do like the company for the fact that we have very few of these in the stock market. However I don't think XRO is comparable with Facebook and TradeMe. The other two are true Web 2.0 companies, in which the quality and the value created by their product/service are directly dependent on the number of users. The SaaS model that XRO is based on belongs to Web 1.0, very similar to the old days when you need to pay to gain access to some websites or some web services. Of course they must have their unique strength in the software itself, but that is again the very traditional thinking of a software business and it is doubtful if that could be "the future" again.

Microsoft still makes very good money, but there must be reason why its share price hasn't changed much for the last decade.

I personally think that Xero is more than a Web 2.0 or traditional web 1.0 companies. Indeed, Its profit relies on the headcount of customer who are willing to pay the monthly fee to use the system. But its revenue sources are various. Its business model is all about education, partnering and integration.

Education

I am not sure whether education is a right word to use. But I think Xero does focus a lot on making
people and especially those accountant consulting companies to understand what Xero is and why it is worth to use. These consulting companies are the key to educate more end users and convince them to pay for a new system like Xero because the end users would get lots of supports from them.

Partnering

Xero has developed a lot of partnership with other companies besides the accounting companies that I mentioned above. For example, it established partnership with telecommunication companies like Telecom. Many telecommunication companies nowadays want to enrich their service and participate in the race of cloud computing. They want to become an IaaS and SaaS providers to both individual customer and business. These partners can provide strong customer sources to Xero in different ways.

One thing for sure is that bank feeds are the most important part of the services. The more bank feeds supported means the more potential customers. That's why Xero is partnering with many banks and the online banking solutions Yodlee to provide more bank feeds access for customers.

Integration (through web API )

Now this is key web2.0 feature allowing other companies custom their development with Xero using their Web API through web services. Through web api, other companies can integrate xero as part of their own service to customers. These integrating services can add a lot of indirect customer sources for Xero.

To summerise it, Xero only focuses on its core business and make it simple, which is to providing online accounting services in technical way. Xero is a red dot in the middle of a big web. It constantly develop its network and utilise the network as customer sources rather than sit and wait for the paying customers.