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Australian Peripheral Stock: Xero

STOCKS RECENTLY ADDED TO HAMILTON HINDIN GREENE’S INVESTMENT COMMITTEE AS PERIPHERAL EQUITIES: Xero

Peripheral equities are designed to be supplementary to your core stocks. As such, it is recommended to have a maximum allocation of 5% of your investable wealth in any peripheral equity.

SHARE PRICE: $44.59 AUD

MARKET CAP: $6.46 BILLION AUD

SECTOR: TECHNOLOGY SERVICES

OVERVIEW

XRO is an information technology provider that specialises in the development and sale of integrated cloud-based accounting software for small businesses and accounting practices around the world.

BUSINESS LINES

XRO generates most of its operating revenues from the sale of subscription services across Australasia, the United Kingdom and to a lesser but growing extent, North America and other countries. 48% of the NZD406.6 million it generated in the 2018 financial year came from Australia, 20% from the United Kingdom, 19% from New Zealand, 8% from North America and the rest from other countries.

XRO develops and sells commercial cloud- based accounting software, covering a range of invoice processing, bank reconciliation, general ledger, payroll, tax and other services required by small businesses and accounting practices around the world. It has 1.4 million customers in over 180 countries who pay monthly subscription fees depending on the nature and number of services they require. XRO operates a partnership program with accounting firms that refer or migrate their clients onto its platform in exchange for business support, discounted platform services and marketing materials. It also provides access to some third-party services through its platform, generally mobile applications operating under revenue-sharing agreements.

STRATEGY, RISKS AND OPPORTUNITIES

‘Software as a service’ is often characterised as highly scalable with a low incremental cost to on-board and serve new customers. Companies try to maximise their customer retention and the average revenue per customer by frequently upgrading their platforms, by reducing payment friction, by offering integrated and cross-subsidised services, and by acquiring complementary customer bases to further leverage their platforms. Specifically, XRO has indicated its near-term focus is to: expand its international subscriber base with a particular emphasis on the United States and the recently entered South African and South East Asian markets; upsell existing subscribers by offering a broader range of services including those provided in partnership with complementary software providers; and automate more of its services through the use of artificial intelligence and machine learning technologies.

XRO competes directly with other domestic and multinational business software and 'software as a service' companies that are also trying to attract customers through various pricing, quality and other customer propositions. Some of its larger competitors are Sage of the United Kingdom, Microsoft and Intuit of the United States, and MYOB of Australia.

XRO has successfully established a global reputation and scalable software platform in Australia and New Zealand, and to a lesser extent, the United Kingdom and the United States. It also sells its software services to a range of customer segments, giving it some ability to allocate more of its resources to countries and sectors with favourable demand drivers and exchange rates, and vice-versa.

Going forward, it should continue to benefit from increased earnings through organic growth, expanding its product suite and geographic presence, optimising its operations and vertically integrating up the supply chain as well as undertaking complementary and value- accretive acquisitions.

 

 

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