Xero CEO on FY Results, Business Strategy

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00:00Talk us through these results, what it kind of says about the macroeconomic environment,

00:03and of course, you know, some of the broader policy and trade-induced volatility that we've

00:08seen for businesses in a number of markets, but particularly in that core market of the United

00:12States. Sure. Well, first of all, we're very pleased with the results. Overall, 23% top-line

00:18growth, $641 million in free cash flow, rule of 44 on rule of 40. So really strong, both top-line

00:26growth and free profit and cash generation. So overall, really pleased with the results.

00:31Now, speaking to that macro resilient kind of business that we have, we really believe that

00:37our software is helpful to SMBs in times of certainty, but also uncertainty. We help them

00:41manage their cash flows, get paid sooner. Of course, that is critical and perhaps even more so in this

00:47environment. So, you know, the prospects for our business, we think we are there to help small

00:52businesses across the world, US, UK, Australia, New Zealand, navigate this uncertainty.

00:59What is the data telling you in terms of what that uncertainty looks like and how these businesses

01:03are faring? Well, as you know, and you've seen the data yourself, interestingly, you know,

01:08US indicators are pretty mixed on whether or not there has yet been an effect. But I think what we

01:13can say is, of course, it has been a time of extreme volatility. It seems to be settling somewhat,

01:19as Trump starts to announce, deals. And that is good for the market overall. For our SMBs,

01:25the things they are managing right now is, is there going to be supply chain disruption? Is

01:29there cost of goods going up? So I think it is fear of what's ahead. I don't think you're seeing

01:34much in the indicators yet. But as I said, our number one job is to help them manage their cash flow

01:40as everyone awaits, you know, Trump's further dealmaking.

01:44So, Kenda, just wondering as well, how much optimism do you see out there among these small

01:49businesses about more favorable rate environment?

01:54You know, interestingly, you know, our small businesses don't tell us a lot about their

01:57expectations of the rate environment. What we see more from them, obviously, is really their

02:02concerns about managing cash, things like late payments. Of course, one can hypothesize on the rate

02:08environment. I am not a macro economist. I'm sure you have many on this show. Mostly what our small

02:12businesses speak to us about is the need to manage cash.

02:18So, Kenda, you said, you know, this was a pretty good set of results. Are you also happy with the

02:24growth in your U.S. market?

02:27You know, we are. I think the U.S. market for us showed us strong underlying growth. We reported our

02:34North America results. So we saw nice increases in subscribers and ARPU. And I think those are both

02:39indications that U.S. businesses, you know, for us is small and growing. I think the key thing for us

02:45in the U.S. that we see is higher product market fit. We've made multiple investments in just, I would

02:51say, better product velocity for that core U.S. market, which for us has a lot of white space in

02:57our global portfolio.

02:58I think towards the end of last year, there were some concerns about subscriptions starting to slow

03:04down, which is perhaps unsurprising in some of the more mature cloud markets like Australia,

03:08like New Zealand, right? What are you seeing in terms of subscriptions at the moment? Are you

03:12optimistic or are you sort of happy with the sort of steady-as-you-go's approach?

03:17Well, first of all, we had another year where we posted double-digit subscriber growth. So 10%

03:22subscriber growth overall and 15% ARPU expansion. So what we see from that is there is still a

03:29tremendous amount of white space. In Australia, we still generate a lot of new subscribers to the

03:34cloud. Of course, New Zealand, which is our oldest and home market, has slower growth. But across the

03:40rest of the portfolio, I would say we still see a lot of opportunity. I will remind you that one of

03:44our key markets is the U.K. This year, the U.K., we think, will experience tailwinds with the

03:49introduction of making tax digital, a regulatory requirement for small businesses to file digital

03:55taxes. So we see lots of reasons to be optimistic about the opportunity for continued subscriber

04:00growth. I wanted to get your view in terms of the sort of innovation and tech ecosystem in

04:06Australia. Obviously, we've come up with a very strong election result. There's more of a mandate

04:10for the government here. But Australia has kind of broadly lagged the likes of the U.S. when it comes

04:15to coming up with companies like Xero. What's your, I guess, input in terms of how that can change

04:22public policy-wise, investment-wise? Yes. Well, look, first and foremost, let's not forget,

04:28you have tremendous Australian-founded companies like Atlassian and Canva that do enjoy a good

04:33amount of global success. Of course, there are peers like WiseTech. So I think that we do see a lot

04:39of great activity. But I think like any government and any economy, one of the reasons that U.S. has

04:45been so successful and can be modeled after is the incentives for entrepreneurs to start

04:50companies, you know, whether that's carried interest, whether that's the fostering of the

04:54venture capital environment. I think these are the things that are, you know, in the U.S. you have

04:58QSBO, which is really the qualified small business opportunity for entrepreneurs to have 10% tax

05:04rather than more on capital gains from starting a company. So I think my advice is probably not

05:09Australia-specific, but it's specific to all the markets in which we operate. If you want to see

05:13small businesses flourish and tech businesses flourish, you need to have, I'd say, incentives

05:20that really drive the flow of capital into these businesses and for entrepreneurs to want to create

05:28wealth in those countries. When you look at longevity for this business and what kind of the next steps

05:35will be, where do you see growth and also cost containment coming from? Do you still look at organic

05:41growth going forward and looking at these individual markets or are you open to potentially deals and

05:46inorganic options as well? Sure. Well, I would point you, first of all, to our core strategy. We've talked

05:52about growing, you know, our big three markets, Australia, the U.S. and the U.K. as being strategic

05:57focus areas in this strategic period. We've talked about payroll, payments, and accounting being the

06:02big three jobs. And we've also been very clear that we will use organic and inorganic opportunities

06:08in order to meet and create that strategic fit for our customers. This past period, we acquired SIFT,

06:15a leader in analytics for both small businesses and accountants and bookkeepers. We're already well on

06:20our way to rolling out access to SIFT within Xero across the U.S. and coming soon to other markets.

06:26So I think we certainly look at M&A as a part of that strategy and feel like we also have a strong

06:31organic base of operations in which to invest capital.

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