Xero shooting for a million customers in UK as digitisation looms

Thursday 21st June 2018

Xero is confident of tripling its UK customer base in the next few years, saying the compulsory digitisation of tax returns providing a tailwind to its rapid pace of growth in the world's fifth-biggest economy.

The Wellington-based, ASX-listed company now counts the UK as its second-biggest market with 312,000 subscribers as at March 31, up 47 percent from a year earlier, and delivering $79.6 million of revenue, about a fifth of all sales. The UK division has tended to fly under the radar with the home territories of Australia and New Zealand attracting most of the attention in the past. That changed in Xero's 2017 annual result, with stock analysts acknowledging the market as a significant opportunity for the company.

Gary Turner, head of Xero's UK and Europe, Middle East and Africa business, likens it to building a skyscraper in downtown Manhattan: "Nobody notices until you build the 40th floor and all of a sudden you pop up above the skyline".

He's now the longest-serving executive at Xero, joining in 2009 when the UK accounted for 3,000 of its 7,500 paying customers. Over that time he has built the UK team to a workforce of 300 from just three in its infancy.

"We've been building our UK business doggedly for a decade now and you don't get credit for the first 40 floors, but you don't get to build the 41st floor and to get that global recognition from people until you've put the groundwork in, Turner said in an interview last month. "What that says about our UK business is that we have an incredibly resilient and sturdy business."

Xero's UK unit is at the point where it can harness its scale to keep growing in a market Turner conservatively estimates to be 2.6 million small and medium-sized businesses that are either VAT registered or employ people.

"We're still at the beginning and there is no reason why the Xero customer base can't be over a million customers in the next period," he said. "It's our intention to continue to execute and to grow and invest to drive to over a million customers in the UK and we think that's a pretty reasonable goal to be shooting for."

Over the past 18 months, Turner said the UK unit has sustained annual revenue growth of 60 percent and customer growth of about 48 percent, and he said the UK government mandate requiring firms to lodge tax returns via software from April next year will provide a major opportunity to maintain that pace of expansion.

"The good news is that presents us with a tailwind, that presents us with a government mandate that says using accounting software is a good idea, which is clearly helpful for us - clearly helpful for our competitors as well," Turner said. "There's opportunity with initiatives like that help us to grow - it doesn't slow us down."

Xero's had success in chasing a million customers before, setting the global target in 2013 when it had just 157,000. The software firm went on to achieve that last year and had 1.39 million subscribers as at March 31.

In a May note for Deutsche Bank, Craigs Investment Partners research analysts Stephen Ridgewell and Samuel White forecast Xero crossing the 1 million UK customer mark in 2023.

"With the UK market still under-penetrated and market growth set to accelerate as tax returns are digitised, Xero’s competitive position improving, and execution improving as unit economics improve, we have materially upgraded our estimates (and valuation) for the UK," they said.

Other analysts see strong UK subscriber growth for Xero, with RBC Capital Markets' Paul Mason predicting the company will have 963,000 UK customers the 2021 financial year, and Wilson Advisory's Mark Bryan and James Bradley picking 891,000 over the same period.

Xero's ASX-listed shares recently traded at A$47.42, up 3.7 percent today, and adding to the 60 percent gain so far this year.

(BusinessDesk)

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