Xero - growing subscribers during the pandemic

Xero (XRO) is a New Zealand-based, global technology company that offers cloud-based accounting software to small and medium-sized businesses. We believe that global annual IT spend – which is around US$1tr – will migrate to cloud solutions, unlocking significant value for cloud service providers and their customers. Xero held their 2020 Annual Shareholder Meeting in August, and confirmed that cloud penetration rate in their vertical (accounting solutions for small and medium-sized business) sat at less than 20% globally and 50% in Australia and New Zealand. Cloud software solutions are more flexible, more accessible and more user-friendly and therefore we think that there is a natural tailwind behind the industry, and an inevitability that the penetration rate will continue to increase globally. Despite COVID-19, Xero added 96,000 net new subscribers between 1st April and 31st July, taking total global subscribers to 2.38 million, a testament to this overarching industry trend and the company’s innovation and strategy. We remain concerned that the impact of COVID-19 will continue to slow subscriber growth, which it did when compared to prior years. However, we think that once the pandemic passes, we will see an acceleration in the adoption of Xero’s products, given the benefits mentioned above, which become more important as business owners prioritise efficiency and flexibility.

The company also announced the acquisition of Waddle, a cloud-based invoice financing platform for small businesses. Waddle has been on Xero’s App Marketplace and an ecosystem partner since 2016. Given this prior relationship, we think Xero is well-placed to help the business grow, deliver a better solution for customers, and create shareholder value.

This note has been prepared by ELM Responsible Investments (‘ELMRI’) ABN 70 607 177 711 AFSL 520428, for Australian wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth).

The information is not intended for general distribution or publication and must be retained in a confidential manner. Information contained herein consists of confidential proprietary information constituting the sole property of ELMRI and its investment activities; its use is restricted accordingly.

This note is for general informational purposes only and does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of preparation and presenting and all forecasts, assumptions, opinions, data and other information are not warranted as to accuracy or completeness and are subject to change without notice. This is not an offer document and does not constitute an offer or invitation of investment recommendation to distribute or purchase securities, shares, units or other interests to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this note. Any potential investor should consider their own circumstances and seek professional advice.

ELMRI funds, its directors, employees, representatives and associates may have an interest in the named securities.

Past performance is for illustrative purposes only and is not indicative of future performance.