If the market for cloud accounting solutions is a land-grab for subscribers then look out, because at the rate XERO FPO NZ (ASX: XRO) is growing the company could soon become the industry's Roman Empire.
The head of the empire, our Augustus and CEO Rod Drury, announced yesterday at the company's AGM (can we take a moment to imagine him presenting in a toga?), that Xero had added more than 40,000 subscribers since hitting the 500,000 subscriber milestone on 3 June.
That's growth of 8% in just 7 weeks and suggests an annual growth rate of slightly below the 67% lift in paying subscribers the company achieved for the 2015 financial year. Is this bad news? Not at all. As the base number of subscribers grows over time it will be harder and harder to grow at the same rate. Maintaining the same growth rate annually would be compounding growth.
What does it mean for investors?
Xero expects the continued subscriber growth will lead to a big lift in subscription revenue. For the full financial year to 31 March 2016 Xero anticipates subscription revenue will exceed NZ$200 million, (based on June 2015 foreign exchange rates). This represents growth of 65% on 2015 where subscription revenue came in at NZ$120.9 million.
Although Xero has been criticised in the past for growing operating expenses, which includes the costs of sales, marketing and product development, faster than subscription revenues it is important to remember that each new subscription comes with a certain 'lifetime' of repeat revenue.
Xero estimates this average lifetime to be 83 months, or just under 7 years. And with a gross margin of 70% the estimated lifetime value of a given new subscriber is NZ$1,622.
Where to next?
Xero's dominion is well established across New Zealand and Australia, so all eyes are firmly on Xero's next big target – the U.S.
The U.S. represents a massive opportunity for Xero. The population of Texas alone is about the size of New Zealand and Australia combined. Despite the recent argument from Myob Group Ltd (ASX: MYO) CEO Tim Reed around the complexities of operating under various different tax rules in the U.S, with a potential market of 29 million subscribers, it is too big for Xero to ignore.
Xero Chairman Chris Liddell noted that a U.S. listing is still on the cards for Xero, but that "timing is dependent on internal and external factors and won't be prior to the release of our 2016 financial year result" (April 2016).
A U.S. listing would increase Xero's exposure in the U.S. and likely give customers there more confidence that the company is locally accountable.
Like the formation of all great empires, Xero's subscriber 'land-grab' will take time and won't all be plain sailing. However the strong rate of recent growth suggests there is little standing in the company's way.
