Cloud accounting platform Xero Limited (ASX: XRO) has a lot going for it thanks to its recurring revenues, high gross profit margins, market-leading product, global market opportunity and impressive growth rates.
At its annual #Xerocon conferences for accountant clients, it’s even trying to make accounting look sexy.
The conferences are packed full of product and partnership updates, alongside plenty of glitz and a ‘party’ atmosphere.
The shareholder returns have been pretty sexy too with the stock tripling since September 2014.
At its Brisbane #Xerocon today it announced a new Australian partnership with GreatSoft which is a “scalable cloud based practice management solution for large accounting firms. The partnership will enable leading professional services firms to adopt Xero’s powerful cloud accounting tools and efficiently manage thousands of clients, jobs and staff in GreatSoft.”
The more partners, apps, and products Xero can plugin to its platform the greater its attraction to clients, which in turn helps to build a network effect that helps deter clients from leaving.
This is important when you remember that Xero’s strength is also a weakness in that its recurring revenue software-as-a-service (SaaS) model also means it’s easy for an unsatisfied client to cancel anytime.
Whereas under an old offline software licensing model a potential client would normally pay a significant fee upfront and then be stuck with the software whatever they thought of it.
However, if you can get the SaaS model right (i.e. with low churn) over the long term it could turn out to be a profit growth compounding machine thanks to the high margin recurring revenues.
This is why Xero and a SaaS player with an even lower churn rate in Wisetech Global Ltd (ASX: WTC) are so highly valued by investors.
Back at #Xerocon it also announced a bank feed partnership with fintech player Waddle today.
Other new developments include a ‘single-sign-on’ platform which helps developers onboard clients without remembering different passwords and helps Xero integrate with certified third party apps more easily.
Single-sign-on platforms for third party apps that boost cyber security are a fast-growing space, with US born in the cloud player Okta Inc. (NASDAQ: OKA) the market leader in this space.
This afternoon Xero shares are flat at $62.70 and I still expect they’ll offer investors market-beating returns over the next few years.
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You can find Tom on Twitter @tommyr345
The Motley Fool Australia owns shares of WiseTech Global and Xero. The Motley Fool US owns shares of and recommends Okta Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.