Xero Analysis

May 24, 2009

Xero has had a lot of media coverage in last couple of months.

They have announced a big capital raising and a number of new marketing partnerships, won some prestigious awards, and most importantly have signed up lots of new paying customers.

So, is now a good time to buy some shares?

Last week they announced that 70% of existing shareholders decided to buy some more in the recently completed round, at 90c per share (the market price as I type is $1.30).

Despite all that has been written there has been very little independent analysis of the company and its prospects. It’s been difficult for me to find information to point people at when I’ve been asked about this. So, I’m pleased to see the analysis that Sam Stewart has published on his blog.

As Sam correctly points out the key numbers to keep an eye on are:

  1. Average Revenue Per User (APRU), or how much the company earns from each customer (currently this is ~$33 per month).
  2. Operating Expenses, or how much the company spends to run the business (in 2008/09 this was $8.3 million, but this will increase as they hire more staff).

Depending on what you think will happen to these two numbers in the future you can can calculate how many customers you think they would need to break even. Or, looking even further ahead, to provide a return sufficient to compensate investors for the risk they are taking by investing at this early stage.

Sam thinks the first magic number is 28,000 customers (they currently have 7,500). But, there are lots of variables and assumptions, so I’d encourage you to read his post and play with the spreadsheet he has put together and form your own opinions.

The general advise to anybody who is investing in risky early-stage ventures like Xero, or thinking about it, is this:

There is a chance that the company will one day be worth a lot more than it is today. And, there is a chance it won’t. Make sure you are comfortable with either outcome.

What do you think?

For the sake of full disclosure: I am a shareholder in Xero. I was not part of the recent capital raising, but I did subscribe for the maximum number of shares available to me under the share purchase plan. I also worked at Xero from May 2007 until February 2008, but I no longer have any day-to-day role in the business. Naturally, as both a shareholder and interested observer, I continue to hope that they are able to build a significant and profitable business.