Xero's (XRO 0.36%) business, including its SaaS model, appears to have a bright future. In this segment of "What in the World" on Motley Fool Live, recorded on Feb. 4, Fool Australia analyst Ryan Newman and chief investment officer Scott Phillips discuss the accounting software company's plans to expand its offerings to customers.
10 stocks we like better than Xero
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Xero wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of January 20, 2022
Ryan Newman: Where the business is today, so as of the 30th of September 2021, it had 3 million subscribers around the world. That was up about 20% on the previous year, and those subscribers are really spread across the ANZ, so Australia, New Zealand, with about 1.7 million subscribers. North America and in the U.K., the majority of those in the U.K., about 1.1 million. Then the rest of the world segment, as it calls it, is about 200,000.
Beyond being just an accounting platform, what these business is really trying to achieve is to become a small business portal. It's not just accounting. What they really want to try and do is help small and medium-sized businesses to perform mission-critical tasks like payroll, invoicing, expense tracking, bank reconciliation.
As far as ultimately, to allow them to spend more time in managing their business, rather than handling financials. That's really one of the core elements to what Xero is trying to empower those small businesses. It also helps them to understand their businesses better because of its easy-to-use interface.
As I said, most accountants and bookkeepers really prefer to use Xero's platform. It does these obviously also using a cloud-based model with the interface that's preferred by accountants. One of the reasons, though, I really like this is the SaaS model. You'll find this with a lot of the businesses that I do recommend, or the businesses that I tend to look for.
The SaaS model because it provides a high revenue, visibility, mission-critical pricing power, and SaaS, I should highlight means software as a service. Sorry. Some businesses are really subscribing to it; paying a monthly or annual fee, and that is recurring to the business. So high revenue visibility there.
I also mentioned before that accountants act as an extension of Xero's marketing arm which saves Xero the marketing dollars and delivers these services via the cloud, and it's also growing the ARPU. I mentioned a minute ago that I like this because it's not just an accounting platform anymore, it's trying to become that small business portal.
That over time I believe will allow it to grow the average revenue per user. Now that has been stymied a little bit through COVID. I know they have stalled one or two price hikes, but generally, these businesses are able to push through those pricing increases because as I said it's a mission-critical service. Without Xero, what are the businesses we're going to do? They're going to go back to doing things the old fashion way. Doing it maybe on a spreadsheet, mucking around with their accountants again.
It doesn't work. Most if not just about every business that uses Xero, I think will probably just be happy enough to pass over those extra couple of dollars per month which over time can actually add up to quite a large value add for Xero. Yeah as I said, it's adding a lot of value to its customers.
I believe there is an opportunity to continue growing average revenue per user, and as well at the minute that they are spending a lot on marketing and sales but that's really driving that growth engine. Over time I think they can start to scale that back and really start to generate stronger margins too, so I see a bright future for Xero.
Scott Philips: Very nice man, I like that a lot. Those are really important metrics when you talk about the number of customers that pick up and the average revenue per customer or per user as you mentioned ARPU, that idea is a really powerful one.
Techies and investors love both acronyms and rhyming terms, so land and expand is the phrase that a lot of our viewers and listeners will have heard before. The idea is if you get someone on a Xero, 10 bucks a month, 20 bucks a month, whatever it costs these days, and then you say, "Well, while you are here on just this basic accounting package, would you like this payroll product? Would you like this other thing as you're saying?"
Price hikes, price increases work generally as well, but getting a user to use more elements, more modules if you like of the Xero platform is a really attractive way. Again, if I just simply create the value high, you don't payroll. You're really rostering over here on a piece of paper, or whatever. We get something that we can help you with that. Want to do a bank for reconciliation? We can do that as well, and there's a really nice way. Many companies do it.
It's not just software by the way. It tends to be focused on software, the idea of acquiring a customer then selling them something else that can help them on top of what they came in for is a really great way to build value for them and as you say for the business itself.
