Xero customers to outstrip banks

Hawke's Bay businessman Rod Drury, right, says his accounting software company Xero is a good vehicle for people wanting to invest in the business migration to cloud computing. He is pictured with Craig Lane, Napier Manager of Forsyth Barr which hosted Mr Drury at Napier War Memorial Conference Centre. Photo/Paul Taylor

Rod Drury, CEO of listed online accounting software company Xero, says it has enough momentum in the New Zealand market for the country to be a world leader in the finance worlds migration to cloud computing.

"Accounting software is a ticket to the game that gets the small business data on to your platform, so you can do some really interesting things," he said.

He told a Forsyth Barr audience that an online invoicing service launched 14 months ago involved emailing a hyperlink. Clicking on the hyperlink to download the invoice created a read receipt. Customers quickly saw if the invoice had been read.

"You get this beautiful network effect of our customers customers seeing Xero, but they also see their outstanding invoices which helps get money paid faster."

He said the average number of debtor days moved from six weeks to four weeks.

"So that moves the needle at scale."

He said by the end of the year Xero expected to have more business customers than any of the New Zealand banks.

"Then the dynamics start to change. With online invoicing and the ability for businesses to pay $10,000 businesses directly to banks, that increases the velocity of cash flow and we are able to say to the banks, now you guys need to spend money inside the firewall and connect to Xero. So we are becoming this market maker of new services."

Because New Zealand banks are owned by Australian banks it presented wider opportunities.

We already have four or five US banks looking at what we are doing in New Zealand.

He hoped New Zealand would become the case study of business to government, business to business and business to bank e-commerce.

Twenty five per cent of New Zealand businesses were already using online accounting so we are the most advanced online small-business economy.

"We should start seeing people flying from Europe to see how were doing in New Zealand."

He said Inland Revenue was considering spending $1.5 billion on a new tax system.

"That's fine, but we could also have a New Zealand space programme for the same money?"

"We said why would you be a retailer of tax services? Why are you building tax software when the GST returns and PAYE schedules are already in our software? We just need to connect it into your engines."

"The IRD could just be a wholesaler and the software industry could provide the retail front end. If people don't want to use our software we could stand up some free versions and put them through the same channel. That might save $300 million."

"Already we are seeing this public/privacy partnership starting to work. We did a workshop with IRD a couple of weeks ago down in Wellington and are actively trying these strategies. Thats the cool thing about doing Xero from New Zealand, it is small enough that you can actually move the needle on a whole bunch of areas."

Xero was founded in 2006, listed on the New Zealand stock exchange in 2007 and on the Australian Stock Exchange in 2012.

It has a market capitalisation of about $4 billion dollars, making it one of the largest companies on the New Zealand stock exchange.

He said the internet had transformed how business was done from New Zealand, enabling him to move to Hawke's Bay six years ago. In that time Xero had expanded from 100 to 750 people as it expanded to the Australian, United Kingdom and US markets.

He said many New Zealander's thought of New Zealand as a chic European nation when it was closer to Fiji with snow.

"If you want New Zealand to grow better you have to grow the pie we have to export and that is what technology allows us to do. It is not just about exporting manufactured stuff, it is now about exporting services. That is the big change that technology is providing to us."

He said he asked several Christchurch accounting firms what their export strategy was.

"Their aim was to just service Christchurch, which was nuts."

The technology allows services companies to export, not just wine bottles and protein.

"The challenge to all New Zealand businesses is to use the technology to drive services export revenue. If you can earn globally and live in a place like Hawke's Bay, it is unreal."

He said a lot of people focused on Xeros efforts in the US. It was early days for that market but he was confident of ultimate success.

"In the first three markets that we have gone into we have done what Intuit, the US competitor, hasnt done in 25 years and beaten the incumbents in each market."

He said Xero had assembled a top team and good strong long-term alliances in the US.

"Talent had moved to well-funded start-ups like ours."

Xero was a good vehicle for investors to get exposure to the cloud movement. The capital cost of writing massive amount of software was prohibitive for competitors in the current market environment.

"If anyone did get funded we could see them coming for 3 to 5 years."

He said the biggest constraint for Xero was hiring people.

"We have an open headcount for another 300 people at the moment and if I could get more developers I could spend money faster."

"We have $200 million in the bank we have to spend it."

"It's a cool thing."