Wednesday, August 1, 2018


I was quoted in the Australian Financial Review on Monday stating that Xero is the only Australian company with the potential to be a $100 billion global tech behemoth.

As the market cap is less than USD5 billion now I am saying a 20 bagger is possible.

The $100 billion number was a matter of some dispute in the office - and a discussion is in the appendix. However suffice to say there is huge upside provided it all works.

Xero however have a few hoops to jump through on that path. This post is to explain my view and also what I hope management improve. I do not think they have done a great job of it so far (even though the stock and business have been a success).

But for the uninitiated I am going to explain what Xero does and why it has such potential.

Xero is an open architecture cloud-based small business accounting software package. It provides a proper double-entry accounting system for small businesses available from any reasonable device, and backed up automatically. It has permissions to allow various people different levels of access (to facilitate proper accounting controls) and in some jurisdictions it connects straight to banking systems to allow payments to be made directly from Xero.

We use it to run our business. It works. It is wonderful.

This is not an isolated view. Check out the @xero twitter feed. People unironically use the word "love" about accounting software. It makes their life easier - and is way better than alternatives out there. [Observation: as I wrote this I saw the first complaint I have ever seen about the Xero system having issues.]

A stylised history of accounting software and Xero's place in it

Small business accounting software tends to be localised by country such as Quickbooks (USA), MYOB (Australia) or bits of Sage (notably in the UK).

The reason for country-specific software was that this stuff arose during the 1980s (which was a big period of tax reform globally) and the localisation was important for compliance. Moreover, that was a different world - there was no reason to expect that (say) Intuit would have the local knowledge to succeed in Australia let alone France. [Question: could you imagine programming French tax law into an accounting package written in California now? Could you imagine doing it pre-internet?]

Small business software is a much more important business outside the United States than inside. Penetration in Australia for instance is over 70 percent (these are for businesses with say 5-10 staff). In the US it is likely around 20-30 percent. The Australian penetration rate is probably around the non-US OECD average.

I am pretty sure the reason for the high-non-US penetration is tax compliance. The US (almost alone) does not have a value-added tax. VATs are beautifully simple taxes, relatively easy to comply with and that raise revenue very efficiently. But they turn almost every small business into a tax collector. Even an architect or a small consulting firm collects value added tax - and it does so on behalf of other people.

Tax authorities get moderately upset if you do not pay tax you yourself owe to them. They become vehemently angry if you withhold tax on behalf of other people and you don't pay it to them. When you become a tax collector your relationship with the tax authority changes. Being compliant and being seen to be compliant becomes a business necessity.

Small business accounting software helps that - indeed it makes it automatic. And that is why in countries with value added taxes small business accounting software is pervasive.

And because small business accounting software was - from inception - about tax compliance it was necessarily highly localised. When these programs arose in the 1980s computer space was limited (you really wouldn't want a global system for your small business) and cross-border compliance was an unrealistic programming goal.

Xero and the rise of open-architecture, cloud based small business accounting software

Into this world of localised (and dare I say in antiquated) small business accounting software comes a truly disruptive company from New Zealand called Xero.

Xero offer a cloud-based accounting package to small business. There are plenty of reasons why cloud-based is superior. But the initial top-of-the-list is the ability to run your business without a dedicated server and on any device.

But there are some big advantages with cloud based software. For instance, if our business had to pay workers compensation insurance to some insurance company we may set up a direct debit (through our accounting software) and make the payment to what is - at least to us - just a bank account number. If we accidentally type the wrong number in that could of course be a disaster. However, Xero have almost certainly had the correct number typed in twenty times before and they can - using a little artificial intelligence - warn us that the number is wrong and get us to type it in again. That is the direction this is heading.

Xero is a minor miracle - a powerful small business accounting software package with an intuitive and elegant interface. Nobody ever said doing their accounts was fun - but following the Xero hashtag on Twitter almost makes small business accounting seem cool. Pushed on that, customers note it saved them the drudgery of the shrink-wrapped solution it replaced.

Anyway -  Xero from inception had a problem. It was based in New Zealand. New Zealand is not exactly the centre of the universe. And trying to run a global software company from New Zealand was a challenge. Besides, when Xero started it was diabolically short of money for expansion.

So they made a decision which seems obvious in retrospect, but was innovative at the time. They made the system open-architecture. They allowed people to put their own apps over Xero to meet specific functions.

For example there is an app for doctors’ practices in Australia. There are lots of small business management practices that are specific to a doctors practice in Australia - for example the classification of and collection processes for government reimbursement of medical procedures. Xero wouldn't know enough about how a doctors practice works in Australia to write that software - but someone else does - and they just plug it into Xero. Slogan: "there is an app for that".

And there is an app (often given away) for ordering building materials for a small construction firm. This app builds into the billing and bidding software and also to the ordering software. It is given away because it locks in customers.

And of course there is an app for payroll too. That app will (necessarily) be country-specific because tax laws and court orders and all the other things that you need to withhold from payroll are country specific. In countries where Xero is pervasive Xero might build or acquire a payroll app and will wind up owning a good part of the system. In countries which are a long way from New Zealand it is likely that there will be a third-party payroll system.

Payroll is particularly difficult. You might have an employee in California who is resident in Oregon and has a court-ordered salary withhold in Texas. No small business can comply with that and so they send their payroll to a payroll processor (such as Automatic Data Processing or Paychex) and the payroll processor complies with that. But there is no reason why this can't be done with cloud-based software. Indeed that is what Ultimate Software does. Ultimate Software (NASDAQ: ULTI) is a rocket-ship stock and is the bear case for (say) Automatic Data Processing.

Bronte (our business) does its payroll on Xero and functionality is more than sufficient. Xero have a payroll program with limited functionality in the USA - but you can have payroll apps on Xero with much broader functionality - see this list. Note in this list ADP is a plug-in for Xero but the one with the worst reviews.

The end-game for an open-architecture accounting system is that there is an app for every function that is hard to comply with. If for example private schools have to separate their building accounts from their general accounts and other things there will be an app for that. If a doctors practice needs to invoice simply 70 different insurance companies there will be an app for that.

And owning the open-architecture backbone will be a stunningly powerful (and ultimately stunningly profitable) position. Profits will - as per most of silicon valley - follow relevance.

The real reason a small business uses software

At the end of the day the reason the small business uses software is that it makes their life easier - and most of that "easier" is broadly compliance: compliance with governments, compliance with insurance companies, compliance with customers needs etc. Having payroll software allows you to comply with tax withholding and other payroll laws. Having accounting software allows you to comply with tax laws (especially valued added taxes).

The state of play in accounting software

Accounting software packages were nice regional monopolies or oligopolies. Compliance differences meant that they did not compete much across borders. There was one or two in most markets. In some markets these were segmented so there were very simple packages for one or two person businesses, then packages which became more complex as the business became larger.

The quasi-monopolies were pretty good businesses, high incremental cash flows but not much growth. In other words they were targets for private equity.

Many got bought and levered up. In Europe many more got hoovered up by Sage (a London based roll-up of accounting and payroll packages). For instance SolvAxis - which was the leader in Switzerland - was bought into the Sage juggernaut.

The exception was the US where the leader (Intuit) was too big and too valuable to be taken private or levered up.

So around the world you have lots of indebted (and hence weakened) competitors and one super-solvent, super strong competitor in the US (Intuit). Sage is only modestly levered, but a roll-up. It is a strong competitor but nowhere near as powerful as Intuit.

Enter the cloud

Cloud accounting is so much superior to the previous shrink-wrapped alternative it is a joke. Nobody would ever go back to the (very limited) box. Moreover the cloud programs get better and better and the improvements are baked in every day. They don't fail to work (notwithstanding Xero’s minor technical problems yesterday).

The customer drag will be one-way forever. Shrink wrapped loses share and eventually shrinks away.

When I first saw Xero I thought that Intuit was ultimately doomed. Relative to Xero, and especially relative to where Xero would be, their product sucked.

I don't think that any more. Every accounting package has come out with a cloud option. Intuit's has turned on a dime. Their investor relations presentations and indeed much of the company is now is a clone of Xero.

No I am not joking. Intuit (a USD55 billion company) copied Xero (a USD4 billion company) and they did it to survive.

Intuit however did more than that. They came to Australia with a cloud-based product (Quick Books Online) and gave it away for $1 a month. This is an unambiguously loss making enterprise. When I asked them why they did it they straight out said "to learn to fight Xero on their home territory".

This is a stunning admission. Intuit is using its huge cash flow (well over a billion per annum) to give away product so they can fight a tiny company from New Zealand.

But it is the right thing to do too. Intuit has learnt how to survive, deserves to survive and will survive.

Ultimately I am not so sure about everybody else. Most of the competitors are weakened and the cloud apps simply steal customers from their non-cloud businesses. At best they can "do an Adobe" and convert much but not all of their customer base to a monthly subscription model. But I suspect that is optimistic. You see artificial intelligence (AI) is going to make a huge gift to the big players.

And that is easy to see by example. Suppose I make a $2000 payment to Dell. You are smart, you know what it is. It is a computer or a server or some other piece of capital equipment. And being a computer it is (for Australian tax purposes) depreciable over three years. I had to look that up.

So I enter it into my accounting package as depreciable over three years.

And go on.

But when 20 people have done that with an AI system the accounting software should recognise this and automatically categorise it correctly. And that just saved you looking up the depreciation schedule.

Xero's stated goal is to get to 99 percent automatic classification of receipts. I don't see any reason why this shouldn't be 99.9 percent. The pain of much of this business - and the whole profession of low-level bookkeeping - should disappear.

And those with the biggest  data should win. They should win big. And it will be near-impossible to compete with them. I am sorry MYOB and Sage. You are destined for the scrapbooks of history.

Xero and AI

I am hardly privy to the software design decisions of Xero but they clearly have their eye on this. They originally wrote Xero so that it ran in Microsoft server hosted on Rackspace. They re-wrote it so its backbone is Amazon Cloud Services. This was a non-trivial task - and I think they did it because Amazon has a much better artificial intelligence as a service offering (either direct or third party). They did it for the AI.

The trick here is to get really big fast. If you get big fast. When you do you will have more data and you will win the AI race.

At the moment Xero is the world leader in cloud based accounting software and records more than a trillion dollars in transactions per year. This is a race that Xero can win.

Xero's management issues

Rod Drury who founded Xero and was CEO until recently was a talismanic software genius whose heart and lifestyle was in Hawkes Bay New Zealand.

Now Hawkes Bay may be one of the nicest places in the world to live - but it is not the centre of anything that matters. He was both the inspirational genius and the limiting factor to growth.

The company was listed in New Zealand, hardly the world's most tech-driven market. And when they moved the listing it was to Australia and not to the NASDAQ.

This stock has always been cheap relative to the US SAAS companies. Take Ulimate for instance - a well run company with a vision far less expansive than Xero. The market cap is about double. This is typical.

Xero run the business to be cash flow break even. They are proudly (just) EBITDA positive. The mantra here is to grow as fast as possible subject to the constraint that they do not run out of cash. Which seems a sensible enough mantra - but given the prize is so big why not grow faster?

A Silicon Valley CFO (say a former tech investment banker at Goldman Sachs) would have hyped the stock, listed it on the NASDAQ, raised a bucket-load of cash with the minimum possible dilution and used the cash to grow even faster. Not doing this is the first thing that the company has done wrong.

The second thing they did wrong was target the USA before they targeted Europe. The USA alone amongst OECD countries does not have a value added tax. It has much less software penetration and the usual selling channel (sell to the accountants who then sell to their clients) was not as easily open.

Moreover going to the USA wakened the only credible long-term competitor.

Instead they should have gone to Europe first. Europe has compliance problems coming out of its ears. It is a natural market for a software product that solves them. And it has a weaker competitor in Sage.

They should have produced Xero in multiple languages. They went to the US without a Spanish language version which seems stupid if not insensitive.

And Quickbooks Online is opening in France - a completely natural market for this product.

There is no reason why Xero should cede the natural markets of Western Europe to the Americans. Hop to it I say.

Hope in the management change

Rod Drury has recently resigned as CEO of Xero.

It is not normally great news for a tech company when the talismanic founding genius leaves. But in this case he might have done the right thing.

You see Xero has appointed a genuine internationalist, Steve Vamos, formerly a senior executive at Microsoft.*

Steve will do certain things much better than Rod.

- he will run the administrative side of the firm a lot better - he is a MUCH better people manager and will hire stronger direct reports
- he will be much better at running the US subsidiary
- he will run a global organization much better
- sales and marketing will strengthen

And he will do somethings much worse

- he has not demonstrated product vision in this area
- he is not a life time accounting expert
- he will understand customer need a lot less well

If Rod can stick around as the product visionary this will work very well as a transition. Steve can cover all of Rod's (considerable) weaknesses and not lose Rod's (also considerable) strengths.

The CFO is also changing and this is unambiguously good news. The old CFO was way too parochial. The biggest weakness of Xero was its financial clout to go with the global potential of the company. The company really needs a first-tier Silicon Valley CFO. I think they are going to get it.

Are they going to get this done? I think so - but they will probably wind up being a nice second player to Intuit because they have not gone fast enough. You can own either stock but the upside is far more considerable at Xero.

I bought my stock at under half the current price. It is not that cheap anymore - trading at 16 times trailing revenue and 11 times forward revenue. If the stock quadruples its revenue you will probably win quite nicely owning it - but I am not looking for a quadruple. I am looking at a path to global significance.

I think they might yet do it. It is far from written in stone - but it is as far as growth tech stocks go - a pretty good bet.


*Many of the observations here come from one of my regular tech correspondents. I have not sought his permission to quote them so I just borrowed them and presented them as mine.

The $100 billion number

The biggest debate in the office came about because of my $100 billion number as an end-game market cap. In some sense that is the big-hairy-audacious-goal (BHAG) for any putative tech giant.

But in this case thinking about how you get there explains it pretty well and also explains to some degree what the company needs to do.

Xero currently has about a million customers paying on average about $400 per year each. We pay a bit more mostly because we transact some of our business in foreign currencies and as we add optional features we would expect to pay more still. We would expect revenue per customer to grow over time and think $600 is not unrealistic. At least some of the customers become bigger over time. We know one 200 person business who runs the entire thing on Xero. Their next transition would typically be to Oracle accounts - but they do not feel this is necessary.

To get to $100 billion in market cap you probably need $15 billion in revenue at some point. Even that is fairly expensive at 7x revenue - but most of the tech giants trade at about 7x revenue.

At $600 per customer that means you need 25 million customers. To get to my BHAG Xero needs 25 million customers. It needs to be 25 times bigger.

My first cut was simple. Xero has the bulk of the market in New Zealand - its home market - and about a third of the market in Australia. It has a small market share in the UK and a tiny market share in the US. Australia is about 2 percent of the world - and so Xero could - if it got to this market share globally - be 50x bigger.

It is a superior product, mission critical and sticky. This seemed plausible to me.

Then one of my staff members pointed out that there are less than 6 million incorporated businesses in the US. And sure this doesn’t count sole-traders but it does make my 25 million customer target seem hard.

This of course led to a debate. How is it possible to have a million customers mainly in Australia and New Zealand (very small countries economically) and there only be a target market of about 6 million customers in the US.

The first answer was the one alluded to above which is that Australia and New Zealand both have value added taxes which means that everyone with any private business has to file regular tax statements and the vast bulk of them use software to comply. This will apply in Europe too. Xero should have gone to Europe before going to America.

The second answer (which I would love to confirm) is about the structure of the US economy versus countries without large pools of low-income labour. In the US there is a vast pool of labour at approximately $10 an hour which is lightly skilled. Many businesses work out how to leverage an entrepreneur’s talent through using dozens of these people. The average restaurant in America is much larger than the average restaurant in Sydney - and leverages one executive chef over many staff. By contrast this low-income labour pool barely exists in Australia - and of consequence I suspect the average small business is smaller and there are many more of them. Australia, not America is a land of thriving small businesses (at least by number).

I suspect the same is true in Europe. Indeed in Europe in many jurisdictions there are penalties for businesses getting too big. France for instance has different labour laws for companies that employ more than 50 people rather than less than 50 people and many businesses deliberately stop growing under that threshold.  My guess is that the market is again relatively bigger in Europe than America. Just because there are more potential customers.

In all cases it leads me to the conclusion that Xero has focussed its energy wrongly (on trying to grow in America) rather than going to countries where it is a natural fit.

Done well though I think there are 25 million customers out there to win. Whether they can do it - that is yet to be seen.



  1. John
    I have been a Xero acccounting convert. It is the best by miles. Again it wins in (non us) high wage countries as eliminates the bookkeepers key punching. Haven’t bought as an investor as too expensive for my value tastes. I have had this so wrong over time with csl, cochlear, Amzn etc. this has cost me a lot of money. 2 further things ... the company it has bought reads emailed invoices (more key punching gone). 2nd it has an accountants product (replacing sage) that it is rolling out - that is awesome - tax compliance and financial reporting etc. They will have an ecosystem ... accountant / link to bank / read invoice / lodge with tax office / prove sales for bank finance ... plus your AI / tax tables / asset register etc. obviously execution but believe they are a massive buy ... sell MYOB. Tim

  2. Thanks for the post. Excellent timing from my perspective since I was just debating the merits of Sage vs Xero for my ManCo.

  3. Very glad to see John firing on all cylinders after what seems like a long break.

    I regard the leading forum for accountants in the UK as being Accounting Web. Here are some relevant threads:

    My only personal comment is that I have seen at first hand what a load of c**p Sage has become. I do not know if they can rescue it. Here is the argument that it can be rescued:

  4. How do they get the market share you envision with the competition? Cloud accounting seems like a crowded marketplace (Intuit, Fresh books, QuickBooks, Wave), and others here are also taking the platform approach of hosting apps for flexibility.
    Will be particularly tough for Xero especially with Intuit, or well funded private companies looking to gain market share at a loss.
    Let me know your thoughts

  5. I am a software engineer. I'm 45. I'm pretty good - I've just finished six months work and now I'm taking three years off.

    I've done no work of my own with what's called "AI", but I know how it works (it is in fact simply a classification method, and the main problem with it is that you have no clue how it comes out with the answers it produces; you get an answer, but you do not get the reasoning, so it's not actually an expert system - they give both).

    I know almost nothing about accounting.

    AIs start when new being like babies - blank pages. You begin feeding them data, they begin to be able to classify, you can then feed them new data and say "please tell me what catagory this new data falls into".

    Problem is, the character and nature of the input may change over time. If this happens, an "AI" trained on earlier data gives wrong or increasingly wrong answers. (I.e. new tax law is implemented.)

    So you then need to train up a new AI.

    The more you train an AI, the harder it becomes for it to learn new associations; the earlier associations tend to dominate.

    So you basically build up your data set, accumulating over time, then divide it up into the data you want to feed new AIs, which you're doing pretty constantly, feed it to them, and then if they seem to be doing a good job, you roll them out to end users.

    You need new incoming data to catch new transaction types - but I think the 80/20 rule rather applies. Once you have a reasonable amount of data, you're catching a really large proportion of transactions in the AI, just because power law.

    There is a diminishing return beyond that point of having more data or even *lots* more data - it just doesn't change things much for the end users. It might be a bit of a difference but I don't expect it to be much of a difference.

    (Thanks for the blog. Been reading for years. Hope to swing by Oz in the next six months or so, might knock on your door and say hi if there's form.)

  6. A recent US court decision requires the collection of state sales tax for out-of-state internet purchases. So, for example, an internet retailer in New York would have to pay California sales tax on an internet sale delivered to a CA address. While not a VAT, this creates a new administrative burden, particularly for small business. In fact, US analysts have opined that this is a big advantage for the likes of Amazon et al. If Xero solves this problem for small businesses, it may have a future in the US in less time than you think.

  7. Dear John,

    I wondered how you come up with the average revenue per client per year of 400 USD? According to the latest Annual the ARPU/m was 29,6NZD in ANZ and 28,2 NZD international - which is way below the 400 USD number.

    And why are the sole traders not relevant in the number of target businesses in the US?

  8. I can see the long term growth prospect of Xero and accept it is a good product, BUT it is today trading on a 100x PE of forecast 2020 EPS. 40c vs $43. So, is there a better way to invest that money before the earnings forecasts are verified? That's the real question IMO.

  9. I'm in a small business using Xero.

    It has a number of (lack of) features that drive me crazy. Simple thing's I'd expect in a business process. For example - when I receive a purchase order there are a bunch of thigns that flow from that (order on my supplier for example). THERE IS NO WAY TO LINK THESE UP. I use printed orders and hand-written notes in old fashioned (cardboard) folders.

    There are many other cases where I want to do something I think is obvious, and a search on the Xero community forums reveals that (1) all dates are removed so we can't see how long the complaints have been going on; and (2) Whilst they know, Xero are ignoring a huge number of requests. Don't even get me started on the INABILITY to generate a delivery note!!!! Something I think should be bleedin obvious.

    Now that all might be limited by cash flow but Xero seem to be putting a lot of effort into things that might be big one day, and not a lot into things that they get a lot of complaints about.

    Most of those complaints can be dealt with using exotic manual procedures, but it all lives in my head or I have to write a long "process instruction" in order to communicate the weird way we have to work around the lousy software package.

    Finally for all its wonderousness (gee I can see the accounts from anywhere... yes that is nice), its jolly annoying when bank feeds fail, or menus disappear so I cant generate an invoice that MUST be out today. And then cloudy delays where its all soooooo slow. Doing one invoice, slow is a big whoopy-do. But doing 20 bills / expense claims one after another becomes painfully painfully slow. Yeah its great I don't have to install this on a local server (but that's cheaper in the long run). The cost of watching the internet hourglass are not taken into account and are substantial.

    Yeah the world is going cloudy. Maybe Xero will be the winner that takes all. Is it really progress when there are things it can't do and seems no willingness to do? Is it really progress when its so damn slow, or the system is only partly functional for hours? It reminds me of the bad old days when the "mainframe" was down.

  10. Wow Bronte posting about a tech stock, and a revenue growth story to boot. Who would have thought. But jokes aside, I do like the thesis and was actually just thinking how crazy is it that INTU is trading at 40x (though proabbly more like 25x CF). MS recently came out with a report on Xero too, for US investors.

    For all the value investors (myself included) you missed the recent tech bull market bc using backward looking valuation models is simply inappropriate for game changing technology. A cheery picked example I know, but look at AAPL. In the early 2000's it was expensive, not it is cheap. Same with FB. Why are ppl buying today at 170 when they could have bought last year or 2 years ago much lower? bc they didnt realize the earnings power these software companies have once they get rolling. Xro, from what I see is like SHOP, trying to build a platform. If successful the financials can eventually back up the valuation

    Regarding AI and the earlier comment, yes lots of AI uses vast amounts of training data (especially deep learning) which can be problematic if there are step changes in the data/rules etc. But having AI as an integral component of your software/organization is not just about the results, its about the processes, ppl in place to make it. Like all software its constantly being updated etc. Plus you have lots of advances in NLP which may be able to bypass some of the learning from data sets and go straight to rule creation.

  11. John, I think you focus too much on the number of endpoints and not enough on increasing the value of the endpoints. If the AI advantage is as significant as you predict you're describing a situation where certain small businesses can potentially replace an entire headcount (or more depending on size) with the platform. In fact businesses on the larger side of SB (like in the states) benefit the most from this type of product and presumably would be willing to pay more for it. What is the cost of the Oracle solution you alluded to?

  12. RE: Nicfu, AI doesnt replace entire headcount, certainly not for most jobs. What it does is streamline the workflow, save you time and effort for simple things etc. Take driving a car, first you had power steering, then ABS, now autonomous driving (powered by AI). But if the car is just a solution to get you from point A to point B, autonomous driving doesnt erase that need, it just makes it easier to achieve.

    For accounting software, it will save users time and effort.

    Oracle/SAP and all enterprise software start at hundreds of thousands of dollars and require big integrations. Plus most ppl using them hate it but once you have it entrenched its almost impossible to leave.

    AI is just about using data in a smart way. Most of it is open source. Its how you use AI that gives you the advantage. Build a culture around data, etc. Check out andrew ng is you are interested to learn more

  13. I second the comment about sales tax and the USA. The court decision leaves open the possibility that every small town , county, state levies their own obtuse ( and usually politically self serving) tax structures. The smaller US govt entities are so deeply underwater with pension plan debt they have no choice.
    Xero should pick a few states with a high Amazon volume ( NY, CA, CT etc) and get them coded up as a proof of concept. Then do a road show to the taxing authorities, outline the various sales tax models and and have them do the work to set up the static data. Add in the links to pay the state directly with whatever audit trail is needed and away you go.

  14. Re. your question about market size and potential small business relative to the goal of 25 million accounts, slide 31 from Xero’s 2015 Annual Meeting deck says there are 200 million small businesses worldwide:

  15. The market is in fact bigger. This Blog does not recognise the practice management market that Xero also targets:

    Will the cloud finish off the accounting software practice suite? Market players are reinvesting to fight entrants.

  16. I wonder whether this business will fall into the mental model of "Scale Economics Shared" Nick Sleep has discussed ( when referring to the Costco and Amazon model... i.e. as you gain scale and efficiency you lower prices to create a wider moat. Here in the US we've been using Quickbooks for a long time and they have created more packages based on complexity that has allowed many businesses like ours to lower the price we pay per month rather than increase it.

    While they likely will have pricing power with current customers, is it a better long-term move to raise prices or lower prices as they scale?

  17. John, great post, in this space you should check out Blackline, BL US. Working on strong new features for the US market. Very interesting space.

  18. Thanks for sharing your thoughts on the company. Why is 7x sales the right multiple? Current trading multiples can't be sufficient reason considering hot air in the sector.

  19. More interesting news from the UK - worth reading the comments about Xero after the article


  20. Does Square's launch of their payroll app change the outlook for all the incumbents in the SME payroll space ?

  21. I have been a follower of this blog for a long time and have a lot of respect for Bronte. But having the benefit of hindsight for three months, it occurs to me that the time when Bronte first "promoted" a growth tech stock, was the time when the stock peaked (for near term at least)

  22. This is a fantastic post which I keep re-reading and have seen repeatedly quoted by others on the Web (sometimes without attribution).

    Pointing out how Xero has mistakenly "wakened the only credible long-term competitor" in Intuit is proving ever more prescient.

    Based on figures from Intuit's investor day yesterday, QuickBooks Online has now caught up with Xero in UK, its 2nd largest market. QBO had 545k customers at Jul-19, up 78% year-on-year (up 84% in prior year), whereas Xero only had 463k at Mar-19, up 48% year-on-year. (On this growth rates it's unlikely Xero would have caught up in 4 months.)

    Sage is looking more and more doomed.

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  24. How do you think about sizing a position that is on the path to global dominance?