Yeah I'm cynical on this one. but i do have an irrational dislike of it. looks like a product repricing strategy to me. the CEO (who i dont trust) made a comment that XRO product prices are well below the competition (for enterprise), and she seems intent on closing that. eating into consumer surplus over the ST/MT is very lucrative, and if customers have nowhere to go, why not hit them hard? The subs (which i note some fiddling in the numbers) and churn i would be looking at closely. it will take a lot to crack it, but she is having a go. When does the US$14m vest, ill have to check. no faith in the chair either, new CFO.......i did disclose I'm biased. :)

I use xero and to be honest a 10-15% annual price increase vs the cost of rooting around and switching to something similar to save a few $$ isn't with it when most of the accountants seem to prefer xero as well.

Another $10 / month vs 4-5 hours to switch plus the other associated pains. I think they have a lot of room to keep lobbing in healthy price rises.

A hard hit from xero is minor compared to insurance cost / public liability insurance rises etc.

Expensive SP wise though.

Disc not held IRL or strawman

Interesting perspectives @Strawman and @Solvetheriddle.

I agree with the point about the need for subscriber momentum and, because of that - the UK and North America are key, as ANZ is more mature. The +11% (US) and +12% (UK) level is not strong enough, and so pricing is making up the gap - for now. However, in both markets, I think there is the potential for subs growth to increase as the product set is built out in line with the 3x3 strategy. So that is on my "issues" list, and it does mean that at these levels, $XRO is not a very high conviction holding for me. Give me $215 today, and I'll take it. (I will do some more detailed work over the coming weeks to update my view on valuation from here.)

That said, subs growth in UK has edged up from +11% in FY24, to +12% in FY25. and in the US from +10% in FY24 to +11% in FY25. That's pretty impressive in the UK, where the economy and business confidence isn't in a good place. In North America, its more about competition, and I think $XRO is continuing to find its way in that market.

Which is why I was so mad at 1H to learn about the "long idle subscription" debacle, because this means that the historical numbers were actually over-stated. But seriously. it's a SaaS subscription business. Surely you know how many accounts are paying their subs? Any idle ones should be discounted from any metrics. So that was an orange flag for me, and if there is any further monkeying around on subs numbers, then that's a red flag for me, because it would indicate that the books are being cooked.

Anyway, back to subs - yes, that's one to watch, and I need to see that tick up in UK and USA otherwise it is going to be hard-to-impossible to sustain the 20%+ annual FCF growth I need. I'd ideally like to see both UK and US get in the 12% - 15% range. We'll see.

As for Sukhinder - I highly rate everything she's done. So far, there's not a foot wrong, and she seems to be running a tight ship from a capital allocation process. I hope her ambition exceeds pocketing a mere US$14m. But, I agree, one to watch.

It is good to get the challenging perspectives. I know I am suffering endowment bias with $XRO, as I have held it for most of the time since 9/9/2016, and until last year, it was my single biggest ASX wealth generator (in absolute terms), a crown wrested off it by $WTC ... but they're still running neck in neck.

@mikebrisy , fair enough. You could read my criticism and conclude that this is exactly why to invest in XRO. I could ultimately be right that pricing comes home to roost, but that could be a decline off a SP 2 or 3x higher than it is now. do you have Any views on where XRO sit versus INTU, MYOB Sage if they are the most relevant competitors? i had a look at the bundles/mixed pricing makes it hard for me to draw hard conclusions (INTU are known for taking price, is my info) if the whole industry raises prices together, then pricing is much less a risk to XRO. SP certainly incorporates no issues on the horizon.

The picture varies significantly by market.

In Australia its really just $XRO (50%), MYOB (30+%), Quickbooks (10%), and Sage (insignficant).

There is a long tail of others, but none has a significant market share. Different markets shares are estaimated in different sources. So, for example, some have $XRO as high as 60%, with MYOB down to 20-25%, and Quickbooks as high as 15%.

On pricing, $XRO and Quickbooks tend to follow each other. Again, I get some conflicting answers from different sources. RBC published the attached in their recent note, but if I look at the Qucikbooks site today, the premium plan after discounts expire is $100/month for up to 25 users (but with Payroll as an add-on), whereas the $XRO Premium Plan is showing $115/month restricted to 10 people for certain functions, but with payroll for 10 people included.

My sense is that $XRO and Quickbooks track each other quite closely in Australia

MYOB doesn't scale as well, incremental users see costs increase at a faster rate than $XRO or Quickbooks. The MYOB user experience is generally considered more clunky, and there are fewer integrations. (Xero 1000+, Quickbooks 750, MYOB 300 - but I have no idea how much of a differentiator that is!)

UK

Its a very different picture in the UK, where Sage is the market leader (c. 30% ) in its home market, $XRO (c. 25%) and Quickbooks (c. 20%). It is very much "game on" in the UK between $XRO and Quickbooks. $XRO was able to dominate MYOB in Australia almost unopposed 7-10 years ago. No so in the UK.

Both Quickbooks and Xero are growing market share at the expense of Sage ... Sage is looking more and more like MYOB was in Australia. It's market share has fallen from c. 40% 5 years ago. And that's because both Xero and Quickbooks positioned themselve to take advantage of the MTD (Making Tax Digital) initiative, which has driven cloud accounting adoption in the UK since 2019.

The UK looks to be getting carved up between Quickbooks and Xero. As the RBC analyss shows, Xero and Quickbooks are matching each other plan for plan, and pricing aggressively in the premium segment vs. Sage. (Although I think Sage is more fully featured for the premium clients ... not sure.)

The UK is also different from Australia in that there is a more significant tail of secondary players, so worth keeping a eye on them in case of any disruptive innovations.

Ultimately, I think we'll see Xero and Quickbooks controlling 60%+ of the market between them, and this should allow for "orderly" conduct on pricing. The top-3 could conceovably control 90% of the market before long.

USA

In the US Quickbook has around 80% market share, Sage is second with around 10% and Xero is a close 3rd. (Even in NZ, where $XRO started and dominates, its share is "only" 60%.) So Quickbooks really is the 800-lb gorilla in the US.

However, the US is an evolving story. For example, $XRO are still building the product stack in the US. Billing was only turned on last month.

And $INTU (Quickbooks) are a much bigger, diversified business. Will they have the same focus as $XRO on SME accounting?

Singificantly, @Mujo pointed out a few days ago that there is also a divergence in strategy emerging, with $INTU encouraging their SME customers to ditch their accountants and do it themselve, using their products like Turbotax. Now, maybe that is the way of the future, I don't know. But with $XRO fully focussed on winning accountants as their key customers and advocates, could this open a valuable niche in the US market? Even if it opened the door for $XRO to take the lead in as little as 25% of the US market, that would be bigger than Australia and UK combined.

The other thing to recognise is that the US is relatively immature in penetration of cloud accounting software. Whereas Australia is at around 80% and UK probably north of 70+% now (with MTD giving real impetus), the US is laging far behind at around 44%.

Conclusion

There is still a lot to play for in Xero's overseas expansion. Without doubt, CAC's will be a lot higher overseas and certainly USA and UK will be more competitive than Australia has been historically.

As long as Xero doesn't mis-step (e.g. big dumb acquisition) and continues to execute well, there is another 5+ years for this to play out IMO. The good news is that there is small number of leading players in each market - 3 in each case - controling around 75% - 80% of market share. And if that is maintained, then there is every chance that these markets will remain orderly from a pricing perspective, with the players able to exert significant pricing power.

So, I can see a path to Xero justifying its valuation on an ongoing basis. However, it is by no means a slam-dunk on risk-reward.

I have a wavering and lower level of conviction on $XRO compared with some of the my other quality holdings ($WTC, $TNE, $RMD, $BRG).I have been that way on $XRO for a while, and have even had some time when I sold out (c. $130, late-2021) only to buy back (c. $70, late 2022).

As you say, "SP incorporate no issues on the horizon", and therefore I'm being mindful of not having a bigger position size than current 6.5%.

@mikebrisy thanks very much, very comprehensive. Sounds like cosy oligopoly with competition on product features and bundling plans (which probably make comparisons difficult). XRO getting 25% of the US market would be a phenomenal effort, I suspect, judging by the US research i read, the INTU s/hs would be stunned at that result and it would go some way (maybe more than all the way) of justifying the SP. thanks again

Just read the latest GS note on the results (TP $205, BUY) and they seem to see the same flicker of hope in the US that I do.

Their 12m PT of $205 broadly consistent with my central case valuation of $175, given time value and expected c. 15-20% annual return.

Here's their summary verbatim, with my attention drawn to the first positive about US.

-------------------------------

GS Xero Ltd. (XRO.AX) FY25 result: Broad based strength; record US sub growth justifies ongoing investment; Buy

Xero reported FY25 Sales/EBIT that was +1%/+2% vs. GSe.

Key positives:

(1) The highlight was the stronger than expected International segment, with revenue/profit +2%/+6% vs. GSe, and North America delivering its strongest ever organic subscriber growth (+35k) despite Canada remaining subdued. We see this performance as an important data-point, that gives confidence to support Xero’s decision to increase its focus (and investment) in the US market, noting that although the NZ$45mn non-recurring expense will drop away - we expect this will be replaced by c.NZ$100mn+ p.a. of brand-building spend from FY27E, when XRO’s US product is GTM ready;

(2) We view commentary in the prepared remarks (1Y forward revenue typically NZ$150mn above AMRR) and inclusion of supporting information within the investor presentation as a strong signal of XRO’s confidence in FY26 revenue guidance of NZ$2.5bn+;

(3) Payment revenue growth was again strong in 2H, with TPV growth accelerating.

Key negatives:

(1) Although in-line with GSe, the FY26 opex guidance will likely drive downgrades to near-term consensus earnings:

(2) Given the specific guidance commentary, we expect 1H26 earnings growth to be impacted by a tougher revenue comparable, and a much greater opex ratio (i.e. we expect a > 600bps difference between 1H26/2H26 ratios); and (3) Tax rate higher than expected, as XRO invests in early stage businesses.

All in we revise FY26-27 EBIT by +4% to +3%, reflecting stronger revenue trends and associated opex (we lower FY26 expense ratio from 71.8% to 71.5%, and leave FY27E unchanged at 71%). Our 12m TP is +2% A$205.

Stay Buy, noting the 12mf EV/EBITDA is in line (+1%) vs. its 3Y avg, despite step-up in investment and promising international trends. 

To be clear, if I really thought they'd get 25% of US market, I'd be all in! Even 10% would be a great outcome.