Forum Topics XRO XRO Bear Case

Pinned straw:

Added one year ago

As a regular user of Xero (across several industries and entities) and someone who previously bought in RL based on a solid track record, my bear case is somewhat anecdotal, but… 

The thing I simply cannot get past is Xero’s apparent unwillingness to make their product better for users.

There are a lot of things to love about using Xero, including its quick deployment, flexibility, integration options and appeal to non-finance folk. As a finance person though, you quickly see that there are gaping holes in its capabilities which, frankly, should not exist in an accounting system designed to help with producing compliant financials for busy business owners. 

To name just a few basic things that Xero should do but doesn’t:

  • Let you revalue or impair a fixed asset. 
  • Provide a function for you to accrue annual leave and LSL on balance sheet without manual entries (very worrying as a payroll system) 
  • Facilitate smoothing of revenue (deferred revenue) - particularly worrying based on the number of SaaS businesses that are using Xero.


The result? A whole bunch of SMEs spitting out financials that don’t comply with accounting standards and require business owners to pay more in the form of advisors and external plug-ins than they should need to. (If they even realise they need to) 

Why this relevant to my divestment decision today (hence "Bear case" and not "Innuendo goes on a rant"):

  • There are heaps more things like the above which prevent Xero from being a great system that they are actively choosing to ignore - there are loads of (mostly unanswered) support & feature request threads going back years pointing them out. 
  • From a finance perspective I don't feel like there have been any meaningful changes/updates to Xero from a functionality and general UX perspective in ages.
  • Competitors are doing some of the basics a lot better, which I think helps to explain slow growth in jurisdictions with a heavier compliance focus (e.g. USA).


Ultimately I feel that Xero is ripe for disruption by a competitor who can bring rapid innovation (so much AI potential in this space) to the table and do the basics right. The SaaS/tech space - much of a market which Xero commands - is the perfect beach head for a new competitor because there is so much functionality that could be there which isn't.

I used to be of the opinion that Xero had a sizeable moat being that it can be cumbersome to change accounting systems. On reflection this doesn't carry as much weight for me anymore because:

  • By definition the bulk of Xero's customers tend not to have really complex accounting setups nor long histories of records kept
  • With technology available and a touch of customer care, a smart competitor could make the onboarding process nearly automatic.
  • SaaS users can be fickle in general and I could see some initial churn (following said disruption) gaining a lot of momentum.


Call me a cynic, but at the current valuation and in the absence of some real tangible product improvement, I can only see downside for Xero...

Disc: Held IRL but probably not for much longer.

actionman
Added one year ago

@innuendo Im still positive on Xero and agree with @harryd. There are many levers they could pull. A good example is Microsoft recently pushed through a 9% price increase to cloud enterprise customers in Australia. Theres not a lot customers can do about it.

Xero still seem to be increasing revenue and profit so the issues you point out may not be having such an impact and it may be best for them to focus on growth. In regards to switching to a competitor, it may not be as easy if you compare like-for-like including integrations to feeds and add ons.

SaaS vendors can spend significant amount of effort on security rather than bug fixes or new features so Xero may have to prioritise their effort away from seemingly obvious fixes. But as a user perspective I get your point, but it may make business sense.

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PeregrineCapital
Added one year ago

I use Xero and I think that despite it lacking some of the more technical feature as mentioned by innuendo, the software caters to it's target market pretty well (majority of users don't know what impairments or deferred revenue even is). It's also very, very user friendly.

That being said, whilst it would be a bit of a pain to switch systems, If Xero keep taking without giving users an improved product (like adding features mentioned) there is a point where I'd consider doing it, and it's at a price not that much higher than it is now. I've heard some rumbles of discontent but have heard no suggestions of viable competitors......yet.


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Strawman
Added one year ago

Xero enjoys a great 'trap door' moat -- very sticky product due to high switching costs (largely the cost of time and effort in this case). Another great example is enterprise software; just look at companies like SAP and Oracle, or Technology One (ASX:TNE) here at home.

So I agree @PeregrineCapital, its a huge pain to switch. Especially when business owners always have a thousand other more pressing issues to deal with. And that's why these companies also have great pricing power too, as @actionman alluded to.

(It's also why the banks hate the idea of portable account numbers)

Given all of that, competitors have tried to make switching a much more seamless experience. EG. Apple has an app for android users to easily switch from android. Chrome makes importing data from other browsers super easy. VOIP companies put a huge emphasis on portable phone numbers back in the day to overcome customer intransigence.

There's probably better examples, but you get the point. Switching in these areas is laughably easy nowadays, but I remember when it was a real hassle.

I note that Intuit uses a product called Dataswitcher to import from Xero to Quickbooks. It's not yet available in Australia from what I can tell, and the process seems fairly involved, but I'm wondering if such programs become better and more widespread over time?

ie. Could it be that in (i dunno) 5 years time switching between one accounting package to another, at least for a small business, is really just a matter of going through a 5 min guided process? And, if so, does this have a material impact on retention and pricing power?

And, of course, it goes both ways (xero uses JetConvert to import Quickbooks data).

I honestly don't know, and am just wondering aloud.

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Valueinvestor0909
Added one year ago

Just heard a podcast where someone gave advice not to get in between high quality compounders and also share his own experience selling PME, AD8 and ALU and how he feels about it rightnow...

In a hindsight so easy and in real time when you are in that situation so bloody hard...love it...

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thunderhead
Added one year ago

@Strawman was doing the same kind of lamenting with ALU and AD8 on the latest Motley Fool Money Pod :D

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Valueinvestor0909
Added one year ago

I actually meant him only. Wanted to see if he actually reads a comment or just puts thumbs up....seems like he hasn't noticed.

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Strawman
Added one year ago

oh i read it @Valueinvestor0909.. and had a little cry on the inside ;)

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thunderhead
Added one year ago

There, there...as someone who has done similar things with some of my positions, I can attest to how hard it can be to hold when the valuation gets well ahead of itself. You also tend to lament in the other direction when there are big drawdowns from clearly overvalued levels, so you just can't win!

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