The recent straws on XRO have prompted this post. I sold Xero around the cap raise after being a v long-term holder.

Why Sell?

• I have no way of researching the US SME market—no ability to conduct on-the-ground customer research or evaluate “excitement” about the product. I have to rely on company reports and trust management on their progress and vision.
• The US is not one country and is not an easy place to penetrate. I personally think of the US as at least 10 different countries, more akin to a version of Europe. States and regions have their own laws, culture, and ways of doing business. This makes it tough for a business like Xero to establish a foothold, as every state requires a somewhat nuanced product.
• Intuit is established and entrenched. Is Xero’s product different enough or suitable for a niche that isn’t currently well served? Does Melio kickstart Xero? I have no idea.
• I also think Intuit will fight back if Xero starts making inroads in the US. The price war and advertising blitz that occurred in Australia around the time Xero entered the US, I admit is a long bow, but the timing was interesting.

My bias:

During its growth phase in Australia, Xero was a ridiculously easy company to research and to verify customer uptake. Non-financial SMEs “raved” about the product. It was easy to see why—the platform was intuitive compared to MYOB, and it made life much easier for SMEs whose bane of existence is paperwork.

There were many incidental moments that reinforced Xero as a strong platform. For example, a friend who runs a restaurant talking about the time-saving and accuracy from photographing invoices and having them auto-upload, or the first time a tradie pulled out their phone and sent an invoice on the spot.

So my question to the SM community is: how do you do on-the-ground style research to verify your US Xero investment case from afar?

Perhaps my bias and experience from holding XRO through the Australian growth phase is blinkering me.

I’m watching from the sidelines for now.

A few quick points I took away from the Q&A on today’s investor call, summarised in my words. (Presentation was a rehash of the results pdf)

-      No significant churn increase with recent price hikes, subscribers average 9.3 years

-      Investment into growth is still a key criteria. The de rating of tech stocks hasn’t changed the reinvesting revenue thesis.

-      Wage inflation has been considered with op expense budget

-      Competition, there has been no significant changes in the landscape. UK in particular sounds like a land grab with the impending digital compliance for small business pushing them towards digital/cloud solutions, currently 1/3 SME have migrated in the UK.

-      Pricing strategy focuses on adding value through new/additional components to improve ARPU

-      M&A comments, cultural fit with XRO noted as key consideration and management are happy with acquisitions integration to date.

Held IR