Xero Limited

Hi, everyone and thank you for joining us today for our briefing on Xero's financial and operating results for the year ended March 31, 2020. I'm Steve Vamos, Xero's CEO and I'm joined by our CFO, Kirsty Godfrey-Billy.

We come together in a time of increased uncertainty and social and economic challenges due to COVID-19. So, first up I want to send you my best wishes and hope to you and those who care about all safe and healthy.

On today's agenda, I'll cover our performance during the year before passing to Kirsty, who will run through the financial results in more detail. I'll then finish by covering our strategy and close with the outlook followed by Q&A.

Before I go over Xero's performance, I'd like to spend a few minutes explaining how Xero is responding to COVID-19. The environment has evolved quickly over the past couple of months and is being felt in every aspect of our lives.

This is particularly the case for our small business customers and advisors, being it bookkeepers, accountants and ecosystem partners who are facing significant pressure to adapt the way they operate. In addition to making sure our people are safe and effectively working from home, our focus has been and still is on supporting our customers and maintaining the quality and continuity of our 100% cloud-based products and services.

Moving to Slide 5, this highlights some of the actions we've taken over the last couple of months. We temporarily closed our Xero offices globally and we are now fully operational from our homes around the world.

Productivity remains high across our workforce and our engagement survey scores indicate that our people have adapted well to the new way of working. With the restrictions on travel and large scale in person events, we made the tough decision to cancel our Annual Xerocon event planned for September in Sydney.

As an alternative we're planning an online experience around that time and expect to be back with Xerocon Sydney in 2021. We also moved quickly to help our customers and partners meet their immediate needs for information and support through a number of initiatives.

We launched the business continuity hub on Xero Central with resources tightly to each region of the world. The hub includes content to provide help on business continuity planning, managing cash flow, live webinars, as well explaining how to access government support.

We established a dedicated customer response team that's available 24/7 to provide case-by-case support and guidance. We've always given customers flexibility and provide those who are facing hardship with options to downgrade, suspend or cancel their subscriptions.

When customers who suspend or ready to return the data is available, to them to pick up from where they left off. We've also prioritized product development in key areas, making changes in particular to simplify and automate the reporting and filing the financial data with government.

By leveraging existing integration with government bodies, we're helping our customers with the eligibility requirements for benefits and with accessing funds from stimulus packages. And Kirsty will provide more detail on the actions we've taken regarding our own financial resources and cost structure.

Slide 6 outlines what we're seeing in the market and what our customers are experiencing right now. You can see on the left-hand chart, subscriber login activity from January through to the end of April and with the exception of an expected dip in usage during the April Easter holiday period, overall usage levels across our markets remain stable.

This is an important indicator for us because we see our subscribers continuing to benefit from the trust inside Xero office. This also aligns with feedback we're getting from our accounting and bookkeeping partners that they are extremely busy helping clients at this time.

As I mentioned earlier, we've also been impressed with our - some of our customers have pivoted so quickly adopting digital models to change their way of doing business. One of my favorites is the event company Stage Kings, they responded to the increasing demand for work from home equipment by designing, producing and selling, self-assembly stand up desks.

At the headline level, we see indicators of accelerated interest and adoption of digital technology and different ways of working. Slide 7 summarizes our financial results for the year with COVID-19 falling late in the year, its impact on Xero's operating and financial performance for fiscal year '20 was modest.

Xero's growth over the past year drove a range of strong financial results for the year. Operating revenue increased by 30% in FY '20 to NZD718.2 million, 467,000 subscribers joined Xero over the past year taking subscriber numbers to just under 2.3 million.

Net profit after tax was positive for the full year for the first time at NZD3.3 million, while free cash flow was also firmly positive at NZD27.1 million, an increase of NZD20.7 million on the prior year. A 26% increase in subscribers, combined with a modest rise in ARPU or average revenue per user to just under NZD30 resulted in a 29% increase in annualized monthly recurring revenue to NZD820.6 million.

The impact of COVID-19 was felt in later stages of March, which will result in some drag on this measure. On Slide 8, we've broken our subscriber and revenue results down by region.

We monitor global cloud adoption rates closely and estimate that cloud accounting penetration remains at less than 20% globally, whilst Australia and New Zealand cloud penetration is well over 50%. It's important to remember they were still early in our journey and many small businesses around the world to yet to make use of cloud accounting.

Moving to Slide 9, across Australia and New Zealand subscriber numbers grew by 21% to exceed 1.3 million. AMRR for the region increased by 18% year-on-year.

Subscriber numbers in Australia increased by 188,000 over the year to 914,000, a 26% increase year-on-year. This outcome reflected a strong first half performance boosted by Single Touch Payroll which is accelerating the digitization of payroll compliance among small business employees across Australia.

Momentum in the second half was also good with the Australian business reporting its strongest ever second half level of subscriber additions. As Kirsty will discuss operating revenue Australia was impacted by currency headwinds climbing by 23% year-on-year to NZD320 million.

In New Zealand, net subscriber adds of 41,000 were down 18% on the prior year as the market reflects high levels of penetration. These additions saw subscriber numbers grow by 12% year-on-year to 392,000.

Our focus on ARPU growth in the form of product upsell and additional platform solution add-ons continue to contribute well to operating revenue, which increased by 19% year-on-year to NZD116 million exceeding NZD100 million for the first time. Our New Zealand go-to-market strategy Xero's engage more directly with small businesses through our nationwide roadshows resulting in more than 1500 small businesses attending our roadshows across New Zealand.

Moving to Slide 10 in international markets, collectively these regions grew subscribers by 32% year-on-year to just under 1 million subscribers. This reflects the growing geographic spread of our subscriber base.

In the UK, we saw the business deliver strong results against an uncertain economic backdrop and continued political uncertainty. In addition to disruption from COVID-19 impacted on the final weeks of the year.

UK subscriber numbers increased by 32% year-on-year, rising by 150,000 to 613,000. Net additions were consistent with the prior year which benefited to a greater extent from Making Tax Digital or MTD.

Revenue in the UK increased by 54% to NZD184 million. For the UK business, the deadline set by HMRC for the first wet phase of MTD are behind us.

We launched Xero Tax during the year and remain focused on the potential for future government initiatives driving greater need for digitized tech solutions for small business customers. In North America we made continued progress in FY '20 with subscriber numbers growing by 25% year-on-year to 241,000 and with net adds of 46,000 new subscribers.

Revenues increased by 25% to NZD55 million or 19% on a constant currency basis and North American team continues to focus on developing our partner channels to grow subscriptions. We estimate, we now have under 1.5 million small businesses connected with our accounting and bookkeeping partners.

Since we acquired Hubdoc in August 2018, our Canadian business become an important part of Xero. Canada is attractive market and represents a very good opportunity for us, given its size and current low levels of cloud accounting penetration.

The rest of world segment saw subscribers grow by 51% to 125,000, while revenues declined by 43% to NZD43 million. Performance was broad based with strong results in Hong Kong, Singapore and South Africa.

On Slide 11, you can see on the left-hand chart how our platform strategy continues to drive growth and change the composition of our revenue. Platform and other non-core accounting revenues accounted for 11% of total operating revenue in fiscal year '20, increasing from 9% in fiscal year '19.

On the right hand side of the slide, you will see how the components of our revenue have grown over the last year. Platform revenues grew 82% year-on-year and include add-ons such as expenses, projects, payroll and adjacent products like Hubdoc and financial transactions, which include invoice and bill payments.

As our business evolves, so will these new revenue streams in the way we present them to you in the future. Specifically, our decision to bundle Hubdoc for all our business addition subscribers around the world is a major step towards our vision of core free accounting and changes how our revenue composition is made up and therefore needs to be presented.

Going forward Hubdoc will be incorporated into our core accounting revenues. Turning to Slide 12 and a few key updates around products.

In H2, we accomplished two significant milestones with Hubdoc earnings to fall. Our two most recent acquisitions being successfully integrated into Xero and launched as key components of our mainstream offering.

With Hubdoc our customers now have the powerful data capture and machine learning capabilities, included in the Xero business addition in subscription. Late in 2018, we acquired Instafile in the UK to help us accelerate the development of our tech solution.

In FY '20, we formally launched the first phase of Xero Tax with a range of great new features at no extra cost to our UK partners. These changes make it much faster to prepare and submit returns.

We also prioritize the release of two great feature pilots in response to COVID-19. These are short-term cash flow and business snapshot and we're in the process of extending into all business addition customers.

We hope these features will help our customers at a time when cash flow visibility and insights are more important than ever. We're proud of the progress we've made and we are pleased to be named an industry leader by global market intelligence firm IDC.

Moving on to Slide 13, we believe Xero can continue to grow a role in helping customers receive payments, pay bills and get access to capital. We made a number of announcements in these areas over the last year.

On the receiving payments front, we announced worldwide agreements with Stripe and GoCardless as our partners. These partners along with many others we're working with offer contemporary features and functions with dial-up speed convenience and security of small business invoice payments.

When it comes to bill payments, we announced two key launches during the year. In Australia we received recognition alongside our partner NAB for an innovative bill payment solution.

In the UK, we launched a similar partnership with TransferWise to offer bank agnostic bill payments via our open banking. Automating bill payment processes using these tools really helps to simplify repetitive tasks, reduce the risk of human error and improve security.

Gaining access to capital is often fundamentals in the success of a small business. Xero partners offers a range of support throughout the lifecycle of the business from short-term working capital related options right through to more traditional long-term lending.

So with that, I conclude my business update and I'll pass over to Kirsty to provide you with insight on our fiscal year '20 financials.

Thanks, Steve. Hello, everyone.

I'm Kirsty Godfrey-Billy, Xero's CFO and I will now cover our financial results for FY '20 in more detail. Before I get to our FY '20 financial results, I would like to provide some detail on what we're doing to manage the business under the current circumstances.

While there has been some aging and lockdown measures in some parts of the world in recent days, because the 19 environment continues to create many unknowns. To consider the near and long-term impacts on the small business economy and Xero, we are evaluating a number of revenue scenarios for both the year ahead and thereafter.

These scenarios range from a severe downside outcome through so more stable performance. The high level inputs and assumptions used in our modeling are outlined on the left side of the slide.

Growth subscriber additions under each scenario are modeled using assumed macro conditions, as well as lead indicators external to Xero such as web traffic volume, trials, business closures and overtime the creation rate of new businesses. Subscription cancellations and other form of churn such as downgrading are modeled based on macro inputs, customer sentiment and other feedback indicators.

We have considered how we could recalibrate as spending and investment plans in line with the revenue scenarios, while still driving towards our strategic priorities. You will see on the right side of the slide, we show a breakdown of our expense base, which is based on our income statement disclosures, the majority of which are variable in nature.

We've taken many actions to manage our cost structure such as selective hiring arrangements, a pause in their compensation and vendor agreement reassessments. While our long-term strategy remains unchanged, we have undertaken some re-prioritization of our short-term investment and capital allocation decisions.

We've also ensured that our investment spend and products and technology can adapt under all scenarios so that Xero is in a strong position to perform well in the post-COVID-19 world. Now moving onto our FY '20 financial results on Slide 16.

With Xero's financial year ending in March, just as COVID-19 was starting to negatively impact the global economy, our FY '20 performance was only modestly impacted. Top line trends versus prior-year period remained strong, with annualized monthly recurring revenue or AMRR rising by 29% to NZD821 million.

The pace of AMRR growth seen in FY '20 is broadly consistent with the momentum seen in recent periods, but the result was impacted. We took the decision to defer a planned price rise in the majority of regions that was scheduled to take place in March.

Subscriber growth trends while also strong did slow somewhat in March with our UK business most affected. The source of the growth in AMRR were also consistent with what we have seen in recent periods, with more than half of the uplift in AMRR coming from our international segment, as our global model continues to scale.

As the right-hand chart shows, we delivered a good uplift and free cash flow which increased to just over NZD27 million. This is a rise of more than NZD20 million from the prior year.

This amount was equivalent to 3.8% of Xero's FY '20 operating revenues and reflects our continued efforts to scale the business, as well as some conservatism in spending as COVID-19 took hold. This positive free cash flow profile means we have the flexibility to continue deploying capital toward strategic investments and initiatives.

Our priority will remain to invest in preparing the business for growth. Moving to Slide 17, we show how cash generation in the period and other movements contributed to total liquid resources of NZD686 million.

This comprises cash and cash equivalents, short-term deposits, including proceeds from convertible notes and undrawn committed debt facilities. Operating cash flows increased by 46% versus the prior year to NZD167 million, well ahead of the EBITDA result for the year, an indicative of Xero's strong underlying monetization profile.

Investing cash flows increased to NZD240 million or 27% year-on-year, excluding M&A. Total cash and short-term deposits at 31st of March 2020 were NZD536 million.

Deducting our term debt liability of NZD425 million in respect of the USD300 million convertible notes issued last financial year, our net cash position at the end of FY '20 was NZD111 million. Our standby debt facility was refinanced with a three-year term and upsized by 50% the NZD150 million during the first half of the year.

As Steve and I've already mentioned, COVID-19 create uncertainty that is difficult to avoid. The cash we have on hand and additional liquidity we have access to combined with the businesses underlying capacity to generate free cash flows, provide comfort.

We remain committed to realizing our strategic ambitions [indiscernible] accordingly. This will be in the form of targeted acquisitions and investments that extend and enhance our small business platform and ecosystem.

It will also come through investment and product and technology development, we believe necessary to best position Xero for the post-COVID-19 economy. Moving now to our SaaS indicators.

On Slide 18, we show how lifetime value per subscriber and the total lifetime value of Xero's subscriber base has developed over the past year. Lifetime value or LTV is widely used across the business to track performance of value creation and a strategic decision making.

It is representative of the value created that is not captured elsewhere in our financial statements. Overall, LTV per subscriber was effectively flat over the year at NZD2,422, with increased gross margin and ARPU offset by some deterioration in June.

As was the case in the first half of the year, there were a couple of opposing trends that contributed to the ARPU outcome further worth revisiting. In Australia, we were able to introduce a new competitively priced payroll only product to maximize the opportunity from Single Touch Payroll.

STP still remains an attractive opportunity for us and take-up has been strong. The success about payroll only product in Australia resulted in a small shift in product mix and as a result, some downward movement on ARPU, which was further amplified by adverse currency movements.

The new connections we established with these Australian customers give us the potential to offer further value-added services in the future. ARPU headwinds in Australia were partially offset by further positive progress on ARPU through upselling cross-sell with New Zealand.

Internationally, ARPU trade [indiscernible] were positive on a constant currency basis, but markedly higher on a reported basis due to currency movements in the period. Churn deterioration slightly versus the prior year.

This was driven by stronger growth from our faster growing markets including all international markets in Australia. With the above movements and the positive move in gross margin, we saw a small increase in LTV per subscriber.

Subscriber numbers increased by 26%, taking total LTV added in the past 12 months to over NZD1.1 billion and our total LTV to just over NZD5.5 billion up 27% on the prior year. On Slide 19, I'd like to also provide detail on the SaaS metrics that the business has delivered.

CAC months indicate the time it takes for us to recover the upfront cost of acquiring a new subscriber through subscription payments. This increased slightly year-on-year from 13.6 months to 14 months, as higher growth markets increased this year of new subscriber additions in the period and LTV to CAC ratio of 5.8 remains a very strong indicator of the significant value created by adding a customer to the platform.

That means we've added almost NZD6 of lifetime value for every dollar we spend on CAC. This measure declined slightly year-on-year with segmental trend slightly based and international segment offset by small reduction in our Australia and New Zealand segment.

Turning to Slide 20, the strength of the underlying unit economics of our SaaS business model has increasingly flowed through our financial statements over the last few years. FY '20 segment contributions from both Australia and New Zealand and International segments were pleasingly positive for a full year period for the first time.

The Australian and New Zealand segment contribution grew by NZD53 million or 24% year-on-year, exceeding revenue trends and demonstrating our ongoing focus on operating discipline scale. Our international segment achieved a first time positive contribution margin for the full year.

This improved by NZD32 million over the year to reach NZD27 million which supported an increase in revenues of NZD88 million or 45%. This outcome was due to the realization of scale driven cost to serve efficiencies in greater sales and marketing spend leverage.

Moving to Slide 21, here we outline our summary income statement for the year showing year-on-year changes from FY '19. Operating revenue increased 30% in FY '20 to NZD718 million.

This was driven primarily by subscriber growth in all markets. Gross margin increased by 1.6 percentage points to 85.2%.

EBITDA on a reported basis was NZD138 million, which is a NZD65 million improvement on the prior year. The EBITDA margin of 19.2% improved by 6 percentage points versus the prior year or 2.8 percentage points excluding the impact of impairments.

This reflects the continuing benefits of scale and efficiency improvements, particularly on our cost to serve in sales and marketing line. We also reported significantly lower impairment charges which at NZD1.4 million for the full year with NZD17 million lower than the prior year.

I'm also pleased to highlight that we've reported a first full year accounting profit with a net profit after tax of NZD3.3 million. Now before I cover the three largest expense items on the next slide, I wanted to flag that we've undertaken some investment in G&A and areas such as Strategy and Corporate Development which added around a point to our G&A ratio over the year.

This additional spend is linked to our strategic priorities, building for global scale and innovation. Moving to Slide 22, as we've already stated, we saw positive contribution margin progress in both Australia and New Zealand and International segments.

This contributed to improvement in gross margin that can be seen in the first chart on the slide. The gross margin continued to gain from cost of - cost of served efficiencies and additional functionality that our cloud hosting provide - provider offers.

The increased use of self-served features and machine learning capabilities within our customer experience portal Xero Central, reduce the need to add headcount to support our growing customer base. In the next chart, you will see we have delivered further improvement in CAC efficiency.

CAC as a percentage of revenue reduced to 44% down from 45% in the prior year. Looking to product spend in the third chart as a percentage of revenue, product costs, including OpEx and CapEx increased slightly to 31%.

As Steve has outlined, we announced a number of great product initiatives during the year and the investment made was consistent with our preference from investing cash generated to drive long-term value. Looking beyond the COVID-19 environment, we anticipate the need to continue with our product and development plans, which could put pressure on associated efficiency ratios and decision scenarios.

We would be comfortable doing this if needed to position ourselves with great products and services for the opportunities that could emerge. So with that, I'll hand back to Steve to take you through an update on our strategy before the outlook and Q&A.

Thank you.

Well, thanks. Thanks, Kirsty and yes, I'll spend a couple of minutes now discussing our strategy.

Over the past 18 months we've invested to build capability and so really clearly outlined the initiatives required to achieve our longer-term ambitions. And we've done that as we reviewed our strategy with a 10-year lens, I'm really looking to the long term.

Slide 24 shows some of the key trends that inform our strategy. Cloud adoption across the small business community is increasing as businesses make more and more use of cloud-based tools in their day-to-day operations.

The continued digitization of tax and compliance is another strong trend around the world as governments move to software only forms of tax filing and record keeping and digital connections with business. This trend is evidenced by Single Touch Payroll in Australia, payday filing in New Zealand and making Tax Digital in the UK.

Innovation in the financial services sector is contributing to an accelerating shift to a cashless societies driven by workflow integrated high function payment platforms. New capital access models are emerging from both established lenders and fintechs.

And finally, post COVID-19 which we expect will accelerate the adoption of digital business and cloud platforms broadly across the small business sector. We're also observing interest from people who are concerned about their employment prospects now really considering starting their own business and these new businesses are more likely to be borne in or with support of cloud technology.

On Slide 25, we've outlined key elements of our strategy on the page. The three strategic priorities to capitalize on our opportunity and deliver on our vision to drive cloud accounting, grow the small business platform and to build Xero for global scale and continued innovation.

Featured on the page are our refreshed vision statement and values and our vision is to be the most trusted and insightful small business platform. It's one that motivates us and represents a unique position and characteristics of Xero.

We now have many of the foundations in place to execute that vision. Engaging our customers in Xero and ecosystem and workflows is key to building the customer data at the heart of Xero.

The vision also captures and emphasizes the importance of the trust our customers place in our platform as both the system of record and as an interface to other cloud-based services they use. Xero is a values driven organization, the five values on the slide may a lot through our people on a day-to-day basis, they guide the decisions we make and the actions we take.

Our strategic priorities haven't changed and at the highest level we don't expect them to for some time. Moving to Slide 26, we've outlined here is investment and the outcomes of support our strategic priorities for the use ahead.

The long-term areas of investment identified above include firstly, extending access and distribution to serve all small businesses. This means increasing our product reach to serve customers with less complex needs in new and more efficient ways, as well as developing new distribution models.

Secondly, serving small businesses with multilingual additions as we look to our longer-term aspirations to address a global customer base. And then thirdly addressing small business need outside of accounting and compliance by developing additional solutions and leveraging our ecosystem more strongly to meet small business operational needs.

And finally payments and helping our customers get access to capital. Before I conclude, I want to touch on social and environmental impact on Slide 27.

This important priority is something we have focused on developing featured more in recent results. Our program featured on this slide outlines the elements of our commitment to our people, diversity and inclusion, our community and the environment.

The onset of COVID-19 has seen an increased need for well-being and social support tools being available to our community. We responded with our Xero assistance program launched in New Zealand late in 2019 and our recently announced partnership with Beyond Blue in Australia.

At our last results in November, we announced that we had made a commitment to fully offset our carbon emissions each year starting an ongoing for fiscal year '19. In recent months, we also announced the funding of three internationally recognized environmental and conservation carbon offset projects.

Now moving to the outlook on Slide 28. While Xero has performed strongly in fiscal year '20, trading in the early stages of fiscal year '21 has been impacted by the COVID-19 environment.

The continued uncertainty surrounding COVID-19 means it would be speculative for us to say anything more at this time on its potential impact on our expected performance for fiscal year '21. Xero's ambition is to be a long-term oriented, high-growth business.

We continue to operate with disciplined cost management and targeted allocation of capital. This allows us to remain agile, so we can continue to innovate, invest, support our customers and respond to opportunities and changes in our operating environment.

Before I conclude, I want to acknowledge and thank the entire team across Xero for all their hard work in helping deliver the results we achieved in FY '20. I'd also like to thank all of you on the webcast and the phone for joining and listening in today.

I'll now hand back to the moderator for your question.

Thanks, Steve, Kristy. Just a couple of questions, I might start with - given the log in activities holding up reasonably well actually very well, the bulk of the customers still paying the subscriptions?

That's my first question.

You want me give both Rohan or let me go one at a time, I'm happy to take both.

Yes, sure. Well actually my second one was around the commentary on Single Touch Payroll and should we still expect that - are you still expecting that to remain a meaningful tailwind or thereabouts in the first half of '20 given the deadline is July that it could possibly be pushed out for SMEs replacement for employees?

Okay. Rohan, first of all, thanks for the questions.

In terms of log in activity, it is pleasing to see that holding up. I would suggest that at this stage in terms of giving more information about what we're seeing in the underlying revenue flows and payments from customers, we'd - we're not going to provide more information at this stage.

We'll certainly see that flow through over the next six months, but I wouldn't associate the two things together is probably my response there. The second thing in terms of STP, there probably is a little bit more of an effect of STP through this half, but certainly we see that the, the bulk of that particular initiative is more behind us.

Thanks, Steve.

Thanks.

Yes, hi, Steve and Kirsty. Thank you for my questions.

I just got a question, one on subscriber growth and another one on discounting and pricing. With the subscriber growth numbers, you did mention it's slowing at the end of March.

I'm just trying to get a sense, has that slowdown accelerated into April, I mean, I just noticed overnight that stage came out with their results and they said that their new customer acquisitions were roughly half the level they previously expected. And so I'm just trying to get a sense, you are saying that March has certainly slowed from a subscriber growth perspective, I'm just wondering what's happened into April?

Hey, Garry, we've provided the information with respect to March and at this stage we're not providing any further information on the specifics of one month into this fiscal year.

Yes, keep going. Sorry.

You can ask your question about discounting. Second question?

Yes. I just want to get a sense to further price rise in March across most of your regions.

One, what was the planned rise? And secondly, you've said it's just for your business addition subscribers, I'm just trying to get a sense of what percentage of subscribers of business addition?

Yes, we have one - I'm happy to tell you that the price rise was NZD2 for business addition subscriptions, it wasn't in all markets. And in terms of that second part of your question, I wanted - I'm not going to provide further information other than what we got just told you.

No trouble, last one just in terms of the competitive set talking around - they're currently providing some really big discounts 50% to 70% type discounts for new customers, I know to date that you certainly have not decreased prices, given the I guess increasingly fragile small to medium environment - business environment, is that an option 402 to adjust the price leader if needed?

Look, Garry, I think we definitely do see the opportunity to promote and run promotions. We do that from time to time in our markets and that's something we're always considering and open to depending on the market circumstances and the programs we have in place.

So that isn't something that we don't do and it's not something that I would rule out going forward, that's promotional - promotional discounts is what I'm talking about.

Thank you. No further questions.

Thanks, Garry.

Hey guys, so just the first one. In terms of your cash flow sort of planning, 3% of revenue yield for free cash flow was probably a little bit ahead of where all was at - I sort of interpreted your prior comments about managing a bit closer to just breakeven.

And so I just wondered what forgetting about the bad environment we're in for a second, but just on a more normal circumstances, is that - is that sort of the level that you guys were planning to manage towards or is this sort of a little bit bolstered by some cost initiatives? Yes, maybe if you can talk through that?

So last year within our outlook statement we said that we would have a similar percentage than the previous periods and so therefore being still sort of low single-digit, that is absolutely within the outlook. What we did though was and what I sort of referenced within the script, when we saw COVID-19 emerging, we did run a number of different revenue scenarios and then looked at the cost base associated with those different revenue scenarios.

And so therefore based on sort of a conservative approach, we're able to pull back a small amount of spend towards the financial year to ensure that we really started this financial year with a strong balance sheet, we were able to also talk you through.

Okay, and just one other one for me on Making Tax Digital. So it looks like the initial release of Xero Tax is largely focused around the VAT compliance and originally with Making Tax Digital there - there was like lot of stages that sort of meant that you had to use an API and sort of bridging software and then eventually that you had to do corporate tax filings as well electronically instead of manually.

Just wondering if you could talk us through a little bit about sort of the - your expected time horizon for sort of launching those capabilities and I know the legislative time frame that sort of disappeared for now, but just your own planning around that?

Yes, just - I think just to clarify, so Making Tax Digital was all about VAT and we had a number of initiatives, product initiatives ready for that and we executed on that. When you look at UK tax in from a Xero context, that is slightly different, the sense that it's focused on tax filing in account preparation for corporations.

And there is other opportunities for us to extend that into - I'd also add, by the way, it includes income tax for micro entities, but we'll go further with that and - but the two different they're not necessarily aimed at UK, the UK tax offering is not sustained that via at MTD, it goes beyond VAT into corporate tax, tax finally and account preparation for corporations. So they had different - a different focus.

And then, also, it enables us to be ready for Phase II of Making Tax Digital…

Correct.

In the future.

Yes. So we expect Making Tax Digital to evolve from VAT into other areas and by having the UK tech solutions we have, we are ready for those.

Okay, that's it from me. Thanks a lot guys.

Thanks.

Thanks, Paul.

Good morning. Good morning.

Hi, Steve. Hi, Kirsty.

I just had two questions. Steve, you made an interesting comment saying that UK was sort of impacted in March, but and my read is maybe Australia-New Zealand was not.

So I was just wondering what are you seeing that is kind of different in Australia and New Zealand, are we doing better in Australia and New Zealand. Is there something going on special kind of thing in the SME space?

And then my second question is you're in quite a good position because company is free cash flow positive, you have cash, good cash on the book. How are you thinking about OpEx over the next kind of six months, do you see yourself investing to try and develop the product, increase competitive differentiation, gain market share or do you think you'll sort of flat line the cost because the macro is uncertain?

Thanks.

Yes, Sameer, let me take - let me take the second one in terms of our investment. Now the principles behind that are always to ensure that what we're investing is going to support our strategy and we've - we haven't shifted dramatically from how we view that.

Now, what we generate we should earmark for investment back into the business and that's what we continue to do. And we obviously, we've got a long-term view of the opportunity here.

And so we continue to do that. We haven't shifted our overall approach to our levels of investment at all.

In terms of the subscription growth, my comments were more broad broadly based than UK, but the UK specifically in March is year-end. So it's a busy time of year in the UK.

And so that's why the impact, I think in probably Kirsty remarks was more referenced. But my comments in my part of this presentation refer more broadly to our business.

Is it just on that - on that investment, if you - do you think you will keep a similar pace as last year or do you think you know -

So I think, Sameer, so I suppose what we've done as always trying to articulate with what, we have a variety of different revenue scenarios and we do have a variety of different cost basis attached to those different revenue scenarios. So as we save from both the macro indicators and also our own lead and lag indicators at the end allows us to be able to marry into the right cost base based on where we think the top line will go.

So really it is - it is going to be an agile year when we manage our cost base incredibly, carefully based on where we see - where we see the business going ultimately. But then also on the other side, it is really important as Steve and I both have been saying that we do ensure that we continue those investments in the strategic priorities to ensure that win whatever the situation is for the world and COVID-19 at the end of that, that we have positioned ourselves in the best way possible based on the big unknown.

If I can just ask one final follow-up. Do you think this is - next 12 months is kind of environment where you may think about launching in a new market or do you think kind of tough and it kind of doesn't make sense to - I know you're doing things in Canada, but outside of sort of Canada, do you think this is the sort of environment where you may decide you want to go into one of the other markets, Continental Europe, Mexico?

We - it's important, remember essentially year two in Canada, South Africa and Hong Kong. So it's not that long ago we entered new markets.

So we're always thinking about it, but also appreciate the fact that we've recently expanded into new markets and I'll be thoughtful about going into new markets at the right time.

Okay, thank you.

Hi, morning. Just a few questions for me.

First one, on your strategic investment slide, you mentioned that you're planning to launch multi label versions of the software. Can you give us a sense of when that's [indiscernible] in terms of the tunnel - in terms of the tunnel which countries are you targeting?

Yes. Look, I think the point I wanted to make was in the context of our strategy and looking at the long-term opportunities, that is something we are keen and committed to address.

In terms of the exact timing, we haven't got anything to say today, we've got a number of approaches that we are looking through there and just wanted to flag that it is something, it is an important priority for us in the context of our strategy, but nothing - nothing to really say about that today.

Okay, all right. And my second question is on the - the gross margin, so it well - for the full year versus the - versus FY '19, but I noticed that in the second half, the gross margin percentage went down in the second half, even compared to the prior half or the PCP, I'm just wondering why that was the case?

So, I mean we - well, we ended the year at 85.2 and we've had 85.2 at the half. And I think you know that was through what we had been driving through ensuring that we had efficiencies from AWS and then also with what we did with Xero Central.

And so we were, as I said at the half really, really pleased to hit over 85, it had been an aspiration of ours for a number of - a number of years. And so we'll continue to look at any ways that we can continue to build on those efficiency gains, but obviously we are phasing into uncertain times.

And so we'll deliver saying that we can, but I feel that way we have got to a good healthy position with our margin.

Thank you.

Thanks, Roger.

Thanks, Roger.

Thank you. I have three questions, just the first one on the AMRR growth right flagging that is impacted by the delay in the price increase, can you just help us quantify what - because you're giving Hubdoc for free now, it's included in the main plan, how much of that was because of Hubdoc towards the end of the year?

Well, the decision to the further price increase was a significant part of the - let's say, impact of COVID-19 because we create an environment where we felt that we were best and not to move at the time we plan to. And in terms of the actual impact of that, I don't think that I'm not sure that we are in a position to specifically release it today.

So - yes. Essentially, I mean the price wise was $2 per business addition sub, not in all markets, but the exact value of how that would have contributed to AMRR is not something that we will talk about today.

Sure. And so you're just confirming though that Hubdoc the fact that it was given, it's included now in the base plan would have had been a negative impact and that you are not increasing the price, just confirming that?

It is a fact that we didn't increase price definitely had a negative impact on AMRR.

Okay. Secondly, just - so, Kirsty, just on the cost outlook, appreciate that you're working with different scenarios, at least as we stand today, if you could just help us guide, you're saying you'll continue to invest in - on the product side.

So the percentage of revenue could increase, but given that you are looking at unit metrics and the CAC economics, should you just assume that you will pull back on advertising and marketing that on the sales and marketing line, is that how we should think about it as we stand?

So - so I suppose it just depends on which scenario you're looking at, because you pivot your cost base depending on what you think your revenue outlook is going to be for that year and whether or not you know you feel that you need to invest CAC to drive growth in the business or whether or not you want to pivot towards product. So I think that you know the statements that we are saying, we are able to pivot our variable cost base depending on whatever revenue scenario, we believe it is where we will be tracking for the year.

But and also doing that, we are very keen to continue to invest in the strategic priorities that we have within our business and they are primarily around product priorities. And so we want to be able to do that if we can within these uncertain times and then look to use CAC as a very variable component based on where we think our revenue scenario will end up.

Okay, sure. And just last one, Steve, just on, I mean, you did touch on multi-lingual, is there any precursor that you need.

I mean, for example, for instance, does your platform need a [indiscernible] to support multi-lingual, how do you think about it and how you are [indiscernible]?

Yes, there is a whole range of factors and one element of a multi-lingual approach and there are many potential pathways. But one element of that is to make sure that the platform is easily localizable on a repeated basis rather than doing one-off, let's say one-off approaches.

So in the work that we do in investing in our technology platforms, that's certainly a consideration of the work we've got underway at this time. And - but there were some other thoughts and ideas that we have that and we're also exploring and investing in.

So, but that is one of the - definitely one of the factors, but going to market in a new market involves a lot more than having the product and those are other considerations we need to keep in mind.

For sure. All right, thanks for taking my questions.

Hey, guys. Thanks for the questions, I just have three please.

Just if - I want to ask a question about the - what you've been observing from your customers cash flow. So you know based on your estimated cash flow is like how would you categorize the health of your customers and what could be made for business Closure.

The second question just on the - a quick one on platform revenues. Could you split out the contributions of the revenue growth there particularly just hitting in payroll and payments there.

And then the third question, just on the M&A, you've obviously spoken about in the past, obviously, a surprise actually that you haven't done anything material following that convertible issue back a couple of years ago, but I guess could you talk about your views on M&A and if it's changed given you obviously have access or fair bit of liquidity and a strong share price if you need additional funding? Thanks.

Okay. Maybe I'll start from the bottom, on the M&A question.

Look, we're really pleased with the fact that two - two acquisitions we made just over 18 months ago and now integrated in the core offering to our customers. We have significantly invested to build capability there with our corporate development team and our strategy teams and we're doing a lot of work.

And it's a process where we are exploring a range of different opportunities that align with our strategic plan and thoughts about potential growth - growth vectors of the business. And when we find - you'll certainly be - you'll certainly know straight away as soon as, as we have something to announce there.

We have active and definitely engaged, but these things are a process and we are following a process and responsible process to make sure that we make the right decisions going forward. On the breakout of specific elements, the detail around the makeup of our adjacent revenues is provided on that slide.

We don't really go further than that. So that is important.

And certainly that will evolve, as I said in my remarks that one of the challenges here is that as we go forward, we are going to change the way we package and bundle and from time to time that will mean changes to the way that we report. And finally, look, it's - we've really only got one month of - of this environment of one full month of this environment under our belt and it's too early.

We - we obviously do have data that we can go and analyze, but at this point, the analysis of that information is early stage and we wouldn't - we haven't decided to make that public anyway. So we obviously have those indicators to have a look at and they are rate, but certainly at this particular time where it's so uncertain.

Again, I wouldn't take that much from what happened in April, because the environment we're operating in is going to change frequently on a number of fronts over the next few months.

Okay, great, thanks.

Thanks, Tom.

Hi guys. First question is just on the NZD3.6 million income - on the income and expenses on the income statement.

I was just hoping to clarify what that relates to? And secondly, on slide 11, some of the growth rate, so the growth rate for work flow max and the non-recurring revenue looks a bit strange relative to last year's slide, has there been a change there at all?

Sorry, slide, you were talking about the breakdown of the ecosystem, the adjusted revenue streams is that?

Yes, that's right, yes. So, if you calculate the workflow max revenue based on the left hand side of the slide, the growth rate doesn't seem to tally with the growth rate on the right hand side of the slide?

Similar for non-recurring as well?

Okay. We're just…

We're just having a quick look.

What are the results - we can come back on this? The second I think it's rounding maybe is the challenge, the NZD2.6 million is really around gains and losses on a mark-to-market gains and losses on an FX.

Right, okay. Because I think a sort of a figure where you excluded the impacts of the impairment, but it seems as though that NZD2.6 million has been left in, so a lot of the underlying figures.

I just wanted to clarify is that corrected and just, thank you.

Yes, so the asset impairment is a completely separate line item, the one above it. So the asset impairment is around development that we have [indiscernible] through the year.

And so it has substantially decreased because we did have that large impairments in the previous financial year, but what I give is full and then the next line down the other income and expenses is really just the market - mark-to-market gains and losses of FX and so it's a complete growth line item.

Sure. Just one final one, just on the Corporate Development and Strategy teams, just curious to know a couple of things, just what the headcount - total headcount is there now and also what their primary focus is going to be going forward?

Yes, look, we won't talk about head count numbers that specifically, but the focus there is - there is a lot of work to be done in the strategy function of Xero and it's a function that we've invested to support a business that is like ours going global and global scale. And that team also includes our corporate development team that are looking at and scanning opportunities, qualifying opportunities with respect to potential acquisitions.

So and we think it's an appropriate level and perhaps to some extent, it's an area where we believe given our strategy and the opportunities going forward, it's one we're having that extra muscles going to make a big difference going forward.

Okay, thanks guys.

Thanks, Gareth.

Just question on, first of all, in your presentation you talked about UK being the most impacted. Just wondering if you could tell me who the least was and maybe how we should think about the delta between the most impacted and the least?

So, coming around the UK as Steve was saying before was just really with regard to the fact that it is the busiest time for the UK leading up into tax season. And so, therefore, on the whole, generally, they have a really strong finish to the second half.

So that was - that was the statement. We're not going to disclose which was least impact you know there was - there was obviously different, different levels of COVID-19 impact across the globe at that stage, but we're certainly not going to give you disclosure at that level.

Okay, thanks. And then just another thing in your annual report, you said sort of as part of your COVID response you're going to improve small business supply payment to 10 days.

What was it before and also roughly what proportion of your supply base are small businesses?

So, we moved from standard terms of try to small - from small business. So, depending on which region, so for example New Zealand would be 20th of the next month and Australia would be the end of the month.

So basically, we were moving from standard turns down to 10 days and depending on the cost description would depend on whether or not we - the level of small businesses involved in that business.

Yes, okay. And just the second part of that question, what proportion of small businesses make up the supply base, is that a big part?

Yes, we're not - so uncertain - I'm not going to break that down, but I think what you could do is maybe look at Note 5 within the financial statements and that's got a good breakdown of the cost base and have a look through it, you've got people cost, you've got AWS cost obviously sitting there and then from there you'd be able to maybe make some judgment on the number that could be small businesses and therefore what they could do with that, with our cash flow, but most of our cost base as you'll see from about five people or platform is another one that's up there.

Okay, great. And then just another question on your cost split, roughly mirror that sort of the general economies of the regions that you operate in or if not are there particularly - particular industries which your overall under indexed on?

Yes look broadly - broadly, yes, they do mirror the economies we operate in.

Yes, okay. And then just on the UK, just last question from me, is your understanding that you are number one in the UK or is that now intuit there?

Look, we - we are very happy with the business we have in UK and comparisons are always very challenging. When you look at the difference between us and our competitors, you look at the difference in our ARPU's, our churn rates.

So we're very happy with the position we have in the business we have.

Okay. Yes.

I guess my question was just around the UK and whether I guess is the aim there to be sort of number one or is it kind of similar to the US where we're thinking maybe a solid second place is a very good outcome there?

So our overwhelming objective is to make sure that we are serving our customers in each of our markets in the best way we possibly can. And ultimately the everything else follows that is the reward we get for doing so.

So, we're not oriented way, we're very much oriented to really meeting the needs of our customers. And a lot of what we've talked about today demonstrates great progress in bringing more value to our customers through Hubdoc UK tax and many of the other innovations that are coming to Xero customers.

So that's really the orientation that we have.

And with 613,000 subs we're pretty happy.

Yes, right.

And we thank you [indiscernible]. We thank - thank you for that question.

That is the last of the questions today. We really appreciate you taking the time to join us today.

Thank you and I'm sure we'll be - we'd be talking, so thanks very much.