Year ended 31 March 2015 Xero Limited annual report 2015 Geoff Tippett and Ana Schwarz, Island Gelato // Xero customers Annual Report 2015 3–9 Chairman and Chief Executive’s Report 10–17 Management Commentary 18 Auditors’ Report 19–22 Financial Statements 23–43 Notes to the Financial Statements 44 Directors’ Responsibilities Statement 45–48 Corporate Governance 49–53 Disclosures Page 2 2015 annual report Performance highlights NZ$123.9M Total operating revenue, year ended 31 March 2015 // 77% growth. Total subscription revenue // 81% growth NZ$268.9M Cash and cash equivalents and short-term deposits at 31 March 2015 NZ$69.5M Net loss after tax, year ended 31 March 2015 475,000 Paying customers at 31 March 2015 NZ$159.3M Annualised committed monthly revenue at 31 March 2015 2015 annual report Page 3 Chairman and Chief Executive’s Report Dear shareholder Xero is the leading accounting software provider in its initial market of New Zealand. We have It has been another year of positive momentum demonstrated the ability to scale in this market for Xero. The Company delivered strong revenue by growing to more than 138,000 customers, and customer growth in all markets during the which represents a significant proportion of all 2015 financial year, while it invested significantly businesses in New Zealand. Large enterprises in building operational capability and capacity and Government are now connecting to the Xero for global growth at scale. We recruited and platform. Xero is the leading online accounting onboarded 403 new Xeros, resulting in 1,161 staff software in the very competitive Australian and in 20 offices globally at 31 March 2015. United Kingdom markets. Our newest geography, the United States, is now experiencing growth The Company’s global profile grew significantly. consistent with our expectations. In March 2015, Forbes ranked Xero as Number 1 on its list of Xero’s global growth potential attracted significant the World’s Most Innovative Growth Companies funding from venture capital investors. for both 2014 and 2015, and in October 2014, BRW named us the most innovative company The Company made global executive and regional in Australia. The Company was also recently management appointments to execute its growth awarded the 2015 Hi-Tech Company of the Year strategy, and a highly experienced SaaS finance at the New Zealand Hi-Tech Awards. and technology executive joined the Board. Xero expanded its strategic partnerships, including being selected as the strategic small business Highlights accounting platform by ‘Big Four’ and other large Xero generated operating revenue of global accounting brands in countries outside $123.9 million, up 77% on the previous year, Xero’s primary regions. and grew subscription revenue by 81% to Xero is the first comprehensive global cloud $120.9 million. Xero is used in over 180 countries accounting solution to exceed the breadth of by more than 475,000 customers. Last year functions offered by traditional packaged small more than $300 billion in transactions was business desktop software. Xero has proven processed by businesses on Xero. We believe its calibre as a global player in its three initial that these results make Xero one of the fastest- markets, and independent product reviews and growing software as a service (SaaS) companies awards continue to place Xero strongly against all in the world. competitors. In the past year Xero has delivered We’ll soon mark another Xero milestone as we pass more than 500 product updates at a rate of 500,000 customers, so we are well on our way to innovation that is difficult for current and future our vision of enabling millions of small businesses rivals to match. worldwide to thrive on beautiful software. Page 4 2015 annual report Operating revenue growth of 77% in the 2015 financial year, with 475,000 paying customers around the world at 31 March 2015. 2015 // 475,000 paying customers 2014 // 284,000 2013 // 157,000 2012 // 78,000 2011 // 36,000 2010 // 17,000 2009 // 5,000 2008 // 762 2007 // 20 2015 annual report Page 5 Investment and growth Investing for growth The global leadership team was boosted with the appointment of Andy Lark, Chief Marketing Officer, We are pursuing a growth agenda to become to drive global online, digital and marketing the long -term global leader in small business performance. Angus Norton joined as Chief software and achieve our vision of millions Product Officer, to lead the distributed product of small businesses growing on Xero. To progress design and development teams in Auckland, this goal, the Company has focused investment on Wellington, Melbourne, Canberra, San Francisco, its internal infrastructure, software, automation, and New York. and sales and marketing capabilities. Our new U.S. President, Russell Fujioka, brings a We invested to expand Xero’s services to existing wealth of experience in the US technology sector, customers, delivering payroll services in our four in particular in digital marketing and operational major markets. This included the acquisition of management of high-growth businesses, and is Seattle-based online payroll company Monchilla complemented by a world-class U.S. management to accelerate state filings in the U.S. team to scale operations and sales. Xero’s growth model is typical of most successful The global Xero team grew to 1,161, adding 403 global SaaS companies. Significant early employees to build critical mass around the globe. investment is required for customer acquisition Xero anticipates a slower rate of employee growth and product development to receive valuable, in FY2016. long-term, future revenue from our customers. Xero has already demonstrated the potential of these returns through the continued rapid growth Winning global firms in recurring revenues and a positive margin Xero values local partners in all its markets and contribution in our more mature New Zealand has more than 16,000 accounting and bookkeeping and Australian markets. Our investment in firms using Xero. Xero is working with global infrastructure and capability will allow us to accounting practices in each of its current markets. grow and scale the business to support millions We have seen an acceleration of winning global of customers globally, and create long-term firm deals, including KPMG UK and KPMG NZ in shareholder value. 2014. In April 2015, KPMG Singapore also became a platinum partner, signalling potential growth in the People Asia Pacific region. In May 2015, Xero announced a partnership with BDO in South Africa assisted The Board welcomed San Francisco based by the work done with BDO across Australia and technology finance executive, Graham Smith, as New Zealand. an independent non-executive Director. Graham, previously the CFO of Salesforce, adds further This is a clear signal of the globalisation of experience in scaling global SaaS businesses. accounting and the superiority of the Xero offering compared with desktop based incumbents. Xero strengthened its global leadership and U.S. management teams, and increased its product development and sales and marketing capabilities. As a fast-growing company with an increasing profile Xero continues to attract top talent throughout the business. Page 6 2015 annual report Regional operating revenue (NZ$000s) 2015 // 58,286 32,873 19,948 7,794 4,849 2014 // 29,297 24,010 10,429 3,589 2,672 2013 // 13,734 16,359 5,477 1,345 1,377 Australia New Zealand United Kingdom North America Rest of world 2015 annual report Page 7 Strategic alliances bookkeepers, and also improved small business productivity and cash flow management through Xero continues to enter strategic alliances with the delivery of payroll, inventory, invoicing and financial institutions that serve small businesses, quotes. Accountants and bookkeepers gained new accountants and bookkeepers. These relationships tools, such as sophisticated Practice-wide Reports streamline the flow of data, enhancing productivity and Tax in Australia. and lowering costs to business owners. Xero’s beautiful interface and features, coupled In New Zealand, the Xero Business Connect with mobility on all devices, place Xero ahead of programme has many of the largest enterprises, legacy accounting software solutions. Product connecting their customer systems to Xero development teams are now able to focus on to streamline transactions from transferring delivering breakaway functionality that will put invoices to insurance assessments, and allowing Xero at the centre of the emerging financial web them to build stronger digital relationships with for small businesses. their customers through Xero. Small business accounting is becoming the platform for Electronic The Company believes small business, financial Data Interchange at scale. advisory, and ecosystem partners are at the centre of our continued success. Our point of difference One of Xero’s key competitive advantages is the is actively engaging with and listening to feedback vast ecosystem of third-party solutions that from our customers, and supporting them through seamlessly integrate with the Xero platform, our innovative award-winning service and support allowing small businesses to adopt an integrated model. This enables Xero to provide beautiful, business solution tailored for their industries. innovative solutions that Xero customers need Xero continues to work closely with an ecosystem and love. of partners such as Square, Vend, ReceiptBank and ZenPayroll; there are now more than 400 ecosystem applications, up from 300 at 31 March Capital raised 2014. Over 20% of our Business Edition customers In March Xero’s global growth potential attracted use these add-on applications, and in our premium a further $147.2 million in funding from venture products the attach rate is 40%. capital investor Accel Partners, and existing shareholder Matrix Capital Management. Xero is Product development well positioned to accelerate growth and deliver at scale in the U.S., and is working hard to address and customer support the vast market unserved by any solution, as well Xero’s availability is best in class, with an uptime as those dissatisfied with legacy software.