Xero Limited 2020 Annual Report Cover images: Momentum Accounting, United States Orenda Tribe, United States Moovaz, Singapore Contents 2–3 4–6 7–12 Highlights Chair’s Review CEO’s Review 13–14 15–30 32–35 The Board Management Auditor’s of Directors Commentary Report 36–39 40–70 71–86 Financial Notes to the Corporate Statements Financial Governance Statements Statement 87–93 94–111 112 Disclosures Remuneration Corporate Report Directory Highlights OPERATING REVENUE FREE CASH FLOW $718.2 m $27.1 m Up 30% YOY Up $20.7m YOY NET PROFIT SUBSCRIBERS $3.3 m 2.285m Increase of $30.5 million YOY Up 467,000 YOY TOTAL AVAILABLE LIQUIDITY ANNUALISED MONTHLY RECURRING REVENUE $686.1 m Cash on hand, short-term deposits including $820.6 m proceeds from convertible notes, and undrawn Up 29% YOY committed debt facilities TOTAL SUBSCRIBER LIFETIME VALUE GROSS MARGIN PERCENTAGE $5.5 b 85.2 % Up $1.2 billion YOY Up 1.6 percentage points HIGHLIGHTS 3 A global Offset 100% ecosystem of of our carbon 800+ apps, emissions 200+ connections for FY19 and to financial services committed to providers remaining ‘net zero’ going forward SCALE OF THE PLATFORM Total value of transactions through Xero platform in FY20 at 31 March 2020 42% of Xero’s $3.62 t* employees Total value of invoices raised were female via Xero during FY20 Xero was one of 325 b global companies $853.2 included in the 2020 Bloomberg Gender- Equality Index *Incoming and outgoing transactions, 12-month period 4 Chair’s Review Dear shareholder Xero is a unique company - a digital disruptor, born in the Southern Hemisphere - that operates at the intersection of technology and finance, with the opportunity to serve the entire global small business economy. This past year as a director, I have come to fully many small businesses are facing financial hardship understand the vital role Xero plays in supporting and we have ensured, as has always been the case, small businesses, their advisors and communities that customers in distress are able to downgrade or around the world. Xero is becoming an integral part of suspend their subscriptions through this difficult time. the small business community and economies around The Xero leadership team has responded strongly the globe. to support our people, partners and small As COVID-19 impacts businesses and communities, business customers during the COVID-19 crisis. Xero is focused on supporting our customers and Our global teams are committed to upholding the maintaining the quality and continuity of our cloud- entrepreneurial spirit of Xero’s start-up heritage, while based products and services. Unquestionably, this is a building the capabilities and processes to support difficult time for many of our customers. a global technology company, and focusing on additional ways to support our customers. We have moved swiftly to develop and roll out a range of new support services for small business as well as for accountants and bookkeepers. We recognise XERO LIMITED 5 FY20 overview Risk management & security We are pleased to announce for the year ended Risk management has always been critical in our 31 March 2020 (FY20), Xero was able to maintain ability to execute our strategic and operational financial and operating performance momentum. priorities, but is even more important in challenging Xero delivered top-line growth, a first ever full-year times like this. From a governance perspective, the net profit after tax, and a positive free cash flow Board is closely monitoring Xero’s risk management result. This is testimony to the importance of the activities in light of COVID-19. Xero platform to the operations of our customers Security and data protection are central to our and partners. vision of being a trusted and insightful platform. We continue to invest and deliver improvements Xero is becoming an integral part of across data governance, security, scalability, and our the small business community and quality of service. We are committed to protecting economies around the globe our customers' information, educating the Xero community about best practice in online security, and ensuring guardrails are in place to safeguard data However, the impact of COVID-19 on March trading that flows through our platform. did result in some reduction in annualised monthly recurring revenue (AMRR) progress in that month. Board update This outcome, along with the ongoing COVID-19 On behalf of the Board and everyone at Xero we environment, will be reflected in Xero’s FY21 extend our sincere thanks to Graham Smith, our financial performance. Xero does not anticipate former Chair. Graham stepped down as Chair on 31 significant changes to its long-term strategy and we January and retired from the Board at the end of believe strongly in the value Xero can bring to small the financial year after supporting a smooth businesses and their advisors. Chair succession. We remain focused on building our community and During the financial year, we also farewelled Bill introducing small businesses to the benefits of Veghte from the Board after five years, and we thank doing business in the cloud and, for those already Bill for his dedicated service. using Xero, extending their activities beyond We welcomed Mark Cross to the Board as an cloud accounting. independent non-executive director on 1 April. Capital management Among his many strengths, Mark brings to Xero Xero had total available liquid resources of $686 considerable experience and expertise in corporate million at 31 March 2020. The US$300 million raised finance and financial markets. from the convertible notes issue in October 2018 Xero has an engaged and experienced Board of remains largely available to fund future investment Directors who are closely connected to the business. opportunities. Our standby $150 million debt facility It has been a pleasure to join this team, and I’d remains undrawn and is available for short-term like to acknowledge my fellow directors for their liquidity requirements should it be required. commitment and thoughtful counsel during the year. Our capital allocation framework remains focused Diversity & Inclusion on enabling the business to grow, both through We believe that healthy teams are diverse and organic opportunities and, where appropriate, inclusive. While there is always more to do, we through the pursuit of complementary targeted are proud that female representation on Xero’s acquisitions that we believe support the execution leadership team and across all our employees sits at of our strategic priorities. 42 percent. The Board set a measurable objective for FY20 to maintain a gender balance with at least three female directors and three male directors, which we have achieved and retain as an objective in FY21. 6 CHAIR’S REVIEW In FY20, we set and achieved numerical targets around representation of women on Xero’s leadership team and across our employees. These are expressed as a 40:40:20 approach – at least 40 percent women and 40 percent men, with the remaining 20 percent unspecified, to allow for flexibility and recognising that gender is not binary. We have also continued our efforts to ensure Xero is an inclusive work environment including initiatives such as LGBTQI+ inclusion, disability inclusion, cultural diversity, flexible working, and employee wellbeing. More information about our initiatives to support progress in this area is set out in the corporate governance statement (see page 71). Conclusion This year Xero has drawn together remuneration information in a consolidated remuneration report (see page 94). We will continue to evolve this report and we welcome your feedback. On behalf of the Board, I would like to thank our talented and passionate team of Xero people for their valuable contributions in FY20. Finally, I'd like to sincerely thank our customers, partners, and investors for your ongoing trust and confidence in Xero. David Thodey Xero Chair XERO LIMITED 7 CEO’s Review Dear shareholder There’s no doubt we are facing a time like no other as COVID-19 impacts each of us, so I start by sending you our best wishes. We hope that you and those you care about are safe and well. It is clear that businesses and communities are Supporting our customers and partners during now under pressure in what is both a global COVID-19 health and economic crisis. Many of Xero’s small We have moved quickly to support our small business business customers, bookkeepers, accountants, and customers and accounting and bookkeeping partners ecosystem partners are having to adapt the way during COVID-19 through a range of new initiatives they operate and invest enormous emotional and focused on providing immediate information and operational effort to find pathways for support including: business survival. • A business continuity hub on Xero Central, our Businesses are being forced to reset priorities, and main customer support centre, which offers a Xero is no different. Although our long-term strategy range of resources, including business continuity remains unchanged, we’ve made clear decisions on planning, cash flow management and working from what we can delay or do without for now, and what home effectively must be protected. In that process, three overarching • A dedicated 24/7 customer response team to, priorities emerge: the need for us to support our among other things, help customers understand customers and partners, the welfare of Xero’s people, and access government funding programs available and the need to ensure continuity of the platform that to them supports the operations of our millions of subscribers and their advisors. 8 CEO’S REVIEW • We have prioritised product development in key Sydney. We communicated our decision early to COVID-19 response areas including short-term cash minimise disruption and impact on our partners, flow and business snapshot features, in-product sponsors, speakers, event staff, and employees.