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Edited Transcript of XRO.NZ earnings conference call or presentation 14-May-20 12:30am GMT

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Full Year 2020 Xero Ltd Earnings Call Jul 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Xero Ltd earnings conference call or presentation Thursday, May 14, 2020 at 12:30:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Kirsty Godfrey-Billy Xero Limited - CFO * Steven M. Vamos Xero Limited - CEO ================================================================================ Conference Call Participants ================================================================================ * Gareth James Morningstar Inc., Research Division - Senior Equity Analyst * Garry Sherriff RBC Capital Markets, Research Division - Executive Director of Equity Research & Head of Australian Technology and Small-Mid Caps * Paul Mason Evans & Partners Pty. Ltd., Research Division - Executive Director of Technology * Roger Samuel Jefferies LLC, Research Division - Equity Analyst * Rohan Sundram MST Marquee - Gaming and Contractors Analyst * Sameer Chopra BofA Merrill Lynch, Research Division - Head of Australian Research and Co-Head of Regional Telecom Research * Siraj Ahmed Citigroup Inc., Research Division - Associate * Thomas G. Beadle UBS Investment Bank, Research Division - Associate Director and Research Analyst * Wei-Weng Chen JPMorgan Chase & Co, Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Xero Limited FY '20 Results. (Operator Instructions) I'd now like to hand the conference over to your first speaker today, CEO Steve Vamos. Thank you. Please go ahead. -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [2] -------------------------------------------------------------------------------- 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 at 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 that you and those you care about are 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 has responded to COVID-19. The environment 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 advisers, 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're 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 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 a business continuity hub on Xero Central with resources tailored to each region of the world. The hub includes content that provides 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 provided those who are facing hardship with options to downgrade, suspend or cancel their subscriptions. When customers who suspend are 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 of financial data with government. By leveraging existing integration with government bodies, we're helping our customers with their 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 trusted insight Xero offers them. This also aligns with feedback we're getting from our accountant and bookkeeping partners that they are extremely busy helping clients at this time. As I mentioned earlier, we've also been impressed with how 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 Stagekings, who responded to the increasing demand for work-from-home equipment by designing, producing and selling self-assembly stand-up desks. At a 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 $718.2 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 $3.3 million, while free cash flow was also firmly positive at $27.1 million, an increase of $20.7 million on the prior year. Our 26% increase in subscribers combined with modest rise in ARPU, or average revenue per user, to just under $30 resulted in a 29% increase in annualized monthly recurring revenue to $820.6 million. The impact of COVID-19 was felt in the 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 that we're still early in our journey, and many small businesses around the world are 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 employers across Australia. Momentum in the second half was also good with the Australian business reporting its strongest year second half level of subscriber additions. As Kirsty will discuss, operating revenue in Australia was impacted by currency headwinds climbing by 23% year-on-year to $320 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 continued to contribute well to operating revenue, which increased by 19% year-on-year to $116 million, exceeding $100 million for the first time. Our New Zealand go-to-market strategy saw us engage more directly with small businesses through our nationwide roadshows, resulting in more than 1,500 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 U.K., we saw the business deliver strong results against an uncertain economic backdrop and continued political uncertainty. In addition, disruption from COVID-19 impacted on the final weeks of the year. U.K. 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 U.K. increased by 54% to $184 million. For the U.K. business, the deadline set by HMRC for the first VAT 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 tax 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 $55 million or 19% on a constant currency basis. Our North American team continues to focus on developing our partner channel 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 has become an important part of Xero. Canada is an 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 climbed by 43% to $43 million. The 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 noncore accounting revenues accounted for 11% of total operating revenue in FY '20, increasing from 9% in fiscal year '19. On the right-hand side of the slide, you'll 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 and the way we present them to you in the future. Specifically, our decision to bundle Hubdoc for all our Business Edition subscribers around the world is a major step towards our vision of code-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 2 significant milestones with Hubdoc and Instafile, our 2 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 their Xero Business Edition subscription. Late in 2018, we acquired Instafile in the U.K. to help us accelerate the development of our tax 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 U.K. partners. These changes make it much faster to prepare and submit returns. We also prioritized a release of 2 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 them to all Business Edition 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're 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 our role in helping customers receive payments, pay bills and get access to capital. We've 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 at dial-up speed, convenience and security of small business invoice payments. When it comes to bill payments, we announced 2 key launches during the year. In Australia, we received recognition alongside our partner, NAB, for an innovative bill payment solution. In the U.K., we launched a similar partnership with TransferWise to offer bank-agnostic bill payments via 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 fundamental to the success of a small business. Xero with partners offers a range of support throughout the life cycle 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 FY '20 financials. -------------------------------------------------------------------------------- Kirsty Godfrey-Billy, Xero Limited - CFO [3] -------------------------------------------------------------------------------- Thanks, Steve. Hello, everyone. I'm Kirsty Godfrey-Billy, Xero's CFO, and I'll 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 easing in lockdown measures in some parts of the world in recent days, the COVID-19 environment continues to create many unknowns. To consider the near and long-term impacts on the small business economy in 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 to a more stable performance. The high-level inputs and assumptions used in our modeling are outlined on the left side of the slide. Gross 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, over time, the creation rate of new businesses. Subscription cancellations and other form of churns, such as downgrading, are modeled based on macro inputs, customer sentiment and other feedback indicators. We have considered how we could recalibrate our 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 merit compensation and vendor agreement reassessments. While our long-term strategy remains unchanged, we have undertaken some reprioritization of our short-term investment and capital allocation decisions. We've also ensured that our investment spend in product 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 on to 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 $821 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 refer -- defer a planned price rise in the majority of regions that were scheduled to take place in March. Subscriber growth trends, while also strong, did slow somewhat in March with our U.K. business most affected. The sources of 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 in free cash flow, which increased to just over $27 million. This is a rise of more than $20 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 towards 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 $686 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 $167 million, well ahead of the EBITDA result for the year and indicative of Xero's strong underlying monetization profile. Investing cash flows increased to $140 million or 27% year-on-year, excluding M&A. Total cash and short-term deposits at the 31st of March 2020 were $536 million. Deducting our term debt liability of $425 million in respect of the USD 300 million convertible notes issued last financial year, our net cash position at the end of FY '20 was $111 million. Our standby debt facility was refinanced with a 3-year term and upsized by 50% to $150 million during the first half of the year. As Steve and I have already mentioned, COVID-19 creates uncertainty that is difficult to avoid. The cash we have on hand and additional liquidity we have access to combined with the business' underlying capacity to generate free cash flows provide comfort. We remain committed to realizing our strategic ambitions and will invest 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 in 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 aid 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 $2,422, with increased gross margin and ARPU offset by some deterioration in churn. As was the case in the first half of the year, there were a couple of opposing trends that contributed to the ARPU outcome that are worth revisiting. In Australia, we were able to introduce a new competitively priced payroll-only product to maximize the opportunity of Single Touch Payroll. STP still remains an attractive opportunity for us, and take-up has been strong. The success of our 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 upsell and cross-sell within New Zealand. Internationally, ARPU trends were positive on a constant currency basis but markedly higher on a reported basis due to currency movements in the period. Churn deteriorated slightly versus the prior year. This was driven by stronger growth from our faster-growing markets, including all international markets and 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 $1.1 billion and a total LTV to just over $5.5 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 with 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. It means we've added almost $6 of lifetime value for every dollar we spend on CAC. This measure declined slightly year-on-year with segmental trends slightly better in our international segment offset by a 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 for both our 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 $53 million or 24% year-on-year, exceeding revenue trends and demonstrating our ongoing focus on operating discipline and scale. Our international segment achieved a first-time positive contribution margin for the full year. This improved by $32 million over the year to reach $27 million, which supported an increase in revenues of $88 million or 45%. This outcome was due to the realization of scale-driven, cost-to-serve efficiencies and 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 $718 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 $138 million, which is a $65 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 and sales and marketing lines. We also reported significantly lower impairment charges, which at $1.4 million for the full year was $17 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 $3.3 million. Now before I cover the 3 largest expense items on the next slide, I wanted to flag that we have undertaken some investment in G&A in areas such as strategy and corporate development, which added around 1 point to our G&A ratio over the year. This additional spend is linked to our strategic priority, building for global scale and innovation. Moving to Slide 22. As we've already stated, we saw a positive contribution margin progress in both our 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-to-serve efficiencies and additional functionality that our cloud hosting provider offers. The increased use of self-serve features and machine learning capabilities within our customer experience portal, Xero Central, reduced the need to add headcount to support our growing customer base. In the next chart, you'll 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 for 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 under certain scenarios. We would be comfortable doing this as 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. -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [4] -------------------------------------------------------------------------------- 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 to really clearly outline the initiatives required to achieve our longer-term ambitions. And we've done that as we reviewed our strategy with a 10-year lens and really looking for 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 U.K. Innovation in the financial services sector is contributing to an accelerating shift to cashless societies driven by workflow-integrated, high-function payment platforms. New capital access models are emerging from both established lenders and fintechs. And finally, there's the effects of 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 a page. The 3 strategic priorities to capitalize on our opportunity and deliver our -- on our vision are 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 business -- 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 the 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 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 a system of record and as an interface to other cloud-based services they use. Xero is a values-driven organization, and the 5 values on this slide mean a lot to 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 the areas of investment and the outcomes that support our strategic priorities for the years 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 editions as we look to our long-term aspirations to address our global customer base; and then thirdly, addressing small business needs 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, developed and featured more in recent results. Our program featured on the 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 Programme 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 and ongoing for fiscal year '19. In recent months, we also announced the funding of 3 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 questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Rohan Sundram from MST. -------------------------------------------------------------------------------- Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [2] -------------------------------------------------------------------------------- Steve, Kirsty, just a couple of questions. I might start with, given the login activities holding up reasonably well -- actually very well, are the bulk of the customers still paying their subscriptions? That's my first question. -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [3] -------------------------------------------------------------------------------- Do you want to give me both, Rohan? Or do you want me to go one at a time? I'm happy to take both. -------------------------------------------------------------------------------- Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [4] -------------------------------------------------------------------------------- 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 (sic) ['21] given the deadline is July and it could possibly be pushed out for SMEs with less than 4 employees? -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [5] -------------------------------------------------------------------------------- Okay. Well, Rohan, first of all, thanks for the questions. In terms of login 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're not going to provide more information at this stage. We'll certainly see that flow through over the next 6 months. But I wouldn't associate the 2 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 bulk of that particular initiative is more behind us. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Our next question comes from Garry Sherriff from RBC. -------------------------------------------------------------------------------- Garry Sherriff, RBC Capital Markets, Research Division - Executive Director of Equity Research & Head of Australian Technology and Small-Mid Caps [7] -------------------------------------------------------------------------------- I've 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 Sage 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 stating that March has certainly slowed from a subscriber growth perspective. I'm just wondering what's happened into April. -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [8] -------------------------------------------------------------------------------- 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 1 month into this fiscal year. The second question... -------------------------------------------------------------------------------- Garry Sherriff, RBC Capital Markets, Research Division - Executive Director of Equity Research & Head of Australian Technology and Small-Mid Caps [9] -------------------------------------------------------------------------------- No trouble. What about -- oh. Yes, keep going. Sorry. -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [10] -------------------------------------------------------------------------------- Are you -- you're going to ask a question about discounting, second question? -------------------------------------------------------------------------------- Garry Sherriff, RBC Capital Markets, Research Division - Executive Director of Equity Research & Head of Australian Technology and Small-Mid Caps [11] -------------------------------------------------------------------------------- Yes. I just wanted to get a sense. You've deferred the 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 Edition subscribers. I'm just trying to get a sense of what percentage of subscribers are Business Edition. -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [12] -------------------------------------------------------------------------------- Yes. Look, I wanted -- I'm happy to tell you that the price rise was $2 for Business Edition subscriptions. It wasn't in all markets. And in terms of that second part of your question, we -- I won't -- I'm not going to provide further information other than what we just told you. -------------------------------------------------------------------------------- Garry Sherriff, RBC Capital Markets, Research Division - Executive Director of Equity Research & Head of Australian Technology and Small-Mid Caps [13] -------------------------------------------------------------------------------- No trouble. The last one just in terms of the competitor 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 for Xero too to adjust the price lever if needed? -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [14] -------------------------------------------------------------------------------- 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 discounts is what I am talking about. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Our next question comes from Paul Mason from E&P. -------------------------------------------------------------------------------- Paul Mason, Evans & Partners Pty. Ltd., Research Division - Executive Director of Technology [16] -------------------------------------------------------------------------------- Just for the first one. In terms of your cash flow sort of planning, 3% of revenue yield for free cash flow, it's probably a little bit ahead of where I was at. I sort of interpreted your prior comments about managing a bit closer to just breakeven. And so I just wondered, like, forgetting about the bad environment we're in for a second, but just under normal circumstances, 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? Maybe if you can talk through that. -------------------------------------------------------------------------------- Kirsty Godfrey-Billy, Xero Limited - CFO [17] -------------------------------------------------------------------------------- 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 digits, 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 that strong balance sheet we were able to also talk you through. -------------------------------------------------------------------------------- Paul Mason, Evans & Partners Pty. Ltd., Research Division - Executive Director of Technology [18] -------------------------------------------------------------------------------- Okay. And just one other one from me on Making Tax Digital. So it looks like the initial release of Xero Tax is largely focused around VAT compliance. And originally, with Making Tax Digital there, there was like a lot of stages that sort of meant that you had to use an API and sort of reading 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 horizons for sort of launching those capabilities. I know the legislative time frames have sort of disappeared for now, but just your own planning around that. -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [19] -------------------------------------------------------------------------------- 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 U.K. tax in -- from a Xero context, that is slightly different in the sense that it's focused on tax filing and account preparation for corporations. And there's other opportunities for us to extend that into -- also, by the way, it includes income tax for micro entities. But we'll go further with that. And -- but the 2 are different. They're not necessarily aimed at -- the U.K. tax offering is not just aimed at MTD. It goes beyond VAT into corporate tax, tax filing and an account preparation for corporations. So they have different focus. -------------------------------------------------------------------------------- Kirsty Godfrey-Billy, Xero Limited - CFO [20] -------------------------------------------------------------------------------- And then also, it enables us to be ready for Phase 2 of Making Tax Digital in the future. -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [21] -------------------------------------------------------------------------------- Correct. Yes. So we expect Making Tax Digital to evolve from VAT into other areas. And by having the U.K. tax solutions we have, we're ready for those. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Our next question comes from Sameer Chopra from Bank of America. -------------------------------------------------------------------------------- Sameer Chopra, BofA Merrill Lynch, Research Division - Head of Australian Research and Co-Head of Regional Telecom Research [23] -------------------------------------------------------------------------------- I just had 2 questions. Steve, you made an interesting comment saying that U.K. was sort of impacted in March, but -- and my read is maybe Australia and 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, a special kind of thing in the SME space? And then my second question is, you're in quite a good position because the 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 6 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 flatline the cost because the macro is uncertain? -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [24] -------------------------------------------------------------------------------- Yes. Sameer, let me take the second one in terms of our investment. The principles behind that are always to ensure that what we're investing is going to support our strategy. And we haven't shifted dramatically from our view that 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 broadly based than U.K. But the U.K., specifically, in March is year-end. So it's a busy time of year in the U.K. And so that's why the impact, I think, in -- probably in Kirsty's remarks was more referenced. But my comments in my part of this presentation refer more broadly to our business. -------------------------------------------------------------------------------- Sameer Chopra, BofA Merrill Lynch, Research Division - Head of Australian Research and Co-Head of Regional Telecom Research [25] -------------------------------------------------------------------------------- So just on that investment, do you think you'll keep a similar pace as last year? Or do you think... -------------------------------------------------------------------------------- Kirsty Godfrey-Billy, Xero Limited - CFO [26] -------------------------------------------------------------------------------- So I think, Sameer -- so I suppose what we've done, as I was trying to articulate [with Paul], we have a variety of different revenue scenarios, and we, therefore, have a variety of different cost bases attached to those different revenue scenarios. So as we see from both the macro indicators and also our own lead and lag indicators, it then 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 going to be an agile year when we manage our cost base incredibly carefully based on 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 when -- whatever the situation is for the world in COVID-19, at the end of it, that we have positioned ourselves in the best way possible based on the big unknown. -------------------------------------------------------------------------------- Sameer Chopra, BofA Merrill Lynch, Research Division - Head of Australian Research and Co-Head of Regional Telecom Research [27] -------------------------------------------------------------------------------- If I can just ask one final follow-up. Do you think this is -- next 12 months is kind of an environment where you may think about launching in a new market? Or do you think it's kind of tough and it kind of doesn't make sense? 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? -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [28] -------------------------------------------------------------------------------- We -- it's important to remember we're essentially in year 2 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 -- and I also appreciate the fact that we've recently expanded in new markets, and we'll be thoughtful about going into new markets at the right time. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Our next question comes from Roger Samuel from Jefferies. -------------------------------------------------------------------------------- Roger Samuel, Jefferies LLC, Research Division - Equity Analyst [30] -------------------------------------------------------------------------------- I just a few questions from me. First one on your strategic investment slide, you mentioned that you're planning to -- some more multilingual versions of the software. Can you give us a sense of when that's going to be, like in terms of the time line and which countries are you targeting? -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [31] -------------------------------------------------------------------------------- Yes, look, I think the point I wanted to make was that 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, I haven't got anything to say today. We've got a number of approaches that we are looking to there. And I just wanted to flag that it is something that is an important priority for us in the context of our strategy but nothing to really say about that today. -------------------------------------------------------------------------------- Roger Samuel, Jefferies LLC, Research Division - Equity Analyst [32] -------------------------------------------------------------------------------- Okay. All right. And my second question is on the gross margin. So it went up for the full year 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. -------------------------------------------------------------------------------- Kirsty Godfrey-Billy, Xero Limited - CFO [33] -------------------------------------------------------------------------------- So I mean we -- well, we ended the year at 85.2%, and we were at 85.2% at the half. And I think 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 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 facing into uncertain times. And so we'll do everything that we can but feel that we have got to a good, healthy position with our margin. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- Our next question comes from Siraj Ahmed from Citigroup. -------------------------------------------------------------------------------- Siraj Ahmed, Citigroup Inc., Research Division - Associate [35] -------------------------------------------------------------------------------- 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 or is included in the main plan, how much of that was because of Hubdoc towards the end of the year? -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [36] -------------------------------------------------------------------------------- Well, the decision to defer the price increase was a significant part of the, let's say, impact of COVID-19 because it created an environment where we felt that we're best not to move at the time we planned to. In terms of the actual impact of that, I don't think that -- I'm not sure that we're in a position to specifically release that today. So -- yes. -------------------------------------------------------------------------------- Siraj Ahmed, Citigroup Inc., Research Division - Associate [37] -------------------------------------------------------------------------------- Yes. So Steve, just to... -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [38] -------------------------------------------------------------------------------- It was -- essentially, it was -- I mean the price rise was $2 per Business Edition sub, not in all markets, but the exact value of how that would have contributed to AMRR is not something that we'll talk about today. -------------------------------------------------------------------------------- Siraj Ahmed, Citigroup Inc., Research Division - Associate [39] -------------------------------------------------------------------------------- Sure. And so just confirming, though, that Hubdoc, the fact that it was given -- it's included now in the base plan would have been a negative impact and that you did not increase the price. Just confirming. -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [40] -------------------------------------------------------------------------------- The fact that we didn't increase price definitely had a negative impact on AMRR. -------------------------------------------------------------------------------- Siraj Ahmed, Citigroup Inc., Research Division - Associate [41] -------------------------------------------------------------------------------- Okay. Secondly, just wanted to see -- just on the cost outlook. I appreciate that you're working through 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're looking at unit metrics and the CAC economics, should we just assume that you will pull back on advertising and marketing on the sales and marketing line? Is that how we should think about it as we stand? -------------------------------------------------------------------------------- Kirsty Godfrey-Billy, Xero Limited - CFO [42] -------------------------------------------------------------------------------- So I suppose it just -- it 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 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 the statements that we're saying are we are able to pivot our variable cost base, depending on whichever revenue scenario we believe is where we will be tracking for the year. But in also doing that, we are very keen to continue to invest in 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 variable component based on where we think our revenue scenario will end up. -------------------------------------------------------------------------------- Siraj Ahmed, Citigroup Inc., Research Division - Associate [43] -------------------------------------------------------------------------------- Okay. Sure. And just last one. Steve, just on -- I mean you did touch on multilingual. Is there any precursor that you need? I mean, for instance, does your platform need [a rehaul] or something to support multilingual? Or how do you think about it? And how do you need to invest... -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [44] -------------------------------------------------------------------------------- Yes, there's a whole range of factors. And one element of a multilingual approach -- and there are many potential pathways. But one element of that is to make sure that the platform is easily localizable on a repeatable 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 are some other thoughts and ideas that we have that we're also exploring and investing in. So but that is one of the -- definitely one of the factors. But go-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. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Our next question comes from Tom Beadle from UBS. -------------------------------------------------------------------------------- Thomas G. Beadle, UBS Investment Bank, Research Division - Associate Director and Research Analyst [46] -------------------------------------------------------------------------------- I just had 3, please. Just -- I guess, firstly, I want to ask a question about the -- what you've been observing from your customers' cash flow. So based on your SMB cash flows, like, how would you categorize the health of your customers? And what could this mean for business closures? The second question is just on -- a quick one on platform revenues. Could you split out the contributions of the revenue growth there, particularly interested in payroll and payments there. And then the third question, just on the M&A. You've obviously spoken about in the past. It probably has been 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 to a fair bit of liquidity and a strong share price if you need additional funding? -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [47] -------------------------------------------------------------------------------- Okay. Maybe I'll start from the bottom on the M&A question. Look, we're really pleased with the fact that 2 in 2 acquisitions we made just over 18 months ago are 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. 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 vectors of the business. And when we find -- you'll certainly be -- you'll certainly know straight away as soon as we have something to announce there. We are active and definitely engaged. But these things are a process, and we are following a process and a 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 1 month of this environment, of 1 full month of this environment under our belt. And it's too early. 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 -- and we haven't decided to make that public anyway. So we obviously have those indicators to have a look at, and they are a read. 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. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- Our next question comes from Gareth James from Morningstar. -------------------------------------------------------------------------------- Gareth James, Morningstar Inc., Research Division - Senior Equity Analyst [49] -------------------------------------------------------------------------------- First question is just on the $2.6 million income, on the income and expenses on the income statement. I was just hoping to clarify what that relates to. Secondly, on Slide 11, some of the growth rates -- so the growth rate for WorkflowMax and the nonrecurring revenue looks a bit strange relative to last year's slide. Has there been a change there at all? -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [50] -------------------------------------------------------------------------------- Sorry, slide -- you were talking about the breakdown of the ecosystem, the adjacent revenue streams. Is that... -------------------------------------------------------------------------------- Gareth James, Morningstar Inc., Research Division - Senior Equity Analyst [51] -------------------------------------------------------------------------------- Yes, that's right. Yes, so if you calculate the WorkflowMax 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 nonrecurring as well. -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [52] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Kirsty Godfrey-Billy, Xero Limited - CFO [53] -------------------------------------------------------------------------------- Okay. We're just... -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [54] -------------------------------------------------------------------------------- We're just having a quick look... -------------------------------------------------------------------------------- Kirsty Godfrey-Billy, Xero Limited - CFO [55] -------------------------------------------------------------------------------- What I'll do is I'll take the first -- I'll take the first question, and then we can come back on the second. The second, I think, it's rounding, maybe is the challenge. The $2.6 million is really around gains and losses on our -- mark-to-market gains and losses on an FX . -------------------------------------------------------------------------------- Gareth James, Morningstar Inc., Research Division - Senior Equity Analyst [56] -------------------------------------------------------------------------------- Right. Okay. Because I think it sort of figured where you excluded the impact of the impairment, but it seems as though that $2.6 million has been left in, so a lot of the underlying figures. I just wanted to clarify. Is that correct... -------------------------------------------------------------------------------- Kirsty Godfrey-Billy, Xero Limited - CFO [57] -------------------------------------------------------------------------------- Yes. So the asset impairment is a completely separate line item, the one above it. So yes, the asset impairment is around development that we have (inaudible) through the year. And so it has substantially decreased because we did have that large impairment in the previous financial year with our [year-end result]. And then the next line down, the other income and expenses, it's really just the market -- mark-to-market gains and losses of FX. And so [it's a separate row] line item. -------------------------------------------------------------------------------- Gareth James, Morningstar Inc., Research Division - Senior Equity Analyst [58] -------------------------------------------------------------------------------- Sure. Just one final one. Just on the corporate development and strategy teams. Just curious to know a couple of things, just what the head count -- total headcount is there now and also what their primary is going to be going forward. -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [59] -------------------------------------------------------------------------------- Yes. Look, we won't talk about head count numbers that specifically. But the focus -- there's 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 we think it's at an appropriate level. And perhaps, to some extent, it's an area where we believe, given our strategy and the opportunities going forward, is one where having that extra muscle is going to make a big difference going forward. -------------------------------------------------------------------------------- Operator [60] -------------------------------------------------------------------------------- Our final question will come from Wei-Weng Chen from JPMorgan. -------------------------------------------------------------------------------- Wei-Weng Chen, JPMorgan Chase & Co, Research Division - Research Analyst [61] -------------------------------------------------------------------------------- Just a question on -- first of all, in your presentation, you talked about the U.K. 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? -------------------------------------------------------------------------------- Kirsty Godfrey-Billy, Xero Limited - CFO [62] -------------------------------------------------------------------------------- So the comment around the U.K., as Steve was saying before, was just really with regard to the fact that it is the busiest time for the U.K., 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 a statement. We're not going to disclose which was least impact. There was obviously 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. -------------------------------------------------------------------------------- Wei-Weng Chen, JPMorgan Chase & Co, Research Division - Research Analyst [63] -------------------------------------------------------------------------------- Okay. And then just another thing. In your annual report, you said sort of as part of your COVID response, you've improved small business supplier payment terms to 10 days. What was it before? And also, roughly, what proportion of your supply base are small businesses? -------------------------------------------------------------------------------- Kirsty Godfrey-Billy, Xero Limited - CFO [64] -------------------------------------------------------------------------------- So we moved from standard terms of trade to small -- from small business. So depending on which region, so for example, in New Zealand, it would be 20th of the next month. In Australia, it would be the end of the month. So basically, we were moving from standard terms down to 10 days. And depending on the cost -- description would depend on whether or not we -- the level of small businesses involved in our vendors. -------------------------------------------------------------------------------- Wei-Weng Chen, JPMorgan Chase & Co, Research Division - Research Analyst [65] -------------------------------------------------------------------------------- Yes. Okay. And just the second part of that question, what proportion of small businesses make up your supply base? Is it a big part? -------------------------------------------------------------------------------- Kirsty Godfrey-Billy, Xero Limited - CFO [66] -------------------------------------------------------------------------------- Yes, we're not to answer. 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 that could do within our cash flow. But most of our cost base, as you'll see from Note 5, are people or -- platform is another one that's up here. -------------------------------------------------------------------------------- Wei-Weng Chen, JPMorgan Chase & Co, Research Division - Research Analyst [67] -------------------------------------------------------------------------------- Okay, great. And then just another question on your customer split. Does it roughly mirror that of sort of the general economies of the regions that you operate in? Or if not, are there particular industries which you're over- or underindexed on? -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [68] -------------------------------------------------------------------------------- Yes. Look, broadly, yes. They do mirror the economies we operate in. -------------------------------------------------------------------------------- Wei-Weng Chen, JPMorgan Chase & Co, Research Division - Research Analyst [69] -------------------------------------------------------------------------------- Yes. Okay. And then just on the U.K., just last question from me. Is your understanding that you are #1 in the U.K.? Or is that now Intuit there? -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [70] -------------------------------------------------------------------------------- Look, we are very happy with the business we have in the U.K. And comparisons are always very challenging when you look at the difference between us and our competitors, you look at the difference in our ARPUs, our churn rates. So we're very happy with the position we have and the business we have. -------------------------------------------------------------------------------- Wei-Weng Chen, JPMorgan Chase & Co, Research Division - Research Analyst [71] -------------------------------------------------------------------------------- Okay. Yes. I guess my question was just around the U.K. and whether -- I guess, is the aim there to be sort of #1? Or is it kind of similar to the U.S., where we're thinking maybe a solid second place is a very good outcome there? -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [72] -------------------------------------------------------------------------------- Look, 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 that follows that is the reward we get for doing so. So our -- we're not oriented that 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, U.K. tax and many of the other innovations that are coming to Xero customers. So that's really the orientation that we have. -------------------------------------------------------------------------------- Kirsty Godfrey-Billy, Xero Limited - CFO [73] -------------------------------------------------------------------------------- And with 613,000 subs, we're pretty happy. -------------------------------------------------------------------------------- Steven M. Vamos, Xero Limited - CEO [74] -------------------------------------------------------------------------------- We 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 talking. So thanks very much. -------------------------------------------------------------------------------- Operator [75] -------------------------------------------------------------------------------- Thank you. Ladies and gentlemen, with that, we come to the end of the Xero FY '20 Results Briefing. Thank you very much for your [participation]. You may now disconnect.