XERO LIMITED — AGM Information 2018

Aug 15, 2018

Annual meeting

16 AUGUST 2018

Hunt & Gather, Raglan, New Zealand

Important notice

This presentation is given on 16 August 2018 on behalf of Xero Limited (Xero) (ASX:XRO) (Company number NZ 183 0488, AU ARBN 160 661 183)

Information in this presentation:

• is for general information purposes only, and is not an offer or invitation for subscription, or purchase of, or a recommendation to invest in, securities in Xero Limited

• should be read in conjunction with, and is subject to, Xero's latest and prior interim and annual reports, including Xero's annual report for the period ended 31 March 2018, and Xero's market releases on the ASX

• includes forward-looking statements about Xero and the environment in which Xero operates, which are subject to uncertainties and contingencies outside of Xero’s control – Xero’s actual results or performance may differ materially from these statements

• • includes statements relating to past performance, which should not be regarded as a reliable indicator of future performance

• may contain information from third parties believed to be reliable, but no representations or warranties are made as to the accuracy or completeness of such information

• All information in this presentation is current at 31 March 2018, unless otherwise stated

All currency amounts are in NZ dollars, unless otherwise stated See page 38 for a glossary of the key terms used in this presentation

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Susan Peterson Independent Non-Executive Director People and Remuneration Committee

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Graham Smith

Chair of the Board Independent Non-Executive Director Nominations Committee (Chair) Audit and Risk Management Committee

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Bill Veghte

Independent Non-Executive Director People and Remuneration Committee (Chair) Nominations Committee

Rod Drury Xero Founder Non-Executive Director

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Board of Directors

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Craig Winkler Non-Executive Director

People and Remuneration Committee Nominations Committee

Lee Hatton Independent Non-Executive Director Audit and Risk Management Committee (Chair)

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Dale Murray, CBE Independent Non-Executive Director Audit and Risk Management Committee

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Agenda

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Chair’s Financial CEO
Q&A
address overview update
Graham Smith Kirsty Godfrey-Billy Steve Vamos
Chair of the Board Chief Accounting Officer Chief Executive Officer
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Chair’s address

Graham Smith

CHAIR OF THE BOARD

Junk & Disorderly, Auckland, New Zealand

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Executive remuneration objectives
Differentiate and reward excellent performance, both in the short and long-term
Enable Xero to attract and retain employees, and motivate them to achieve results with
When reviewing
integrity and fairness
Xero’s executive
remuneration
Balance the mix of fixed and variable remuneration to influence appropriate behaviours and
structure, we had
actions to support a growing business
the following
objectives:
Remuneration structure that meets the expectations of shareholders for an ASX company
Reward outcomes aligned to Xero’s aspirations for growth and operational discipline
Competitive total remuneration benched to S&P/ASX 100 for AU/NZ roles and local tech
sector for UK/US roles
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Executive remuneration structure

Xero’s executive remuneration for FY19 consists of the following components:

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Fixed remuneration
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Annual salary

• Retirement: Superannuation (AU), KiwiSaver (NZ), 401k (US) and pension (UK)

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Short-term incentive
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Long-term incentive
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• Deferred STI plan: 50% in cash at end of 12 month performance period, 50% deferred as equity for a further 12 months. Performance measures are:

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Voice of Shareholder Voice of Voice of Employee
Customer Individual
Objectives
Revenue MRR Subscriber
EBITDA Cash NPS eNPS Engagement
growth growth additions
- -
Global Exec 30% 15% 15% 10% 5% 5% 20%
Regional Leads 20% 10% 10% 26% 14% 5% 2.5% 2.5% 10%
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• “Block options plan”: block of options granted, vesting equally on the 2nd, 3rd and 4th anniversary of the grant date, five year expiry

Current executives (except CEO) granted block options in June 2018, vesting in June 2020, June 2021 and June 2022, and expiring June 2023

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CEO inclusion in evolved structure

• Steve Vamos, CEO, will be included in the evolved executive remuneration structure as detailed below:

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Short-term incentive
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• Steve's incentive for FY19 will now include the deferral component applying to all senior executives

• 50% is payable as cash at the end of the 12 month performance period ending 31 March 2019

• 50% is deferred as equity in the form of restricted stock units (RSUs) for a further 12 months

• Subject to measures outlined on previous slide and calculated over the 12 month performance period

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Long-term incentive
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• Steve will participate in the new executive block options plan from August 2018

• To reflect Steve's existing LTI grants, participation reduced by 25% and vesting foregone in June 2020

• 180,000 options to be granted, vesting in equal parts in June 2021 and June 2022, expiring June 2023

• Strike price calculated as at 1 April 2018 to align with the start of Xero's current financial year and the strike price applicable for other executives

• The terms of Steve's employment agreement will be varied to the extent necessary to implement the changes to his variable remuneration as outlined above

• Steve's base salary will increase by 12.5% from $900,000 to $1,012,500 per annum effective from the first full pay period following his retirement from the Telstra Board in October 2018

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Resolutions
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X

RESOLUTION 1

Fixing the remuneration of the Auditor

That the Board is authorised to fix the remuneration of the auditor for the ensuing year

For 80,586,939

99.37% Against 420,246

0.52%

Discretionary 89,671*

0.11%

• 58,163 of which are held by the Chair of the Meeting who intends to vote in favour of the resolution

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RESOLUTION 2

Election of Dale Murray as a Director

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That Dale Murray, appointed by the Board as a Director on 13 April 2018, be elected as a Director of Xero Limited

For 81,008,124

99.86%

Against 18,987

0.02%

Discretionary 93,718* 0.12%

• 58,810 of which are held by the Chair of the Meeting who intends to vote in favour of the resolution

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RESOLUTION 3

Re-election of Rod Drury as a Director

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That Rod Drury, retiring from office as a Director of Xero Limited by rotation, be re-elected as a Director of Xero Limited

For

81,042,764

99.89%

Against 2,941

0.00%

Discretionary

89,946*

0.10%

• 53,038 of which are held by the Chair of the Meeting who intends to vote in favour of the resolution

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RESOLUTION 4

Re-election of Craig Winkler as a Director

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That Craig Winkler, retiring from office as a Director of Xero Limited by rotation, be re-elected as a Director of Xero Limited

For

67,012,647

82.60%

Against

1,021,132

1.26%

Discretionary

13,096,939*

16.14%

• 13,062,531 of which are held by the Chair of the Meeting who intends to vote in favour of the resolution

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RESOLUTION 5

Re-election of Graham Smith as a Director

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That Graham Smith, retiring from office as a Director of Xero Limited by rotation, be re-elected as a Director of Xero Limited

For 79,686,064

98.22%

Against

1,338,712

1.65%

Discretionary 102,448*

0.13%

• 67,140 of which are held by the Chair of the Meeting who intends to vote in favour of the resolution

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RESOLUTION 6(a)

Approval of the issue of shares to Directors - Lee Hatton

That for the purposes of ASX Listing Rule 10.11, and for all other purposes, approval is given for Xero to issue shares to Lee Hatton in lieu of her remuneration on the terms and conditions set out in the Explanatory Notes of this Notice of Meeting

For

80,600,839

99.36%

Against 0.52%

421,419

Discretionary

96,400*

0.12%

* 61,492 of which are held by the Chair of the Meeting who intends to vote in favour of the resolution

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RESOLUTION 6(b)

Approval of the issue of shares to Directors - Bill Veghte

That for the purposes of ASX Listing Rule 10.11, and for all other purposes, approval is given for Xero to issue shares to Bill Veghte in lieu of his remuneration on the terms and conditions set out in the Explanatory Notes of this Notice of Meeting

For

80,665,499

99.44% Against 357,449

0.44%

Discretionary

95,710*

0.12%

* 60,802 of which are held by the Chair of the Meeting who intends to vote in favour of the resolution

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RESOLUTION 7 (SPECIAL RESOLUTION) Adoption of new Constitution

That Xero’s current constitution be revoked and Xero adopt the new Constitution tabled at the Meeting in its place, with effect from the close of the Meeting or any adjournment of it

For 81,014,352 99.87% Against 9,024

0.01%

Discretionary 98,912*

0.12%

• 64,004 of which are held by the Chair of the Meeting who intends to vote in favour of the resolution

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SMTAX, Cape Town, South Africa
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X

Positive EBITDA with continued growth

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POSITIVE EBITDA
$ $ $
$
484.4m 406.6m 41.2m
1.4m
26.0m
+ $55m YOY
1
See the Glossary on page 38 for details on annualised monthly recurring revenue
+ 351,000 YOY + 38% YOY
1
AMRR SUBSCRIBERS OPERATING REVENUE OPERATING CASH FLOW
+ 33% YOY +46m YOY
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Strong top-line and bottom-line performance

Xero subscriber growth

[1 ] as % of revenue

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0%
FY15 FY16 FY17 FY18
351,000
added in 12 months
-20%
1,386,000
-40%
subscribers
-60% (71%) to (9%)
in 3 years
Mar 07 Mar 18 -80%
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1

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$121m added in 12 months

$ 484m Annualised monthly recurring revenue

Mar 18

Mar 11

Increasing lifetime value

March 2018 Progress from March 2017 ARPU $29.13 MRR churn % 1.10% Gross margin 81% LTV per subscriber[1] $2,310 +9%[2]

Total group subscriber lifetime value (LTV)

$ 990m ([$] 1.0b in CC[2] ) added in 12 months

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$ 3.2b

$2.2b

1 Increased 8% YOY in nominal terms

Mar 18

Mar 17

2 Constant currency based on FX rates at 31 March 2017

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Positive EBITDA

First positive EBITDA for the full-year driven by operating efficiencies across the business EBITDA excl. SBP1 was $43.0m in FY18, an improvement of $59.9m YOY from $(16.9m) loss in FY17

EBITDA margin

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15%
0%
-15%
-30%
FY16 FY17 FY18
EBITDA EBITDA excl. SBP [1]
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6%
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1 SBP is a non-cash cost to Xero

Positive operating

Positive operating cash flow of $41.2m for FY18, an improvement of $45.6m from $(4.4m) in FY17

Operating and investing cash flows as a % of revenue improved to 9% in FY18. Total operating and investing cash flows were $(36.9m) for FY18, a reduction from $(70.8m) in FY17

Cash and short-term deposits balance at 31 March 2018 was $80.0m

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$50m
$25m
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$0m

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$-25m
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$41m
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No current plans to draw down on stand-by debt facility of $100m

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$-50m
FY16
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FY17
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FY18
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• Beauty of Xero's SaaS model

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Acquire Grow
Generate
Grow gross Retention at
subscribers
revenue per long-term
margins scale
economically subscriber
value
at scale
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New accounting standards

Xero has adopted the following three accounting standards from 1 April 2018:

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IFRS 15
Revenue from contracts with
customers
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IFRS 16
Leases
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IFRS 9
Financial instruments
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• Xero’s commission costs will be capitalised and expensed over time

• This standard also changes the classification and timing of when revenue is recognised

• The majority of Xero’s leases will be recognised on the balance sheet, with the expense moving from operating expenses to depreciation and finance expense

• Amends the classification and measurement of Xero’s financial instruments and simplifies its hedge accounting model to align more closely to risk management strategies and objectives

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CEO update

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Steve Vamos

CHIEF EXECUTIVE OFFICER

Lagom, Bristol, United Kingdom

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Great people and teams

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Xero’s mission is to rewire the global economy, connecting millions of businesses to their banks, advisors and each other

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products and global platform

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Love and protect our customers

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Win with accountants and bookkeepers

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Grow into new spaces and places

Build to scale globally

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Continued focus

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Alignment of execution with strategy Global and regional operating model Great product management Capital investment framework

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• Driving adoption of cloud accounting

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Accountants
Small
and
businesses
Bookkeepers
Growth drivers
Existing markets New markets Adjacent products
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• Strengthening Xero’s global footprint

Subscribers at 31 March 2018

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301,000 583,000 312,000
New Zealand Australia United Kingdom
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Leading cloud accounting platform
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132,000
North America
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58,000
Rest of World
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Cloud
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TAM potential in a
large global
underserved
market1
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1 Estimated English speaking addressable market based on publicly available data

Grow small business platform revenues

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Suppliers App ecosystem
Financial
Customers
institutions
Accountants
Small
Employees and Government
businesses
Bookkeepers
Growth drivers
Finweb Transactional Data-driven
revenues solutions
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Growing the small business platform
94%
Revenue
Revenue
composition
growth
YOY
Group
operating revenue
50%
$406.6m
37%
38%
29% Group
operating
revenue
Core accounting
growth
Platform revenues1
93%
2
WorkflowMax
Non-recurring3 Core Platform 2 Non-
WorkflowMax
1 3
revenues
accounting recurring
[3%]
1% [3%]
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• 1 Platform revenues include revenue derived from related services, including add-ons with incremental revenue (such as payroll and expenses modules)

• and revenue share agreements with partners

• 2

• 3 Non-recurring includes revenue from events (such as Xerocons and roadshows), and other non-subscription or platform services

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Acquisition of Hubdoc Leading data capture solution

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Significant step towards

Enhances Xero’s platform

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Outlook

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Xero will continue to focus on growing its global small business platform

Cash outflow1 in FY19 is forecast to reduce from FY18. Xero is managing the business to cash flow break-even within its current cash balance, without drawing on its debt facility, excluding capital outlays for M&A

Following cash flow break-even, it is intended that surplus cash flow will be reinvested, subject to investment criteria, to drive long-term shareholder value

1

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Q&A
X
RBK Advisory, Melbourne, Australia
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Rec Room, Berkeley, California, USA 37

X

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Appendix
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Glossary

Subscribers

Subscriber means each unique subscription to a Xero-offered product that is purchased by an accounting partner or an end user and is, or is available to be, deployed

AMRR

Annualised monthly recurring revenue (AMRR) represents monthly recurring revenue at 31 March, multiplied by 12. It provides a 12 month forward view of revenue, assuming any promotions have ended and other factors such as subscriber numbers, transaction volumes, pricing and foreign exchange remain unchanged during the year

Total lifetime value

LTV is the gross margin expected from a subscriber over the lifetime of that subscriber. This is calculated by taking the average subscriber lifetime (1 divided by MRR churn) multiplied by ARPU, multiplied by the gross margin percentage. Group LTV is calculated as the sum of the individual segment LTVs, multiplied by segment subscribers, divided by total Group subscribers

CAC months

CAC months or months of ARPU to recover CAC represent the number of months of revenue required to recover the cost of acquiring each new subscriber. The calculation is sales and marketing costs for the 12 month period less conference revenue (such as Xerocon), divided by gross new subscribers added during the same period, divided by ARPU

ARPU

ARPU is calculated as annualised monthly recurring revenue at 31 March divided by subscribers at that time (and divided by 12 to get a monthly view)

MRR churn

MRR churn is the value of monthly recurring revenue (MRR) from subscribers who leave Xero in a month as a percentage of the total MRR at the start of that month. The percentage provided is the average of the monthly churn for the previous 12 months

NPS

eNPS

Employee net promoter score

Net promoter score

Finweb

CAC

Financial web

Customer acquisition costs

TAM

Total addressable market

SBP

Share-based payments

GAAP

Generally accepted accounting principles

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www.xero.com/investors