XERO LIMITED — Interim / Quarterly Report 2020

Nov 6, 2019

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Investor
briefing
Half year results to
30 September 2019
7 November 2019
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Third Drawer Down AUSTRALIA |

Important notice

This presentation is given 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, Xero securities

• should be read in conjunction with, and is subject to, Xero's latest and prior interim and annual reports, including Xero's interim report for the period ended 30 September 2019, 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

• includes Non-GAAP measures as we believe they provide useful information for readers to assist in understanding Xero’s financial performance. NonGAAP financial measures do not have a standardised meaning and should not be viewed in isolation or considered as substitutes for measures reported in accordance with NZ IFRS. These measures have not been independently audited or reviewed

All information in this presentation is current at 30 September 2019, unless otherwise stated.

All currency amounts are in NZ dollars, unless otherwise stated.

See page 34 for a glossary of the key terms used in this presentation.

2

Agenda

Business Financial update results Steve Vamos Kirsty Godfrey-Billy CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER

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Outlook

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Q&A

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3

Business

Moovaz SINGAPORE |

4

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478,000

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2,057,000 added in 12 months

subscribers

Sep 07

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$
175m
added in 12 months
$
764m
Annualised monthly
recurring revenue
Sep 11
Sep 11
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Sep 19

6

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Global growth
AMRR FREE CASH FLOW
with strong
$ $
764.1m 4.8m
SUBSCRIBERS
financial
+ 30% YOY + $14.6m YOY
indicators
2.06m
+ 478,000 YOY
OPERATING
REVENUE
ARPU
$
338.7m
EBITDA
TOTAL
EXCLUDING IMPAIRMENTS
LIFETIME VALUE
$ + 32% YOY (33% in
30.96
constant currency [1] )
- 0.4% YOY (- 0.1% in $
65.9m
$
constant currency [1] ) 5.4b
+ $31.4m YOY
+ $1.4b YOY
1 7
See glossary for definition
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Executing on strategic priorities

Drive cloud Grow small accounting business platform

Building for global scale and innovation

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8�8
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H1 FY20 subscriber additions by geo

Cloud accounting adoption[1]

Drive cloud accounting

1 Estimated adoption rates across English speaking addressable cloud accounting markets, based on publicly available data

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AU 114,000
ANZ
130,000
%
NZ 16,000
>
50
Australia and New Zealand
UK 73,000
North International
America 20,000
109,000
RoW 16,000
%
<
20
0k 30k 60k 90k 120k
Global
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9

Australia and New Zealand

Australia

• 28% subscriber growth YOY to 840,000 subscribers. Revenue growth of 26% YOY (29% constant currency)

• Single Touch Payroll legislation extended to all employers from July 2019, helping to encourage cloud accounting adoption through digitisation of payroll compliance

• Partnership with GreatSoft to help harness the power of cloud accounting for large accounting practices

New Zealand

• 13% subscriber growth YOY to 367,000 subscribers. Revenue growth of 22% YOY

• Positive ARPU trends driven by increasing emphasis on additional platform solutions including payments and Xero Payroll which benefited from introduction of Payday filing by Inland Revenue

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Subscribers
1.2m
1,250k
1,000k
750k
500k
250k
0k
H1 FY17 H1 FY18 H1 FY19 H1 FY20
$
Revenue
211m
$240m
$180m
$120m
$60m
$0m
H1 FY17 H1 FY18 H1 FY19 H1 FY20
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$240m
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10

United Kingdom

51% subscriber growth YOY to 536,000 subscribers HMRC’s Making Tax Digital legislation continued to contribute to performance throughout H1 FY20

56% YOY AMRR growth (57% constant currency) driven by accelerated subscriber additions and ARPU trends. Revenue growth of 51% YOY (52% constant currency) New Manchester office to complement London and Milton Keynes locations

Invested heavily in readiness for Open Banking

Subscribers

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536k
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600k
400k
200k
0k
H1 FY17 H1 FY18 H1 FY19 H1 FY20
Revenue $
80m
$80m
$60m
$40m
$20m
$0m
H1 FY17 H1 FY18 H1 FY19 H1 FY20
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11

North America

21% subscriber growth YOY to 215,000 subscribers. Revenue growth of 34% YOY (29% constant currency)

Community partner strategy showing good progress with more than 40% YOY uplift in partner channel capacity

Novo became the first US-based digital bank (supporting small business and entrepreneurs), to integrate with Xero’s global bank feeds API

Localisation of product with improved compliance functionality including GST returns in Canada and tax mapping in the US

Xerocon San Diego was attended by more than 1,000 people

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Subscribers
215k
300k
200k
100k
0k
H1 FY17 H1 FY18 H1 FY19 H1 FY20
Revenue
$27m
$30m
$20m
$10m
$0m
H1 FY17 H1 FY18 H1 FY19 H1 FY20
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12

Rest of World

52% subscriber growth YOY to 99,000 subscribers. Revenue growth of 43% YOY (37% constant currency)

Asia

• Bank feed integration launched with Hang Seng Bank in Hong Kong, a leading SME bank

• South Africa

• Great traction across Johannesburg and Cape Town roadshows

• Launched three new alternative lending integrations

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Subscribers
99k
100k
75k
50k
25k
0k
H1 FY17 H1 FY18 H1 FY19 H1 FY20
Revenue
$
19m
$20m
$13m
$7m
$0m
H1 FY17 H1 FY18 H1 FY19 H1 FY20
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13

Our platform strategy

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App Partners/ Ecosystem Xero solutions Xero products
800+ apps Stripe Bank feeds Projects
>50,000 users of Xero’s API (invoice payments) Payroll Hubdoc
developer tools Gusto (US Payroll) Expenses WorkflowMax
Financial web services Figured (Agri vertical)
For small
business
Small businesses can
manage their day-to-day
finances with software
that’s smart and easy-to
use, having instant access
to their data and files
For accounting
partners
Accounting partners can
connect to their clients’
data and work efficiently,
bringing various work
streams of their practice on
to one platform in the cloud
App Partners/ Ecosystem Xero Partner products
Partner-specific tools and apps Compliance HQ apps and explorer
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Xero Partner products
Compliance HQ apps and explorer
Workpapers Practice Manager
Tax solutions Reporting
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14

• Driving growth through the platform

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H1 FY20
revenue
composition
Group
operating revenue
$338.7m
Core accounting
Platform revenues1
89%
2
WorkflowMax
Non-recurring3
[6%]
2% [3%]
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H1 FY20
116%
revenue
growth
YOY
32%
Group
29%
operating
revenue
20% 19%
growth
Core Platform 2 Non-
1 WorkflowMax 3
revenues
accounting recurring
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1 Platform revenues include revenue derived from related services, including adjacent products (such as Hubdoc), add-ons with incremental revenue (such as payroll and expenses modules), payments 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

15

So what, now what?

Human Insights

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Data is at the heart of Xero Leveraging our machine learning and AI capabilities, we can support small businesses to use their data to drive simpler and more seamless workflows and surface powerful human insights

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Machine Learning

Data

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AI

Apps

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16

Progress on workflows and data integrations

Bringing Xero and Hubdoc closer together Marked improvement in the speed and accuracy of data ingestion and coding Looking to bring Hubdoc’s data capture and automation smarts closer to more Xero users Stripe invoice payment integration Small businesses get paid more quickly when attaching an invoice payment option Workflow integration enables more convenient Stripe account provisioning, sign-on and enhanced end customer features

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17

Xero Leadership Team

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Steve Vamos CHIEF EXECUTIVE OFFICER Craig Hudson MANAGING DIRECTOR, NEW ZEALAND AND PACIFIC ISLANDS Mark Rees CHIEF TECHNOLOGY OFFICER Damien Tampling CHIEF STRATEGY AND CORPORATE DEVELOPMENT OFFICER

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Anna Curzon CHIEF PRODUCT OFFICER Trent Innes MANAGING DIRECTOR, AUSTRALIA AND ASIA Nicole Reid ACTING CHIEF PEOPLE OFFICER

Gary Turner MANAGING DIRECTOR, UNITED KINGDOM AND EMEA

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Kirsty Godfrey-Billy CHIEF FINANCIAL OFFICER Rachael Powell CHIEF CUSTOMER OFFICER Chaman Sidhu CHIEF LEGAL OFFICER AND COMPANY SECRETARY Tony Ward PRESIDENT OF AMERICAS

18

Social and environmental impact

Reduce Xero's impact on the environment by offsetting our carbon emissions to zero - Net Zero @ Xero

Support our employees and the for-purpose sector to make a difference in the community

Ambition to enable our customers to be more socially and environmentally conscious

With people at the heart of what we do - we will continue to embed diversity and inclusion initiatives with our employees, who will support the diverse needs of our customers

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Our
people
&
IRONM
Y I
V E
T
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N N
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C
I
P O
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S
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N
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S
I
E T
V I
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I
I
S
S D
U
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B
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19

Financial

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KARVD Walls UNITED STATES
|
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20

X

• Maintaining strong top-line momentum with improving free cash flow

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$4.8m
Annualised monthly recurring revenue Free cash flow
$800m
+30% YOY $5m
$600m
$-5m
$400m
$-15m
$200m
$-25m
$0m
$-35m
H1 FY18 H1 FY19 H1 FY20 H1 FY18 H1 FY19 H1 FY20
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$4.8m

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21
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Contribution margins positive in both segments

Australia and New Zealand contribution improved 34% YOY, exceeding revenue growth of 25% YOY due to continued operating discipline and scale benefits

International contribution positive for the first time as scaling and CAC efficiencies offset continued investment to drive strong subscriber additions

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Australia and New Zealand
contribution
$
131m
$150m
$100m
$50m
H1 FY18 H1 FY19 H1 FY20
$0m
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International segment contribution

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$11m
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$20m
$10m
$0m
$-10m
H1 FY18 H1 FY19
$-20m
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H1 FY20
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22

Significant lifetime value uplift

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September 2019 Progress from
September 2018
ARPU $30.96 [1]
Churn % 1.10%
Gross margin 85%
LTV per subscriber $2,619 6% [2]
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Total subscriber lifetime value (LTV)

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$
>
1.4b
added in 12 months
$
5.4b
$
3.9b
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1 ARPU decreased $0.13 from 30 September 2018

• 2 LTV per subscriber growth in constant currency based on exchange rates at 30 September 2018. 5% increase in nominal terms

Sep 18

Sep 19

23

Unit economics and track record of value creation

Value of a Xero subscriber

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$2,500 LTV/CAC
$2,000
6.9
$1,500
$1,000
$500
CAC $0
$382
$-500
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
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Compelling SaaS
unit economics
CAC months 12.3
LTV
$2,619 MRR churn 1.10%
LTV/CAC 6.9
LTV $2,619
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Total lifetime value

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5.4b
$6b International
ANZ
3.9b
$4b
2.8b
1.7b
$2b
1.1b
$0b
H1 FY16 H1 FY17 H1 FY18 H1 FY19 H1 FY20
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Strong track record of value creation

$1.4 billion LTV added in 12 months

LTV almost doubled in last 2 years

H1 FY16 to H1 FY20 CAGR:

• ANZ: 47%

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- International: 55%
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24

Financial performance

Operating revenue growth of 32% YOY (33% constant currency) driven primarily by subscriber growth across all markets

EBITDA improved $48.1 million YOY, resulting in a 12.6pp increase in EBITDA margin over the period as the business continues to benefit from scale and efficiency improvements

EBITDA excluding impairments increased by 91% YOY while EBITDA margin, excluding impairments, increased by 6.0pp

First time interim net profit of $1.3 million and second consecutive net profit for a six month period following H2 FY19 net profit of $1.4 million

	H1 FY19	H1 FY20	YOY change
	($000s)	($000s)	(%)
Total operating revenue	256,527	338,658	32%
Gross proft	212,277	288,517	36%
Gross margin	82.8%	85.2%	+2.4pp
Sales & marketing costs	115,747	146,072	26%
Product design & development	68,866	85,297	24%
General & administration	31,093	41,138	32%
EBITDA	16,759	64,850	287%
EBITDA excl. impairments	34,516	65,921	91%
EBITDA margin	6.5%	19.1%	+12.6pp
EBITDA margin excl. impairments	13.5%	19.5%	+6.0pp
Net proft/(loss) after tax	(28,565)	1,336	NM
Net proft/(loss) after tax excl. impairments	(10,808)	2,407	NM

25

Further gross margin improvement

Gross margin improved by 2.4pp over the prior period to 85.2% for H1 FY20. Both the Australia and New Zealand and International segments saw positive gross margin trends

Gross margin improvement powered by efficiencies in cloud hosting and other platformrelated benefits driving further improvements to customer service quality at a lower cost

Gross margin

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90%
85.2%
85%
80%
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75%
H1 FY18 H1 FY19 H1 FY20
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26

Continued focus on CAC and product efficiency

Sales and marketing costs increased by 26% YOY which was lower than growth in revenue in H1 FY20. This resulted in a 2pp improvement YOY in CAC as percentage of revenue

Product costs including opex and capex as a percentage of revenue increased 1pp to 31% in H1 FY20

Product investment targeted a range of initiatives that will support near term product and customer objectives as well as longer-term strategic and technological needs

CAC as % of revenue

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70%
55% 43%
40%
H1 FY18 H1 FY19 H1 FY20
Product costs including
opex and capex as % of
revenue [1]
50%
31%
35%
20%
H1 FY18 H1 FY19 H1 FY20
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1 Net of government grants

27

Strong capital position with positive free cash

Positive free cash flow result in H1 FY20 of $4.8m, equivalent to 1.4% of operating revenues in the period

Operating cash flow increased 99% to $71.5m for H1 FY20, an improvement of $35.6m from $36.0m in H1 FY19

Net cash position at 30 September 2019 was $101.4m (comprising cash and short-term deposits less term debt) compared to $45.3m at 30 September 2018

Movement in net cash position

H1 FY19 H1 FY20 YOY ($000s) ($000s) change ($000s) Cash and 21,187 110,898 89,711 cash equivalents Short-term deposits 55,000 385,130 330,130 Total cash and 76,187 496,028 419,841 short-term deposits - Term debt (30,850) 30,850 Convertible notes – - (394,631) (394,631) term debt liability Net cash 45,337 101,397 56,060

28

Orenda Tribe | UNITED STATES 29

X

Outlook

Xero will continue to focus on growing its global small business platform and maintain a preference for reinvesting cash generated, subject to investment criteria and market conditions, to drive long-term shareholder value Free cash flow[1] in the financial year to 31 March 2020 is expected to be a similar proportion of total operating revenue to that reported in the financial year to 31 March 2019

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1 Free cash flow is defined as cash flows from operating activities less cash flows used for investing activities excluding cash used for acquisitions of, and investments into, businesses and strategic assets

30

Nubian Skin | UNITED KINGDOM 31

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Q&A
X
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A ppendix

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Farmit NEW ZEALAND
|
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32
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X

SaaS metrics summary

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ANZ International Group
H1 FY19 H1 FY20 H1 FY19 H1 FY20 H1 FY19 H1 FY20
ARPU $31.95 $31.64 $29.68 $29.98 $31.09 $30.96
CAC months 8.4 8.6 18.2 16.0 12.9 12.3
MRR churn 0.87% 0.82% 1.55% 1.58% 1.10% 1.10%
Subscribers 981,000 1,207,000 598,000 850,000 1,579,000 2,057,000
LTV per sub $3,064 $3,362 $1,558 $1,563 $2,494 $2,619
LTV/CAC 11.5 12.3 2.9 3.3 6.2 6.9
Total LTV $3.01b $4.06b $0.93b $1.33b $3.94b $5.39b
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33

Glossary

Subscribers

Subscriber means each unique subscription to a Xero-offered product that is purchased by an accounting partner or an end user and which is, or is available to be, deployed. Subscribers that have multiple subscriptions to integrated products on the Xero platform are counted as a single subscriber

Lifetime value (LTV)

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 churn) multiplied by ARPU, multiplied by the gross margin percentage. Group LTV is calculated as the sum of the individual segment LTVs, multiplied by their respective segment subscribers, divided by total Group subscribers

AMRR

Annualised monthly recurring revenue (AMRR) represents monthly recurring revenue at 30 September, 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

ARPU

Average revenue per user (ARPU) is calculated as AMRR at 30 September divided by subscribers at that time (and divided by 12 to get a monthly view)

Churn

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

Constant currency

Constant currency comparisons for revenue are based on average exchange rates for the 6 months ended 30 September 2018. Comparisons for ARPU, AMRR and LTV are based on exchange rates at 30 September 2018

CAC months

Customer Acquisition Cost (CAC) months are months of ARPU to recover the cost of acquiring each new subscriber. The calculation is sales and marketing costs for the year excluding the deferral and amortisation of commissions paid to sales people, less conference revenue (such as Xerocon), divided by gross new subscribers added during the same period, divided by ARPU

Free cash flow is defined as cash flows from operating activities less cash flows used for investing activities excluding cash used for acquisitions of, and investments into, businesses and strategic assets

Finweb

GAAP

SBP

Generally accepted accounting principles

Share-based payments

Financial web

TAM

Total addressable market

34

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Beautiful business xero.com/investors