Small businesses are doing it tough. Cloud accounting platform Xero has some answers

ASX-listed accounting software provider Xero recently held its major Xerocon conference in Sydney. Pendal equities analyst ELISE McKAY attended.

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XERO’S annual Xerocon event is known as ‘Coachella for accountants’ – a reference to a Californian rock concert with a cult-like following.

The ASX-listed cloud-accounting platform has a pretty strong following itself now, with more than 3.7 million subscribers in 180 countries.

And that’s led to a pretty good understanding of the state of small-to-medium businesses (SMBs).

Pendal equities analyst Elise McKay has been following Xero closely for years and attended the recent Xerocon event in Sydney.

Here are some take-aways relevant to Xero investors and anyone interested in the state of small business in Australia.

Sales growth under pressure

Small businesses are seeing slower sales growth in Australia, Canada, NZ, the UK and the US, Xero reports.

While all five countries averaged double-digit sales growth in the first half of 2022, this has since slowed to single-digit growth everywhere except the US (where sales were 5% lower). 

After adjusting for inflation, Australia was the only country where small businesses typically reported volume growth (an increase in the number of units sold). 

“On the positive side, Xero reports that wage pressures are starting to ease in Australia, NZ and the UK,” says McKay.

“Xero now sees wages growing in-line with the long-term average of its data — and materially lower than record highs in 2022.

“While they’re holding up, it’s a difficult time to be running a small business,” says McKay.

One of the ways Xero is responding is by integrating third-party payments systems (such as Stripe or Paypal or Square) which can speed up customer payments.

“There’s been an increase in the number of days before SMBs are paid, putting more pressure on cash flows,” McKay says.

“An integrated payment solution such as a Pay Now button offers customers more ways to pay. As a result, the small business can get paid faster,” she says.

The impact of artificial intelligence

Not surprisingly, SMBs are reporting mixed views on the extent to which artificial intelligence will disrupt their industries.

Like a number of other software developers, Xero expects AI will mostly benefit businesses where the technology is used to boost human expertise rather than replace it.

Xero is adding AI where it can speed up repetitive tasks or provide better insights that help humans focus on higher-value strategic activities.

“For example, helping to better enable reconciliations or provide better forecasting tools around things like cash flow,” says McKay.

“And potentially using generative AI to improve customer support.”

The value of brand

Anyone watching the recent FIFA Women’s World Cup would know Xero made a significant investment in branding at the event.  

“The success of the world cup event was not only great for women’s sport, but also Xero’s brand equity,” says McKay. 

“Brand equity is a leading indicator of market share.”

The Xerocon event also highlighted the importance of the SMB “eco-sphere”, Mckay says.

Xero now has more than 1000 partners in its ecosystem — relationships which help improve the ‘stickiness’ of the group’s products.

Xero’s app store is also a revenue stream.

“As small businesses adopt more apps, and have more linkages to Xero, they become more integrated and that provides a greater lifetime value.”

That also helps Xero develop cross-selling opportunities and build awareness of its products in new audiences.

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager here