XRO AU

Publicly traded companies mentioned herein: Intuit Inc (INTU), Xero Ltd (XRO AU)

Highlights

The presenter is long shares of Xero Ltd (XRO AU), which was founded in 2006 in New Zealand, has a market cap of AUD$21.5B, and has a net cash balance sheet. XRO provides cloud accounting software for small businesses, and the presenter considers it like Intuit for international markets. He is bullish on back-office software for small businesses because it is an underpenetrated market (i.e., SMBs have been slower to adopt cloud software) and because it is mission critical, the latter of which allows for a LDD% annual churn rate that he considers exceptional for the SMB business demographic. XRO currently has 2.46MM SMB customers and there is significant runway considering its dominant non-US market share and current cloud accounting adoption rates (~50% in ANZ, <20% in all other English speaking addressable markets). Any increased penetration would contribute meaningfully to XRO’s financials given its exceptional unit economics: its revenue mix is 98% recurring, gross margins are 86%, and LTV/CAC in its home ANZ market is 11x (well above 5x, a number that he would consider strong). Management uses the strong FCF generation in ANZ to fund expansion into other markets, such as the UK (26% of revenue growing 33%). While the presenter sees upside to its current valuation based on continued international expansion, he also identifies several call options that can create significant incremental value for the company and shareholders.