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Xero’s biggest ever deal creates four growth options

Xero’s $285 million acquisition of a Danish rostering platform is about making its ecosystem for SMEs even stickier.  

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Sometimes the tech sector speaks a different language to the rest of us.

And on Thursday morning, Xero chief executive Steve Vamos was waxing particularly lyrically as he announced the cloud accounting software group’s acquisition of a Danish staff rostering platform called Planday.

Vamos variously described the €183.5 million ($285 million) deal as “extending out the surface of the Xero platform” and “enriching the core of Xero”, which demonstrates either Xero’s dexterous approach to growth or a particularly ambitious melding of metaphors. Or perhaps both.

Steve Vamos sees Planday as a way into new markets.  David Rowe

At any rate, we’ll put it down to Vamos’ enthusiasm for a deal that does appear to provide Xero four growth options.

The first comes from Xero’s stated desire to expand its small business cloud ecosystem beyond accounting and compliance  into other areas where small businesses need help.

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Planday is a cloud-based tool that lets SMEs manage their labour force, including scheduling shifts, communicating with staff, planning leave, tracking time and attendance, and managing compliance issues.

Vamos says when you combine this tool with an accounting product such as Xero you get a package that lets SME owners have more control over labour costs, which are typically an employer’s biggest expense.

It will likely take some time before Xero investors know whether they have got value for money here.

Planday has 350,000 employee users on its platform across Europe and Britain, where it is already available on Xero’s platform. The plan now is to bring Planday to all of Xero’s markets, including Australia and New Zealand.

The second source of growth comes from Planday’s existing channels.

While Vamos declined to provide much in the way of detail about how Planday will be integrated into the Xero ecosystem – it’s not yet clear whether it will eventually be packaged with the core Xero accounting product or sold alongside it – he emphasised that previous products Xero has acquired, including invoice lending platform Waddle and data capture firm Hubdoc, are still sold on rival platforms.

That strategy looks likely to persist with Planday. “Small businesses are the ones who choose what they buy and where they buy it,” Vamos says.

The third and fourth growth options come from the new areas that Planday could take Xero to.

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Expanded footprint

One is geographic – Xero isn’t established in some of the European nations that Planday operates in – and the other comes from the segments the Danish company services.

For example, Vamos says Planday has some customers that have a larger number of employees spread across a number of smaller sites, potentially giving Xero a look at the smaller end of the enterprise market.

“It’s fair to say this does give Xero a footprint and insights in new markets, new languages and new customer experiences, so it is exciting,” he says.

The purchase price of up to €183.5 million is made up of an upfront payment of €155.7 million (45 per cent in Xero shares and the rest in cash) plus earn-out payments of up to €27.8 million (up to half of which will be in Xero shares).

It will likely take some time before Xero investors know whether they have got value for money here.

Xero says the acquisition is expected to contribute about 3 percentage points of additional operating revenue growth for the group in financial 2022, but transaction, integration and operating costs are anticipated to have a “modest negative impact” on earnings before interest, tax depreciation and amortisation in the same year.

Vamos and chief financial officer Kirsty Godfrey-Billy were particularly cautious about commenting on Planday’s profitability, but the bottom line is that if Planday is profitable, it’s only just in the black.

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All of which says this deal is really about making Xero stickier for its customers, rather than delivering a big earnings sugar hit in the short term.

Xero shares fell 3.5 per cent in early trade to $114.86. Like many tech stocks worldwide, rising bond yields seem to have made investors cautious about the company.

While its shares have climbed 48 per cent in the past 12 months, the stock has now fallen almost 25 per cent since hitting a record high $152.71 in early January.

Vamos is unlikely to be too fazed by these gyrations. His message with Planday’s potential mirrored his long-held view of Xero’s long-term growth prospects.

“There is a significant opportunity because penetration of these products – like cloud accounting – are really in the early stages,” he says.

“[Labour scheduling] is an area, like cloud accounting, where there are a number of players doing a nice job, but there … is a long way to go before anyone can say the opportunity has been capitalised on.”

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Summary | 2 Annotations
but the bottom line is that if Planday is profitable, it’s only just in the black.
2021/03/04 04:24
Xero stickier for its customers
2021/03/04 04:24