Xero Limited
2020
Annual
Report
Cover images:
Momentum Accounting, United States
Orenda Tribe, United States
Moovaz, Singapore
Contents
2–3
Highlights
4–6
Chair’s Review
7–12
CEO’s Review
13–14
The Board
of Directors
15–30
Management
Commentary
32–35
Auditor’s
Report
36–39
Financial
Statements
40–70
Notes to the
Financial
Statements
71–86
Corporate
Governance
Statement
87–93
Disclosures
94–111
Remuneration
Report
112
Corporate
Directory
Highlights
OPERATING REVENUE
FREE CASH FLOW
$718.2 m
Up 30% YOY
$27.1 m
Up $20.7m YOY
NET PROFIT
SUBSCRIBERS
$3.3 m
Increase of $30.5 million YOY
2.285m
Up 467,000 YOY
ANNUALISED MONTHLY
RECURRING REVENUE
$820.6 m
Up 29% YOY
TOTAL AVAILABLE LIQUIDITY
$686.1 m
Cash on hand, short-term deposits including
proceeds from convertible notes, and undrawn
committed debt facilities
TOTAL SUBSCRIBER LIFETIME VALUE
GROSS MARGIN PERCENTAGE
$5.5 b
Up $1.2 billion YOY
85.2 %
Up 1.6 percentage points
HIGHLIGHTS
3
A global
ecosystem of
800+ apps,
200+ connections
to financial services
providers
Offset 100%
of our carbon
emissions
for FY19 and
committed to
remaining ‘net zero’
going forward
SCALE OF THE PLATFORM
Total value of transactions
through Xero platform in FY20
$3.62 t*
Total value of invoices raised
via Xero during FY20
$853.2 b
at 31 March 2020
42% of Xero’s
employees
were female
Xero was one of 325
global companies
included in the 2020
Bloomberg Gender-
Equality Index
*Incoming and outgoing transactions, 12-month period
4
Chair’s Review
Dear shareholder
Xero is a unique company - a digital disruptor, born in the
Southern Hemisphere - that operates at the intersection of
technology and finance, with the opportunity to serve the entire
global small business economy.
This past year as a director, I have come to fully
understand the vital role Xero plays in supporting
small businesses, their advisors and communities
around the world. Xero is becoming an integral part of
the small business community and economies around
the globe.
As COVID-19 impacts businesses and communities,
Xero is focused on supporting our customers and
maintaining the quality and continuity of our cloud-
based products and services. Unquestionably, this is a
difficult time for many of our customers.
We have moved swiftly to develop and roll out a range
of new support services for small business as well
as for accountants and bookkeepers. We recognise
many small businesses are facing financial hardship
and we have ensured, as has always been the case,
that customers in distress are able to downgrade or
suspend their subscriptions through this difficult time.
The Xero leadership team has responded strongly
to support our people, partners and small
business customers during the COVID-19 crisis.
Our global teams are committed to upholding the
entrepreneurial spirit of Xero’s start-up heritage, while
building the capabilities and processes to support
a global technology company, and focusing on
additional ways to support our customers.
5
FY20 overview
We are pleased to announce for the year ended
31 March 2020 (FY20), Xero was able to maintain
financial and operating performance momentum.
Xero delivered top-line growth, a first ever full-year
net profit after tax, and a positive free cash flow
result. This is testimony to the importance of the
Xero platform to the operations of our customers
and partners.
Xero is becoming an integral part of
the small business community and
economies around the globe
However, the impact of COVID-19 on March trading
did result in some reduction in annualised monthly
recurring revenue (AMRR) progress in that month.
This outcome, along with the ongoing COVID-19
environment, will be reflected in Xero’s FY21
financial performance. Xero does not anticipate
significant changes to its long-term strategy and we
believe strongly in the value Xero can bring to small
businesses and their advisors.
We remain focused on building our community and
introducing small businesses to the benefits of
doing business in the cloud and, for those already
using Xero, extending their activities beyond
cloud accounting.
Capital management
Xero had total available liquid resources of $686
million at 31 March 2020. The US$300 million raised
from the convertible notes issue in October 2018
remains largely available to fund future investment
opportunities. Our standby $150 million debt facility
remains undrawn and is available for short-term
liquidity requirements should it be required.
Our capital allocation framework remains focused
on enabling the business to grow, both through
organic opportunities and, where appropriate,
through the pursuit of complementary targeted
acquisitions that we believe support the execution
of our strategic priorities.
Risk management & security
Risk management has always been critical in our
ability to execute our strategic and operational
priorities, but is even more important in challenging
times like this. From a governance perspective, the
Board is closely monitoring Xero’s risk management
activities in light of COVID-19.
Security and data protection are central to our
vision of being a trusted and insightful platform.
We continue to invest and deliver improvements
across data governance, security, scalability, and our
quality of service. We are committed to protecting
our customers' information, educating the Xero
community about best practice in online security,
and ensuring guardrails are in place to safeguard data
that flows through our platform.
Board update
On behalf of the Board and everyone at Xero we
extend our sincere thanks to Graham Smith, our
former Chair. Graham stepped down as Chair on 31
January and retired from the Board at the end of
the financial year after supporting a smooth
Chair succession.
During the financial year, we also farewelled Bill
Veghte from the Board after five years, and we thank
Bill for his dedicated service.
We welcomed Mark Cross to the Board as an
independent non-executive director on 1 April.
Among his many strengths, Mark brings to Xero
considerable experience and expertise in corporate
finance and financial markets.
Xero has an engaged and experienced Board of
Directors who are closely connected to the business.
It has been a pleasure to join this team, and I’d
like to acknowledge my fellow directors for their
commitment and thoughtful counsel during the year.
Diversity & Inclusion
We believe that healthy teams are diverse and
inclusive. While there is always more to do, we
are proud that female representation on Xero’s
leadership team and across all our employees sits at
42 percent. The Board set a measurable objective for
FY20 to maintain a gender balance with at least three
female directors and three male directors, which we
have achieved and retain as an objective in FY21.
XERO LIMITED 6
CHAIR’S REVIEW
In FY20, we set and achieved numerical targets
around representation of women on Xero’s leadership
team and across our employees. These are expressed
as a 40:40:20 approach – at least 40 percent women
and 40 percent men, with the remaining 20 percent
unspecified, to allow for flexibility and recognising
that gender is not binary.
We have also continued our efforts to ensure Xero is
an inclusive work environment including
initiatives such as LGBTQI+ inclusion, disability
inclusion, cultural diversity, flexible working, and
employee wellbeing.
More information about our initiatives to support
progress in this area is set out in the corporate
governance statement (see page 71).
Conclusion
This year Xero has drawn together remuneration
information in a consolidated remuneration report
(see page 94). We will continue to evolve this report
and we welcome your feedback.
On behalf of the Board, I would like to thank our
talented and passionate team of Xero people for their
valuable contributions in FY20. Finally, I'd like to
sincerely thank our customers, partners, and investors
for your ongoing trust and confidence in Xero.
David Thodey
Xero Chair
7
CEO’s Review
Dear shareholder
There’s no doubt we are facing a time like no other as COVID-19 impacts
each of us, so I start by sending you our best wishes. We hope that you
and those you care about are safe and well.
It is clear that businesses and communities are
now under pressure in what is both a global
health and economic crisis. Many of Xero’s small
business customers, bookkeepers, accountants, and
ecosystem partners are having to adapt the way
they operate and invest enormous emotional and
operational effort to find pathways for
business survival.
Businesses are being forced to reset priorities, and
Xero is no different. Although our long-term strategy
remains unchanged, we’ve made clear decisions on
what we can delay or do without for now, and what
must be protected. In that process, three overarching
priorities emerge: the need for us to support our
customers and partners, the welfare of Xero’s people,
and the need to ensure continuity of the platform that
supports the operations of our millions of subscribers
and their advisors.
Supporting our customers and partners during
COVID-19
We have moved quickly to support our small business
customers and accounting and bookkeeping partners
during COVID-19 through a range of new initiatives
focused on providing immediate information and
support including:
• A business continuity hub on Xero Central, our
main customer support centre, which offers a
range of resources, including business continuity
planning, cash flow management and working from
home effectively
• A dedicated 24/7 customer response team to,
among other things, help customers understand
and access government funding programs available
to them
XERO LIMITED 8
CEO’S REVIEW
• We have prioritised product development in key
COVID-19 response areas including short-term cash
flow and business snapshot features, in-product
prompts and reminders to help stay informed of
government stimulus packages
• Simplifying and automating payroll and tax
changes to help small businesses with reporting
and filing of data, to prove eligibility and access
government stimulus benefits and with financial
institutions where applicable
• We also deferred a planned price rise, and from
1 April improved Xero's global small business
supplier payment terms to paying in 10 days
During COVID-19 we have moved
quickly to support our small business
customers and accounting and
bookkeeping partners through a
range of new initiatives focused on
providing immediate information
and support
People as a priority
Our people have adapted well to working from home
under COVID-19, although this has brought personal
and work challenges particularly for those with
younger children, living alone, or with homes not
easily adapted to work environments.
Our teams are well connected and work
collaboratively by using cloud-based tools and
technology, which are embedded in the way we
operate our global business and allow us to work in an
agile way to solve customer and business problems.
Our ability to respond to COVID-19 has been
supported by a number of actions we took before the
onset of the global crisis. These included bringing
together our global Customer Experience, Marketing,
Education, Sales, and Communications teams into
a single portfolio under our Chief Customer Officer.
This focus on customers helps to ensure consistency
of decision making and sharing of insights and ideas
around the needs of our customers in all markets.
Due to COVID-19, we have cancelled our Asia-Pacific
Xerocon event scheduled for September 2020 in
Sydney. We communicated our decision early to
minimise disruption and impact on our partners,
sponsors, speakers, event staff, and employees. We
are now considering alternative digital events to
connect with our community of cloud accounting
leaders to share our latest product and
technology updates.
I am incredibly proud of the way our people have
embraced the challenges and changes we’ve faced
during these past months. It is a real credit to them
and the culture of Xero that we have been able
to live our values, and support one another and
our customers.
FY20 results update
Xero finished FY20 with 2.3 million subscribers
globally and delivered top-line growth and a positive
free cash flow result that mean the business has a
sound financial position heading into FY21.
Digitisation of tax and compliance remained a
key driver of demand for Xero’s cloud accounting
solutions. The positive subscription growth achieved
was supported by Xero’s product and marketing
response to a number of regulatory initiatives.
These included the ATO’s Single Touch Payroll (STP)
initiative in Australia, and HM Revenue & Customs’
(HMRC) Making Tax Digital (MTD) for VAT initiative
in the UK.
Performance highlights FY20
(All figures in NZD as at 31 March 2020.
Comparisons are made against FY19)
• 30% growth in operating revenue to $718.2
million (29% in constant currency (CC))
• 29% growth in AMRR to $820.6 million
• 26% growth in total subscribers to 2.285
million
• Rest of World and North America
contributed almost one in four subscriber
additions in H2 FY20
• Total subscriber lifetime value grew by 27%
(25% in CC) to $5.5 billion
9
• Free cash flow was $27.1 million, taking total
available liquid resources to $686.1 million
• Net profit of $3.3 million, an improvement of
$30.5 million over a net loss of $27.1 million
• EBITDA of $137.7 million, an improvement of
88% compared to $73.2 million
Product & Strategy
While COVID-19 has required us to rapidly implement
immediate solutions to help our customers, our
long-term strategy and ambitions are unchanged.
We remain committed to three strategic priorities: to
drive cloud accounting around the world, grow the
small business platform, and build for global scale
and innovation.
Digitisation of tax and compliance
remained a key driver of demand for
Xero’s cloud accounting solutions. The
positive subscription growth achieved
was supported by Xero’s product and
marketing response to a number of
regulatory initiatives
Xero’s purpose is to make life better for people in
small business, their advisors and communities
around the world. Our vision is ‘to be the most
insightful and trusted platform for small
business’. This underpins our strategy and our
innovation pipeline.
This vision demands that we put data at the centre of
everything we do, to develop new products, smarter
services, more personalised customer experiences
and richer partnerships.
We have invested in strategic capabilities and a
strategy that reflects our aspiration and the size of the
opportunity we have for the next 10 years and beyond.
Our product vision is based on a passion to provide
smarter, simpler and seamless workflows and trusted
insights to our customers. We delivered important
product milestones in the year with the bundling
of Hubdoc and the integration of Instafile. Both
businesses were acquired in the past two years and
successfully embedded into Xero’s product portfolio.
Hubdoc is now included in all Xero business edition
plans, helping to deliver on our vision for intelligent
automation and code-free accounting. Xero Tax in
the UK, built on technology acquired via our Instafile
acquisition, provides accountants and bookkeepers
with an easier way to deal with their tax and
compliance needs.
In addition, we announced a number of new product
enhancements during the year, including short-term
cash flow and business snapshot feature pilots for
our customers.
Xero customers have access to an ecosystem of more
than 800 connected apps and over 200 connections
to financial services providers through our small
business platform. These connections are with some
of the largest banks and fintechs in the world.
We also developed new and tighter workflow-driven
integrations relating to receiving payments and
paying bills. For invoice payments, we announced
global agreements with Stripe and GoCardless and
a recent partnership with Square in Australia. We
announced innovative bill payment partnerships
with TransferWise in the UK and NAB in Australia.
The latter was recognised by Canstar (Australasia’s
leading product comparison site) with an Innovation
Excellence Award for 2020.
Outlook
While Xero has performed strongly in FY20, trading
in the early stages of FY21 has been impacted by the
COVID-19 environment. The continued uncertainty
surrounding COVID-19 means it would be
speculative for us to say anything more at this time
on its potential impact on our expected performance
for FY21.
Xero’s ambition is to be a long-term oriented,
high-growth business. We continue to operate with
disciplined cost management and targeted allocation
of capital. This allows us to remain agile so we can
continue to innovate, invest, support our customers,
and respond to opportunities and changes in our
operating environment.
XERO LIMITED 10
CEO’S REVIEW
Conclusion
These are extraordinary times, both in life and in
business. As remote working becomes the norm
and digitisation of the small business economy and
government compliance continues to gather pace
around the world, we are focused on making it easier
to manage small business by using the power of cloud-
based technologies.
COVID-19 presents significant challenges to say the
least, and has required all of us to quickly adjust.
The Xero executive team and I are committed to
supporting and connecting closely with our customers,
partners, and our people at Xero during this time.
Thanks to our people, our customers and
communities, shareholders, and to everyone who
supports Xero.
Steve Vamos
Chief Executive Officer
11
Market highlights
FY20
Australia
New Zealand
United Kingdom
North America
Rest of World
Subscribers
Net additions
914k
188k
+26%
+31%
392k
+12%
41k
-18%
613k
150k
+32%
-1%
241k
46k
+24%
+5%1
125k
+51%
42k
+68%
Revenue
$320m +23%
$116m
+19%
$184m +54%
$55m +25%
$43m +43%
1 Excludes acquired Hubdoc subscribers in FY19
Australia subscribers grew by 26% in the year to
reach 914,000. Net subscriber additions of 188,000
set a new high for net additions in all our markets.
Revenue was up 23% (25% in CC). We continued to
benefit from the opportunity represented by Single
Touch Payroll
UK subscribers grew by 32% to 613,000. Revenue
grew by 54% (50% in CC). The strong net
subscriber additions of 150,000 were assisted in
part by the Making Tax Digital initiative and by
Xero Tax now offering end-to-end integration
with HMRC
New Zealand subscribers grew by 12% in the
year to 392,000, with 41,000 subscribers joining
in FY20. Revenue outpaced subscriber growth,
increasing by 19%
North America subscribers grew by 24% in
the year to 241,000. Net additions of 26,000 in
H2 FY20 compared to 17,000 in H2 FY19. This
is a strong indicator of the early progress from
our renewed positioning in a key global market.
Revenue grew by 25% (19% in CC)
Rest of World subscribers grew by 51% to
125,000, maintaining the momentum that this part
of the business has reported in recent periods.
Revenue grew by 43% (36% in CC)
Detailed updates and analysis of Xero’s FY20
financial performance can be found in the
management commentary on pages 15–30
XERO LIMITED 12
CEO’S REVIEW
Social and environmental impact
As a purpose-led business, we understand the
importance of our responsibility as a global citizen
and to the communities we serve. Xero’s social and
environmental impact (SEI) program has been
a priority during FY20. We have made
investments and commitments
to support the environment,
sustainability and communities
around the world.
E
Raising awareness around
the importance of mental
health in New Zealand, we
extended the pilot of the
Xero Assistance Programme
(XAP) to provide free and
confidential wellbeing
support to our customers
and partners, as well as their
employees and families.
E
V
I
D
B
U
S
I
N
E
S
S
S
U
P
P
O
RT
In Australia, Xero has partnered
with Beyond Blue, an expert, not-for-
profit provider of mental health initiatives,
which provides our team and partners in Australia
access to resources to support their mental health.
Xero donated funds to support the Red Cross
Disaster Relief and Recovery fund to support those
impacted by Australian bushfires.
Through our global employee volunteer program,
Community Connect, Xero employees contributed
more than 4,200 hours in support of their
communities this financial year. Every Xero employee
Xero named as a worldwide leader by the
IDC MarketScape
In April, Xero was recognised by the IDC
MarketScape as a leader in the market. The
IDC MarketScape recognised Xero as a Leader
for SaaS and Cloud-Enabled Small Business
Finance and Accounting Applications Vendors
(doc #US45837020, April 2020). This recognition
reflects the strength of Xero's strategy, product
and service offerings and customer satisfaction.
is entitled to a paid day of leave each year to help
not-for-profit organisations in their community.
Xero launched the Forward Fund scholarship in the
US to give aspiring accounting students assistance
via three USD$10,000 scholarships.
N V I R ONMEN
R S I T Y & IN
C
L
U
T
S
I
O
N
O U R
P EO P L E
We announced Net Zero @ Xero, a
commitment to offset 100 percent
of our carbon emissions to
become carbon neutral,
while also looking to
reduce our environmental
impact. Subsequently, we
announced we had offset
100 percent of Xero’s
carbon emissions for the
year to 31 March 2019
(assessed retrospectively
and finalised during
S
E
I
T
I
N
U
FY20). To achieve this, Xero
invested in three internationally
recognised environmental and
conservation projects.
M
M
O
C
Global ESG rating agencies and sustainability
rankings recognised Xero's efforts to positively
contribute to environmental and social impact as
well as maintain sustainable and ethical operations.
Xero was recognised in FTSE Russell ESG Rating
FTSE4Good Index Series in 2019 and received
an MSCI ESG Rating of A. We were also rated by
RobecoSAM and ISS-oekom.
For information on Xero’s SEI initiatives and Net Zero
@ Xero projects visit xero.com/socialimpact.
The report also calls out the strengths of our open
API strategy and machine learning for code-free
accounting, and the ecosystem of app partners
which provides small businesses with point
solutions to their needs.
For more information please visit www.xero.com/
about/investors/idc-report.
13
The Board of Directors
Mark was at Deutsche Bank for 10 years,
initially based in Sydney in Mergers and
Acquisitions, then in London as a Managing
Director and co-head of a European M&A
industry group. Mark holds a Bachelor of
Business Studies (Accounting & Finance)
degree from Massey University New Zealand,
is a member of Chartered Accountants
Australia and New Zealand, a chartered
member of the New Zealand Institute of
Directors and a member of the Australian
Institute of Company Directors.
Audit and Risk Management Committee
Rod Drury
XERO FOUNDER / NON-EXECUTIVE
DIRECTOR
Director since July 2006
For more than a decade, Rod led Xero to
be a global software business and S&P/
ASX 100 company. Rod started his career
at Ernst & Young and went on to establish
and lead a number of innovative technology
businesses. Rod was an independent director
on the NZX Board and the Trade Me Board.
At the Deloitte Top 200 Awards in 2017, Rod
was named Visionary Leader of the Year.
He was named Ernst & Young New Zealand
Entrepreneur of the Year in 2013, and is a
member of the New Zealand Hi-Tech Hall
of Fame.
David Thodey AO
CHAIR OF THE BOARD
Independent Director since June 2019 and
Chair since February 2020
David is a business leader focused
on innovation, technology and
telecommunications, with more than 30
years of experience creating brand and
shareholder value. He is currently chairman
of Australia’s national scientific research
agency, the Commonwealth Scientific and
Industrial Research Organisation (CSIRO),
and Tyro, Australia’s only independent
EFTPOS provider, a non-executive board
director of Ramsay Health Care, a global
hospital group; and of Vodafone Group Plc.
David had a successful executive career
as CEO of Telstra, a significant Australian
telecommunications company and as CEO
of IBM Australia and New Zealand. In 2017,
David was made an Officer (AO) in the
General Division of the Order of Australia.
People and Remuneration Committee
Nominations Committee (Chair)
Mark Cross
NON-EXECUTIVE DIRECTOR
Independent Director since April 2020
Mark is an experienced professional
director with more than 20 years of
international experience in corporate
finance and investment banking. Mark
is currently a non-executive director of
dual-listed ASX/NZX businesses Chorus
and Z Energy and is Chair of Milford Asset
Management. He is also a founding
director of Virsae, a communications
management SaaS business.
XERO LIMITED 14
THE BOARD OF DIRECTORS
Lee Hatton
NON-EXECUTIVE DIRECTOR
Independent Director since April 2014
Lee has over 20 years’ experience
internationally in the Financial Services
industry and has held senior executive
roles in Marketing, Strategy, Risk and
large scale customer-facing businesses.
Lee was the Chief Executive Officer of
UBank (a digital bank in Australia) for
five years, 2015 to 2020. Lee has been
recognised by IBM as one of 40 Women
Leaders in Artificial Intelligence across the
globe for her work in delivering world-
first innovations. Lee holds a Bachelor
of Business from Auckland University
of Technology (NZ), and is an alumni of
Berkeley Haas School of Business. She is
also a member of Chief Executive Women
(CEW) which represents Australia’s most
senior and distinguished female leaders
Audit and Risk Management Committee
(Chair)
Dale Murray CBE
NON-EXECUTIVE DIRECTOR
Business, Innovation & Skills. She served on
the Business Taskforce on EU Redtape for
the British Prime Minister in 2013. Dale was
awarded a CBE by Her Majesty the Queen in
2013, for services to business.
Audit and Risk Management Committee
Nominations Committee
Susan Peterson
NON-EXECUTIVE DIRECTOR
Independent Director since February 2017
Susan is an experienced independent
director on both ASX and NZX listed
companies. She is currently an independent
director of Trustpower, Vista Group,
Property for Industry, and ASB Bank. Susan
is a member of the New Zealand Markets
Disciplinary Tribunal, was a past Ministerial
Appointee to The National Advisory Council
for the Employment of Women, and is a
Board member of non-profit Global Women
(NZ). Susan is founding co-chair and a
shareholder in fast-growing health and
wellness start-up company Organic
Initiative Limited.
People and Remuneration Committee (Chair)
Independent Director since April 2018
Nominations Committee
Dale is a growth strategy consultant and
former technology entrepreneur. Dale
co-founded mobile pioneer Omega Logic
in 1999, which co-launched prepay top-ups
in the UK. She led the growth of top-up
transactions to £450m within five years,
generating net revenue of £25 million. After
selling the company in a trade sale, she
turned to investing and advising start-
ups and won the British Angel Investor of
the Year award in 2011. Dale is currently a
Partner at Founders Intelligence Ltd, a non-
executive director at The Cranemere Group
Ltd, and a board advisor to Accelerate:Her.
She was formerly a non-executive director
and Trustee for the Peter Jones Foundation
and a non-executive director at Sussex
Place Ventures and the Department for
Craig Winkler
NON-EXECUTIVE DIRECTOR
Director since May 2009
Craig co-founded Australian small business
accounting software provider MYOB in 1991.
Craig built MYOB to be a popular business
tool and brand which, in 2004, merged with
Solution 6 to become Australia’s largest IT
company. Craig joined the Xero Board in
2009. He now spends the majority of his time
working in the philanthropic sector.
People and Remuneration Committee
Nominations Committee
15
Management Commentary
You should read the following commentary with the consolidated financial statements and the related notes in this report.
Some parts of this commentary include information regarding the plans and strategy for the business, and include forward-
looking statements that involve risks and uncertainties. Actual results and the timing of certain events may differ materially from
future results expressed or implied by the forward-looking statements contained in this commentary. All amounts are presented
in New Zealand dollars (NZD) except where indicated. References to the period or FY20 are for the year ended 31 March 2020.
References to the comparative period or FY19 are for the year ended 31 March 2019.
Non-GAAP measures have been included, as we believe they provide useful information for readers to assist in understanding
Xero’s (the Group’s) financial performance. Non-GAAP financial measures should not be viewed in isolation or considered as
substitutes for measures reported in accordance with New Zealand equivalents to International Financial Reporting Standards
(NZ IFRS).
XERO LIMITED 16
Business results
Year ended 31 March
Subscription revenue
Other operating revenue
Total operating revenue
Cost of revenue
Gross profit
Gross margin percentage
Total operating expenses
Percentage of operating revenue
Other income and expenses
Operating profit before asset impairments
Asset impairments
Operating profit/(loss)
Percentage of operating revenue
Net finance expense
Income tax expense
Net profit/(loss)
Percentage of operating revenue
*pp stands for percentage points
**NM stands for not meaningful
2020
($000s)
696,220
22,011
718,231
(106,582)
611,649
85.2%
(580,090)
80.8%
2,550
34,109
(1,427)
32,682
4.6%
(22,845)
(6,501)
3,336
0.5%
2019
($000s)
538,384
14,435
552,819
(90,915)
461,904
83.6%
(451,881)
81.7%
(96)
9,927
(18,604)
(8,677)
-1.6%
(14,459)
(4,007)
(27,143)
-4.9%
change
29%
52%
30%
17%
32%
1.6pp*
28%
-0.9pp
NM**
244%
-92%
NM
6.2pp
58%
62%
NM
5.4pp
During FY20, Xero continued to execute its growth strategy delivering strong operating revenue growth of 30% while remaining
focused on operational discipline. This was reflected in Xero’s first full year net profit after tax of $3.3 million, an improvement
of $30.5 million compared to the $27.1 million loss in FY19. The net profit result was generated by ongoing growth in operating
revenue coupled with improved gross margin performance and disciplined management of operating expenses. FY19 results were
also impacted by $18.6 million of non-cash asset impairments compared to $1.4 million in FY20.
These results were impacted by the lockdowns that took effect across the world during March, late in Xero’s 2020 financial year.
This meant the impact of COVID-19 on Xero’s operating and financial performance for the period was modest. The sales
performance in March was subdued. A planned price increase in March (for the majority of Business Edition customers) was also
deferred. As a result, our Business Edition customers now have access to Hubdoc as part of their plan at no extra cost.
Operating revenue growth was supported by subscriber growth in all markets. Xero reached a milestone in the first half of FY20,
surpassing two million subscribers globally. 467,000 net subscribers were added during the period, bringing total subscribers to
2,285,000 at 31 March 2020.
Gross margin percentage improved by 1.6 percentage points compared to FY19. This was due to the realisation of continued
efficiencies in the costs of hosting Xero’s cloud services and further productivity gains from Xero Central (Xero’s customer
experience and community platform). Total operating expenses increased by 28% compared to the comparative period as
Xero continued to invest in scaling its global business, developing new products, and driving quality subscriber growth.
Total operating revenue growth of 30% exceeded growth in total operating expenses, resulting in improved operating profit
before asset impairments of $34.1 million in FY20, up $24.2 million from $9.9 million in FY19.
Depreciation and amortisation (which is included in costs of revenues and operating expenses) increased by $23m, or 28%,
compared to FY19. This was in line with operating expenses increasing by 28%. This was due to an increase in intangible asset
balances and increased depreciation due to additional office space.
The increase in net finance expense of $8.4 million was primarily driven by incurring a full year of interest costs associated with
the convertible notes issued in October 2018, compared to six months of such costs incurred in FY19.
MANAGEMENT COMMENTARY 17
Earnings before interest, tax, depreciation, and amortisation (EBITDA)
EBITDA disclosures (which are non-GAAP financial measures) have been included, as we believe they provide useful information
for readers in understanding Xero’s financial performance. EBITDA is calculated by adding back depreciation, amortisation, net
finance expense, and income tax expense to net profit/loss.
Year ended 31 March
Net profit/(loss)
Add back: net finance expense
Add back: depreciation and amortisation
Add back: income tax expense
EBITDA
EBITDA margin
2020
($000s)
3,336
22,845
105,061
6,501
137,743
19.2%
2019
($000s)
(27,143)
14,459
81,848
4,007
73,171
13.2%
change
NM
58%
28%
62%
88%
6.0pp
EBITDA improved by $64.6 million or 88% in FY20 compared to FY19, resulting in EBITDA as a percentage of revenue increasing
from 13.2% in FY19 to 19.2% in FY20. FY19 EBITDA was affected by $18.6 million of asset impairments. The improvement in FY20
EBITDA was primarily driven by revenue growth of 30% compared to FY19, as the business continues to deliver the benefits of
scale. Operational efficiencies were delivered across the cost of revenue, sales and marketing, and product design and
development functions, as total operating expenses as a proportion of operating revenue decreased to 80.8%, compared to 81.7%
in FY19.
EBITDA excluding the impact of non-cash share-based payments and impairments (a non-GAAP financial measure) is provided as
we believe it provides useful information to analyse trends in cash-based expenses.
Year ended 31 March
EBITDA
Add back: non-cash share-based payments
Add back: non-cash impairments
EBITDA excluding non-cash share-based
payments and impairments
Percentage of operating revenue
2020
($000s)
137,743
34,336
1,427
173,506
24.2%
2019
($000s)
73,171
28,946
18,604
120,721
21.8%
change
88%
19%
-92%
44%
2.4pp
EBITDA excluding non-cash share-based payments and non-cash impairments for FY20 was $173.5 million, an improvement
of $52.8 million or 44% compared to FY19. Operating revenue growth of 30% exceeded growth in included cash-based expenses
of 26%. This resulted in EBITDA excluding non-cash share-based payments and impairments improving as a percentage of
operating revenue by 2.4 percentage points.
XERO LIMITED 18
Cash flows and liquidity
Free cash flow is a non-GAAP financial measure that has been included to show readers net cash generated by, and invested into,
the business. We define free cash flow as cash flows generated from operating activities less cash flows used for investing
activities, excluding cash used for acquisitions of, and investments into, businesses and strategic assets.
Year ended 31 March
Receipts from customers
Other operating cash flows
Total cash flows from operating activities
Investing activities
Add back: acquisitions
Free cash flows
2020
($000s)
717,264
(550,635)
166,629
(139,524)
–
27,105
2019
($000s)
552,256
(438,030)
114,226
(140,471)
32,696
6,451
change
30%
26%
46%
-1%
-100%
320%
Free cash flows for FY20 increased by $20.7 million to $27.1 million, equating to 3.8% of total operating revenue, compared to
$6.5 million or 1.2% of total operating revenue in FY19.
Receipts from customers increased by 30% or $165.0 million to $717.3 million which is aligned with operating revenue growth of
30%. Cash flows from operating activities increased by $52.4 million to $166.6 million as receipts from customers grew at a faster
rate (30%) than other operating cash flows (26%, primarily due to payments to suppliers and employees).
Cash outflows from investing activities, excluding acquisitions, increased by 29% or $31.7million. The increase was largely driven by
higher capitalised spend on product design and development, which increased by $29.0 million or 39% compared to FY19.
Free cash flows
$25m
$0
($25m)
($50m)
($75m)
FY17
FY18
FY19
FY20
Total available liquidity (defined as cash and cash equivalents, short-term deposits including proceeds from convertible notes,
and undrawn committed debt facilities) at 31 March 2020 was $686.1 million. This comprised $536.1 million of cash and cash
equivalents and short-term deposits as well as access to an undrawn committed debt facility of $150.0 million. Of the cash and
cash equivalents and short-term deposits balance, $410.5 million relates to the convertible note proceeds that are held in USD for
future strategic investments and acquisitions. None of Xero’s term debt nor the standby debt facility matures in the next 24
months.
During FY20, Xero refinanced its standby debt facility for a three year term and upsized it to $150.0 million, an increase from
$100.0 million. The lender group was expanded from two to four banks, with existing lenders BNZ and ANZ joined by global banks
HSBC and Citibank. This facility is in place to ensure Xero maintains access to prudent levels of operational liquidity, appropriate
to the size and maturity of the business.
MANAGEMENT COMMENTARY 19
Operating revenue
Subscription revenue comprises recurring monthly fees from subscribers to Xero’s cloud-based platform. Within a subscription,
customers also receive support services and product updates.
Operating revenue includes subscription revenue as well as revenue from other related services, including attendance fees for
conferences and events such as Xerocon, revenue share agreements with financial services providers including fintech, and the
implementation of online accounting and other software services. Subscription revenue comprises 97% of operating revenue
in FY20.
Year ended 31 March
Subscription revenue
Other operating revenue
Total operating revenue
2020
($000s)
696,220
22,011
718,231
2019
($000s)
538,384
14,435
552,819
change
29%
52%
30%
change in
constant currency*
29%
50%
29%
*constant currency operating revenue (a non-GAAP financial measure) is provided to assist readers in understanding and assessing Xero’s financial performance during
the year, excluding the impact of foreign currency fluctuations. Constant currency operating revenue is calculated by translating operating revenue for FY20 at the
effective exchange rates for FY19.
Operating revenue growth of 30% from FY19 was a key driver of Xero’s first full year profit. This was driven by subscriber growth,
increased uptake of Xero add-ons, and growth in other operating revenue.
Subscription revenue increased by 29%, primarily driven by organic subscriber growth. Subscriber numbers at 31 March 2020
increased by 26%, or 467,000, compared to 31 March 2019. In addition, uptake of Xero add-ons such as payroll, projects and
expenses modules was higher, contributing to the subscription revenue increase.
Other operating revenue increased by 52% as a result of two major contributing components, fintech partnerships and conference
revenue. Xerocon conference revenue increased by 29% compared to FY19. Xero partners with fintech providers to offer online
financial solutions to subscribers, resulting in an associated share of revenue between the provider and Xero. Other operating
revenue excluding conference income increased by 73% compared to FY19.
As 84% of Xero’s operating revenue is denominated in currencies other than NZD (the Group’s functional currency), changes in
foreign exchange rates over the year have influenced reported revenue. The impact of the comparatively stronger NZD against the
Australian dollar (AUD) was more than offset by the impacts of the weaker NZD against the US dollar (USD) and Great British
pound (GBP) during FY20 compared to FY19. This resulted in constant currency operating revenue for the Group being $3.3
million lower than reported revenue.
XERO LIMITED 20
Operating revenue by geography
Year ended 31 March
Australia
New Zealand
Australia and New Zealand (ANZ) total
United Kingdom
North America
Rest of World
International total
Total operating revenue
2020
($000s)
2019
($000s)
change
change in
constant currency
320,376
116,154
436,530
183,565
55,398
42,738
281,701
718,231
261,468
97,639
359,107
119,521
44,270
29,921
193,712
552,819
23%
19%
22%
54%
25%
43%
45%
30%
25%
19%
23%
50%
19%
36%
41%
29%
Operating revenue growth in all geographies is underpinned by continued subscriber growth. In the ANZ market, operating
revenue grew by 22%, exceeding the 21% growth in subscribers shown in the next section. With the high level of penetration into
the ANZ market, Xero’s continued revenue growth in this market is encouraging.
The Australian market’s operating revenue grew by 23% compared to subscriber growth of 26%. This was primarily due to the
strengthening of the NZD against the AUD during FY20 (with constant currency revenue growth of 25%). Additional factors were
the release of lower-priced, payroll-only plans to support the Single Touch Payroll initiative recently introduced by the ATO, and
the further extension into existing partner practices with lower ARPU products.
New Zealand operating revenue increased by 19%, comparatively faster than subscriber growth of 12%. This was due to positive
movement in product mix and further uptake in platform-related products, such as payroll, and growth of revenue from
fintech partnerships.
For the first time, revenue growth in the International segment of $88.0 million, exceeded revenue growth in the more established
ANZ market ($77.4 million). Operating revenue in the UK grew by 54% compared to FY19, as Xero was well positioned to benefit
from HM Revenue & Customs’ (HMRC) Making Tax Digital initiatives. Operating revenue in North America grew by 25% while the
Rest of World markets grew by 43%. The Rest of World’s performance was driven by subscriber growth of 51%, with South Africa
and Singapore the largest contributing markets.
Reported revenue benefited from fluctuations in the foreign exchange rates, specifically the NZD being weaker against both the
GBP and USD on average during FY20 compared to FY19. In constant currency, operating revenue for the International segment is
$273.0 million, $8.7 million or 3.1% lower than reported revenue.
Total Group operating revenue by geography*
$800m
$600m
$400m
$200m
Rest of World
North America
United Kingdom
New Zealand
Australia
0
FY17
FY18
FY19
FY20
*represents each region's contribution to total Group operating revenue for the respective period
MANAGEMENT COMMENTARY 21
Subscriber numbers
The definition of ‘subscriber’ is: Each unique subscription to a Xero-offered product that is purchased by a user (e.g. small
business or accounting partner) 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.
At 31 March
Australia
New Zealand
2020
2019
change
914,000
392,000
726,000
351,000
Australia and New Zealand (ANZ) total
1,306,000
1,077,000
United Kingdom
North America
Rest of World
International total
Total paying subscribers
613,000
241,000
125,000
979,000
2,285,000
463,000
195,000
83,000
741,000
1,818,000
26%
12%
21%
32%
24%
51%
32%
26%
Subscribers grew by 26% compared to 31 March 2019, bringing total subscribers to 2,285,000. Subscriber additions continue to
grow, with 467,000 net subscribers added in FY20 compared to 432,000 in FY19. This is the largest subscriber increase in a
financial year since Xero’s inception in 2006. For the second year in a row, more subscribers were added in the International
markets than in ANZ with 238,000 subscribers added in International, compared to 229,000 in ANZ. The impacts of Covid-19
resulted in less than expected subscriber additions in the last month of the year. The UK in particular was impacted to a greater
extent in March than Xero's other markets.
Xero continued to increase its presence in the established ANZ market, growing subscribers by 21%, or 229,000, compared to
FY19. Xero’s position as market leader in Australia was further solidified as Xero added 188,000 subscribers in FY20 to reach
914,000 subscribers. This result was assisted by the ATO’s Single Touch Payroll initiative, which requires businesses to submit
payroll reports digitally. Xero released a new payroll-only product in Australia to assist small businesses in their preparation for
the new legislative requirements, which is also proving an integral tool for access to COVID-19 government stimulus benefits.
While more developed, New Zealand remains a growth market for Xero as it added another 41,000 subscribers, representing a
12% increase.
The UK led the International segment, adding 150,000 subscribers in FY20 to end on 613,000 subscribers, an increase of 32%.
The UK performance continued to benefit from HMRC’s Making Tax Digital initiatives under which businesses require software to
process VAT returns and digitise their financial and other business records.
North American subscriber numbers increased by 24%, or 46,000, from the comparative period, the highest annual net organic
additions to date. This performance is an early sign of progress from the partner channel strategy across North America.
Rest of World markets also performed strongly with 51% growth in subscribers in FY20. These numbers reflect Xero’s adoption
across a number of regions, with South Africa and Singapore continuing to gain traction.
Net subscriber additions
Australia
New Zealand
United Kingdom
North America
Rest of World
FY20
32.1%
FY19
34.9%
33.1%
467k
40.3%
432k
9.8%
9.0% 8.8%
14.6%
11.6%
5.8%
XERO LIMITED 22
Annualised monthly recurring revenue
Annualised monthly recurring revenue (AMRR) is a non-GAAP financial measure, which 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.
Constant currency AMRR (also a non-GAAP financial measure) is calculated by translating AMRR at 31 March 2020 at the foreign
exchange rates at 31 March 2019, and is provided to assist in understanding and assessing year-on-year growth rates, excluding
the impact of foreign currency fluctuations.
At 31 March
ANZ
International
Total
2020
($000s)
467,537
353,020
820,557
2019
($000s)
396,233
241,946
638,179
change
18%
46%
29%
change in
constant currency
19%
33%
25%
Total Group – AMRR surpassed $800 million during the year, ending FY20 at $820.6 million - up $182.4 million, or 29%, from
31 March 2019. Growth of AMRR was principally driven by subscriber growth in all regions. In constant currency terms, total
AMRR grew by 25%, due to subscriber growth of 26% offset by a 1% decrease in constant currency ARPU. The impact of Covid-19
on March trading, with fewer subscriber additions, resulted in less than expected AMRR growth for the month. Of particular
impact to AMRR was the decision to defer a planned price rise for business edition subscribers for all regions except the UK.
While the lower than expected AMRR growth had little impact on FY20 operating revenue, revenue in FY21 will be impacted to a
greater extent.
ANZ – Continued subscriber growth of 21% drove AMRR, which increased 18% to $467.5 million. Constant currency AMRR growth
was 1 percentage point higher than reported growth, due to the stronger NZD against the AUD at 31 March 2020 compared to 31
March 2019.
International – AMRR growth in the International markets was 46%, driven by growth in subscriber numbers (32%) and the
impact of foreign exchange. The weaker NZD against the USD and GBP at 31 March 2020 compared to 31 March 2019 had a
favourable impact on reported AMRR for the International segment. Constant currency AMRR growth was 33%, slightly ahead of
subscriber growth due in part to a price change in the UK market.
MANAGEMENT COMMENTARY 23
Gross profit
Gross profit represents operating revenue less cost of revenue. Cost of revenue consists of expenses directly associated with
securely hosting Xero’s services, sourcing relevant data from financial institutions, and providing support to subscribers.
The costs include hosting and content distribution costs, bank feed costs, personnel and related expenses (including salaries,
benefits, bonuses, and share-based payments) directly associated with cloud infrastructure and subscriber support, contracted
third-party vendor costs, related depreciation and amortisation, and allocated overheads.
Year ended 31 March
Operating revenue
Cost of revenue
Gross profit
Gross margin percentage
2020
($000s)
718,231
(106,582)
611,649
85.2%
2019
($000s)
552,819
(90,915)
461,904
83.6%
change
30%
17%
32%
1.6pp
Gross margin increased by 1.6 percentage points to reach 85.2% for FY20. This was driven by operating revenue growth of 30%,
as well as efficiencies in cost of revenue. This resulted in gross profit increasing by $149.7 million, or 32%, to $611.6 million.
Cost of revenue for FY20 grew by $15.7 million to $106.6 million, representing a 17% increase when compared to FY19. The primary
reasons for the change in cost of revenue were increases in personnel costs related to higher headcount in Xero’s customer
support teams, and increased cloud hosting costs.
Growing use of Xero Central (launched in FY19) and hosting cost efficiencies were the main drivers of improvement in gross
margin. There has been an emphasis on customer self-service with the aid of machine learning, via Xero Central, which has helped
offset the need for additional customer experience headcount as we continue to scale. Xero has also realised efficiencies in
hosting through optimising the Amazon Web Services (AWS) product mix and reducing wastage by scaling resources to reflect
actual user load at any given time.
Gross margin percentage
85.0%
80.0%
75.0%
FY17*
FY18
FY19
FY20
*affected by AWS migration
XERO LIMITED 24
Sales and marketing
Sales and marketing expenses consist of personnel and related expenses (including salaries, benefits, bonuses, the amortisation
of capitalised commission costs, and share-based payments) directly associated with the sales and marketing teams, and the
cost of educating and onboarding both partners and small business customers. Costs also include relationship management costs
incurred to support the existing subscriber base. Other costs included are external advertising costs, marketing costs and
promotional events, as well as allocated overheads.
Year ended 31 March
Sales and marketing expenses
Percentage of operating revenue
2020
($000s)
312,852
43.6%
2019
($000s)
248,014
44.9%
change
26%
-1.3pp
Sales and marketing costs increased by $64.8 million, or 26%, to $312.9 million for FY20, compared to operating revenue growth
of 30%. The majority of sales and marketing costs are incurred in acquiring new subscribers and are expensed in the period, in
contrast to the associated revenue from those subscribers, which is recognised over the life of the subscriber (typically more than
seven years).
Sales and marketing spend has increased as Xero continues to pursue subscriber growth in all regions. Campaigns to drive sales
in Australia and the UK, to take advantage of the Single Touch Payroll and Making Tax Digital initiatives, accounted for
a significant share of investment in sales and marketing costs in the period. These contributed towards strong net subscriber
additions in both countries, 26% in Australia and 32% in the UK.
The average cost of acquiring a subscriber increased to $420 per gross subscriber added in FY20 compared to $397 in FY19. This
reflects the increasing globalisation of Xero’s subscriber mix with an increased contribution to our subscriber growth from the less
developed markets within our International segment.
As a percentage of operating revenue, sales and marketing costs decreased from 44.9% in FY19 to 43.6% in FY20. While an
improvement as a percentage of revenue, which shows increased efficiency, the significant continued investment in sales and
marketing reflects the intention to reinvest cash back into the business to deliver on Xero’s strategic priorities, realising benefits
in future years.
MANAGEMENT COMMENTARY 25
Product design and development
Product design and development costs consist primarily of personnel and related expenses (including salaries, benefits, bonuses,
and share-based payments) directly associated with product design and development teams, as well as allocated overheads.
The proportion of product design and development expenses that creates a benefit in future years and meets certain requirements
under NZ IFRS is capitalisable as an intangible asset and is then amortised to the Income Statement over the estimated life of the
asset created. The amount amortised relating to the Xero product and platform is included as a product design and
development expense.
Year ended 31 March
Total product design and development costs
(including amounts capitalised)*
Percentage of operating revenue
Less capitalised development costs
Product design and development expense (excluding
amortisation of amounts capitalised)
Less government grants
Add amortisation of capitalised development costs
Product design and development expenses
Percentage of operating revenue
*excludes impairments
2020
($000s)
225,756
31.4%
(102,621)
123,135
(5,164)
60,287
178,258
24.8%
2019
($000s)
170,946
30.9%
(73,598)
97,348
(5,219)
45,666
137,795
24.9%
change
32%
0.5pp
39%
26%
-1%
32%
29%
-0.1pp
Xero continues to invest in its product and platform, developing and deploying a significant range of features in FY20 including:
- Xero Tax in the UK digitally prepares and files accounts and tax returns more efficiently, with an end-to-end integration
with HMRC
- Xero HQ VAT in the UK supports managing Making Tax Digital compliance by providing accountants and bookkeepers
oversight over VAT filings
- Xero HQ Payroll provides deeper insights for accountants and bookkeepers, which helps them support their clients by
providing a single aerial view and insights over their clients' payroll. This also allows visibility in Australia on clients'
Single Touch Payroll status
- The Hubdoc product is now included globally in Business Edition plans with a streamlined set up, single sign-on, and access
from within Xero
- Xero NAB payments is a feature that provides a seamless and secure process for small businesses to pay and approve
multiple bills from Xero’s real-time integrated platform. This is provided in partnership with leading Australian bank NAB
- Our strategic partnership and product integration with Stripe enables new payment experiences including a new Stripe feed
and auto pay feature
- Short-term cash flow and Business Snapshot are two pilots underway that give small businesses deeper insights into their
future cash flow and important trends
- Single Sign-On is a new, seamless and secure way for developers to build on the Xero platform, onboard new users without
making them remember more passwords, and integrate Xero with certified third-party apps more easily
- Advisor-powered app recommendations allows advisors to curate the Marketplace to ensure businesses get a tailored
experience to help source the right tools and apps for them
XERO LIMITED 26
Total product design and development costs were $225.8 million in FY20, $54.8 million or 32% higher than in FY19. Of this,
$102.6 million was capitalised, with the balance of $123.1 million included in the Income Statement within total product design
and development expenses. The amount capitalised represents a capitalisation rate of 45.5% of total product design and
development costs for FY20, which is 2.4 percentage points higher than FY19.
As a proportion of operating revenue, total product design and development costs for FY20 (including amounts capitalised)
increased by 0.5 percentage points to 31.4%. This highlights the continued investment in Xero’s global platform as product design
and development costs keep pace with revenue growth.
The amortisation of previously capitalised product design and development expenditure of $60.3 million was included as a
non-cash expense in the Income Statement, giving total net expenses (after the netting of government grants) of $178.3 million
for FY20. Amortisation of previously capitalised development costs increased due to higher intangibles balances than in FY19.
General and administration
General and administration expenses consist of personnel and related expenses (including salaries, benefits, bonuses, and
share-based payments) for executive, finance, billing, legal, human resources, strategy, corporate development, and
administrative employees, and the Xero Board. It also includes legal, accounting and other professional services fees, insurance
premiums, other corporate expenses, and allocated overheads.
Year ended 31 March
General and administration expenses
Percentage of operating revenue
2020
($000s)
88,980
12.4%
2019
($000s)
66,072
12.0%
change
35%
0.4pp
General and administration costs were $89.0 million for FY20, $22.9 million or 35% higher than FY19. This is due to the growth in
personnel related expenses as Xero continues to scale. In particular, investment was made in building out strategy and corporate
development functions to enable future growth.
General and administration costs as a proportion of operating revenue remained consistent with FY19, increasing 0.4 percentage
points to 12.4%.
MANAGEMENT COMMENTARY 27
Employees
At 31 March
Total Group
2020
3,055
2019
2,531
change
21%
Full-time equivalent (FTE) employees increased by 524 or 21% in FY20, taking the total FTEs to 3,055. This is compared to a 26%
increase in subscribers and 30% increase in operating revenue. The slower growth in FTEs compared to revenue and subscribers
reflects the benefits of economies of scale and operating efficiencies, while investment continues to be made in sales and
marketing as well as product design and development.
Net finance expense
Year ended 31 March
Interest income on deposits
Total finance income
Interest on convertible notes
Bank standby facility costs
Lease liability interest
Other finance expense
Total finance expense
Net finance expense
2020
($000s)
13,432
13,432
(28,033)
(1,691)
(6,280)
(273)
(36,277)
(22,845)
2019
($000s)
8,035
8,035
(12,753)
(1,847)
(4,987)
(2,907)
(22,494)
(14,459)
change
67%
67%
120%
-8%
26%
-91%
61%
58%
Finance income in FY20 was $13.4 million, an increase of $5.4 million from the comparative period. This was due to a significant
increase in cash and short-term deposit balances from the issue of convertible notes in October 2018, being held for all of FY20
compared to six months of FY19. Proceeds from the convertible notes issue remain largely undeployed and are held on deposit
until required.
Finance expense increased by 61%, driven by interest on the convertible notes combined with lease liability interest. Of the
$28.0 million of interest on convertible notes, $11.0 million relates to coupon payments, a cash cost, and the remainder being the
non-cash amortisation of the related debt liability discount. Lease liability interest increased by $1.3 million, largely due to the
lease of Xero’s Auckland office, which was entered into during the second half of FY19. Net cash finance costs, cash interest
income less cash interest expense, were $5.1 million compared to $4.5 million in FY19.
XERO LIMITED 28
Segment information
Operating revenue is allocated to a segment depending on where the subscriber resides. Expenses include cost of revenue, sales
and marketing costs incurred directly in-region, and an allocation of centrally managed costs and overheads, such as hosting and
user support costs.
Year ended 31 March 2020
Operating revenue
Expenses
Segment contribution
Contribution margin percentage
Year ended 31 March 2019
Operating revenue
Expenses
Other income
Segment contribution
Contribution margin percentage
ANZ
($000s)
International
($000s)
Total
($000s)
436,530
(164,962)
271,568
62.2%
359,107
(140,175)
69
219,001
61.0%
281,701
(254,472)
27,229
9.7%
193,712
(198,754)
331
(4,711)
-2.4%
718,231
(419,434)
298,797
41.6%
552,819
(338,929)
400
214,290
38.8%
ANZ - Operating revenue for FY20 grew by 22% compared to the comparative period, further reinforcing Xero’s market leading
position in the region. Australia led the growth in this segment as the ATO’s Single Touch Payroll initiative contributed to strong
demand for cloud accounting and payroll-specific solutions. Constant currency operating revenue grew by 23% compared to the
comparative period. This exceeded the 21% growth in subscribers, largely due to the timing of new subscriber additions, with
more subscribers added in the first half of the year than the second half.
The operating revenue growth, along with continued cost efficiencies, resulted in an FY20 segment contribution of $271.6 million.
This was an increase of 24% on FY19 and represents 62.2% of operating revenue, up from 61.0% in the comparative period. Across
the ANZ segment, 229,000 net subscribers were added during FY20, a new record for this segment.
International - Operating revenue for FY20 grew by 45%, or 41% in constant currency, largely due to subscriber growth of 32%.
Revenue growth exceeded subscriber growth due to a UK price increase during H1 FY20, along with the annualised revenue
benefit of strong subscriber growth in H2 FY19, which benefited from the rollout of Making Tax Digital for VAT. The International
segment had a positive segment contribution in FY20 of $27.2 million, compared to a contribution loss of $4.7 million in FY19.
This is the first positive full year contribution for the International segment.
As a percentage of revenue, the contribution margin improved from -2.4% to 9.7%. This was due to strong revenue growth,
combined with scaling and efficiencies, particularly in the UK. The contribution margin remained comparatively lower than that of
ANZ, reflecting the emphasis on investment in growing subscriber additions in the UK, North America, Asia, and South Africa, as
Xero continues to develop brand recognition and build distribution channels in these markets.
MANAGEMENT COMMENTARY 29
Key SaaS Metrics
SaaS companies like Xero operate on many of the same performance metrics as traditional companies, such as revenue, cash
flow, and customer numbers. However, understanding the performance of SaaS companies and being able to benchmark them
is assisted by an understanding of SaaS-specific metrics. Below are some of the headline metrics we use to manage and drive
Xero’s performance.
Average revenue per user (ARPU) is calculated as AMRR (see definition on page 22) at 31 March, divided by subscribers at that
time (and divided by 12 to get a monthly view).
CAC months are the months of ARPU to recover the cost of acquiring (customer acquisition costs: CAC) each new subscriber.
The calculation represents the sales and marketing costs for the year excluding the capitalisation and amortisation of contract
acquisition costs, less conference revenue (such as Xerocon), divided by gross new subscribers added during the same period,
divided by ARPU.
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.
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 (one divided by churn), multiplied by ARPU, multiplied by the gross margin percentage.
Group LTV is calculated as the sum of the individual segment LTV, multiplied by their respective segment subscribers, divided by
total Group subscribers.
LTV/CAC is the ratio between the LTV and the cost to acquire that subscriber. For example, the LTV derived from a subscriber in
ANZ is currently on average 10.6 times the cost of acquiring that subscriber.
We strive to maximise total LTV while optimising the level of CAC investment we undertake in order to achieve a desirable LTV/
CAC ratio. We can improve total LTV in multiple ways, such as increasing subscriber numbers, enhancing products and services
for existing subscribers thereby increasing ARPU and/or reducing churn, and improving gross margin through cost efficiencies.
The table below outlines key metrics across Xero’s segments:
At 31 March 2020
ARPU ($)
CAC months
Churn
LTV per subscriber ($)
LTV/CAC
At 31 March 2019
ARPU ($)
CAC months
Churn
LTV per subscriber ($)
LTV/CAC
ANZ
International
29.83
9.7
0.84%
3,058
10.6
30.05
18.1
1.59%
1,573
2.9
ANZ
International
30.66
9.4
0.85%
3,075
10.7
27.21
18.3
1.55%
1,413
2.8
Total
29.93
14.0
1.13%
2,422
5.8
Total
29.25
13.6
1.10%
2,398
6.0
XERO LIMITED 30
ANZ – ARPU within the ANZ segment decreased by 3% compared to 31 March 2019. This was largely due to the launch of Single
Touch Payroll focused products in Australia during FY20, with a lower associated ARPU, as well as a weaker AUD against the NZD
at 31 March 2020 compared to 31 March 2019. This was partially offset by increases in ARPU within New Zealand, driven by a
greater emphasis on add on solutions such as Xero Payroll, which benefited from the introduction of payday filing by Inland
Revenue on 1 April 2019.
In constant currency terms, ANZ ARPU decreased 2% to $30.19 compared to $30.66 at 31 March 2019. CAC months at 31 March
2020 was moderately higher than at 31 March 2019 as Xero continues to invest in its small business platform, ecosystem and
fintech strategies that target existing customers, as well as investing to drive growth to further increase market share in the
ANZ segment.
The decrease in ARPU, offset by improved gross margin and lower churn, led to a 1% decrease in LTV per subscriber
(a 1% increase in constant currency) within ANZ. Total ANZ subscriber LTV increased by $0.7 billion, or 21% to $4.0 billion
at 31 March 2020 compared to $3.3 billion at 31 March 2019.
International – ARPU across the International segment increased by 10% (1% in constant currency) from 31 March 2019.
A price increase in the UK for Standard and Premium pricing plans in August 2019 had a favourable impact on UK ARPU.
The comparatively stronger USD against the NZD also had a positive effect on ARPU within North America and Rest of World.
This was partially offset by a shift towards the more efficient but lower ARPU partner channel in these markets.
Improvements in ARPU resulted in the decline in CAC months from 18.3 months to 18.1 months. This was despite increased sales
and marketing costs in this segment contributing to a 9% increase in the cost of acquiring each new subscriber (a 6% increase in
constant currency) compared to the comparative period.
LTV per subscriber improved by 11% at 31 March 2020 compared to the comparative period (an increase of 1% in constant
currency), due to higher gross margin and ARPU, despite a slight increase in churn. Total LTV for the International segment
increased by 47% to $1.5 billion (34% in constant currency) at 31 March 2020 compared to 31 March 2019 due to subscriber
growth, particularly in the UK market.
Total Group – Group ARPU increased by 2% compared to 31 March 2019. This was due to increases in pricing in the UK, and the
impact of favourable foreign currency movements in the USD and GBP. ARPU decreased 1% in constant currency compared to 31
March 2019.
LTV per subscriber increased 1% from the same time last year to $2,422, primarily due to improvements in gross margin and
ARPU, while churn was slightly higher than FY19. Group constant currency LTV per subscriber at 31 March 2020 was 1% lower
than at 31 March 2019.
Total subscriber LTV at 31 March 2020 was $5.5 billion, an improvement of more than $1.1 billion compared to 31 March 2019.
CAC months increased 3% to 14.0 months when compared to 31 March 2019, due to a 6% increase in the cost of acquiring each
new subscriber. This was despite an ARPU increase in actual currency.
Total lifetime value
International
ANZ
$6b
$5b
$4b
$3b
$2b
$1b
$0
2017
2018
2019
2020
At 31 March
MANAGEMENT COMMENTARY 31
Financial Statements
Independent auditor’s report
Financial Statements
Income Statement
Statement of Comprehensive Income
Statement of Financial Position
Statement of Changes in Equity
Statement of Cash Flows
Notes to the Financial Statements
General information
1. Reporting entity and statutory base
2. Basis of accounting
Performance
3. Segment information
4. Revenue
5. Expenses
6. Finance income and expense
7. Earnings per share
Operating assets and liabilities
8. Trade and other receivables
9. Property, plant and equipment
10. Intangible assets
11. Trade and other payables
12. Other current liabilities
13. Lease liabilities
Funding and risk
14. Term debt
15. Financial instruments, capital
and financial risk management
16. Derivatives and hedge accounting
17. Share capital
Group structure
18. Group entities
Other information
19. Current and deferred income tax
20. Reconciliation of operating cash flows
21. Changes in financial assets and liabilities
arising from financing activities
22. Share-based payments
23. Key management personnel and related parties
24. Commitments and contingencies
25. Events after balance sheet date
Directors' responsibilities statement
32
36
36
36
37
38
39
40
40
40
41
42
43
44
45
46
47
48
50
50
51
51
52
59
61
62
63
65
66
66
69
69
69
70
XERO LIMITED 32
INDEPENDENT AUDITOR'S REPORT
Independent auditor's report to
the Shareholders of Xero Limited
Report on the audit of the financial statements
OPINION
We have audited the financial statements of Xero Limited
(“the company”) and its subsidiaries (together “the Group”)
on pages 36 to 69, which comprise the consolidated statement
of financial position of the Group as at 31 March 2020,
and the consolidated statement of comprehensive income,
consolidated statement of changes in equity and consolidated
statement of cash flows for the year then ended of the Group,
and the notes to the consolidated financial statements
including a summary of significant accounting policies.
In our opinion, the consolidated financial statements on pages
36 to 69 present fairly, in all material respects, the
consolidated financial position of the Group as at 31 March
2020 and its consolidated financial performance and cash
flows for the year then ended in accordance with New Zealand
equivalents to International Financial Reporting Standards and
International Financial Reporting Standards.
This report is made solely to the company’s shareholders,
as a body. Our audit has been undertaken so that we might
state to the company’s shareholders those matters we are
required to state to them in an auditor’s report and for no
other purpose. To the fullest extent permitted by law, we do
not accept or assume responsibility to anyone other than the
company and the company’s shareholders, as a body, for
our audit work, for this report, or for the opinions we
have formed.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (New Zealand). Our responsibilities
under those standards are further described in the Auditor’s
Responsibilities for the Audit of the Financial Statements
section of our report.
We are independent of the Group in accordance with
Professional and Ethical Standard 1 (revised) Code of Ethics
for Assurance Practitioners issued by the New Zealand
Auditing and Assurance Standards Board, and we have
fulfilled our other ethical responsibilities in accordance
with these requirements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Ernst & Young has provided R&D tax credit advice and other
assurance services related to the Group’s compliance with ISO
27001. Partners and employees of our firm may deal with the
Group on normal terms within the ordinary course of trading
activities of the business of the Group. Ernst & Young uses the
Group’s platform in delivering services to some clients. We
have no other relationship with, or interest in, the Group.
Key audit matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the
consolidated financial statements of the current year. These
matters were addressed in the context of our audit of the
consolidated financial statements as a whole, and in forming
our opinion thereon, but we do not provide a separate opinion
on these matters. For each matter below, our description of
how our audit addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s
responsibilities for the audit of the financial statements section
of the audit report, including in relation to these matters.
Accordingly, our audit included the performance of
procedures designed to respond to our assessment of the risks
of material misstatement of the financial statements. The
results of our audit procedures, including the procedures
performed to address the matters below, provide the basis for
our audit opinion on the accompanying consolidated
financial statements.
33
Capitalised Software Development Costs including impairment
Why significant
How our audit addressed the key audit matter
Intangible assets make up 79% of the Group’s non-current
assets. The most significant of these intangible assets is
capitalised software development costs.
The Group capitalises costs incurred in the development of its
software. These costs are then amortised over the estimated
useful life of the software.
The Group’s process for calculating the value of internally
developed software involves judgment as it includes
estimating time which staff spend developing software and
determining the value attributable to that time.
NZ IAS 36: Impairment of Assets requires that finite life
intangible assets be tested for impairment whenever there is
an indication that the intangible assets may be impaired. This
assessment requires judgment including consideration of both
internal and external sources of information.
Disclosures relating to Intangible Assets, including key
assumptions, are included in Note 10 to the consolidated
financial statements.
Our work on capitalised development costs focused on the
Group’s process for estimating the time spent by staff on
software development that can be capitalised under NZ IAS
38: Intangible Assets.
Our audit procedures included the following:
• Assessing the nature of a sample of projects against the
requirements of NZ IAS 38 to determine if they were capital
in nature;
• Assessing the procedures applied by the Group to review
the rates applied to capitalise payroll costs;
• Assessing the effectiveness of controls over the processing
of payroll costs;
• Assessing capitalised costs with reference to actual payroll
information for a sample of employees;
We assessed the factors that the Group considered regarding
impairment of capitalised development costs and whether any
indicators of impairment existed. This included having
regard to:
• Significant changes in the extent or manner in which the
associated software is used;
• Potential or actual redundancy or disposal of developed
software;
• Amortisation periods applied by the Group to developed
software relative to its experience of software lifecycle;
• Significant changes in the market in which the assets are
used; and
We assessed the adequacy of the disclosures related to
capitalised development costs and related impairment
considerations in the consolidated financial statements.
XERO LIMITED 34
INDEPENDENT AUDITOR'S REPORT
Goodwill impairment testing
Why significant
How our audit addressed the key audit matter
The Group recognises $78.8 million of goodwill related to the
100% acquisition of Hubdoc Inc in FY19.
NZ IAS 36: Impairment of Assets requires that goodwill be
tested for impairment annually irrespective of whether there is
any indication of impairment and this assessment requires
judgement including consideration of both internal and
external sources of information.
The Group assesses goodwill impairment by using an internally
developed value-in-use model which considers a range of
scenarios. The range of scenarios considered by management
in this assessment has changed in the period to specifically
consider the potential impacts of the economic uncertainty
related to the COVID-19 pandemic. Key assumptions used in
the value-in-use model are described in Note 10.
During the reporting period management changed the cash
generation units to which this goodwill was allocated to reflect
a change in the way in which the Hubdoc technology is made
available to customers.
We assessed the Group’s judgements in their annual
impairment test. Our audit procedures included
the following:
• Using our valuation specialists to:
- assess whether the methodology applied in the value in
use model met the requirements of NZ IAS 36; and
- consider the discount rates and terminal growth rates
used in the impairment models;
• Considering the appropriateness of the changes made to
the cash generating units to which goodwill is allocated
across the Group;
• Assessing the appropriateness of cash flow forecasts
considering historical cash flows, our knowledge of the
business and relevant external information. Given the
current economic uncertainty as a result of the COVID-19
pandemic, we placed a particular focus on the assumed
subscriber and associated revenue growth forecasts;
Disclosures relating to Goodwill, including key
assumptions, are included in Note 10 to the consolidated
financial statements.
• Performing sensitivity analysis around key drivers of the
impairment model, including the sensitivity of the results
to changes in future projected cash flows; and
• Assessing whether the assumptions which have the most
significant effect on the determination of the recoverable
amount of goodwill have been appropriately disclosed in
the consolidated financial statements.
35
Information other than the financial statements and
auditor’s report
Auditor’s responsibilities for the audit of the
financial statements
The directors of the company are responsible for the Annual
Report, which includes information other than the
consolidated financial statements and auditor’s report.
Our opinion on the consolidated financial statements does not
cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the consolidated financial
statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is
materially inconsistent with the consolidated financial
statements or our knowledge obtained during the audit, or
otherwise appears to be materially misstated.
If, based upon the work we have performed, we conclude that
there is a material misstatement of this other information, we
are required to report that fact. We have nothing to report in
this regard.
Our objectives are to obtain reasonable assurance about
whether the consolidated financial statements as a whole are
free from material misstatement, whether due to fraud or error,
and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with
International Standards on Auditing (New Zealand) will always
detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken
on the basis of these consolidated financial statements.
A further description of the auditor’s responsibilities for the
audit of the financial statements is located at the External
Reporting Board’s website: https://www.xrb.govt.nz/standards-
for-assurance-practitioners/auditors-responsibilities/audit-
report-1/. This description forms part of our auditor’s report.
The engagement partner on the audit resulting in this
independent auditor’s report is Grant Taylor.
Chartered Accountants
Wellington
14 May 2020
Directors’ responsibilities for the financial statements
The directors are responsible, on behalf of the entity, for the
preparation and fair presentation of the consolidated financial
statements in accordance with New Zealand equivalents to
International Financial Reporting Standards and International
Financial Reporting Standards, and for such internal control as
the directors determine is necessary to enable the preparation
of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the
directors are responsible for assessing on behalf of the entity
the Group’s ability to continue as a going concern, disclosing,
as applicable, matters related to going concern and using the
going concern basis of accounting unless the directors either
intend to liquidate the Group or cease operations, or have no
realistic alternative but to do so.
XERO LIMITED 36
FINANCIAL STATEMENTS
Income Statement
Year ended 31 March
Subscription revenue
Other operating revenue
Total operating revenue
Cost of revenue
Gross profit
Operating expenses
Sales and marketing
Product design and development
General and administration
Total operating expenses
Asset impairments
Other income and expenses
Operating surplus/(deficit)
Finance income
Finance expense
Net profit/(loss) before tax
Income tax expense
Net profit/(loss)
Basic and diluted earnings/(loss) per share
Statement of Comprehensive Income
Year ended 31 March
Net profit/(loss)
Other comprehensive income*
Movement in cash flow hedges (net of tax)
Translation of foreign operations
Total other comprehensive income/(loss) for the period
Total comprehensive income/(loss) for the period
Notes
4
5
5
9, 10
6
6
19
7
Note
16
2020
($000s)
696,220
22,011
718,231
(106,582)
611,649
(312,852)
(178,258)
(88,980)
(580,090)
(1,427)
2,550
32,682
13,432
(36,277)
9,837
(6,501)
3,336
2019
($000s)
538,384
14,435
552,819
(90,915)
461,904
(248,014)
(137,795)
(66,072)
(451,881)
(18,604)
(96)
(8,677)
8,035
(22,494)
(23,136)
(4,007)
(27,143)
$0.02
($0.19)
2020
($000s)
2019
($000s)
3,336
(27,143)
845
(3,393)
(2,548)
788
999
1,006
2,005
(25,138)
* Items of other comprehensive income will be reclassified to the Income Statement when specific conditions are met
The accompanying notes form an integral part of these financial statements
37
Statement of Financial Position
Notes
At 31 March
2020
($000s)
At 31 March
2019
($000s)
Assets
Current assets
Cash and cash equivalents
Short-term deposits
Trade and other receivables
Derivative assets
Other current assets
Total current assets
Non-current assets
Property, plant and equipment
Intangible assets
Deferred tax assets
Derivative assets
Other non-current assets
Total non-current assets
Total assets
Liabilities
Current liabilities
Trade and other payables
Employee entitlements
Lease liabilities
Income tax payable
Derivative liabilities
Other current liabilities
Total current liabilities
Non-current liabilities
Term debt
Derivative liabilities
Lease liabilities
Deferred tax liabilities
Other non-current liabilities
Total non-current liabilities
Total liabilities
Equity
Share capital
Reserves
Accumulated losses
Total equity
Total liabilities and shareholders’ equity
The accompanying notes form an integral part of these financial statements
8
16
9
10
19
16
11
13
19
16
12
14
16
13
19
17
108,027
428,052
55,877
124,698
1,856
718,510
86,638
342,246
3,751
–
2,543
435,178
1,153,688
42,954
39,893
11,755
2,679
3,157
15,694
116,132
424,587
121,972
60,871
1,114
6,646
615,190
731,322
677,540
85,362
(340,536)
422,366
1,153,688
121,527
336,819
49,466
77,328
1,478
586,618
91,491
289,731
1,613
238
627
383,700
970,318
27,043
37,830
11,541
1,958
147
26,560
105,079
357,731
77,367
71,308
1,789
3,735
511,930
617,009
627,848
69,333
(343,872)
353,309
970,318
XERO LIMITED 38
FINANCIAL STATEMENTS
Statement of Changes in Equity
Share
capital
($000s)
Treasury
shares
($000s)
Notes
Share-
based
payment
reserve
($000s)
Accumulated
losses
($000s)
Foreign
currency
translation
reserve
($000s)
Cash flow
hedge
reserve
($000s)
Premium
on call
spread
options
($000s)
Total
equity
($000s)
Balance at 1 April 2019
638,234
(10,386)
30,902
(343,872)
2,266
35,261
353,309
Net profit
Other comprehensive
income/(loss)
Total comprehensive
income
Transactions with owners:
–
–
–
–
–
–
–
–
–
3,336
–
904
–
–
(3,393)
845
–
–
3,336
(2,548)
3,336
(3,393)
845
–
788
Share-based payments
17, 22
16,282
585
23,497
Exercising of employee
and director share options
17, 22
17,353
–
(4,920)
Issue of shares - deferred
consideration for
acquisition of Hubdoc
17
15,472
–
–
–
–
–
–
–
–
–
–
–
–
40,364
–
12,433
–
15,472
Balance at 31 March 2020
687,341
(9,801)
49,479
(340,536)
(2,489)
3,111
35,261
422,366
Balance at 1 April 2018
549,596
(11,852)
18,904
(316,729)
(102)
1,267
Net loss
Other comprehensive
income
Total comprehensive
loss
Transactions with owners:
–
–
–
–
–
–
–
–
–
(27,143)
–
–
–
1,006
999
–
–
–
241,084
(27,143)
2,005
(27,143)
1,006
999
–
(25,138)
Share-based payments
17, 22
13,673
1,466
17,343
Exercising of employee
and director share options
17, 22
20,115
–
(5,345)
Issue of shares -
acquisition of Hubdoc,
net of issuance costs
17
54,850
Premium on call spread
options, net of issuance
costs
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
32,482
–
14,770
–
54,850
–
35,261
35,261
Balance at 31 March 2019
638,234
(10,386)
30,902
(343,872)
904
2,266
35,261
353,309
The accompanying notes form an integral part of these financial statements
39
Note
2020
($000s)
2019
($000s)
Statement of Cash Flows
Year ended 31 March
Operating activities
Receipts from customers
Other income
Interest received
Payments to suppliers and employees
Interest paid
Income tax paid
Net cash flows from operating activities
20
Investing activities
Capitalised development costs
Acquisition of Hubdoc
Capitalised contract acquisition costs
Purchase of property, plant and equipment
Other investing activities
Net cash flows from investing activities
Financing activities
Payment of lease liabilities
Receipt of lease incentive
Exercising of share options
Proceeds from borrowings
Repayment of borrowings
Proceeds from issuance of convertible notes, net of issue costs
Purchase of call spread options
Payments for short-term deposits
Proceeds from short-term deposits
Net cash flows from financing activities
Net increase/(decrease) in cash and cash equivalents
Foreign currency translation adjustment
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
The accompanying notes form an integral part of these financial statements
717,264
5,609
14,363
(542,760)
(19,460)
(8,387)
166,629
(111,296)
–
(13,682)
(13,872)
(674)
552,256
5,370
5,028
(435,043)
(9,502)
(3,883)
114,226
(82,182)
(30,312)
(13,512)
(15,727)
1,262
(139,524)
(140,471)
(13,417)
504
12,433
–
–
–
–
(785,753)
734,563
(51,670)
(24,565)
11,065
121,527
108,027
(9,103)
14,500
14,770
30,850
(31,583)
447,766
(45,810)
(336,819)
59,000
143,571
117,326
(16,754)
20,955
121,527
XERO LIMITED 40
Notes to the Financial Statements
1. REPORTING ENTITY AND STATUTORY BASE
Xero Limited (‘the Company’) is a company registered under the New Zealand Companies Act 1993 and is listed on the Australian
Securities Exchange (ASX), and is required to be treated as an FMC Reporting Entity under the Financial Market Conducts Act
2013 and the Financial Reporting Act 2013.
The consolidated financial statements of the Group for the year ended 31 March 2020 were authorised in accordance with a
resolution of directors for issue on 14 May 2020.
2. BASIS OF ACCOUNTING
(a) Basis of preparation
The audited consolidated financial statements of the Company and its subsidiaries (together 'the Group' or 'Xero') have been
prepared in accordance with Generally Accepted Accounting Practice in New Zealand (NZ GAAP). The Group is a for-profit entity
for the purposes of complying with NZ GAAP. The consolidated financial statements comply with New Zealand equivalents to
International Financial Reporting Standards (NZ IFRS), other New Zealand accounting standards, and authoritative notices that
are applicable to entities that apply NZ IFRS. The consolidated financial statements also comply with International Financial
Reporting Standards.
Other than where described below, or in the notes, the consolidated financial statements have been prepared using the historical
cost convention.
The consolidated financial statements are presented in New Zealand dollars ($) (the ‘presentation currency’). Items included in
the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in
which the entity operates (the ‘functional currency’).
(b) Changes in accounting policies and disclosures
The accounting policies and disclosures adopted are consistent with those of the previous year.
Certain comparative information has also been reclassified to conform with the current period’s presentation.
(c) Standards or interpretations issued but not yet effective and relevant to the Group
There are no standards or amendments that have been issued but are not yet effective that are expected to have a significant
impact on the Group.
The Group has not adopted, and currently does not anticipate adopting, any standards prior to their effective dates.
(d) Critical accounting estimates
In applying the Group’s accounting policies, management continually evaluates judgements, estimates, and assumptions based
on experience and other factors, including expectations of future events that may have an impact on the Group. All judgements,
estimates, and assumptions made are believed to be reasonable based on the most current set of circumstances available to the
Group. Actual results may differ from the judgements, estimates, and assumptions.
The significant judgements, estimates, and assumptions made by management in the preparation of these financial statements
are outlined within the financial statement notes to which they relate.
NOTES TO THE FINANCIAL STATEMENTS 41
3. SEGMENT INFORMATION
The Group operates in one business segment, providing online business solutions for small businesses and their advisors.
Xero has two operating segments: Australia and New Zealand (ANZ) and International. These segments have been determined
based on how the Xero leadership team (the chief operating decision-maker) reviews financial performance.
Segment operating expenses represent sales and marketing costs and service delivery costs, including both in-country costs and
an allocation of centrally managed costs.
ANZ
($000s)
International
($000s)
Total
($000s)
Year ended 31 March 2020
Operating revenue
Expenses
Segment contribution
Year ended 31 March 2019
Operating revenue
Expenses
Other income
Segment contribution
436,530
(164,962)
271,568
359,107
(140,175)
69
219,001
Reconciliation from segment contribution to net profit/(loss) before tax
Year ended 31 March
Segment contribution
Product design and development
General and administration
Asset impairments
Other income and expenses
Finance income
Finance expense
Net profit/(loss) before tax
Depreciation and amortisation by segment
Year ended 31 March
ANZ
International
Corporate (not allocated to a segment)
Total
281,701
(254,472)
27,229
193,712
(198,754)
331
(4,711)
2020
($000s)
298,797
(178,258)
(88,980)
(1,427)
2,550
13,432
(36,277)
9,837
2020
($000s)
14,125
18,799
72,137
105,061
718,231
(419,434)
298,797
552,819
(338,929)
400
214,290
2019
($000s)
214,290
(137,795)
(66,072)
(18,604)
(496)
8,035
(22,494)
(23,136)
2019
($000s)
11,379
14,542
55,927
81,848
At 31 March 2020, $361.2 million, or 84%, of the Group’s property, plant and equipment and intangible assets was domiciled in
New Zealand (2019: $316.6 million, or 83%).
XERO LIMITED 42
Share-based payments by segment
Year ended 31 March
ANZ
International
Corporate (not allocated to a segment)
Total
4. REVENUE
Operating revenue by geographic location
Year ended 31 March
Australia
United Kingdom
New Zealand
North America
Rest of World
Total operating revenue
Subscription revenue
2020
($000s)
7,601
8,110
18,625
34,336
2020
($000s)
320,376
183,565
116,154
55,398
42,738
718,231
2019
($000s)
5,600
8,325
15,021
28,946
2019
($000s)
261,468
119,521
97,639
44,270
29,921
552,819
Subscription revenue comprises the recurring monthly fees from subscribers to Xero’s online software products. Subscribers
are invoiced monthly. Unbilled revenue at year end is recognised in the Statement of Financial Position as accrued income and
included within trade and other receivables. Unearned revenue at year end is recognised in the Statement of Financial Position as
income in advance and included within other current liabilities.
Revenue is recognised as performance obligations under customer contracts are met. Performance obligations for subscriptions
to Xero’s cloud-based software consist of the provisioning of the software and related support services over the term of the
contract. Where the performance obligations of add-ons are usage-based (such as payroll and expenses), revenue is recognised
consistent with the usage profile.
Other operating revenue
Other operating revenue comprises revenue from related non-subscription services like fintech products, along with income from
conferences and events.
Performance obligations under fintech arrangements include the referral of customers to the revenue share counterparty and the
continued servicing of that customer by the counterparty. Performance obligations for conference and event revenue consist of
the delivery of the conference or event.
NOTES TO THE FINANCIAL STATEMENTS 43
5. EXPENSES
Overhead allocation
The presentation of the Income Statement by function requires certain overhead costs to be allocated to functions. These
allocations require management to apply judgement. Facilities, internal use information technology costs, and depreciation and
amortisation not relating to external product software development have been allocated to functions on a headcount basis.
Recruitment costs have been allocated according to the number of employees employed in each function during the period. The
amortisation of product-related software development is included in product design and development.
Sales tax
The Income Statement and the Statement of Cash Flows have been prepared so that all components are stated exclusive of sales
tax, except where sales tax is not recoverable. All items in the Statement of Financial Position are stated net of sales tax with the
exception of receivables and payables, which include sales tax invoiced. Sales tax includes Goods and Services Tax and Value
Added Tax where applicable.
Cost of revenue and operating expenses
Year ended 31 March
Employee entitlements
Employee entitlements capitalised
Share-based payments
Share-based payments capitalised
Advertising and marketing
Platform costs
Computer equipment and software
Consultants and contractors
Travel-related costs
Superannuation costs
Communication, insurance and office administration
Rental costs
Staff recruitment
Auditors’ remuneration
Other operating expenses
Total cost of revenue and operating expenses excl. depreciation and amortisation*
*Includes grant income of $5.2 million (2019: $5.2 million)
2020
($000s)
371,679
(106,758)
45,174
(10,838)
113,227
40,252
23,657
18,936
16,356
15,094
7,962
5,768
3,523
471
37,108
581,611
2019
($000s)
301,559
(82,200)
36,612
(7,666)
76,421
33,468
19,380
18,506
11,601
11,373
6,820
3,487
2,166
821
28,600
460,948
XERO LIMITED 44
Depreciation and amortisation
Year ended 31 March
Relating to:
Amortisation of development costs
Amortisation of other intangible assets
Depreciation of property, plant and equipment
Total depreciation and amortisation
Total cost of revenue and operating expenses
Depreciation and amortisation included in function expenses as follows:
Product design and development
Cost of revenue
Sales and marketing
General and administration
Total depreciation and amortisation
Auditors’ remuneration
Year ended 31 March
Audit and review of financial statements
Other assurance services*
Taxation services
Other services**
Total fees paid to auditors
2020
($000s)
2019
($000s)
69,452
12,574
23,035
105,061
686,672
68,490
7,105
25,819
3,647
105,061
53,600
10,358
17,890
81,848
542,796
53,012
5,393
20,529
2,914
81,848
2020
($000s)
2019
($000s)
373
80
16
2
471
323
452
43
3
821
* Other assurance services relate to assurance services in connection with ISO 27001 certification and compliance services in respect of grant funding. Services in the
comparative period also included assurance services in connection with reporting on service organisation controls, and comfort letter over convertible notes issuance.
These additional independent assurance services were closely related to the financial statement audit
** Services relate to provision of remuneration market data
6. FINANCE INCOME AND EXPENSE
Finance income
Finance income comprises interest income on cash and cash equivalents and short-term deposits. Interest income is recognised
as it is accrued using the effective interest method. The effective interest method calculates the amortised cost of the financial
asset and allocates the interest income over its expected life.
Finance expense
Year ended 31 March
Interest on convertible notes
Bank standby facility costs
Lease liability interest
Other finance expense
Total finance expense
2020
($000s)
28,033
1,691
6,280
273
36,277
2019
($000s)
12,753
1,847
4,987
2,907
22,494
NOTES TO THE FINANCIAL STATEMENTS 45
7. EARNINGS PER SHARE
The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares.
Basic EPS is calculated by dividing the net profit/(loss) attributable to ordinary shareholders of the Company by the weighted
average number of ordinary shares on issue during the year, excluding shares held as treasury shares.
Diluted EPS is determined by adjusting the net profit/(loss) attributable to ordinary shareholders and the weighted average
number of ordinary shares on issue for the effects of all potential dilution to ordinary shares, which comprise convertible notes,
restricted shares, options, and restricted stock units (RSUs). Instruments are only treated as dilutive when their conversion to
ordinary shares would decrease EPS or increase the loss per share.
Year ended 31 March
Net profit/(loss) after tax
Add back: foreign exchange revaluation on contingent consideration included in ordinary
shares for basic calculation prior to the date of share issue, net of tax
Net profit/(loss) attributable to equity holders of the Group, used in calculating
basic and diluted EPS
2020
(000s)*
2019
(000s)*
$3,336
($27,143)
($44)
$3,292
–
($27,143)
Weighted average number of ordinary shares for basic EPS
140,922
139,204
Effect of dilution from:
Share options
Restricted shares
Restricted stock units
1,376
450
404
–
–
–
Weighted average number of ordinary shares adjusted for the effect of dilution
143,152
139,204
Basic earnings/(loss) per share
Diluted earnings/(loss) per share
* Except for per share amounts
$0.02
$0.02
($0.19)
($0.19)
For the year ended 31 March 2020, 6,474,084 shares that would be issued on conversion of the convertible notes and
131,941 shares that would be on issue for the full year relating to the Hubdoc acquisition are excluded from the diluted weighted
average number of shares because their effect would be anti-dilutive. The shares resulting from the notes and contingent
consideration are anti-dilutive as a result of the corresponding adjustments that would be required to be made to net profit
attributable to ordinary shareholders.
XERO LIMITED 46
8. TRADE AND OTHER RECEIVABLES
At 31 March
Accrued income
Prepayments
Trade receivables
Provision for doubtful debts
Interest receivable
Rental bonds and other receivables
Total trade and other receivables
2020
($000s)
22,750
22,617
7,614
(633)
2,534
995
55,877
2019
($000s)
21,957
16,405
7,064
(504)
3,465
1,079
49,466
Trade and other receivables are initially recognised at the fair value of the amounts to be received, plus transaction costs (if any).
They are subsequently measured at amortised cost (using the effective interest method) less impairment losses.
Trade receivables relate primarily to the monthly subscriptions to Xero’s online products. Subscriptions are charged monthly,
the majority being paid by direct debit. At 31 March 2020, trade receivables of the Group of $876,000 were past due and are
considered partially impaired (2019: $704,000). At 1 April 2018, accrued income was $19.1 million.
Key estimates and assumptions
In accordance with NZ IFRS 9: Financial Instruments, the Group recognises impairment losses using the lifetime Expected Credit
Loss (ECL) model. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and
the cash flows that the Group expects to receive.
A six month historical default rate is applied to the current period trade receivables balance to calculate the impairment.
At 31 March 2020, this default rate was increased to reflect the potential impact of the COVID-19 pandemic on credit losses.
The carrying amount of the asset is reduced through the use of a provision account, and the amount of the loss is recognised in
the Income Statement. When a receivable is uncollectible, it is written off against the provision account for receivables.
Subsequent recoveries of amounts previously written off are credited against the Income Statement.
NOTES TO THE FINANCIAL STATEMENTS 47
Total
($000s)
91,491
22,426
(7,289)
9. PROPERTY, PLANT AND EQUIPMENT
Right of use
asset
($000s)
Leasehold
improvements
($000s)
Furniture and
equipment
($000s)
Computer
equipment
($000s)
Year ended 31 March 2020
Opening net book value
Additions
Disposals*
Depreciation expense
Impairment reversals
Foreign exchange adjustment
Closing net book value
At 31 March 2020
Cost
Accumulated depreciation
Closing net book value
63,440
8,312
(6,795)
(12,614)
207
2,257
15,474
4,866
(87)
(3,662)
–
152
7,542
4,478
(366)
(2,355)
–
279
5,035
4,770
(41)
(4,404)
(23,035)
–
150
207
2,838
54,807
16,743
9,578
5,510
86,638
79,552
(24,745)
54,807
23,836
(7,093)
16,743
15,374
(5,796)
9,578
11,602
(6,092)
5,510
130,364
(43,726)
86,638
* $6.8m of right of use asset disposals relates to disposal of lease liabilities (2019: $1.9 million)
Year ended 31 March 2019
Opening net book value
Additions
Disposals
Depreciation expense
Impairments
Foreign exchange adjustment
Closing net book value
At 31 March 2019
Cost
Accumulated depreciation
Closing net book value
Right of use
asset
($000s)
Leasehold
improvements
($000s)
Furniture and
equipment
($000s)
Computer
equipment
($000s)
42,419
33,520
(1,863)
(10,709)
(497)
570
10,271
8,351
(1,047)
(2,077)
–
(24)
5,687
3,828
–
(2,020)
–
47
3,427
4,669
(9)
(3,084)
–
32
Total
($000s)
61,804
50,368
(2,919)
(17,890)
(497)
625
63,440
15,474
7,542
5,035
91,491
86,764
(23,324)
63,440
20,706
(5,232)
15,474
13,052
(5,510)
7,542
8,890
(3,855)
5,035
129,412
(37,921)
91,491
Key estimates and assumptions
Property, plant and equipment are stated at historical cost less depreciation.
Depreciation on assets is charged on a straight-line basis to allocate the differences between their original cost and the residual
values over their estimated useful lives, as follows:
Leasehold improvements
Computer equipment
Furniture and equipment
Right of use asset*
* Substantially all of the right of use asset relates to building leases
** Lease terms range between 1 -12 years
Term of lease**
2 - 3 years
2 - 7 years
Term of lease**
The residual values and useful lives of assets are reviewed and adjusted if appropriate at each balance date. If an asset’s carrying
amount is greater than its estimated recoverable amount, the carrying amount is immediately written down to its recoverable amount.
XERO LIMITED 48
10. INTANGIBLE ASSETS
Year ended 31 March 2020
Opening net book value
Additions*
Amortisation expense
Impairments
Foreign exchange adjustment
Closing net book value
At 31 March 2020
Cost
Accumulated amortisation
Closing net book value
Software
development
($000s)
Contract
acquisition asset
($000s)
Other intangible
assets
($000s)
Goodwill
($000s)
Total
($000s)
177,695
120,542
(69,452)
(1,634)
–
28,727
13,829
(10,937)
–
1,459
4,536
345
(1,637)
–
–
78,773
–
–
–
–
289,731
134,716
(82,026)
(1,634)
1,459
227,151
33,078
3,244
78,773
342,246
370,563
(143,412)
227,151
60,360
(27,282)
33,078
6,075
(2,831)
3,244
78,773
–
515,771
(173,525)
78,773
342,246
* Included in software development additions is $17.3 million of externally purchased assets (2019: $14.5 million)
Software
development
($000s)
Contract
acquisition asset
($000s)
Other intangible
assets
($000s)
Goodwill
($000s)
Total
($000s)
139,146
89,583
15,508
(53,600)
(12,942)
–
24,035
13,384
–
(9,154)
–
462
470
–
5,270
(1,204)
–
–
5,165
–
78,773
–
(5,165)
–
168,816
102,967
99,551
(63,958)
(18,107)
462
177,695
28,727
4,536
78,773
289,731
283,244
(105,549)
177,695
50,435
(21,708)
28,727
5,733
(1,197)
4,536
78,773
418,185
–
(128,454)
78,773
289,731
Year ended 31 March 2019
Opening net book value
Additions
Acquisitions
Amortisation expense
Impairments
Foreign exchange adjustment
Closing net book value
At 31 March 2019
Cost
Accumulated amortisation
Closing net book value
Key estimates and assumptions
Software development
Costs that are directly associated with the development of software are recognised as intangible assets where the following
criteria are met:
–
It is technically feasible to complete the software product so that it will be available for use
– Management intends to complete the software product and use or sell it
– There is an ability to use or sell the software product
–
It can be demonstrated how the software product will generate probable future economic benefits
– Adequate technical, financial, and other resources to complete the development and to use or sell the software product are
available
– The expenditure attributable to the software product during its development can be reliably measured
NOTES TO THE FINANCIAL STATEMENTS 49
Other development expenditure that does not meet the above criteria is recognised as an expense when incurred. Development
costs previously recognised as expenses are not recognised as assets in a subsequent period. Research costs, and costs
associated with maintenance, are recognised as an expense when incurred.
At 31 March 2020, if software development capitalisation rates had been 10% higher/lower with all other variables held constant,
the impact on operational expenses would have been $10.3 million lower/higher.
Contract acquisition asset
In accordance with NZ IFRS 15: Revenue, Xero capitalises incremental costs of obtaining customer contracts. Capitalisable costs
consist of sales commissions that have a direct relationship to new revenue contracts obtained. Costs capitalised are amortised
to sales and marketing and expensed over the average period of benefit associated with the costs. The period of benefit for the
contract acquisition asset is determined to be five years. Management have determined this as appropriate with reference to
estimated customer lifespans and the useful lives of the software to which the commissions relate.
Other intangible assets
Other intangible assets consist of patents, domains, and trademark costs, along with customer contracts. Other intangible assets
acquired are initially measured at cost. Internally generated assets, excluding capitalised development costs, are not capitalised
and expenditure is recognised in the Income Statement when the expenditure is incurred.
Useful lives of intangible assets
With the exception of goodwill, the useful lives of the Group’s intangible assets are assessed to be finite. Assets with finite lives
are amortised over their useful lives and tested for impairment whenever there are indications that the assets may be impaired.
Amortisation is recognised in the Income Statement on a straight-line basis over the estimated useful life of the intangible asset,
from the date it is available for use. The estimated useful lives are as follows:
Software development
Contract acquisition asset
Customer contracts
Patents, domains, and trademark costs
Impairment considerations
3 - 7.5 years
5 years
3 years
5 - 10 years
At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of
impairment exists, the Group makes a formal estimate of the recoverable amount. Where the carrying value of an asset exceeds
its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.
The recoverable amount is the greater of fair value less costs to sell or the asset’s value in use. For the purposes of assessing
impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows.
The Group recognised impairment losses of $1.6 million during the year ended 31 March 2020 on write-down of software
development (2019: $12.9 million).
Goodwill is tested at least annually for impairment, or whenever indicators of impairment exist.
An impairment loss is recorded against goodwill if its recoverable amount is less than its carrying amount. The recoverable
amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate.
Goodwill and goodwill impairment testing
Goodwill represents the excess of purchase consideration over the fair value of net assets acquired in a business combination.
Goodwill is allocated to cash-generating units (CGUs), which are the lowest level of assets for which separately identifiable cash
flows can be attributed. Xero’s goodwill at 31 March 2020 relates solely to the acquisition of Hubdoc Inc. and has been allocated
to the ANZ and International CGUs. Of the $78.8 million of goodwill, $39.0 million is allocated to ANZ and $39.8 million is
allocated to International.
XERO LIMITED 50
For the year ended 31 March 2019, the Hubdoc Inc. goodwill was allocated to the Hubdoc CGU. The reallocation of goodwill to new
CGUs in the current year has arisen from the fact that the Hubdoc product from March 2020 was bundled with Xero’s core
accounting software, therefore separately identifiable cash flows are no longer able to be attributed to the Hubdoc CGU.
The recoverable amount of the ANZ and International CGUs were calculated on the basis of value in use using a discounted cash
flow model. Future cash flows were projected for five years for ANZ and ten years for International, with key assumptions being
CGU earnings which is based on expected future performance of the CGUs. A period of ten years was used to project future cash
flows for the International CGU due to the early stage of growth the market is in.
Key assumptions applied for the Group include growth rate of 7.0% (2019: 15.0%), pre-tax discount rate of 10.0% (2019: 20.0%), and
terminal growth rate of 5.6% (2019: 3.0%). The terminal growth rate is determined based on the long-term anticipated growth rate
of the business. The forecast financial information is based on both past experience and future expectations of CGU performance.
Estimated potential future impacts of COVID-19 have been considered within forecast financial information. The major inputs and
assumptions used in performing an impairment assessment that require judgement include revenue forecasts, operating cost
projections, discount rates, terminal growth rates, and future technology paths.
No impairment arose as a result of goodwill impairment testing for the year ended 31 March 2020.
11. TRADE AND OTHER PAYABLES
At 31 March
Trade payables
Accrued expenses
Sales tax payable
Total trade and other payables
2020
($000s)
10,615
23,440
8,899
42,954
2019
($000s)
5,690
15,434
5,919
27,043
The Group recognises trade and other payables initially at fair value and subsequently at amortised cost using the effective
interest method. The amounts are unsecured and non-interest bearing.
12. OTHER CURRENT LIABILITIES
At 31 March
Income in advance
Accrued interest
Other short-term liabilities
Contingent consideration
Total other current liabilities
2020
($000s)
9,607
5,812
275
–
15,694
2019
($000s)
7,682
5,114
309
13,455
26,560
The Group recognises other current liabilities initially at fair value, and subsequently at amortised cost using the effective interest
method.
Income in advance is recognised when the Group has received consideration prior to services being rendered. All income in
advance from the prior period was subsequently recognised as revenue in the year.
NOTES TO THE FINANCIAL STATEMENTS 13. LEASE LIABILITIES
Balance at 1 April
Leases entered into during the period
Lease incentives received
Principal repayments
Change in future lease payments
Foreign exchange adjustment
Balance at 31 March
Current
Non-current
51
2020
($000s)
82,849
5,988
504
(13,417)
(6,213)
2,915
72,626
11,755
60,871
2019
($000s)
45,437
33,267
14,500
(9,103)
(1,889)
637
82,849
11,541
71,308
Under NZ IFRS 16: Leases the Group is required to recognise lease liabilities for contracts identified as containing a lease, except
when the lease is for 12 months or less or the underlying asset is of low value.
Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense
in the Income Statement. Low-value assets comprise IT equipment and small items of office furniture. The expense relating to
low-value assets for the year ended 31 March 2020 was $2.8 million (2019: $2.2 million).
Lease liabilities are initially measured at the present value of the remaining lease payments, discounted at the Group’s
incremental borrowing rate. Subsequently, the carrying value of the liability is adjusted to reflect interest and lease payments
made. Lease liabilities may be re-measured when there is a change in future lease payments arising from a change in an index or
market rate, or if there is a change in the Group’s estimate of the amount expected to be payable.
Key estimates and assumptions
The Group assesses at lease commencement whether it expects to exercise renewal options included in contracts. Where it is
reasonably certain that renewal options will be exercised, the extension period is included in the lease liability calculation.
14. TERM DEBT
Convertible notes
In September 2018, Xero Investments Limited, a wholly owned subsidiary of the Company, made an offering of USD300 million of
convertible notes. The convertible notes were settled and listed on the Singapore Exchange Securities Trading Limited (SGX-ST)
on 5 October 2018. The notes have a coupon interest rate of 2.375% per annum, payable six-monthly in arrears.
The notes are unsubordinated, unsecured obligations of Xero, and are scheduled to mature on 4 October 2023. The settlement of
the notes will be in cash unless Xero elects to settle in shares, in which case Xero will be obliged to deliver ordinary shares to
relevant noteholders. The cash settlement amount will be calculated based on the volume-weighted average price of the ordinary
shares over a 90 day trading period.
XERO LIMITED 52
Notes and conversion feature derivative
The conversion feature of the notes is required to be separated from the notes and is accounted for as a derivative financial
liability. The principal amount, unamortised debt discount, unamortised issuance costs, and net carrying amount of the liability
component of the notes at 31 March are as follows:
At 31 March
Principal amount
Unamortised debt discount
Unamortised issuance costs
Term debt
2020
($000s)
500,526
(69,473)
(6,466)
424,587
2019
($000s)
440,787
(75,984)
(7,072)
357,731
The effective interest rate for the convertible notes is 7.30%. The coupon interest expense, and amortisation of debt discount and
issuance costs for the year ended 31 March were as follows:
Year ended 31 March
Coupon interest expense
Amortisation of debt discount and issuance costs
Total finance expense on convertible notes
Call spread options
2020
($000s)
11,010
17,023
28,033
2019
($000s)
5,126
7,627
12,753
In connection with the issuance of the convertible notes, Xero purchased call spread options which are expected to reduce
potential dilution to shareholders upon conversion of the notes and to offset any cash payments Xero may be required to make in
excess of the principal amounts on conversion. The call spread options consist of 6.5 million lower strike call options purchased
with an average strike price equal to the conversion price of the notes, and 6.5 million upper strike call options sold with an
average strike price of USD60.5966. The call spread options expire on 4 October 2023.
The upper strike call options are accounted for as equity, and are recognised at their fair value, less transaction costs. On initial
recognition, the upper strike options were recognised at a fair value of $35.3 million and were not subsequently revalued.
15. FINANCIAL INSTRUMENTS, CAPITAL AND FINANCIAL RISK MANAGEMENT
Financial instruments
Financial instruments recognised in the Statement of Financial Position include cash and cash equivalents, short-term deposits,
receivables and payables, contingent consideration, term debt, and derivative financial instruments. The Group’s policy is that no
speculative trading in financial instruments may be undertaken.
Classification and fair values
Xero has carried out a fair value assessment of its financial assets and liabilities at 31 March 2020 in accordance with NZ IFRS 9.
Under NZ IFRS 9, financial instruments are classified as either measured at amortised cost, fair value through other
comprehensive income, or fair value through profit or loss. The classification of the Group’s financial instruments into these
categories is included within the table below.
The Group’s foreign exchange derivatives are recognised at fair value. Fair value is determined using forward exchange rates that
are quoted in an active market (level two on the fair value hierarchy).
The fair values of the conversion feature and call option derivative asset relating to the convertible notes are determined using
valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as
little as possible on entity-specific estimates (level two on the fair value hierarchy). Inputs into the valuation include share price
volatility and time to expiration.
NOTES TO THE FINANCIAL STATEMENTS 53
At initial recognition, the fair value of the convertible notes was determined using a market interest rate for an equivalent
non-convertible bond. The notes are subsequently recognised at amortised cost. The fair value of the debt component of the
convertible notes at 31 March 2020 was $454.5 million (2019: $362.6 million).
The carrying values of the Group’s other financial instruments do not materially differ from their fair value.
There were no transfers between classes of financial instruments during the period.
Financial assets at
amortised cost
($000s)
Financial
instruments at fair
value through profit
or loss
($000s)
Financial liabilities
at amortised cost
($000s)
Total carrying
value
($000s)
At 31 March 2020
Assets
Cash and cash equivalents
Term deposits
Trade and other receivables
Derivative assets (foreign currency derivatives)*
Derivative assets (call spread options)
Total financial assets
Liabilities
Trade and other payables
Derivative liabilities (foreign currency derivatives)*
Derivative liabilities (conversion feature on convertible notes)
Term debt
Other current liabilities
Other non-current liabilities
Total financial liabilities
At 31 March 2019
Assets
Cash and cash equivalents
Term deposits
Trade and other receivables
Derivative assets (foreign currency derivatives)*
Derivative assets (call spread options)
Total financial assets
Liabilities
Trade and other payables
Derivative liabilities (foreign currency derivatives)*
Derivative liabilities (conversion feature on convertible notes)
Term debt
Other current liabilities
Other non-current liabilities
Total financial liabilities
108,027
428,052
11,837
7,347
117,351
672,614
34,055
3,256
121,873
108,027
428,052
11,837
–
–
–
–
–
7,347
117,351
547,916
124,698
–
–
–
–
–
–
–
–
–
–
–
–
–
121,527
336,819
11,731
–
–
470,077
–
–
–
–
–
–
–
–
34,055
–
–
3,256
121,873
–
–
2,840
424,587
424,587
5,812
–
5,812
2,840
127,969
464,454
592,423
–
–
–
3,567
73,999
77,566
–
147
77,367
–
13,455
600
91,569
–
–
–
–
–
–
21,124
–
–
357,731
5,114
–
121,527
336,819
11,731
3,567
73,999
547,643
21,124
147
77,367
357,731
18,569
600
383,969
475,538
* Foreign currency derivatives are hedge accounted when possible with unrealised gains and losses recognised in other comprehensive income until the underlying
cashflows are realised, at which point the gains and losses are reclassified to the Income Statement
XERO LIMITED 54
Capital management
The capital structure of the Group primarily consists of equity raised by the issue of ordinary shares in the Company and
issued debt.
Xero manages its capital to ensure that it maintains an appropriate capital structure to support its business and maximise
shareholder value. The Group’s capital structure is adjusted based on business needs and economic conditions. During the year
ended 31 March 2019, Xero issued USD300 million of convertible notes for the purpose of investments into strategic and
complementary businesses and assets which are in line with the Group’s strategy to drive long-term shareholder value.
As part of the Group’s ongoing risk management, during the year ended 31 March 2020 the Group renewed its standby syndicated
facility for a further three year term. As part of this, the facility was increased from $100 million to $150 million. Counterparties to
the facility are ANZ, BNZ, HSBC, and Citibank.
The facility provides Xero with additional liquidity to cover unforeseen operating cash flow requirements. The facility agreement
contains financial undertakings usual for facilities of this nature. The facility remains undrawn and there are no current plans to
draw down on the facility.
Financial risk management
The Group is exposed to the following risks through the normal course of business and from its use of financial instruments:
a. Market risk
b. Liquidity risk
c. Credit risk
The following presents both qualitative and quantitative information on the Group’s exposure to each of the above risks, along
with policies and processes for managing risk.
(a) Market risk
The Group is exposed to market risk primarily through changes in foreign currency exchange rates and interest rates.
Foreign currency risk
Nature of risk
Foreign currency risk is the risk that the New Zealand dollar (NZD) net cash flows that flow through to the Group are negatively
impacted by changes to foreign currency exchange rates.
Exposure and risk management
Xero is exposed to currency risk from the operations of foreign subsidiaries and foreign currency denominated expenses in the
parent Company. The Group has significant operations in four currencies, being Great British pounds (GBP), Australian dollars
(AUD), United States dollars (USD), and Canadian dollars (CAD), with exposures to other currencies to a lesser degree.
The material exposures are USD and CAD outflows, as well as AUD and GBP inflows. In order to reduce the impact of short-term
movements in exchange rates, the Group’s treasury policy requires a portion of the next 18 months’ cash flows to be hedged with
forward exchange contracts and vanilla options (outright purchased options and vanilla collars).
NOTES TO THE FINANCIAL STATEMENTS 55
The Group’s exposure to monetary foreign currency financial instruments and lease liabilities is outlined below in NZD:
At 31 March 2020
Exposures
Cash and cash equivalents, and short-term deposits
Trade and other receivables
Trade and other payables
Other current liabilities
Other non-current liabilities
Lease liabilities
Term debt (including conversion feature)
AUD
($000s)
USD
($000s)
GBP
($000s)
CAD
($000s)
8,525
1,387
(8,766)
–
–
419,699
3,695
(7,019)
(5,812)
–
(5,392)
(13,523)
–
(500,526)
9,004
2,736
(6,187)
–
(2,840)
(1,794)
–
2,310
174
(524)
–
–
(1,223)
–
Derivative financial instruments (foreign currency derivatives)
85,164
(31,517)
63,990
(13,231)
Total foreign currency exposure
80,918
(135,003)
64,909
(12,494)
At 31 March 2019
Exposures
Cash and cash equivalents, and short-term deposits
Trade and other receivables
Trade and other payables
Other current liabilities
Other non-current liabilities
Lease liabilities
Term debt (including conversion feature)
14,664
366,744
914
635
5,734
1,928
(2,649)
(3,639)
(4,787)
–
–
(18,569)
–
(5,872)
(19,557)
–
(440,788)
–
(600)
(3,135)
–
Derivative financial instruments (foreign currency derivatives)
64,667
(65,804)
58,957
874
207
(551)
–
–
(102)
–
–
Total foreign currency exposure
71,724
(180,978)
58,097
428
At 31 March, a movement of 10% in the NZD would impact the Income Statement and Statement of Changes in Equity (after
hedging) as detailed in the table below:
2020
($000s)
10% decrease
2019
($000s)
2020
($000s)
10% increase
2019
($000s)
Impact on:
Net profit/(loss) before income tax (increase/(decrease))
Equity (before income tax) (increase/(decrease))
(1,751)
12,646
905
1,199
1,432
(10,214)
(740)
889
This analysis assumes a movement in the NZD across all currencies and only includes the effect of foreign exchange movements
on financial instruments. All other variables remain constant.
XERO LIMITED 56
Interest rate risk
Nature of risk
Interest rate risk is the risk that changes in interest rates negatively impact the Group’s financial performance or the value of its
financial instruments.
Exposure and risk management
The Group’s interest rate risk arises from its cash and cash equivalents and short-term deposit balances, and when term debt at
fixed rates is refinanced. Cash and cash equivalents comprise cash on hand, deposits held on at call with banks, funds invested in
money market funds, and other short-term and highly liquid investments with original maturities of 90 days or less. Surplus
balances are placed on short-term deposit at fixed rates. The repricing of these at maturity exposes the Group to interest rate
risk. Money market funds invested into include a broad range of highly-rated short-term fixed income securities and calculate
investment returns on a daily basis. Changes to interest rates will impact the returns generated by each fund. The convertible
notes give rise to interest rate risk at maturity (October 2023) if the Group were to refinance at prevailing interest rates, with
higher interest rates increasing the cost of debt financing should they be in effect at this time.
The Group does not currently enter into interest rate hedges. However, management regularly reviews its banking arrangements
to ensure it achieves the best returns on its funds while maintaining access to necessary liquidity levels to service the Group’s
day-to-day activities.
Sensitivity to interest rate risk
If interest rates for the year had been 1.0% higher/lower with all other variables held constant, the impact on the interest income,
net profit and accumulated losses of the Group would have been $5.4 million lower/higher (2019: $4.6 million). This analysis
assumes that the cash and cash equivalents and short-term deposits balance was consistent with the year end balance
throughout the year.
(b) Liquidity risk
Nature of risk
Liquidity risk is the risk that the Group cannot pay contractual liabilities as they fall due.
Exposure and risk management
At 31 March 2020, the Group held cash and cash equivalents of $108.0 million and term deposits of $428.1 million. Of this,
$43.4 million of cash and cash equivalents and $367.1 million of term deposits relates to the proceeds from the issuance of
convertible notes, which is intended to be used for investments into strategic and complementary businesses and assets.
The remaining $64.6 million of cash and cash equivalents and $61.0 million of term deposits is available to service the Group’s
day-to-day activities. The $150 million syndicated standby facility provides additional liquidity to cover unforeseen operating
cash flow requirements.
The liquidity risk that arises on maturity of the convertible notes in October 2023 is being closely monitored by management, with
the intention that there will be repayment or refinancing plans in advance of this, to ensure that the Group has sufficient liquidity
to meet its contractual obligations as they fall due.
NOTES TO THE FINANCIAL STATEMENTS 57
The Group’s exposure to liquidity risk based on undiscounted contractual cash flows relating to financial liabilities and lease
liabilities is summarised below:
Less than
12 months
($000s)
Between 1
and 2 years
($000s)
Between 2
and 5 years
($000s)
Over
5 years
($000s)
Total
contractual
cash flows
($000s)
Carrying
amount
($000s)
At 31 March 2020
Non-derivative financial liabilities
Trade and other payables
Lease liabilities
Term debt*
Other non-current liabilities
Contractual cash flows
Derivative financial liabilities
Forward exchange contracts
Inflows
Outflows
Contractual cash flows
At 31 March 2019
Non-derivative financial liabilities
Trade and other payables
Lease liabilities
Term debt*
Other current liabilities
Other non-current liabilities
Contractual cash flows
Derivative financial liabilities
Forward exchange contracts
Inflows
Outflows
Contractual cash flows
34,055
18,446
11,887
–
–
–
–
16,468
33,470
53,003
34,055
121,387
34,055
72,626
11,887
2,840
524,301
–
–
–
548,075
430,399
2,840
2,840
64,388
31,195
557,771
53,003
706,357
539,920
–
62,563
(65,158)
(2,595)
–
3,095
(3,128)
(33)
–
–
–
–
–
–
–
–
–
(3,256)
65,658
(68,286)
–
–
(2,628)
(3,256)
21,124
17,819
10,349
13,455
–
–
17,009
10,469
–
600
–
–
21,124
21,124
30,849
53,200
118,877
82,849
472,193
–
–
–
–
–
493,011
362,845
13,455
13,455
600
600
62,747
28,078
503,042
53,200
647,067
480,873
–
17,467
(17,899)
(432)
–
–
–
–
–
–
–
–
–
–
–
–
–
17,467
(17,899)
(432)
147
–
–
147
* Term debt cash flows and carrying value include $5.8 million of interest included in other current liabilities at 31 March 2020 (2019: $5.1 million)
XERO LIMITED 58
(c) Credit risk
Nature of risk
Credit risk arises in the normal course of Xero’s business on financial assets if a counterparty fails to meet its contractual
obligations.
Exposure and risk management
Financial instruments that potentially subject the Group to credit risk principally consist of cash and cash equivalents, short-term
deposits, derivatives, and receivables.
The Group manages credit risk by placing cash, short-term deposits, and derivative contracts with high quality financial
institutions. The exposure to the credit risk of the call option counterparties means that in the event of default the Group may
have to pay an increased amount on settlement of the convertible notes. The Group manages liquidity factoring in any risk of
default. The credit risk associated with trade receivables is small due to the inherently low transaction value and the distribution
over a large number of customers.
Group financial assets subject to credit risk at balance date are as follows:
At 31 March
Cash and cash equivalents
Short-term deposits
Trade and other receivables
Derivative financial assets
Non-current assets
Total financial assets subject to credit risk
2020
($000s)
108,027
428,052
10,510
124,698
1,327
672,614
2019
($000s)
121,527
336,819
11,104
77,566
627
547,643
A summary of the Group’s exposure to credit risk on cash and cash equivalents, short-term deposits, and derivatives categorised
by external credit risk grading is as follows:
At 31 March
Cash and cash equivalents and short-term deposits
A-1+
A-1
A-2
Total cash and cash equivalents and short-term deposits
Derivative assets
A-1+
A-1
Total derivative assets
Total exposure to credit risk
2020
($000s)
2019
($000s)
470,121
60,379
5,579
536,079
5,917
118,781
124,698
660,777
406,612
47,533
4,201
458,346
2,923
74,643
77,566
535,912
The Group’s trade and other receivables and non-current assets are with counterparties who have no external credit risk rating.
Due to the nature of the Group’s business, the balances do not consist of any concentration of risk that is considered individually
material.
NOTES TO THE FINANCIAL STATEMENTS 59
16. DERIVATIVES AND HEDGE ACCOUNTING
The Group’s derivative financial instruments consist of forward exchange contracts, vanilla foreign exchange options (outright
purchased options and vanilla collars), conversion feature of the convertible notes, and call spread options entered into in
connection with the convertible notes.
At 31 March
Current derivative assets
Call spread options
Foreign exchange contracts
Foreign exchange options
Non-current derivative assets
Forward exchange contracts
Foreign exchange options
Total derivative assets
Current derivative liabilities
Forward exchange contracts
Foreign exchange options
Non-current derivative liabilities
Conversion feature of convertible notes
Forward exchange contracts
Foreign exchange options
Total derivative liabilities
Foreign currency hedges
2020
($000s)
117,351
5,732
1,615
–
–
124,698
(1,937)
(1,220)
2019
($000s)
73,999
2,703
626
189
49
77,566
(89)
(58)
(121,873)
(77,367)
(39)
(60)
–
–
(125,129)
(77,514)
The Group uses derivatives in the form of forward exchange contracts and vanilla foreign exchange options (outright purchased
options and vanilla collars) to reduce the risk that movements in foreign exchange rates will affect the Group’s NZD cash flows.
Whenever possible, these hedges have been designated as a hedge of a highly probable forecast transaction (a cash flow hedge
under NZ IFRS 9). The Group determines the existence of an economic relationship between the hedging instrument and the
hedged item based on the currency and timing of respective cash flows. Derivatives in hedge relationships are designated based
on a hedge ratio of 1:1. Hedges that do not have a highly probable forecast transaction are recognised as ineffective hedges. The
Group’s policy is to hedge a portion of the next 18 months’ forecasted cash flows.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised
in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the Income
Statement. Amounts accumulated in equity are reclassified to the Income Statement in the periods when the hedged transaction
affects profit and loss. Only the intrinsic value of options are designated as hedge relationships with movements in the time value
of foreign exchange options recognised immediately in the Income Statement. The Group has taken up the option under NZ IFRS
9 to defer forward points into other comprehensive income.
During the year, a net hedging gain of $6.8 million (before taxation) was recognised in other comprehensive income (2019: gain of
$6.9 million). During the year, a gain of $5.6 million (before taxation) was reclassified out of other comprehensive income to the
Income Statement (2019: gain of $5.5 million). The remaining balance will be reclassified to the Income Statement in the 18
months following 31 March 2020.
XERO LIMITED 60
Due to the uncertainty resulting from COVID-19, the Group revised its forecasted currency exposures, resulting in some hedge
ineffectiveness. As a result of this ineffectiveness, a loss of $0.3 million was reclassified from other comprehensive income to
the Income Statement. Amounts reclassified are recorded within other income and expenses. There was no other material
ineffectiveness of hedging relationships.
Hedge position
The Group’s hedge accounted financial instruments are as follows:
At 31 March
Derivative assets
Buy USD - Sell NZD
Buy CAD - Sell NZD
Buy NZD - Sell AUD
Buy NZD - Sell GBP
Total
Derivative liabilities
Buy USD - Sell NZD
Buy NZD - Sell AUD
Buy NZD - Sell GBP
Total
2020
Average
forward
rate
0.6692
0.8692
0.9332
–
–
–
0.5051
2020
Fair
value
($000s)
2020 Notional
amount hedged
(NZD)
($000s)
3,388
528
3,034
–
6,950
–
–
(2,643)
(2,643)
28,180
13,231
85,164
–
–
–
53,665
2019
Average
forward
rate
0.6898
–
0.9214
0.5083
0.6723
0.9633
–
2019
Fair
value
($000s)
2019 Notional
amount hedged
(NZD)
($000s)
553
–
2,262
730
3,545
(121)
(16)
–
(137)
53,641
–
58,957
46,400
12,162
5,710
–
Conversion feature and call option derivative
The conversion feature derivative liability of the convertible notes represents an embedded derivative financial instrument in the
host debt contract. The conversion feature represents the Group’s obligation to issue Xero Limited shares (or an equivalent
amount of cash) should noteholders exercise their conversion option. The embedded conversion derivatives are carried in the
Statement of Financial Position at their estimated fair value and adjusted at the end of each reporting period, with any unrealised
gain or loss reflected in the Income Statement. During the period, the Group recognised a $33.6 million revaluation loss in the
Income Statement relating to the conversion feature derivative (2019: $5.7 million gain).
In connection with the issue of the convertible notes, the Group entered into call spread options. The lower strike call options
mirror the conversion option embedded in the convertible notes, and are accounted for as derivative assets in the Statement of
Financial Position at their estimated fair value. The derivative assets are adjusted to fair value each reporting period, with
unrealised gains or losses reflected in the Income Statement. During the year, the Group recognised a $32.9 million revaluation
gain in the Income Statement relating to the lower strike call options (2019: $5.0 million loss).
NOTES TO THE FINANCIAL STATEMENTS 61
17. SHARE CAPITAL
Balance at 1 April
Issue of ordinary shares - acquisition of Hubdoc
Issue of ordinary shares - exercising of employee share options
Issue of ordinary shares - restricted stock unit schemes
Issue of ordinary shares - employee restricted share plan
Issue of ordinary shares - exercising of director and advisor share options
Issue of ordinary shares - directors’ fees
Ordinary shares on issue at 31 March
Treasury shares
Ordinary shares on issue at 31 March excluding treasury shares
All shares have been issued, are fully paid, and have no par value.
Note
22
22
22
22
2020
(000s)
2019
(000s)
140,774
138,449
176
504
266
67
60
4
141,851
(339)
141,512
1,133
748
180
228
26
10
140,774
(411)
140,363
During the year, the company issued 176,230 shares at a price of AUD84.85 for the settlement of the contingent consideration
relating to the acquisition of Hubdoc.
During the year, employees exercised 504,021 share options with a weighted average exercise price of $22.70 (2019: 747,821,
$19.20).
During the year, 327,917 RSUs vested, of which 266,190 were converted to shares with a weighted average price of $48.01.
The remaining 61,727 were surrendered to settle payroll withholding obligations (2019: 249,608 vested, 179,554 converted at a
weighted average price of $20.89, 70,504 surrendered to settle payroll withholding obligations).
During the year, the Company allocated 141,582 shares under the employee restricted share plan (RSP), at a weighted average
price of AUD63.95 (2019: 364,955, AUD45.22). Of the shares allocated, 66,823 were new shares issued, and 74,759 were the
reissue of shares held as treasury shares (2019: 228,459 and 136,496 respectively).
During the year, a director and an advisor exercised 59,530 share options, with a weighted average exercise price of $16.76
(2019: a director exercised 25,730 options with an exercise price of $16.14).
During the year, the Company issued 4,605 shares at a weighted average price of $59.65 to directors in lieu of cash payment for
directors’ fees (2019: 10,072, $40.17).
XERO LIMITED 62
18. GROUP ENTITIES
Consolidation subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is
exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns
through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group.
They are deconsolidated from the date that control ceases.
Inter-company transactions and balances between Group companies are eliminated on consolidation.
The financial statements of each of the Group’s subsidiaries are prepared in the functional currency of that entity.
The functional currency is determined for each entity based on factors such as the principal trading currency. The assets and
liabilities of these entities are translated at exchange rates existing at balance date. Revenue and expenses are translated
at rates approximating the exchange rates ruling at the dates of the transactions. The exchange gains or losses arising on
translation are recorded in other comprehensive income and accumulated in the foreign currency translation reserve in equity.
Principal activity
Country of incorporation
Balance date
Interest
2020 (%)
Interest
2019 (%)
Xero (NZ) Limited
Xero (UK) Limited
Xero Australia Pty Limited
Xero, Inc.
Reseller
Reseller
Reseller
Reseller
New Zealand
United Kingdom
Australia
United States
Xero (Singapore) Pte. Ltd
Service provider
Singapore
Xero Software (Canada) Ltd
Service provider
Canada
Xero (HK) Limited
Service provider
Hong Kong
Xero South Africa (Pty) Ltd
Service provider
South Africa
Xero Trustee Limited
Hubdoc Inc.
Hubdoc Pty Limited
Hubdoc (UK) Limited
Trustee
Reseller
Reseller
Reseller
New Zealand
Canada
Australia
31 March
31 March
31 March
31 March
31 March
31 March
31 March
31 March
31 March
31 March
31 March
Xero Investments Limited
Funding & investment New Zealand
Cicerone Limited
Non-active
United Kingdom
31 March
31 August
United Kingdom
31 January
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
NOTES TO THE FINANCIAL STATEMENTS 63
19. CURRENT AND DEFERRED INCOME TAX
Tax expense comprises current and deferred tax. Income tax is recognised in the Income Statement or Statement of
Comprehensive Income except when it relates to items recognised directly in equity (in which case the income tax is recognised
in equity). Income tax is based on tax rates and regulations enacted in the jurisdictions in which the entities operate.
Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes. The amount of deferred tax is based on the expected manner of
realisation of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the end of the
reporting period.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which
the asset can be utilised.
Income tax expense
The tax on the Group’s profit/(loss) before tax differs from the theoretical amount that would arise using the New Zealand
statutory income tax rate as follows:
Year ended 31 March
Accounting profit/(loss) before income tax
At the New Zealand statutory income tax rate of 28%
Non-deductible expenditure
Prior period adjustment
Utilisation of tax losses not previously recognised
Net research and development expense deferred
Tax rate variance of subsidiaries
Losses not recognised in current year
Income tax expense
Comprising:
Income tax payable
Prior period adjustment
Deferred tax
Tax losses utilised
Effect of changes in foreign currency
Income tax expense
Income tax payable
Balance at 1 April
Prior period adjustment
Income tax liability for the year
Income tax paid
Effects of changes in foreign currency
Income tax payable
2020
($000s)
9,837
2,754
370
(116)
(14,036)
7,803
847
8,879
6,501
9,196
(116)
(1,565)
(972)
(42)
6,501
2020
($000s)
1,958
(83)
9,196
(8,387)
(5)
2,679
2019
($000s)
(23,136)
(6,478)
1,640
119
(10,074)
4,023
2,890
11,887
4,007
5,361
119
(1,153)
(398)
78
4,007
2019
($000s)
537
177
5,361
(3,883)
(234)
1,958
XERO LIMITED 64
Deferred income tax
Year ended 31 March 2020
Deferred tax asset balances
At 1 April 2019
Prior period adjustment
Charged to Income Statement
Charged to equity
Impact of change in tax rates
At 31 March 2020
Deferred tax liability balances
At 1 April 2019
Prior period adjustment
Charged to Income Statement
Charged to equity
Tax losses utilised
At 31 March 2020
Year ended 31 March 2019
Deferred tax asset balances
At 1 April 2018
Prior period adjustment
Charged to Income Statement
Charged to equity
At 31 March 2019
Deferred tax liability balances
At 1 April 2018
Prior period adjustment
Charged to Income Statement
Charged to equity
Tax losses utilised
Impact of change in tax rates
Recognition of deferred tax on business
combination
At 31 March 2019
Derivatives
($000s)
Provisions and
employee benefits
($000s)
Tax depreciation
($000s)
Tax losses
($000s)
Total
($000s)
–
–
–
–
–
–
(881)
–
–
(328)
–
5,661
(547)
4,153
(23)
44
(2,849)
584
(547)
–
(46)
(1,199)
647
(2,718)
591
–
9,288
(2,858)
(2,679)
9,276
(267)
2,185
3,452
–
(19,048)
39
(3,968)
–
–
(1,209)
14,646
(22,977)
–
–
–
–
–
1,629
42
3,273
717
5,661
(1,129)
(48)
(1,672)
–
(2,849)
8,864
(412)
2,462
(3,460)
972
8,426
–
21
(503)
(717)
(1,199)
(483)
6,603
(17,041)
10,308
–
–
(5)
671
(398)
2,053
–
–
–
(881)
–
(46)
–
9,276
(409)
(268)
–
–
88
(1,418)
(19,048)
322
(390)
(1,774)
398
–
–
8,864
1,613
684
888
568
(2)
3,751
(1,789)
(640)
679
(336)
972
(1,114)
500
15
1,098
–
1,613
(613)
(92)
13
(119)
398
42
(1,418)
(1,789)
NOTES TO THE FINANCIAL STATEMENTS 65
Recognised temporary differences
The Group’s recognised deferred tax asset and deferred tax liability are expected to be recovered by $2.36 million and
$0.48 million respectively within the next 12 months. Deferred tax assets and liabilities have been offset where the balances are
due to/receivable from the same counterparties. Deferred income tax assets are recognised for carried forward tax losses to the
extent of deferred tax liabilities.
Unrecognised temporary differences
The Group has elected to defer the deduction of research and development expenditure in accordance with sections DB 34(7)
and EE 1(5) of the Income Tax Act 2007.
The total amount of deferred research and development expenditure available to the Group is $85.4 million (2019: $58.6 million).
The deferred research and development expenditure can be deducted from taxable income in future periods, and the ability to carry
forward deferred research and development expenditure is not dependent on maintaining shareholder continuity.
The Group has estimated unrecognised tax losses available to carry forward of $279.9 million (2019: $296.9 million) subject to
shareholder continuity being maintained.
Key estimates and assumptions
The Group recognises a deferred tax asset in relation to tax losses to the extent of the Group’s deferred tax liabilities.
Where it is probable that future taxable profit will be available against which carried forward tax losses can be utilised, a deferred
tax asset will be recognised for these amounts, subject to shareholder continuity (or other legislative requirements). No material
deferred tax asset has been recognised for losses in the Group, given the uncertainty of the timing of future profitability and the
requirement for shareholder continuity.
20. RECONCILIATION OF OPERATING CASH FLOWS
Year ended 31 March
Net profit/(loss)
Adjustments:
Depreciation
Amortisation
Share-based payments
Amortisation of debt discount and issuance costs
Impairment of assets
Deferred tax
Tax losses utilised
Bad debts
Other non-cash items
Changes in working capital:
Increase in trade receivables and prepayments
(Increase)/decrease in interest receivable
Increase in trade payables and other related items
Increase in income tax payable
Increase in employee entitlements
Increase in income in advance
2020
($000s)
2019
($000s)
3,336
(27,143)
23,035
82,026
34,336
17,023
1,427
(1,565)
(972)
1,974
(2,435)
(5,833)
931
6,396
721
4,304
1,925
17,890
63,958
28,946
7,627
18,604
(1,153)
(398)
1,459
766
(14,111)
(3,008)
5,068
1,421
10,764
3,536
Net cash flows from operating activities
166,629
114,226
XERO LIMITED 66
21. CHANGES IN FINANCIAL ASSETS AND LIABILITIES ARISING FROM FINANCING ACTIVITIES
Year ended 31 March 2020
At 1 April
2019
($000s)
Proceeds
($000s)
Payments
($000s)
Amortisation
expense
($000s)
Foreign
exchange
movement
($000s)
Other
non-cash
items
($000s)
At 31 March
2020
($000s)
Short-term deposits
336,819
(734,563)
785,753
–
40,043
Term debt
(357,731)
–
–
(17,023)
(49,833)
Year ended 31 March 2019
Short-term deposits
Other current liabilities
Bank loans
Term debt*
At 1 April
2018
($000s)
Proceeds
($000s)
Payments
($000s)
Amortisation
expense
($000s)
59,000
(59,000)
349,459
(733)
–
–
–
(30,850)
(455,721)
733
30,850
7,955
–
–
428,052
(424,587)
Other
non-cash
items
($000s)
At 31 March
2019
($000s)
–
–
–
336,819
–
–
Foreign
exchange
movement
($000s)
(12,640)
–
–
–
–
–
(7,627)
12,197
85,465
(357,731)
* Other non-cash movements reflects the fair value of the embedded conversion derivative at inception of the debt
22. SHARE-BASED PAYMENTS
The Group operates equity-settled, share-based compensation plans, under which employees provide services in exchange for
non-transferable options, RSUs, or restricted shares. The value of the employee services rendered for the grant of non-
transferable options, RSUs, and restricted shares is recognised as an expense over the vesting period, and the amount is
determined by reference to the fair value of the options, RSUs, and restricted shares granted.
Employee restricted share plan
Under the employee restricted share plan, ordinary shares in the Company are issued to a trustee, Xero Limited Employee
Restricted Share Trust, a wholly owned subsidiary, and allocated to participants on grant date, using funds lent to them by
the Company.
The shares are beneficially owned by the participants. The length of retention period before the shares vest is up to three years. If
the individual is still employed by the Group at the end of each specific period, the employee is given a bonus that must be used
to repay the loan and shares are then transferred to the employee. The weighted average grant date fair value of restricted shares
issued during the year was AUD63.95 (2019: AUD45.22) and was determined by the volume-weighted average price of the
Company shares for the 20 trading days preceding the grant date. Shares with a grant date fair value of $11.1 million vested during
the year (2019: $12.7 million). The Group has no legal or constructive obligation to repurchase or settle the shares for cash.
NOTES TO THE FINANCIAL STATEMENTS 67
2020
Number
of shares
(000s)
2019
Number
of shares
(000s)
371
142
(61)
(139)
313
26
339
0.2%
138
44
182
522
365
(90)
(426)
371
40
411
0.3%
261
110
371
Outstanding restricted shares at 1 April
Granted
Forfeited
Settled
Outstanding restricted shares at 31 March - allocated to employees
Forfeited shares not yet reallocated - held by Trustee
Total
Percentage of total ordinary shares
Ageing of unvested shares
Vest within one year
Vest after one year
Total unvested shares at 31 March*
* Varies to outstanding restricted shares above as shares which vested on 31 March 2020 were not settled until 1 April 2020
The number of shares awarded pursuant to the RSP does not equal the number of shares created for the scheme as forfeited
shares are held in the trust and reissued.
Share options scheme
Options are granted to selected employees, directors, and advisors. Options are conditional on the completion of the necessary
years of service (the vesting period) as appropriate to that tranche.
The options’ tranches vest within four years from the grant date. No options can be exercised later than the second anniversary of
the final vesting date. There were 52 holders of options at 31 March 2020 (2019: 44).
The Group has no legal or constructive obligation to repurchase or settle the options in cash.
Movements in the number of options outstanding and their related weighted average exercise prices are as follows:
Outstanding at 1 April
Granted
Forfeited/expired
Exercised
Outstanding at 31 March
Exercisable at 31 March
2020
Weighted average
exercise price
($)
31.91
64.85
37.12
22.07
42.04
21.32
2020
Options
(000s)
2,995
763
(333)
(564)
2,861
288
2019
Weighted average
exercise price
($)
20.65
39.13
31.48
19.10
31.91
19.55
2019
Options
(000s)
2,225
2,092
(548)
(774)
2,995
365
The weighted average share price on date of exercise for options exercised in the year ended 31 March 2020 was AUD67.94
(2019: AUD43.31). The weighted average remaining contractual term of options outstanding at 31 March 2020 is 3.1 years
(2019: 3.6 years).
XERO LIMITED 68
Options outstanding at 31 March fall within the following ranges:
Granted
2015-16
2016-17
2017-18
2018-19
2019-20
Exercise price
NZD16.00
NZD17.51 - NZD19.50
NZD25.75 - NZD32.48
AUD34.00 - AUD48.33
AUD51.82 - AUD83.04
2020
Options
(000s)
–
445
190
1,463
763
2,861
2019
Options
(000s)
30
830
327
1,808
–
2,995
The weighted average fair value of options granted during the year, determined using the Black-Scholes valuation model, was
$18.89 per option (2019: $21.41).
The significant inputs into the model were the market share price at grant date, the exercise price as shown above, expected
annualised volatility of between 31% and 36%, a dividend yield of 0%, an expected option life of between three and five years, and
an annual risk-free interest rate of between 0.7% and 1.4%.
The volatility input is measured as the standard deviation of continuously compounded share returns and is based on a statistical
analysis of daily share prices over a period consistent with the options’ expected life.
Restricted stock units
RSUs are issued to certain employees and executives of the Group. On the grant date, an RSU agreement is entered into between
employee and Company stipulating the number of units granted and their vesting schedules. On the vest date, the RSUs are
converted to ordinary shares in the Company.
No cash consideration is required to be paid on vesting of the RSUs. The fair value of RSUs granted in the year ended
31 March 2020 was $28.1 million (2019: $12.8 million) as determined by the volume-weighted average share price. The RSUs are
conditional on the employees completing up to three years’ service (the vesting period) and are, for the most part, converted to
shares in equal amounts over the vesting period.
Outstanding at 1 April
Granted
Forfeited
Converted to shares
Surrendered to settle payroll
withholding obligations
Outstanding at 31 March
2020
Weighted average
grant date fair value
($)
2020
RSUs
(000s)
2019
Weighted average
grant date fair value
($)
38.89
66.00
53.71
48.01
34.33
60.16
370
425
(89)
(266)
(61)
379
21.64
46.23
32.05
20.93
20.76
38.89
2019
RSUs
(000s)
401
277
(57)
(180)
(71)
370
The Company withholds shares under certain circumstances to settle tax withholding obligations on vesting. Based on the market
share price on 31 March 2020, future cash payments to meet tax withholding obligations on the vesting of RSUs are expected to
be $1.5 million (2019: $4.9 million).
NOTES TO THE FINANCIAL STATEMENTS 69
23. KEY MANAGEMENT PERSONNEL AND RELATED PARTIES
Key management personnel
Key management personnel are defined as those persons having authority and responsibility for planning, directing, and controlling
the activities of the Group, directly or indirectly, and include the directors, the Chief Executive, and his direct reports.
The following table summarises remuneration paid to key management personnel.
Year ended 31 March
Short-term employee benefits
Directors’ fees
Share-based payments - options
Share-based payments - restricted stock units
Share-based payments - employee restricted share plan
Related party transactions
2020
($000s)
8,329
1,332
7,807
1,360
147
2019
($000s)
7,807
1,214
5,841
2,008
889
During the year Atomic.io Limited, a related party, provided product development services to the Group of $0.2m.
A number of key management personnel, or their related parties, hold positions in other entities that result in them having
control or significant influence over the financial or operating policies of these entities. A number of these entities subscribe to
services provided by the Group. None of these related party transactions are significant to either party, and are completed on
arm’s length terms. There were no other related party transactions during the year.
No amounts with any related parties have been written off or foregone during the year (2019: nil).
24. COMMITMENTS AND CONTINGENCIES
Capital commitments
Capital commitments of $1.2 million for building fit-outs were contracted for at 31 March 2020 but not yet incurred
(2019: $1.0 million).
Contingent liabilities
There were no contingent liabilities at 31 March 2020 (2019: nil).
25. EVENTS AFTER THE BALANCE SHEET DATE
In March 2020, the World Health Organisation declared the outbreak of a novel coronavirus (COVID-19) as a pandemic.
Subsequent to 31 March 2020, the virus continues to spread globally, giving rise to economic uncertainties which may impact
Xero’s customers.
While the ultimate disruption which may be caused by the outbreak is uncertain, it may result in an adverse impact on the
Group’s financial position, performance, and cash flows, should it result in global economic downturn impacting our subscribers.
The related financial impact and duration cannot be reasonably estimated at this time.
There were no other significant events between balance date and the date these financial statements were authorised
for issue.
XERO LIMITED 70
DIRECTORS' RESPONSIBILITIES STATEMENT
Directors’ Responsibilities Statement
The directors are required to prepare financial statements for each financial year that present fairly the financial position of the
Group and its operations and cash flows for that period.
The directors consider these financial statements have been prepared using accounting policies suitable to the Group’s
circumstances, that these have been consistently applied and are supported by reasonable judgements and estimates, and that
all relevant financial reporting and accounting standards have been followed.
The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy, at any time, the
financial position of the Group and to enable them to ensure that the financial statements comply with the Companies Act 1993
(New Zealand). They are also responsible for safeguarding the assets of the Group and for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
During the year ended 31 March 2020, the principal activities of the Group were for the provision of an online business platform to
small businesses and their advisors. Other than as disclosed in this Annual Report, there were no significant changes in the state
of affairs or activities of the Group during the year.
The Board authorised these financial statements for issue on 14 May 2020.
For and on behalf of the Board
David Thodey
Chair
Xero Limited
14 May 2020
Lee Hatton
Director
Xero Limited
14 May 2020
71
Corporate Governance Statement
Xero is committed to high standards of corporate governance.
We believe this is essential for the long-term performance and
sustainability of Xero and supports the interests of our
shareholders. The Xero Board of Directors (the Board) is
responsible for ensuring that Xero has an appropriate
corporate governance framework to protect and enhance
Xero’s performance and to build sustainable value. Xero’s
corporate governance framework is designed to support our
business operations, deliver on our strategy, monitor
performance, and manage risk.
ASX Corporate Governance Principles and Recommendations
(ASX Principles and Recommendations). This Corporate
Governance Statement (Statement) addresses the
recommendations contained in the 3rd edition of the ASX
Principles and Recommendations, which applies to Xero for
the financial year ended 31 March 2020. For completeness,
we note that the 4th edition of the ASX Principles and
Recommendations will apply to Xero for the financial year
ending 31 March 2021. This Statement is current as at 3 April
2020, and has been approved by the Board.
Xero is listed on the Australian Securities Exchange (ASX) and
is a New Zealand incorporated and domiciled company. From a
regulatory perspective, this means that while the ASX Listing
Rules apply to Xero, certain provisions of the Australian
Corporations Act 2001 (Cth) do not.1
The Statement should be read in conjunction with this
Annual Report and Xero's Investor Centre at
www.xero.com/au/about/investors/governance, where
full copies of Xero’s corporate governance policies and
charters can be found.
Xero’s corporate governance reporting framework has been
developed with regard to the ASX Listing Rules and the
References to FY20 are to the year ended 31 March 2020.
1 Xero complies with the ASX Listing Rules. As Xero is not incorporated in Australia, it is not a disclosing entity for the purpose of Chapter 2M of the Australian
Corporations Act 2001 (Cth) (Financial reports and audits) and certain provisions of that chapter do not apply (e.g. section 295 regarding annual financial report,
section 298 regarding directors' report or section 300A regarding remuneration reporting). As a New Zealand company, Xero’s annual reporting is primarily governed
by the Companies Act 1993 (New Zealand)
XERO LIMITED
72
ASX Principles and Recommendations
PRINCIPLE 1: LAY SOLID FOUNDATIONS FOR MANAGEMENT AND OVERSIGHT
The Board
Charter The Board Charter outlines the Board’s roles and
responsibilities and describes those matters expressly
reserved for the Board’s determination and those matters
delegated to management. The Charter is available on
Xero’s website.
The Board monitors Xero’s management and performance and
ensures that management’s activities are aligned with the
expectations and risks identified by the Board and
management. The Board has a number of mechanisms to
ensure this is achieved, including:
The Board is appointed by the shareholders (other than
directors who are appointed by the Board to fill a casual
vacancy, who must be subsequently approved by shareholders
at the next general meeting of the company), and meets
sufficiently regularly to perform its role effectively. It comprises
directors who bring a mix of skills, knowledge, experience,
diversity and independence, together with a deep
understanding of, and competence to deal with, current and
emerging issues and to guide the business.
Responsibilities The Board is responsible for overseeing
and appraising Xero’s strategic direction, purpose, values,
policies, performance, risk appetite and governance
framework. To assist with carrying out its responsibilities, the
Board has established the following standing Committees:
1. Audit and Risk Management Committee
(ARM Committee)
2. People and Remuneration Committee
(P&R Committee)
3. Nominations Committee
The Board may also delegate specific functions to ad hoc
Committees from time to time.
Xero’s Chief Executive Officer (CEO) has responsibility for the
day-to-day management and administration of the Xero
business, supported by the rest of Xero’s leadership team.
The CEO manages Xero in accordance with the strategic plan,
annual budget, risk appetite, and risk management strategies
approved by the Board.
- Approving Xero’s strategic plan, overseeing performance to
ensure alignment with the strategic plan, and focusing
Xero’s activities on long-term shareholder value
- Assessing and making determinations on Xero’s culture
and management framework, governance policies,
procedures and compliance, and relevant Board and
Committee frameworks
- Approving Xero’s financial statements, required reports and
annual budget, as well as confirming Xero’s financial
position and overseeing and reviewing the integrity of
Xero’s accounting and corporate reporting systems
- Selecting the CEO, overseeing succession plans for Xero’s
leadership team, and approving policies, practices and
measurable objectives for achieving diversity
- Approving the remuneration framework, ensuring Xero’s
remuneration policies and practices fit with its strategic
goals, and overseeing equity incentive programs
- Approving an annual operating plan and systems of
financial and non-financial risk management, as well
as confirming Xero has in place accurate and reliable
reporting systems, internal controls, compliance activities,
and systems to monitor the effectiveness of Xero’s risk
management framework
Appointment Before appointing a director, Xero undertakes
appropriate background checks to determine that
candidate’s suitability.
CORPORATE GOVERNANCE STATEMENT 73
Board and Committee membership and meeting attendance The members of Xero’s Board and each of Xero’s Committees
for FY20, and the number of scheduled1 meetings and attendance at those meetings was:
Director
Board
Nominations
Committee
ARM
Committee
P&R
Committee
David Thodey3
Rod Drury
Lee Hatton
Dale Murray4
Susan Peterson5
Bill Veghte6
Graham Smith7
Craig Winkler
Held�
Attended
Held2
Attended
Held2
Attended
Held2
Attended
5
7
7
7
7
4
7
7
4
7
6
7
7
1
7
7
3*
-
-
-
-
2
4
4
3
-
-
-
-
1
4
4
-
-
6*
6
-
-
6
-
-
-
6
6
-
-
6
-
3
-
-
-
5*
3
-
5
3
-
-
-
5
1
-
5
1
In addition to meetings scheduled in advance for the year, the Board and Committees hold other meetings as appropriate to meet governance demands. In FY20,
the Board held three additional meetings, the Nominations Committee held seven additional meetings, the ARM Committee held one additional meeting and the P&R
Committee held one additional meeting
2 Held represents the number of scheduled meetings held that the relevant director was eligible to attend
3 Appointed as a director 27 June 2019; appointed as Chair of the Board 1 February 2020; appointed as Chair of the Nominations Committee 26 February 2020
4 Appointed to the Nominations Committee 26 February 2020
5 Appointed as Chair of the P&R Committee 1 July 2019; appointed to the Nominations Committee 26 February 2020
6 Resigned as Chair of the P&R Committee effective 1 July 2019; resigned as a director effective 15 August 2019
7 Resigned as Chair of the Board effective 31 January 2020; resigned as Chair and member of the Nominations Committee effective 26 February 2020; resigned as a
director effective 31 March 2020
* Committee Chair
The qualifications of each director are detailed on pages 13 and
14 of this Annual Report.
All directors and members of Xero’s leadership team are
appointed pursuant to formal letters of appointment or
agreements setting out the key terms and conditions of their
appointment, including remuneration. Director appointment
letters also include details regarding: Board, Committee and
directors’ duties and responsibilities, time commitment, Board
and individual performance evaluation, disclosure of interests
and matters affecting independence, confidentiality, the
Board’s policy on obtaining independent advice, insurance, and
deeds of indemnity.
Company Secretary Chaman Sidhu is the Chief Legal Officer &
Company Secretary of Xero. Her qualifications and experience
are set out on Xero’s website.
The Company Secretary is accountable to the Board, through
the Chair, on all matters to do with the effective functioning of
the Board. The formal reporting line of the Company Secretary
is through the CEO. All directors have direct access to the
Company Secretary.
XERO LIMITED Respect and Responsibility Policy Xero’s Respect and
Responsibility Policy supports a clear and consistent approach
to equal opportunity, promotes a workplace free from
discrimination, harassment, sexual harassment, and bullying,
and sets out the internal process to resolve concerns and
complaints. The policy is supported by an online training
module for all employees and additional face-to-face training
for people managers.
Wellbeing At Xero, we value wellbeing and believe it is part of
our commitment to create an inclusive work environment to
support our employees, customers and partners. Internally, we
have delivered a range of wellbeing activities including mental
health training, resilience workshops, mindfulness programs
and initiatives to promote physical health and financial
wellbeing. In FY20, we also completed a strategic review of our
wellbeing initiatives as the first step in developing a global
strategy to consolidate and enhance our efforts in this area.
74
Diversity and inclusion
Xero values diversity and inclusion and considers it a priority in
the creation of a sustainable business capable of delivering
shareholder value. Xero embraces the diverse experience,
ideas, skills and perspectives of our people. Having a diverse
workforce enables Xero to innovate, attract and retain top
talent, and to better reflect and serve our customers, partners,
and the communities we interact with every day. Xero takes a
broad view of the meaning of diversity and believes that it’s
through inclusion that we will tap into the potential and power
of our people’s differences.
Diversity and Inclusion Policy Xero’s Diversity and Inclusion
Policy outlines requirements for the Board to establish
measurable objectives for achieving diversity and to annually
assess those objectives and the progress towards achieving
them. This policy is available on Xero’s website.
The policy reflects six key principles that provide the
framework for Xero’s goal of developing and maintaining a
diverse and inclusive workplace and the implementation of
initiatives to support this. The key principles are:
1. We value diversity because it reflects and serves our
customers and ensures our people thrive
2. We’re all accountable to create an inclusive culture
3. We’re committed to attracting diverse talent and
hiring fairly
4. We support flexible ways of working
5. We’re committed to equal pay for equal work
6. We have an obligation to champion diversity and inclusion
in the community
Xero’s joint Heads of Diversity and Inclusion lead our global
diversity and inclusion strategy and initiatives and support our
regions to achieve local diversity priorities.
CORPORATE GOVERNANCE STATEMENT 75
Measurable objectives The following is a summary of progress achieved against Xero’s measurable objectives for FY20,
as approved by the Board:
Objective
Progress
Xero maintains a gender balance
on its Board by having at least
3 female directors and at least
3 male directors
Xero attracts diverse talent in the
tech industry with particular focus
on women in tech, and maintains:
-
female representation on Xero’s
leadership team at or above
40%
-
female representation across all
employees at or above 40%
(This reflects a 40:40:20 target for
these levels, i.e. 40% women and
40% men, with the remaining 20%
unspecified to allow for flexibility
and recognise that gender is not
binary)
- At 31 March 2020, Xero’s Board comprised 3 women and 4 men
- Progress on gender diversity: At 31 March 2020, 42% of Xero’s employees were female
-
and 42% of Xero’s leadership team were female
Included in the 2020 Bloomberg Gender Equality Index globally recognising our
commitment to supporting diversity in the workplace
- Community engagement: Maintained our support for organisations and initiatives to
attract and develop a more gender diverse workforce, including Code Like A Girl,
GirlbossNZ, Tech Girls Movement, Ladies that UX and Leading Ladies
- Engaged in community outreach to increase diversity in the pipeline of talent into tech,
including promoting careers in tech to girls and women through activities such as
coding camps and a one-week Girlcode workshop in Auckland
- Employee networking & development: Supported the launch of a new Women of Xero
(WOX) network group in Australia, hosting regular learning and discussion events in
support of gender equality and diversity at Xero
- Measurement & monitoring: Maintained an internal diversity dashboard to track key
diversity data (including gender diversity data) for internal monitoring and
accountability
- Gender pay equity: Conducted our annual organisation-wide pay equity review at Xero
and communicated results to employees, and won the ‘On the Journey’ award in the
2019 YWCA Equal Pay Awards (NZ) for our work on pay transparency and gender
pay equity
- Communications: Continued to incorporate diversity and inclusion in Xero’s external
communications and activities, including through a new page on Xero’s website
highlighting Xero’s activities in these areas, and delivered a global International
Women’s Day campaign with local events across our offices
- Attraction of talent: Continued to seek diverse talent through recruitment platforms
and partners to promote diversity in hiring including Vercida in the UK, Hired in Canada,
and Work180 in Australia
- Conducted a disability recruitment review in Australia through Australian Network on
Disability to identify potential barriers to recruitment for people with disability, with the
goal of utilising findings to implement a best practice, barrier-free approach to
recruitment globally
XERO LIMITED 76
Xero is an inclusive work
environment where different
contributions and perspectives are
valued and everyone can bring
their whole self to work
Some of the ways in which we continued to build our inclusive work environment during
the year:
- Education to underpin an inclusive environment: Delivered face-to-face training for
people managers and online training for employees on Xero’s Respect and
Responsibility Policy, and additional training to support diversity and inclusion at Xero,
including LGBTQI+ awareness and mental health awareness, and launched a new online
learning program on worldviews and religion to build understanding of differences
between our people
- “Grassroots” inclusion initiatives: Supported internal groups of diversity and
inclusion champions to develop locally meaningful initiatives, such as the creation of
the WOX network group in Australia and participation in the Midsumma Festival Pride
parade in Melbourne
- LGBTQI+ inclusion: Introduced options in Xero’s internal human resources system for
employees to identify as non-binary or gender diverse
- Disability inclusion: Participated in the Australian Network on Disability’s PACE
mentoring program in Australia, and achieved Level 2 Disability Confident Employer
status in the United Kingdom
- Mental health & wellbeing: Delivered a range of wellbeing activities including mental
health training, resilience workshops, mindfulness programs and initiatives to promote
physical health and financial wellbeing
- Craig Hudson, Xero’s Managing Director New Zealand & Pacific Islands, was
awarded the DiversityWorks 2019 ‘Walk the Talk’ award for his leadership to
encourage open discussion of mental health and wellbeing by our people and our
small business customers
- Completed a strategic review of Xero’s wellbeing initiatives with a view to developing a
FY21 global strategy to consolidate and enhance our efforts in this area
- Cultural diversity: Promoted cultural diversity through sharing Xero stories of cultural
diversity on World Day for Cultural Diversity, delivering Māori language week activities
and Māori language courses in New Zealand, participating in the TupuToa internship
program in New Zealand, and holding shared cultural lunches in some of our offices
-
Indigenous engagement in Australia: Held NAIDOC week activities to support
Indigenous awareness among our people, and hosted events in Sydney and Melbourne
for Kinaway and IndigiSpace, organisations that support Indigenous business owners
and the development of small businesses by Indigenous people
- Flexible work: Continued initiatives to promote flexible working, including flexible
working resources for our people, and conducted a XeroNow episode on work-life balance
- Delivered internal polls and a survey to track flexible working and satisfaction with
flexible working at Xero
- Support for parents: Launched a pilot parental leave coaching program in Australia,
and completed a strategic review of current parental leave entitlements across our
regions to support the development of a new global parental leave policy in FY21
- Measuring inclusion: Delivered surveys to capture feedback on the extent to which
employees feel that Xero is an inclusive workplace
- Capability development: Joined the Diversity Council of Australia
CORPORATE GOVERNANCE STATEMENT 77
Gender diversity statistics The proportion of women employed by Xero Limited and its subsidiaries (Xero Group) as at
31 March 2020 is shown below:1
DIRECTORS
Male
57%
LEADERSHIP TEAM
EMPLOYEES
Female
43%
Male
58%
Female
42%
Male
57%
Female
42%
At 31 March
Directors
Leadership team2
2020
women
2020
men
3
5
4
7
2020
total
7
12
Employees
1,292
1,743
3,0473
2020
%
43%
42%
42%
2019
women
3
5
2019
men
4
5
2019
total
7
10
1,060
1,464
2,531
Non-binary
0.1%
2019
%
43%
50%
42%
1 These figures include permanent full-time, permanent part-time, fixed-term, casual employees and interns, and do not include contractors
2 Xero’s leadership team is defined as the CEO and all senior executives who report directly to the CEO. The leadership team increased from 10 to 12 during the year. The
number of women on the leadership team remained unchanged
3 Xero has an optional gender identification question that allows employees to choose from the following options: female, male, gender diverse, non-binary, none of the
options offered and prefer not to say. At 31 March 2020, 3 employees (0.1%) had selected non-binary and 9 employees (0.3%) had selected none of the options offered or
prefer not to say, and are included in the total. 50 employees (1.6%) were excluded from the total because they have not responded to the gender identification question
WGEA report notification Xero’s Australian subsidiary,
Xero Australia Pty Limited, submits an annual Workplace
Gender Equality Report under the Australian Workplace
Gender Equality Act 2012 (available once published on
WGEA’s website at www.wgea.gov.au).
Evaluation of the Board
On an annual basis, the Board, with assistance from the
Nominations Committee, reviews and evaluates its
performance (including against the requirements of the
Board Charter) and the performance of Committees and
individual directors.
These performance reviews are conducted both internally and,
on a periodic basis, externally with the assistance of a
facilitator. The Board conducted an internal performance
review during FY20. This review evaluated Board, Committee,
and individual director performance.
endorse the directors who will stand for re-election at the
Annual General Meeting (AGM).
Evaluation of the leadership team
The Chair of the Board, with support from the P&R Committee,
reviews and makes recommendations on the performance
evaluation of the CEO. The CEO, with oversight from the P&R
Committee, reviews and makes recommendations on the
performance evaluation of the rest of Xero’s leadership team.
The performance of Xero’s leadership team is reviewed
annually. Performance reviews are conducted by assessing
each executive’s performance against specific and measurable
quantitative and qualitative performance criteria. The
assessment is then discussed with the P&R Committee.
The performance criteria against which the executives are
assessed are aligned with the financial and non-financial
objectives of Xero.
The Board, with guidance from the Nominations Committee,
determines the size and composition of the Board, and the
appointment, re-election or retirement of directors. A director
does not participate in the decision regarding their own
re-election.
Performance reviews for Xero’s leadership team took place for
FY20 in accordance with this process. The remuneration
outcomes resulting from the performance reviews for the CEO
and Chief Financial Officer (CFO) are detailed in pages 98 to 106
of this Annual Report in the Remuneration Report.
After considering a number of factors, including the results of
the performance reviews, the Board determines whether to
XERO LIMITED 78
PRINCIPLE 2: STRUCTURE THE BOARD TO ADD VALUE
Director appointment In selecting and appointing new
directors, the Board identifies and considers qualified potential
candidates, in light of the appropriate mix of skills, knowledge,
experience, diversity, and independence that the Board and
Committees are seeking to achieve, and the time commitment
required from non-executive directors. Before appointing a
director, Xero undertakes appropriate background checks to
determine the candidate’s suitability.
Suitable candidates are appointed by the Board and hold office
until Xero’s next AGM, where they are then eligible for election.
In determining Board membership, the Board seeks to achieve
a mix of skills and diversity that includes experience in the
areas set out in the table on the following page. The table
summarises the directors’ relevant skills as at 3 April 2020.
The Board is satisfied that the skills matrix demonstrates that
the Board has the appropriate mix of skills and experience
necessary to oversee the governance and operations of Xero.
Nominations Committee
Charter The Nominations Committee Charter sets out the
Nominations Committee’s role to, in summary, assist the Board
in relation to Board and Committee size, composition,
performance evaluation, succession planning, and director and
CEO appointment. The Nominations Committee Charter is
available on Xero’s website.
The Nominations Committee Charter provides that the
Committee will consist of a majority of independent directors,
be chaired by an independent non-executive director, and have
at least three members. The Committee composition meets
these requirements. The Committee meets at least four times
per year and all directors have a standing invitation to attend
its meetings.
Details about the Nominations Committee membership and
meeting attendance are set out in Principle 1 on page 73.
Responsibilities The Nominations Committee’s duties and
responsibilities include:
- Regularly reviewing and making recommendations to the
Board as to the size and composition of the Board and
its Committees
- Overseeing the search for, and selection of, new directors
for nomination for appointment by the Board
- Making recommendations to the Board regarding the
appointment of the CEO, as well as the nomination of
directors for election or re-election by shareholders
- Overseeing and regularly reviewing an appropriate director
induction program, as well as ensuring all directors have
access to a professional development program
- Overseeing the regular assessment of, and making
recommendations to the Board as to, the independence of
each director and associated disclosures
- Developing succession plans for the Board to maintain an
appropriate mix of skills, knowledge, experience,
independence and diversity
CORPORATE GOVERNANCE STATEMENT 79
Board skills matrix
Capability
Number of directors with the capability
Cloud
Expertise in business software and delivering solutions at scale through
cloud platforms within the SaaS industry
Digital product management and marketing
Digital product expertise with extensive expertise across technology trends,
and implications and the software and technology product value chain
Strategy and development
Corporate strategy and development including M&A and strategic
partnerships
Go-to-market and customer experience
Deep customer insight and advocacy. Go-to-market expertise including
direct sales, internet sales and new markets, and specific customer
channel experience
Financial expertise
Financial expertise with deep public company experience in finance,
accounting, planning and investor relations
International markets
Exposure to at least two of Xero’s key international markets
(Asia, Americas, EMEA, New Zealand and/or Australian markets)
Listed company governance; risk
Depth of expertise in listed company governance, compliance and risk
management
People and culture
Remuneration, workforce planning, talent, culture, and diversity
and inclusion
Independence
Xero considers a director to be independent when they are a
non-executive director who is independent of management
and free of any business or other relationship that could
materially interfere with (or could reasonably be perceived to
materially interfere with) the independent exercise of their
unfettered judgement, having regard to the best interests of
Xero as a whole.
In the context of director independence, “materiality” is
considered from both Xero and an individual director
perspective.
The Board makes an assessment of the independence of each
director upon their appointment and annually thereafter.
Directors are required to disclose to the Board relevant
personal interests and conflicts of interest on an ongoing basis.
In accordance with the definition of independence above, and
High capability
Medium capability
having regard to the relevant factors listed in the ASX
Principles and Recommendations, the following directors of
Xero are considered to be independent:
David Thodey (Chair)
Mark Cross (commenced 1 April 2020)
–
–
– Lee Hatton
– Dale Murray
– Susan Peterson
– Graham Smith (resigned as a director effective
31 March 2020)
The length of service of each director is ascertainable from the
information on pages 13 and 14 of this Annual Report.
XERO LIMITED 80
Board composition and Chair
The Board Charter states that the Board will consist of a
majority of independent non-executive directors. The Chair of
Xero, David Thodey, is assessed as an independent non-
executive director. The Chair’s role is to, in summary, lead the
Board, facilitate constructive discussion at Board meetings,
and ensure that the Board functions effectively and
communicates the Board’s position to shareholders.
Board diversity and tenure
As at 31 March 2020
Tenure
0–3 years
29%
Gender
Location
3-6 years
42%
Male
57%
Female
43%
US
14%
9+ years
29%
No directors are within the 6-9 year tenure bracket
UK
14%
NZ
29%
AU
43%
Induction
All new Board members are given appropriate induction to
enable them to gain an understanding of Xero, its operations
and values, its financial, strategic, and risk management
position, and the rights, duties and responsibilities of the
Board, its Committees and management. Each new Board
member has the opportunity to meet with existing Board
members, Xero’s leadership team, and relevant members of the
senior management team. All Board members are expected to
maintain the skills required to discharge their respective roles.
CORPORATE GOVERNANCE STATEMENT 81
PRINCIPLE 3: ACT ETHICALLY AND RESPONSIBLY
Code of Conduct
Xero has a Code of Conduct (the Code), which applies to all
directors, officers, employees, contractors and consultants of
the Xero Group. The Code details Xero’s standards and values
and sets out expectations for behaviour and conducting
business at Xero. The Code is underpinned by Xero policies,
some of which are global and some of which are country
specific, and include topics covering safety and wellbeing,
respect and consideration, and workplace behaviour. The Code
also sets out Xero’s zero-tolerance approach to bribery,
facilitation payments, and corruption in any form.
The Code is available on Xero’s website and is also made
available to employees via Xero’s intranet.
Whistleblower Policy
Xero has a Whistleblower Policy, which applies to everyone
who currently works or formerly worked at any entity in
the Xero Group (including all directors, officers, employees,
contractors, consultants, volunteers, interns, casual workers
and agency workers) and to any current or former supplier of
goods or services (whether paid or unpaid) to any entity in
the Xero Group (and their employees). The policy also applies
to the relatives, dependants or spouses of any of those people.
The policy aims to encourage a culture of openness and
accountability within the Xero Group. It includes topics such as
the types of concerns that can be raised, how to raise
concerns, how whistleblowers will be protected and supported,
and how Xero will investigate and deal with any concerns that
are raised.
The policy is available on Xero’s website and is also made
available to employees via Xero’s intranet along with
supporting information specific to relevant regions.
Modern Slavery and Human Trafficking Statement
Xero has published a statement (under Section 54(1) of the
United Kingdom’s Modern Slavery Act 2015) setting out the
actions that it has taken to understand potential modern
slavery risks related to its business and supply chains and to
implement steps to prevent slavery and human trafficking (the
UK Statement).
The current UK Statement is available on Xero’s website.
PRINCIPLE 4: SAFEGUARD INTEGRITY IN CORPORATE REPORTING
Audit and Risk Management Committee
Purpose The ARM Committee Charter (the ARM Charter) sets
out the ARM Committee’s role to, in summary, assist the Board
in relation to financial reporting principles and policies,
integrity of Xero’s financial statements, audit functions,
internal control processes, risk management, and legal and
regulatory compliance. The ARM Charter is available on
Xero’s website.
The ARM Charter provides that the Committee will consist of
non-executive directors, be chaired by an independent director
and have at least three members, a majority of whom are
independent. The ARM Charter also provides that all members
will be financially literate, and at least one member will have
accounting or related financial management expertise. The
Committee composition meets these requirements. The
Committee meets at least four times per year and all directors
have a standing invitation to attend its meetings.
Details about ARM Committee membership and meeting
attendance are set out in Principle 1 on page 73.
Responsibilities The ARM Committee is responsible for
providing recommendations and advice to the Board on
areas including:
- Reviewing financial statements and financial forecasts
intended for external publication and the results of the
half-year review and full year audit
- Reviewing Xero’s corporate and financial reporting and
disclosure processes, as well as Xero’s accounting policies
and financial reporting practices
- Overseeing the effectiveness of the accounting and internal
control systems
- Appointment, reappointment, removal, and remuneration
or replacement of the external auditor as well as approving
and reporting annually on the fees for and terms of the
external auditor’s engagement, and on the scope and
adequacy of the audit plan of the external auditors
- Reviewing and reporting on the overall adequacy and
effectiveness of relevant internal controls, processes
and compliance
XERO LIMITED 82
- Approving and reviewing the structure of the Assurance
function, the scope and adequacy of the program of work
and reviewing significant assurance findings and action
taken by management to address these
replaced by a new senior audit partner from FY21. The policy
also requires the external auditor to confirm annually that it
has complied with all professional regulations relating to
auditor competency and independence.
- Annually assessing and reviewing the overall adequacy and
effectiveness of Xero’s risk management framework, the
methodology and processes for identifying, assessing,
monitoring and managing financial and non-financial risks,
and the risk appetite
Reporting The Chair of the ARM Committee communicates
the findings of the Committee to the Board at the next
Board meeting.
To ensure that the external auditor remains independent
at all times, non-audit work is authorised by the ARM
Committee.
Xero is committed to ensuring that the external auditor carries
out its function independently and has adopted an Auditor
Independence Policy. The policy requires that the senior audit
partner must be rotated at least every five years. The current
senior audit partner has been serving since FY16 and will be
The external auditor will attend and be available to answer
shareholder questions at the AGM.
Declaration regarding financial statements
As a New Zealand domiciled company, section 295A of the
Australian Corporations Act 2001 (Cth) is not applicable to
Xero. However, the CEO and CFO provide written statements to
the Board in accordance with the ASX Principles and
Recommendations, in respect of the half and full year reporting
periods. These statements confirm whether, in their opinion,
the financial records of Xero have been properly maintained
and that the financial statements comply with the accounting
standards and give a true and fair view of the financial position
and performance of Xero, and that their view is founded on the
basis of a sound system of risk management and internal
control which is operating effectively in all material respects.
PRINCIPLE 5: MAKE TIMELY AND BALANCED DISCLOSURE
Continuous Disclosure Policy
Xero’s Continuous Disclosure Policy describes the key
obligations of the Board and Xero’s leadership team to ensure
that Xero complies with its disclosure obligations under the
ASX Listing Rules. The Board is responsible for compliance with
Xero’s continuous disclosure obligations. The Board has
established a Disclosure Committee, comprising the CEO, an
independent director, the CFO, and the Chief Legal Officer &
Company Secretary to support this primary responsibility and
provide assurance. Xero’s Chief Legal Officer & Company
Secretary is primarily responsible for overseeing and
coordinating all communications with the ASX, and is the
Disclosure Officer for the purpose of the policy. The Authorised
Spokespersons of Xero include the Chair, the CEO, the CFO, the
Executive General Manager of Investor Relations, the Executive
General Manager of Communications, the Director of Corporate
Communications, and any other person authorised by the CEO.
The policy is available on Xero’s website.
CORPORATE GOVERNANCE STATEMENT 83
PRINCIPLE 6: RESPECT THE RIGHTS OF SECURITY HOLDERS
Shareholder communication
Investor relations program
Investor centre Xero's website has a dedicated Investor
Centre. This provides important information about Xero and its
governance that is relevant to Xero’s shareholders. Xero’s
Investor Centre includes:
- Xero’s Board and Committee Charters, policies and
Constitution
- Profiles of Xero’s directors and leadership team
- ASX releases
- Media releases
- Half and full year financial results and investor
presentations
- Links to live webcasts or conference calls for the financial
results investor briefings
- Historical financial reports and share price
- Details of Xero’s share registry provider, Link Market
Services Limited
- An online form to enable investors to send enquiries
directly to the Xero investor relations team
Annual Report and other shareholder communications
Alongside the publication of half and full year results, Xero’s
Annual Report is made available to shareholders electronically
(and by post when elected) and includes relevant information
about the operations of Xero and other required disclosures.
Each shareholder also receives a Notice of Annual General
Meeting, inviting them to attend and participate in Xero’s AGM.
Xero has an investor relations function which operates a
comprehensive and active investor relations program.
The program supports Xero’s commitment to ensure its
shareholders receive important information in a timely and
effective manner and facilitates close dialogue with investors.
Activities undertaken as part of the investor relations program
include:
- Post-result and ad hoc meetings with institutional investors
and analysts
- Attendance at a range of domestic, regional and global
investor conferences
- Pre-AGM engagement with our largest beneficial interest
holders and the primary governance advisory bodies
- Engagement with the retail investor community through
close involvement with shareholder associations
Annual General Meeting
Xero actively encourages shareholders to attend our AGM and
to ask questions of the Chair, Board, CEO, CFO and other
attending members of Xero’s leadership team:
- Shareholders are notified of the AGM in advance of the
meeting in accordance with regulatory requirements
- Shareholder voting is conducted via a poll, and
shareholders may vote electronically or by proxy
- For the last four years, Xero has held a hybrid AGM,
meaning shareholders can attend the meeting in person or
virtually via an online platform. If shareholders attend
virtually, they are able to watch the meeting live, vote, and
ask questions online. Xero’s FY20 AGM will be fully virtual
via an online platform provided by Xero’s share registrar,
Link Market Services Limited
XERO LIMITED 84
PRINCIPLE 7: RECOGNISE AND MANAGE RISK
Audit and Risk Management Committee
Purpose As mentioned in Principle 4 on page 81, the
Board has established an ARM Committee that operates under
the ARM Charter, which is available on Xero’s website.
The Board is ultimately responsible for ensuring that material
risks facing Xero have been identified and that adequate
controls, monitoring, and reporting mechanisms are in
place and operating effectively. The ARM Committee assists
the Board with its oversight of risk management, audit,
and compliance.
The ARM Committee operates in accordance with the ARM
Charter, which sets out its responsibilities for monitoring Xero’s
risk management, including how Xero identifies, assesses, and
controls strategic, operational, and financial risks within the
Board approved risk appetite. This is designed to ensure the
adequacy and effectiveness of Xero’s ongoing risk management
program, including policies and guidelines relating to corporate
governance, legal, regulatory and ethical compliance, business
continuity management, data privacy, and information
systems security.
Risk framework
Xero has an enterprise risk management framework that is
managed by the CFO and overseen by the ARM Committee.
There are several components to Xero’s risk management
framework including:
- Policies and procedures covering key financial and
non-financial risks
- Guidelines and limits for approval of all expenditure,
including capital expenditure and investments
- Various risk management governance forums to oversee
key areas of risk, including the Security Governance Group
- Due diligence processes for M&A activities
A key component of Xero’s risk management framework is the
regular review of key risks and opportunities by the Xero
leadership team. A Xero Group risk profile was developed
through a series of workshops conducted by the strategy
function and involved Xero’s leadership team, senior
management, and operational specialists. They assessed
areas of potential risk to the business, estimated likelihoods,
impacts, and mitigation strategies. The identified discrete
risks are included in a risk dashboard according to the key
risk categories, which include operational, strategic, legal,
and financial risks. The risk dashboard is reviewed with each
member of Xero’s leadership team at least twice per year. Risks
lying outside the boundaries of Xero’s agreed risk appetite
require proactive mitigation and are included in an ongoing
action plan, which is tracked and monitored on a periodic basis
by Xero’s leadership team.
The ARM Committee reviews and approves the risk appetite
parameters, and reviews the risk dashboard at least twice per
year to ensure it has oversight of status and key changes. It
also periodically oversees the action plan and, together with
the Board, monitors key mitigation actions recorded on the
dashboard. The ARM Committee reviewed Xero’s overall risk
management framework during FY20 and considered that it is
sound. During FY20 an Executive General Manager of Risk and
Assurance was appointed to oversee and better optimise the
operation of the risk management framework and drive
further improvements.
Internal audit
Xero has an internal Assurance function which provides
independent and objective assurance and advice on Xero’s
organisational governance, risk management and internal
control processes. The Assurance function assists the business
in understanding and managing risk and provides confidence
that the key elements of the business that are relied on to
manage risk are in place and working effectively.
To maintain independence, the Executive General Manager
of Risk and Assurance has a reporting line to the Chair of
the ARM Committee and regularly meets with the Chair
without other management present. The Assurance function
develops an assurance plan which is endorsed by the ARM
Committee twice per year. The ARM Committee receives and
reviews reports regarding assurance activity undertaken and,
through these reports, monitors the progress of management
action plans.
CORPORATE GOVERNANCE STATEMENT 85
two years. Xero has also produced a Service Organization
Control 2 (SOC 2) type II report annually for the past four years,
which is the result of an independent assessment of controls in
place for security, confidentiality, and availability.
Xero hosts its data in Amazon Web Services (AWS) in US
locations. All locations have the same security measures to
protect Xero’s and our customers’ information.
Xero has the following company-wide security practices and
procedures in place:
- Executive General Manager of Security, accountable for
information security
- Security strategy, which is communicated to the Board by
Xero’s leadership team
- An internal security governance group, which meets
regularly and has Xero leadership team representation
- An information security risk management framework
- Formalised security policy and security standards
- Business continuity management policy and plans
- Security awareness training is conducted at least annually
- Data Classification Standards are regularly communicated
to our employees, which incorporate the understanding of
the sensitivity of data that is dealt with as part of business
activities
Data protection Xero has a global data protection framework
and privacy program in place. Xero’s data protection
framework enables management of all personal data collected
in compliance with regulations in regions where Xero
operates. Our approach to data protection is built around
four key principles – transparency, enablement, stewardship
and security.
Strategic direction and implementation A clear and
disciplined approach to strategic choices and delivery is key to
success as Xero grows and pursues a wider range of strategic
objectives in more markets. With Board oversight, Xero’s
leadership team reviews the strategic direction on an ongoing
basis and shares learnings from across the business as well as
incorporating the impact of external developments as required.
Underlying initiatives are reviewed and updated, assigned
owners, and tracked on a regular basis.
Management of economic, environmental,
and social sustainability risks
Xero operates in an online environment, with its operational
model primarily utilising office-based employees. Accordingly,
Xero’s environmental footprint is relatively small and is
made up largely from the energy used in its offices, third-party
data centres, employee travel, and from the typical
consumables of an online, office-based business. However,
we acknowledge that how we conduct our business has an
impact on a range of stakeholders, the communities in
which we operate, and on the environment more broadly.
More information about our approach to social and
environmental impact is available on Xero’s website at
www.xero.com/au/about/social-and-environmental-impact.
There are a number of business risks that could materially
impact Xero. As part of the risk management process
described above, Xero has identified and assessed those areas
of risk that may impact the business. Effective monitoring
and mitigation of these risks supports Xero’s ongoing growth
and protects returns. Key areas of risk are described below.
Other risks relevant to economic sustainability are noted on
pages54 to 58 of this Annual Report in the Notes to the
Financial Statements.
Technology platform & information security As Xero
continues to grow its customer base and broaden product
usage across current users, it must ensure that its platform is
scalable. This enables Xero to continue to provide the same
levels of quality user experience as traffic grows on the
platform. We closely monitor all relevant aspects of the
platform to identify areas that may need to be addressed to
ensure future performance robustness.
Xero is committed to the security of its customers’ information
and has partnered with industry-leading security vendors to
leverage their platforms and expertise to protect its systems.
Xero has a security team that is responsible for security
risk management, product and platform security, security
operations, security compliance, and security training
and awareness.
Xero takes a risk-based approach to security, which means
tighter security controls are implemented where risk to the
business and our customers is higher. In order to manage
security risks within Xero’s risk appetite, processes are in place
for identification, assessment, and treatment of security risks.
Xero maintains a robust security management program,
including a comprehensive information security management
system which is audited annually by an accredited and
independent external auditor. As part of our commitment to
information security, Xero has successfully maintained an
ISO/IEC 27001 Information Security Certification for the past
XERO LIMITED 86
Innovation momentum and delivery It is critical that Xero
maintains its ability to stay ahead of the competition and
continues to build and deliver innovative products and services
to customers, providing Xero with a competitive advantage.
Xero proactively aligns its teams with its strategy to more
rapidly and efficiently advance Xero’s goals. We have processes
to monitor progress, as well as enabling delivery through
improving Xero’s product management capability. This
foundation of strategic alignment, tracking, oversight,
and capability development supports Xero’s ongoing delivery
of product innovation.
Access to talent As Xero grows, it requires more talent
working across the globe. The organisational model needs to
constantly evolve to serve more teams in more diverse
locations. In addition to current strategies to attract talent into
current locations, alternative approaches are being explored to
attract talent to new locations.
PRINCIPLE 8: REMUNERATE FAIRLY AND RESPONSIBLY
People & Remuneration Committee
Charter The P&R Committee Charter (the P&R Charter) sets
out the P&R Committee’s role to, in summary, assist the Board
in relation to overseeing the human resources activities of
Xero, including overseeing strategies and policies relating to
organisational structure and culture, remuneration, employee
performance and development, and succession planning of
Xero’s leadership team (other than the CEO). The P&R Charter
is available on Xero’s website.
The P&R Charter provides that the Committee will consist of a
majority of independent directors, be chaired by an
independent non-executive director, and have at least three
members. The Committee composition meets these
requirements. The Committee meets at least four times per
year and all directors have a standing invitation to attend
its meetings.
Responsibilities The P&R Committee’s duties and
responsibilities include:
- Overseeing appointment, termination, performance and
succession planning of Xero’s leadership team (other than
the CEO)
- Reviewing and recommending to the Board Xero’s
remuneration strategy, structure and policy, and short and
long-term incentive plans, including amendments to such
plans and other material employee benefits
- Annually making recommendations to the Board about
measurable objectives for achieving diversity and assessing
the effectiveness of the Diversity and Inclusion Policy,
measurable objectives for diversity and the progress
toward achieving them
Details about P&R Committee membership and meeting
attendance are set out in Principle 1 on page 73.
More information about our approach to remuneration is set
out on pages 94 to 111 of this Annual Report.
CORPORATE GOVERNANCE STATEMENT
87
Disclosures
All financial figures in this section of the Annual Report are in New Zealand dollars except where indicated otherwise. References
to FY20 are to the financial year ended 31 March 2020. References to FY19 are to the financial year ended 31 March 2019.
Xero Group means Xero Limited (Xero) and its subsidiaries.
EQUITY HOLDINGS OF DIRECTORS, CEO & CFO
At 31 March 2020
Non-executive directors
David Thodey¹
Rod Drury²
Lee Hatton
Dale Murray
Susan Peterson
Graham Smith
Craig Winkler³
CEO & CFO
Steve Vamos
Kirsty Godfrey-Billy⁴
Number of ordinary
Number of unlisted options
Number of restricted stock
shares (Shares)
(Options)
units (RSUs)
4,461
15,719,779
9,378
950
2,630
–
9,275,990
10,500
1,884
–
–
–
–
–
–
–
180,000
120,000
–
–
–
–
–
–
–
18,118
1,261
1 Shares are held by Aspiring Co Pty Limited on behalf of the Thodey Family Trust. David Thodey is a director of Aspiring Co Pty Limited and the beneficiaries of the
Thodey Family Trust are the immediate family members of David Thodey
2 Shares are held by Rodanna Ventures Trust. The trustees of the Rodanna Ventures Trust are Rodney Kenneth Drury, Anna Margaret Clare Drury, and Scott Moran.
The beneficiaries of the Rodanna Ventures Trust are the immediate family members of Rodney Kenneth Drury and Anna Margaret Clare Drury
3 8,254,545 Shares are held by Givia Pty Limited, the trustee of an Australian charitable trust. Craig Winkler is a director of Givia Pty Limited; he and his family members
are not beneficiaries of the trust. A further 1,000,000 of Givia’s Shares are the subject of a stock borrow arrangement in connection with Xero's convertible notes issue,
as disclosed to the Australian Securities Exchange (ASX) on 26 September 2018. 21,445 Shares are held by a custodian for the benefit of Bangarie Investments Pty
Limited. Craig Winkler is a director of Bangarie Investments Pty Limited
4 The 1,261 RSUs will vest (be converted to Shares) in May 2020
XERO LIMITED 88
ENTRIES RECORDED IN THE INTERESTS REGISTER
Xero maintains an interests register in accordance with the Companies Act 1993 (New Zealand).
Directors’ interests
Directors disclosed the following relevant interests, or cessations of interest, during FY20.
Director/Entity
David Thodey
Relationship
Commonwealth Scientific and Industrial Research Organisation (CSIRO)
chair and director
National COVID-19 Coordination Commission (NCCC)1
Ramsay Health Care Limited
Tyro Payments Limited
Vodafone Group Plc
Mark Cross*
Chorus Limited
MFL Mutual Fund Limited / Superannuation Investments Limited
Milford Asset Management Limited
Z Energy Limited
Lee Hatton
BLD Group Pty Limited
National Australia Bank Limited
Suncorp Group Limited
Dale Murray
Founders Intelligence Ltd
Obelisk Legal Support Solutions Limited
Sussex Place Ventures Limited
The Cranemere Group Limited
deputy chair
director
chair and director
director
director
chair and director
chair and director
director
ceased to be a director
ceased to be chief executive officer of UBank and
executive general manager of direct banking
chief executive officer of banking and wealth division
partner
ceased to be an advisor
ceased to be a director
director
1 Finite commitment, at the request of the Australian Government, to advise on Australia’s economic and social response to COVID-19
* Commenced 1 April 2020
DISCLOSURES 89
Share dealings of directors
Directors disclosed the following acquisitions or disposals of relevant interests in Xero Shares during FY20.
Registered holder
Date of acquisition/
Consideration
Number of
David Thodey
Aspiring Co Pty Limited1
Aspiring Co Pty Limited1
Aspiring Co Pty Limited1
Aspiring Co Pty Limited1
Rod Drury
Rodanna Ventures Trust2
Lee Hatton
Lee Hatton3
Lee Hatton4
Susan Peterson
Susan Peterson
Craig Winkler
Givia Pty Limited5
Givia Pty Limited5
Givia Pty Limited5
Bill Veghte6
William Lewis Veghte7
William Lewis Veghte8
disposal
per Share
Shares acquired/
(AUD)
(disposed)
5 July 2019
11 October 2019
14 October 2019
15 October 2019
$62.96
$66.24
$67.67
$68.63
4,000
138
170
153
21 May 2019
$58.00
(2,000,000)
22 May 2019
13 November 2019
6 August 2019
23 May 2019
27 May 2019
11 November 2019
22 May 2019
19 July 2019
$56.20
$70.52
$59.00
$59.72
$60.00
$75.00
$56.20
$61.88
780
746
803
(650,000)
(100,000)
(3,000,000)
2,164
915
1 Shares are held by Aspiring Co Pty Limited on behalf of the Thodey Family Trust. David Thodey is a director of Aspiring Co Pty Limited and the beneficiaries of the
Thodey Family Trust are the immediate family members of David Thodey
2 Shares are held by Rodanna Ventures Trust. The trustees of the Rodanna Ventures Trust are Rodney Kenneth Drury, Anna Margaret Clare Drury, and Scott Moran.
The beneficiaries of the Rodanna Ventures Trust are the immediate family members of Rodney Kenneth Drury and Anna Margaret Clare Drury
3 Shares issued as full payment in lieu of cash remuneration for role as a director of Xero. At the date of issue, Shares issued represented, as a percentage of total issued
capital, 0.001%
4 Shares issued as full payment in lieu of cash remuneration for role as a director of Xero. At the date of issue, Shares issued represented, as a percentage of total issued
capital, 0.001%
5 Craig Winkler is a director of Givia Pty Limited, the trustee of an Australian charitable trust. Craig Winkler and his family members are not beneficiaries of the trust. See
ASX announcement dated 16 May 2017 for information on disposals by Givia Pty Limited
6 Resigned as a director of Xero effective 15 August 2019
7 Shares issued as full payment in lieu of cash remuneration for role as a director of Xero. At the date of issue, Shares issued represented, as a percentage of total issued
capital, 0.002%
8 Shares issued as full payment in lieu of cash remuneration for role as a director of Xero. At the date of issue, Shares issued represented, as a percentage of total issued
capital, 0.001%
Insurance
Deeds of Indemnity
In accordance with the Companies Act 1993 (New Zealand),
Xero has continued to insure its directors and officers (through
renewal of its D&O insurance policy) against potential liability
or costs incurred in any proceeding, except to the extent
prohibited by law.
Xero has provided deeds of indemnity to all directors and
officers of Xero and its subsidiaries for potential liabilities and
costs they may incur for acts or omissions in their capacity as
directors or officers of Xero or its subsidiaries,
to the extent permitted by law.
XERO LIMITED 90
REMUNERATION REPORTING
Xero’s remuneration policy and practices are summarised on pages 94 to 111 of this Annual Report.
SHAREHOLDER INFORMATION
The shareholder information set out below is current as at 3 April 2020, unless otherwise specified.
Issued capital The total number of issued Shares in Xero at 31 March 2020 was 141,851,409, of which 339,176 Shares were held on
a restricted basis in connection with Xero’s share-based compensation plans.
Distribution of shareholding
Range
1 to 1,000
1,001 to 5,000
5,001 to 10,000
10,001 to 100,000
100,001 and over
Total
Number of holders
23,028
2,457
269
196
28
25,978
%
88.64
9.46
1.04
0.75
0.11
100
Shares
5,229,991
5,163,082
1,930,400
5,063,580
124,511,568
141,898,621
%
3.69
3.64
1.36
3.57
87.75
100
There were 514 holders of less than a marketable parcel of Shares as at 3 April 2020, based on a market price of AUD $65.66 per
Share.
RSUs and Options There were 52 individuals holding a total of
2,860,873 Options and 1,746 individuals holding a total of
317,196 RSUs. RSUs are a conditional contractual right to be
issued an equivalent number of Shares in Xero.
Substantial holdings and limitations on the acquisition of
securities Xero is a New Zealand incorporated and domiciled
company listed on the ASX. From a regulatory perspective, this
means that while the ASX Listing Rules apply to Xero, certain
provisions of the Australian Corporations Act 2001 (Cth) do
not. Xero is not subject to chapters 6, 6A, 6B, and 6C of the
Australian Corporations Act 2001 (Cth) dealing with the
acquisition of its Shares (including substantial holdings and
takeovers). The Companies Act 1993 (New Zealand) applies to
Xero and certain provisions of the Financial Markets Conduct
Act 2013 (New Zealand) also apply to Xero (including in
relation to financial reporting, but not including the provisions
relating to substantial shareholdings).
There is no requirement on Xero’s substantial shareholders to
provide substantial product holder notices to Xero. Xero has
not received any such notices during FY20.
Key limitations on the acquisition of Shares in Xero are
imposed by the following New Zealand legislation: Commerce
Act 1986, Overseas Investment Act 2005, and Takeovers Act
1993, together with various regulations and codes promulgated
under such legislation.
DISCLOSURES 91
Top 20 holders The names of the 20 largest holders of Xero Shares as at 3 April 2020 are listed below.
Name
1. HSBC Custody Nominees (Australia) Limited
2. J P Morgan Nominees Australia Limited
3. Rodney Kenneth Drury & Anna Margaret Clare Drury & Scott Moran
4. Citicorp Nominees Pty Limited
5. Givia Pty Limited
6. HSBC Custody Nominees (Australia) Limited - GSCO ECA
7. National Nominees Limited
8. BNP Paribas Noms Pty Ltd
9. Custodial Services Limited
10. JBWere (NZ) Nominees Limited <56968 A/C>
11. BNP Paribas Nominees Pty Ltd
12. Citicorp Nominees Pty Limited
13. Nelson Nien Sheng Wang & Pei-Chun Ko
14. Solium Nominees (Australia) Pty Ltd
15. Australian Foundation Investment Company Limited
16. HSBC Custody Nominees (Australia) Limited - A/C 2
17. HSBC Custody Nominees (Australia) Limited
18. BNP Paribas Nominees Pty Ltd
19. BNP Paribas Noms (NZ) Ltd
20. W5 Limited
Top 20 holders of fully paid Shares (total)
Other shareholders (balance on register)
Grand total
Shares
Number
% of
held
issued capital
32,569,591
27,704,696
15,719,779
12,939,515
8,254,545
7,367,903
4,410,523
2,207,778
1,869,148
1,745,207
1,617,717
1,522,962
1,138,688
913,800
870,500
664,962
535,556
465,706
286,780
270,000
123,075,356
18,823,265
141,898,621
22.95
19.52
11.08
9.12
5.82
5.19
3.11
1.56
1.32
1.23
1.14
1.07
0.80
0.64
0.61
0.47
0.38
0.33
0.20
0.19
86.73
13.27
100.00
Voting rights Xero has a single class of Shares on issue. Where voting at a meeting of shareholders is by voice or a show of hands,
every shareholder present in person, or representative, has one vote. On a poll, every shareholder present in person, or by
representative, has one vote for each fully paid Share. In practice, Xero ensures that all resolutions at shareholder meetings are
decided by a poll rather than a show of hands.
On-market buy-back There is no current on-market buy-back for Xero Shares.
XERO LIMITED 92
COMPANY INFORMATION
Donations The Xero Group made charitable donations totalling $109,158 during FY20. The Xero Group made no donations to
political parties during FY20.
Company directors The following persons held office as directors of Xero Limited during FY20.
Directors
David Thodey (Chair)
Rod Drury
Lee Hatton
Dale Murray
Susan Peterson
Graham Smith
Craig Winkler
Directors who ceased to hold office during FY20
Bill Veghte (resigned effective 15 August 2019)
Company subsidiaries and directors Xero has 14 wholly owned subsidiaries as shown in the table below. The following persons
held office as directors of Xero’s subsidiary companies during FY20.
Jurisdiction
Subsidiary
Directors
Directors who ceased to hold office during FY20
Keri Gohman (resigned effective 27 August 2019)
James McDonald (resigned effective 25 March 2020)
James Shulman (resigned effective 25 March 2020)
Keri Gohman (resigned effective 27 August 2019)
Australia
Hubdoc Pty Limited
Xero Australia Pty
Limited
Canada
Hubdoc Inc.
Xero Software
(Canada) Ltd
Hong Kong
Xero (HK)
Limited
New Zealand
Xero Investments
Limited
Xero (NZ)
Limited
Kirsty Godfrey-Billy
Trent Innes
Chaman Sidhu
Kirsty Godfrey-Billy
Trent Innes
Chaman Sidhu
Will Buckley
Andy Burner
Kirsty Godfrey-Billy
Will Buckley
Andy Burner
Kirsty Godfrey-Billy
Kevin Fitzgerald
Kirsty Godfrey-Billy
Damien Tampling
Anna Curzon
Kirsty Godfrey-Billy
Craig Hudson
Anna Curzon
Kirsty Godfrey-Billy
Craig Hudson
Xero Trustee Limited
Kirsty Godfrey-Billy
Singapore
Xero (Singapore)
Pte. Ltd
South Africa
Xero South Africa
(Pty) Ltd
Kevin Fitzgerald
Kirsty Godfrey-Billy
Damien Tampling
Kirsty Godfrey-Billy
Colin Timmis
Gary Turner
DISCLOSURES 93
United Kingdom
Cicerone Limited
Hubdoc (UK)
Limited
Xero (UK)
Limited
Anna Curzon
Kirsty Godfrey-Billy
Gary Turner
Damon Anderson
Kirsty Godfrey-Billy
Gary Turner
Damon Anderson
Kirsty Godfrey-Billy
Gary Turner
Anna Curzon (resigned effective 16 October 2019)
Edward Berks (resigned effective 1 December 2019)
Anna Curzon (resigned effective 16 October 2019)
Edward Berks (resigned effective 1 December 2019)
United States
Xero, Inc.
Kirsty Godfrey-Billy
Keri Gohman (resigned effective 27 August 2019)
There were no changes to the interests of directors of Xero’s subsidiaries during FY20.
No employee appointed as a director of Xero’s subsidiary companies receives any remuneration or other benefits from Xero in
their role as a director. The remuneration and other benefits of such employees, received as employees, are included in the
relevant bandings for employee remuneration disclosed on page 110 of this Annual Report.
Annual General Meeting Xero’s AGM will be held on Thursday, 13 August 2020 and will be fully virtual via an online platform
provided by Xero’s share registrar, Link Market Services Limited. Further details in relation to the AGM will be released in a notice
of meeting at the relevant time.
XERO LIMITED 94
Remuneration Report
In this report
Introduction .................................................................................................................................................................................................................... 94
Remuneration strategy ................................................................................................................................................................................................. 94
Xero’s performance ....................................................................................................................................................................................................... 97
Remuneration outcome overview .............................................................................................................................................................................. 98
Directors and senior executives ................................................................................................................................................................................. 99
Remuneration governance ........................................................................................................................................................................................ 100
Key remuneration components for the CEO and CFO .......................................................................................................................................... 101
STI outcomes in detail .................................................................................................................................................................................................105
CEO and CFO remuneration .......................................................................................................................................................................................106
CEO and CFO employment conditions ....................................................................................................................................................................107
Non-executive director remuneration .....................................................................................................................................................................107
Employee remuneration .............................................................................................................................................................................................. 110
Introduction
We are pleased to present this report, which is intended to
provide greater clarity about the ways we seek to reward and
recognise the contribution our Xero teams are making to the
success of small businesses and their advisors around the
world. Our approach to reward and recognition is designed
to support Xero's purpose and the successful delivery of
our strategy.
This report outlines the principles, approach and structure of
Xero’s remuneration of directors, CEO Steve Vamos, and CFO
Kirsty Godfrey-Billy, and how they align with Xero’s purpose,
values, strategy, and financial results. We also provide details
on how Xero’s performance in the financial year ended 31
March 2020 (FY20) has driven remuneration outcomes for our
CEO and CFO.
Xero’s FY20 performance included strong top-line growth,
a first ever full-year net profit after tax, and a positive free
cash-flow result. However, the global operating environment
changed dramatically in March as COVID-19 escalated around
the world, and some of the steps taken by Xero to support
customers resulted in reduced performance against FY20
financial targets.
This is reflected in moderate performance against short-term
incentive (STI) targets for the CEO and CFO.
In recognition of the global COVID-19 crisis, we are conscious
of the challenges and uncertainties that we, along with many
organisations, face with respect to business performance and
remuneration. We will continue to monitor and review the
appropriateness of our remuneration approach and outcomes
in this unprecedented environment.
In the interest of providing greater transparency and insight
into our remuneration practices, this report goes beyond what
we are required to disclose as a New Zealand incorporated
company. We welcome feedback on this report.
Remuneration strategy
Our purpose and values
Xero’s purpose is to make life better for people in small
business, their advisors and communities around the
world. Our purpose is underpinned by five values that are
fundamental to everything we do.
REMUNERATION REPORT 95
Human
Xeros are authentic,
inclusive and really
care
Challenge
Xeros dream big,
lead and embrace
change
Kind and assume best
intent
Are curious and think
big
Team
Xeros are great
team players
Champion Xero’s
purpose and
priorities
Inclusive,
approachable and
show empathy
Welcome challenging
conversations and do
it with respect
Work together to do
what’s best for Xero
and our customers
Are willing to be
vulnerable, share fears,
failures and learnings
Lead and embrace
change, seeking new
and better ways
Appreciate and
celebrate each other
and success
Ownership
Xeros deliver on
our commitments
Do what we say we
will do
Own our mistakes
and take positive
action
Move fast to get the
right things done
Beautiful
Xeros create
experiences that
people love
Create experiences
that inspire and
delight
Do high-quality
work
Go the extra mile
Our remuneration principles are designed to ensure our
remuneration strategy links closely to Xero’s purpose by
driving alignment with Xero’s strategy and values.
execution of Xero’s strategic plan over a multi-year period.
Each remuneration principle is reflected in our remuneration
structure as follows:
Xero's remuneration framework is designed to attract and
retain best-in-class talent through a remuneration
structure that:
Alignment: A significant proportion of executive
remuneration is contingent on share price, ensuring Xero
executives receive rewards that mirror shareholder outcomes
• ensures alignment with business strategy
• supports sustainable long-term value creation for
shareholders
• supports appropriate risk management
Remuneration principles
As a global technology company, Xero is dependent on highly
skilled, specialist employees to implement our strategy. Our
ability to attract, retain, reward, and motivate our people is
fundamental to our long-term success.
Our executive remuneration framework has been carefully and
purposefully developed to enable this by offering:
• Market competitive fixed remuneration
• Short-term incentives based on challenging individual and
company-wide targets, with a deferred equity component
• A long-term, options-based equity plan that is aligned with
Xero’s long-term strategy
This framework is designed to conserve cash so we can
prioritise investment in Xero’s growth. The high proportion of
equity within the remuneration structure, and the application
of options as an equity instrument, continues to attract
highly skilled people. It also aligns executive performance
with shareholder interests and rewards the effective
Fairness: Market competitive up-front cash-based
remuneration is balanced by equity remuneration with
significant potential upside. Value creation for shareholders is
matched by value creation for employees
Collaboration: Performance conditions are largely company-
wide focused, with a less significant individual component.
Emphasis on delivering against Xero’s strategic objectives via
a significant equity component ensures Xero’s people must
collaborate to drive personal rewards
Simplicity: There are no complicated long-term performance
measures that require extensive explanation or to which the
executives do not have a direct line of sight – the structure
simply incentivises long-term value creation. Short-term
measures are aligned with the voices of the shareholder,
customer and employee
Flexibility: Xero’s short-term performance measures
combined with long-term options strike the right balance
between ensuring that Xero executives have sufficient
flexibility to respond to changing needs and circumstances,
while always having regard to Xero’s strategy, long-term
vision, and long-term value creation
XERO LIMITED 96
Remuneration structure
Xero’s executive remuneration structure is deliberately weighted to have a substantial portion of total remuneration at risk. A
large part of this at-risk component consists of option grants, providing leverage and a growth orientation for our executives that
is aligned to our overall strategy.
Component
Description
Fixed annual
remuneration (FAR)
• Base salary
• Retirement benefits (superannuation / KiwiSaver or local
Short-term incentive
(STI)
equivalent)
• An at-risk component set as a percentage of base salary
• Calculated based on achievement against a range of company-
wide performance measures (financial and non-financial) and
individual objectives
• Paid after a one-year performance period (1 April to 31 March,
aligned with Xero’s financial year). STI comprises 50% cash
and 50% deferred equity in the form of restricted stock units
(RSUs). Deferred equity vests one year after grant, subject
to continuing employment and confirmation that no award
adjustment events have occurred
Long-term incentive
(LTE)
• An at-risk component in the form of a block options grant plan
• Participating executives are granted a block of options that
vest in equal portions in each of the second, third and fourth
years after grant
• New hires / promotions may be invited to participate in the
block options plan, with a pro rata allocation to reflect their
later entry into the plan
• Vesting is subject to continuing employment, which provides
an additional time-based retention incentive, and confirmation
that no award adjustment events have occurred
Link to strategy and performance
Reviewed annually based on individual
skills, experience, accountabilities,
performance, leadership and behaviours
Rewards delivery of key strategic and
financial objectives, in line with the annual
business plan, and rewards outcomes
aligned to Xero’s goals for growth and
operational discipline
Organisational measures are approved by
the People and Remuneration Committee
and aligned with the strategic objectives of
Xero
Rewards delivery against longer-term
strategy and sustained shareholder value
creation. Provides alignment between
shareholder and executive outcomes
Malus and clawback
All executive variable remuneration is subject to malus and clawback in certain award adjustment events, including the following:
• where an executive has acted fraudulently or dishonestly or is in material breach of their obligations to Xero;
• where Xero becomes aware of a material misstatement or omission in the financial statements of the Xero Group; or
• in any other circumstances (for example, relating to the executive’s conduct) where the award would result in an unfair benefit
to the executive
Remuneration benchmarking
Executive remuneration is benchmarked to a specific S&P/ASX100 peer group that is determined to be similar to Xero in terms of
operations. Each year, the peer group is reviewed and updated. Xero’s People and Remuneration Committee (P&R Committee), in
partnership with an external consultant, conducts a comparative analysis of the executive team’s compensation against reported
roles within that identified peer group.
REMUNERATION REPORT 97
Xero’s performance
Xero’s financial results over the last five years are shown below:
Measure
Subscribers
Annualised Monthly
Recurring Revenue
FY16
717,000
FY17
1,035,000
FY18*
1,386,000
FY19
1,818,000
FY20
2,285,000
$257,925,000
$359,669,000
$484,421,000
$638,179,000
$820,557,000
Operating Revenue*
$207,060,000
$295,389,000
$406,659,000
$552,819,000
$718,231,000
Free Cash Flow*
($88,590,000)
($70,831,000)
($28,513,000)
$6,451,000
$27,105,000
*Operating Revenue and Free Cash Flow for FY18 has been restated for changes in NZ IFRS 9, NZ IFRS 15, and NZ IFRS 16. FY16 and FY17 have not been restated
Xero’s share price, total shareholder return, and the ASX100 index return over the last five years are shown below:
Measure
Xero Share Price (AU$)*
Xero Total Shareholder
Return
ASX100 Total
Shareholder Return
FY16
13.95
-40.18%
FY17
18.10
29.75%
FY18
33.44
84.75%
FY19
48.65
45.48%
FY20
67.91
39.59%
-8.95%
22.78%
3.08%
14.16%
-12.60%
* Closing price for the last trading day in the financial year
XERO LIMITED • Value of the CFO’s options that vested during the year
ended 31 March 2020. 20,000 options from a legacy grant in
2016 vested for the CFO this year
Further details on the CEO's and CFO's STI outcomes are
presented on page 105.
Further details on the CEO's and CFO's other remuneration
elements and outcomes for the year are included in on
page 102.
98
Remuneration outcomes overview
Headline remuneration outcomes for Xero’s CEO and CFO are
disclosed in the graph below on a realisable basis for FY20,
including:
• Fixed annual remuneration
• Realisable cash and deferred RSU STI awarded based on
FY20 performance, with deferred RSUs yet to be granted
and vest pending service. 81.8 percent of target STI (56.4
percent of maximum) was awarded to each of the CEO and
CFO. 50 percent is paid in cash and 50 percent deferred
into RSUs to vest one year post grant
• Value of the CEO’s one-off performance-based RSUs that
vested during the year ended 31 March 2020. 110% of target
RSUs were awarded (55 percent of maximum), with one-
third vesting this year
• Value of the CFO’s one-off service-based RSUs and shares
that vested during the year ended 31 March 2020. All of the
RSUs and shares vested
CEO
CFO
0
500,000
1,000,000
1,500,000
2,000,000
Fixed
STI cash
STI equity
RSUs
Shares
LTE options
REMUNERATION REPORT 99
Directors and senior executives
This report focuses on the remuneration of Xero’s directors, CEO and CFO in FY20 as identified in the table below.
Country of
residence
New Zealand
New Zealand
Executive
Steve Vamos
Kirsty Godfrey-Billy
Non-executive directors
Position
Period position was held during the year
CEO
CFO
Full year
Full year
David Thodey
Australia
Independent non-executive Chair
Appointed as director 27 June 2019. Appointed
Board Chair effective 1 February 2020
Rod Drury
Lee Hatton
New Zealand
Founder, non-executive director
Australia
Independent non-executive director
Dale Murray, CBE
United
Independent non-executive director
Kingdom
New Zealand
Independent non-executive director
Australia
Non-executive director
Susan Peterson
Craig Winkler
Former
Bill Veghte
Graham Smith
United States
Independent non-executive Chair
Ceased as director effective 31 March 2020
United States
Independent non-executive director
Ceased as director effective 15 August 2019
Full year
Full year
Full year
Full year
Full year
XERO LIMITED Other members of the Board, the CEO and members of Xero’s
leadership team may be invited to attend meetings of the P&R
Committee where appropriate.
The P&R Committee considers all proposals to award variable
remuneration to executives, including recommended cash STI
payments and awards of deferred equity, awards of LTE, and
any upcoming vests to determine whether there is an award
adjustment event (see malus and clawback section on
page 96).
External and independent advice
During the year, the P&R Committee engaged the services
of independent external consultants to provide guidance on
Xero’s remuneration framework to ensure it remains fit for
purpose given Xero’s current and expected growth trajectory.
The engagement of independent external consultants
ensured the P&R Committee did not receive advice solely
from management or advisors who also received significant
fees from additional work commissioned by management.
No protection arrangements
Xero’s Securities Trading Policy prohibits employees and
directors from entering into transactions that are intended
to hedge or otherwise limit the economic risk of unvested or
restricted Xero securities.
A copy of Xero’s Securities Trading Policy is available on
Xero’s website at www.xero.com/about/investors/governance
100
Remuneration governance
Xero’s remuneration governance framework is managed
by the P&R Committee on behalf of the Board. The P&R
Committee is tasked with ensuring that Xero’s remuneration
practices are aligned with Xero’s strategic objectives and
consistent with Xero’s remuneration principles and risk
appetite. The P&R Committee has regard to the interplay
between remuneration structures and risk when
designing structures and setting and determining
remuneration outcomes.
Role of the People and Remuneration Committee
The P&R Committee operates under a charter, which is
available on Xero’s website at www.xero.com/about/investors/
governance. The P&R Committee oversees Xero’s strategies
and policies relating to:
• Organisational structure and culture
• Remuneration
• Employee performance and development
• Succession planning for direct reports to the CEO
(succession planning for the CEO is managed by the
Nomination Committee)
The P&R Committee provides strategic, structural and policy
oversight of remuneration, employee performance and culture
for the general Xero workforce, making recommendations
to the Board regarding HR policies, remuneration budgets,
employee incentive plans, and material employee benefits.
The P&R Committee’s oversight of the remuneration
of the CEO and direct reports involves closer scrutiny
of remuneration quantum and performance outcomes,
including developing independent recommendations for CEO
remuneration increases and performance outcomes to be
presented to the Board.
The P&R Committee seeks input from management where
appropriate and also engages the services of independent
advisors from time to time to inform decisions.
People and Remuneration Committee independence
Consistent with the ASX Corporate Governance Principles and
Guidelines, the P&R Committee consists of three members,
the majority of whom are independent, including the Chair.
The current membership comprises:
• Susan Peterson (Chair)
• David Thodey
• Craig Winkler
REMUNERATION REPORT 101
Key remuneration components for the CEO and CFO
Further detail is outlined below on how the remuneration structure described on page 96 applies to the CEO and CFO.
CEO remuneration mix
The CEO’s remuneration mix is as follows.
Target
30%
Maximum
44%
26%
38%
13%
13%
18%
18%
CFO remuneration mix
The CFO’s remuneration mix is as follows.
Target
31%
Maximum
50%
27.5%
44.5%
Fixed annual
remuneration
STI cash
STI equity
LTE
Fixed annual
remuneration
STI cash
STI equity
LTE
9.5%
9.5%
14%
14%
XERO LIMITED 102
Fixed annual remuneration (FAR)
Fixed annual remuneration is set in the context of Xero’s wider, growth-orientated remuneration strategy and considers an
individual executive’s skills, experience, accountabilities, performance, leadership and behaviours.
For the CEO, the FY20 remuneration review process resulted in his base salary increasing to $1,145,000 from 1 April 2019. There
was also a change in payment currency from Australian currency to New Zealand dollars.
For the CFO, the FY20 remuneration review process resulted in her base salary increasing to $550,000 from 1 April 2019.
Element
Components
Process
Details
Base salary
Retirement benefits (superannuation, KiwiSaver or local equivalent)
Set and reviewed annually based on individual skills, experience,
accountabilities, performance, appropriate benchmarks, leadership and
behaviours
At risk – short-term incentive (STI)
STI is an at-risk component of remuneration that is structured to reward progress towards and alignment with Xero’s strategic
and financial objectives together with creation of value for customers, employees and shareholders in the financial period. STI
incentive payments are set as a percentage of base salary, based on level of responsibility and country of residence.
STI is calculated based on achievement against a range of organisational performance measures (financial and non-financial) and
individual objectives. STI payments comprise 50% cash and 50% deferred equity in the form of restricted stock units (RSUs).
Element
Purpose
Details
Focus participants on delivery of business objectives over a one-year period
Target opportunity (% base salary)
Maximum opportunity (% base salary)
CEO 60%, CFO 40%
CEO 87%, CFO 58%
Performance period
Performance measures
Financial objectives (60%)
Non-financial objectives (40%)
Pay vehicle
Vesting conditions
Performance is measured from 1 April to 31 March
Performance metrics measure success in relation to our key stakeholders,
reflecting the voice of employee, customer and shareholder
Financial objectives reflect the “voice of shareholder” - cash flow and net new
monthly recurring revenues (MRR) targets
Non-financial metrics are based on:
• Voice of Customer – Partner and small business net promoter score (NPS)
targets
• Voice of employee – Employee NPS and engagement targets
• Individual objectives – Goals aligned to company strategic objectives
50% of STI awarded is paid in cash with the remaining 50% issued in RSUs
RSUs vest one year from grant date, subject to continued service for both
executives
The STI performance metrics have been chosen as they focus the CEO and CFO on growing the global subscriber base and
creating valued customer experiences while at the same time maintaining operational discipline.
The targets set at the beginning of each financial year are reviewed and approved by the P&R Committee and are aligned to our
longer-term strategic objectives.
Performance against financial and non-financial objectives is determined at the end of the financial period after review of
executive performance by the CEO, in consultation with the P&R Committee (and in the case of the CEO, by the Board).
At all times the Board retains discretion over any variable payments made and such payments are supported by the P&R
Committee which applies a qualitative overview of outcomes to ensure an appropriate balance is always maintained. This ensures
there is not undue emphasis on short-term results at the expense of our longer-term vision.
The CEO, Chief People Officer and P&R Committee review and approve all upcoming incentive payments and equity vests to
ensure there is not any reason for withholding.
REMUNERATION REPORT 103
At risk – long-term incentive (LTE)
LTE is an at-risk component of executive remuneration that is structured to reward the effective execution of Xero’s strategic plan
over a multi-year period.
Element
Purpose
Details
Rewards delivery against longer-term strategy and sustained shareholder
value creation. Provides alignment between shareholder and executive
outcomes and time-based retention through multi-year vesting
Maximum opportunity (% base salary)
CEO 72%, CFO 64%
Pay vehicle
Grant date
Vesting conditions
Options with an exercise price based on the 20-day VWAP leading up to grant
date. Options lapse five years from grant date
Options were granted to the CEO in August 2018 and CFO in June and October
2018
For the CEO, options vest in two equal tranches in each of the third and fourth
years after grant. For the CFO, options vest in three equal tranches in each of
the second, third and fourth years after grant. Vesting is contingent upon
continued service for both executives
The CEO was invited to participate in the LTE plan from August 2018. As an offset to his existing RSU grants outlined on page
104 below, the total number of options granted to the CEO under the LTE was reduced by 25 percent and vesting in June 2020
was foregone.
XERO LIMITED 104
Legacy CEO and CFO equity arrangements
Details of other equity grants made to the CEO and CFO before the current LTE was adopted are outlined below.
Legacy CEO equity arrangements
Element
Purpose
Details
Focus participant on delivery of business objectives over a one-year period
and provide time-based retention through multi-year vesting
Target opportunity (% base salary)
Maximum opportunity (% base salary)
70%
140%
Performance period
Performance measures
Pay vehicle
Grant details
Vesting conditions
Outcome
Legacy CFO equity arrangements
Legacy CFO Options
Element
Purpose
Pay vehicle
Grant details
Vesting conditions
Outcome
Legacy CFO RSUs
Element
Purpose
Pay vehicle
Grant details
Vesting conditions
Outcome
Performance was measured from 1 April 2018 to 31 March 2019
The performance metrics were as follows:
40 percent
Revenue growth
MRR
40 percent
EBITDA 20 percent
RSUs
A total of 32,658 RSUs were issued in April and June 2018 to account for
maximum performance. Following confirmation of achievement against
targets, 12,276 RSUs were forfeited, leaving 20,382 RSUs to vest.
Shares vest in three equal tranches in May 2019, 2020 and 2021. Vesting is
contingent upon continued service
The first tranche of 6,794 RSUs vested in May 2019. The second and third
tranches of 6,794 and 6,794 RSUs will vest in May 2020 and May 2021
Details
Executive team retention plan intended to reward delivery against longer-
term strategy and sustained shareholder value creation. Provides alignment
between shareholder and executive outcomes and time-based retention
through multi-year vesting
Options with an exercise price based on the 20-day VWAP leading up to grant
date. Options lapse five years from grant date
80,000 options were granted in June 2016
Options vest in four equal tranches at each 12-month anniversary of the grant
date. Vesting is contingent upon continued service
Tranches of 20,000 options vested in June 2017, 2018 and 2019. The final
tranche of 20,000 options will vest in June 2020
Details
Retention of executives during CEO transition
RSUs
3,051 RSUs were granted in April 2018
Vesting is contingent upon continued service
All RSUs vested in May 2019
REMUNERATION REPORT 105
Legacy CFO shares
Element
Purpose
Pay vehicle
Grant details
Vesting conditions
Outcome
Details
Company-wide long-term incentive plan incorporating time-based retention
through multi-year vesting
Restricted shares
1,359 shares were granted in July 2017
Vesting is contingent upon continued service
All shares vested in March 2020
STI outcomes in detail
The annual outcomes achieved for CEO and CFO are based on Xero’s FY20 performance as follows:
Objectives
Weighting
Outcome
Threshold
Target
Maximum
Outcome
Outcome
(% of target)
(% of max)
Company Objectives
Voice of the shareholder¹
60%
10%
10%
20%
20%
Voice of the customer
Voice of the employee
Total Company Objectives
Individual Objectives
CEO individual targets
CFO individual targets
Total CEO Outcome
Total CFO Outcome
1 For the voice of the shareholder component, there is the ability to out-perform up to 200% on the net new MRR measure
78.0%
44.6%
50.0%
50.0%
100.0%
100.0%
61.8%
49.4%
100.0%
100.0%
100.0%
100.0%
81.8%
56.4%
81.8%
56.4%
XERO LIMITED 106
CEO and CFO remuneration
The following table provides details of the actual remuneration received by the CEO and CFO, in the years ended 31 March 2020
and 31 March 2019.
Fixed remuneration
Variable remuneration1
Accounting value of grants vested
during the year, in the form of:
Salary
($000s)
Superannuation/
KiwiSaver
($000s)
Other²
($000s)
Cash STI
($000s)
Additional
value of all
grants vested
in the year,
attributable to
share price
appreciation
($000s)
167
-
940
Total
remuneration
received
inclusive of
share price
appreciation
($000s)
1,960
1,067
1,875
Option/
Share
grants
($000s)
RSU
grants
($000s)
-
-
184
246
-
110
-6
75
48
212
-
506
1,196
793
270
S Vamos
2020
S Vamos4
2019
1,145
1,0135
K Godfrey-
550
Billy
2020
K Godfrey-
4177
Billy
2019
54
54
14
11
-
2
2
1
Includes the value of options, RSUs and shares granted in prior years that vested in the year
2 Other fixed pay relating to annual leave
3 Relates to payout of annual leave under New Zealand requirements, which includes STI received in calculation of payments
4 Amounts shown for S Vamos in FY19 were paid in AUD and are shown in NZD (translated at the average exchange rate for the year)
5 Base salary increased to AU$1,012,500 effective 1 October 2018
6 No STI or LTI amounts were paid to S Vamos during FY19 as his employment with Xero commenced on 1 April 2018
7 Base salary increased to $450,000 effective 1 October 2018 following promotion to the role of CFO
The following tables present current at-risk equity and holdings for the CEO and CFO.
At-risk equity as at 31 March 2020
Options
CEO
CFO
RSUs
CEO
CFO
Restricted Shares
CFO
Opening
balance1
Granted
during the
year
180,000
160,000
20,383
3,051
-
-
4,530
1,261
-
-
20,000
40,000
6,794
3,051
N/A
N/A
N/A
1,359
-
1,359
1 The opening balances in this table disclose all vested and unvested options, unvested RSUs and unvested Restricted Shares at 1 April 2019
Equity holdings as at 31 March 2020
CEO
CFO
Shares
10,500
1,884
Options
180,000
120,000
-
-
-
-
-
180,000
120,000
18,118
1,261
-
RSUs
18,118
1,261
Vested
Exercised
Lapsed/
Forfeited
Closing
balance
REMUNERATION REPORT 107
CEO and CFO employment conditions
Item
Basis of contract
Notice period
Details
Ongoing (no fixed term)
CEO – 6 months by either party
CFO – 3 months by either party
Shorter notice may apply by agreement
Non-executive director remuneration
The total remuneration available to non-executive directors is fixed by shareholders.
Currently, the annual total aggregate non-executive directors’ remuneration is capped at $2.2 million, as approved by
shareholders at Xero’s Annual Meeting in August 2019.
The Board sets the fees for the non-executive directors at a level that provides Xero with the ability to attract and retain directors
of a high calibre. Directors have the option to receive their fees in cash or Xero shares.
The fees paid to non-executive directors are structured to reflect time commitment, responsibilities, and workloads. Target fees
for non-executive directors are benchmarked to the Australian and New Zealand markets, except where benchmarked non-
executive director fees are higher in another market, in which case local benchmarks are used for that market. This reflects the
global composition of Xero’s Board.
To preserve independence and impartiality, non-executive directors have not received any performance-related or “at risk”
compensation (such as options) since 2016. Xero does not provide any scheme for retirement benefits, other than statutory
superannuation, for non-executive directors.
Below are the annual fees payable to non-executive directors during FY20. Directors’ fees are paid in New Zealand dollars in order
to avoid exchange rate fluctuations impacting the annual fee cap. Fees are reviewed every two years and were last reviewed early
in 2019.
Country of
residence
New Zealand
Australia
United States
United Kingdom
Chair
($000s)
Director
Audit & Risk Management
People & Remuneration
($000s)
Committee Chair
Committee Chair¹
($000s)
($000s)
358
358
358
373
145
145
252
145
30
30
30
30
30
30
30
30
1 No additional fees are currently paid for Chair of the Nominations Committee or for membership of any committee
XERO LIMITED 108
The total remuneration1 of, and the value of other benefits received by, each non-executive director during FY20 was:
Director
Country of
residence
Role
Committee
Chair
2020
base
fees
($000s)
2020
Committee
Chair fees
($000s)
2020
Vested
Equity
($000s)
2020
One-off
Payment
($000s)
2020
Total fees
($000s)
David
Thodey²
Rod Drury
Australia
New
Zealand
Lee Hatton
Australia
Chair
NED
Nominations
Committee
-
Independent
NED
Independent
NED
Independent
NED
NED
United
Kingdom
New
Zealand
Australia
United
States
United
States
Independent
NED
Former Chair
ARM
Committee
-
P&R Committee
-
-
Nominations
Committee
Dale Murray
CBE
Susan
Peterson
Craig
Winkler
Former
Director
Bill Veghte3
Graham
Smith⁴
Total
143
138
138
138
138
138
45
399
1,277
-
-
29
-
22
-
4
-
55
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
143
138
167
138
160
138
49
399
1,3321
1 Total remuneration is presented based on accounting expense and may include amounts earned but not yet received
2 Appointed director 27 June 2019, appointed Board Chair effective 1 February 2020
3 Ceased as a director effective 15 August 2019
4 Ceased as a director effective 31 March 2020
REMUNERATION REPORT 109
Lee Hatton was issued 1,526 Shares in lieu of receiving her director fees in cash during FY20 and Bill Veghte was issued 3,079
Shares in lieu of receiving his director fees in cash during FY20 (for further details, please see the explanatory notes of the 2018
and 2019 notices of meeting). In total, this represented 0.003% of Xero’s issued capital as at 31 March 2020.
The total remuneration1 of, and the value of other benefits received by, each non-executive director during the year ended
31 March 2019 (FY19) was:
Director
Country of
residence
Role
Committee
Chair
Graham Smith
Rod Drury³
United
States
New
Zealand
Lee Hatton
Australia
Dale Murray
CBE⁴
Susan
Peterson
Bill Veghte⁵
United
Kingdom
New
Zealand
United
States
Chair
NED
Nominations
Committee
-
ARM
Committee
-
-
Independent
NED
Independent
NED
Independent
NED
Independent
NED
P&R Committee
226
Craig Winkler
Australia
NED
-
Total
90
1,007
2019
base
fees
($000s)
310
90
90
111
90
2019
Committee
Chair fees
($000s)
2019
Vested
Equity
($000s)
-
-
20
-
-
14
-
34
-
-
-
-
-
59
-
59
2019
one-off
payment2
($000s)
2019
Total
fees
($000s)
150
460
-
-
-
-
-
-
90
110
111
90
299
90
150
1,250¹
1 Total remuneration is presented based on accounting expense and may include amounts earned but not yet received
2 For additional Board duties related to M&A and US$300m capital raising in FY19
3 Appointed as a non-executive director effective 1 April 2018. Rod Drury was an executive director during the year ended 31 March 2018 and received executive
remuneration from Xero. During that year, he did not participate in Xero’s share-based compensation plans or receive additional remuneration in his capacity as a
director
4 Appointed as a director effective 13 April 2018
5 The fees for Bill Veghte differ from the standard annual fees because they include the value of options granted to him in prior periods (2015 and 2016) that vested in the
current year
XERO LIMITED 110
Employee remuneration
The following table shows the number of current and former employees of the Xero Group whose remuneration and benefits for
FY20 were within the specified bands above $100,000.
Remuneration including share-
based remuneration
Number of employees
Remuneration including
share-based remuneration
Number of employees
100,000 to 109,999
110,000 to 119,999
120,000 to 129,999
130,000 to 139,999
140,000 to 149,999
150,000 to 159,999
160,000 to 169,999
170,000 to 179,999
180,000 to 189,999
190,000 to 199,999
200,000 to 209,999
210,000 to 219,999
220,000 to 229,999
230,000 to 239,999
240,000 to 249,999
250,000 to 259,999
260,000 to 269,999
270,000 to 279,999
280,000 to 289,999
290,000 to 299,999
300,000 to 309,999
310,000 to 319,999
320,000 to 329,999
330,000 to 339,999
340,000 to 349,999
350,000 to 359,999
360,000 to 369,999
370,000 to 379,999
380,000 to 389,999
390,000 to 399,999
400,000 to 409,999
410,000 to 419,999
420,000 to 429,999
430,000 to 439,999
450,000 to 459,999
176
171
164
145
140
121
88
105
72
75
50
41
34
22
28
14
18
8
15
7
9
15
8
6
7
5
1
4
2
7
3
1
2
2
2
460,000 to 469,999
470,000 to 479,999
480,000 to 489,999
500,000 to 509,999
530,000 to 539,999
550,000 to 559,999
580,000 to 589,999
590,000 to 599,999
610,000 to 619,999
640,000 to 649,999
750,000 to 759,999
760,000 to 769,999
820,000 to 829,999
850,000 to 859,999
860,000 to 869,999
870,000 to 879,999
890,000 to 899,999
910,000 to 919,999
960,000 to 969,999
980,000 to 989,999
1,000,000 to 1,009,999
1,020,000 to 1,029,999
1,050,000 to 1,059,999
1,250,000 to 1,259,999
1,420,000 to 1,429,999
1,470,000 to 1,479,999
1,650,000 to 1,659,999
1,720,000 to 1,729,999
1,760,000 to 1,769,999
1,870,000 to 1,879,999
1,880,000 to 1,889,999
1,960,000 to 1,969,999
2,060,000 to 2,069,999
2,810,000 to 2,819,999
3
1
1
1
2
2
3
1
1
1
1
1
1
1
1
1
2
1
1
1
1
1
1
2
1
1
1
1
1
1
1
2
1
1
The remuneration covered in the table includes monetary payments received and share-based payments vested (i.e. restricted
shares, restricted stock units, and vested options). The table above includes the total remuneration received by the CEO and CFO.
REMUNERATION REPORT 111
The value of options vested during the year has been calculated as the difference between the exercise price of those options and
the share price on the day the options vest (become exercisable). This methodology is different from that used for this disclosure
in Xero's FY19 annual report where the value attributed to vested options was calculated based on the fair value at grant date
as determined using the Black-Scholes valuation model. Our revised methodology has been chosen as it provides a closer
representation of the actual remuneration received by employees during the year and is consistent with the approach made
within the CEO and CFO remuneration disclosures detailed above.
XERO LIMITED 112
Corporate Directory
Registered offices
Directors
Leadership team
David Thodey, AO (Chair)
Mark Cross
Rod Drury
Lee Hatton
Dale Murray, CBE
Susan Peterson
Craig Winkler
New Zealand
19-23 Taranaki Street
Te Aro, Wellington 6011
New Zealand
Telephone: +64 4 819 4800
Australia
1/6 Elizabeth Street
Hawthorn, Vic 3122
Australia
Telephone: +61 3 9981 0408
Company numbers
183 0488 (New Zealand)
ARBN 160 661 183 (Australia)
Web address
www.xero.com
Auditor
Ernst & Young
Stock exchange
Xero’s ordinary shares
are listed on the ASX
Share registrar
Link Market Services Limited
Level 13, Tower 4,
727 Collins Street
Melbourne, Vic 3000
Australia
Telephone: +61 1300 554 474
Steve Vamos
Chief Executive Officer
Anna Curzon
Chief Product Officer
Kirsty Godfrey-Billy
Chief Financial Officer
Craig Hudson
Managing Director,
New Zealand &
Pacific Islands
Trent Innes
Managing Director,
Australia & Asia
Rachael Powell
Chief Customer Officer
Mark Rees
Chief Technology Officer
Nicole Reid
Chief People Officer
Chaman Sidhu
Chief Legal Officer
& Company Secretary
Damien Tampling
Chief Strategy & Corporate
Development Officer
Gary Turner
Managing Director,
United Kingdom & EMEA
Tony Ward
President, Americas