Xero wins plaudits for artificial intelligence product suite with revenue potential

Xero signalled AI and machine learning were at the heart of a new product suite last year.

 Xero has won plaudits in a wide-ranging report on artificial intelligence by Asian broking firm CLSA, which counts the New Zealand software developer among the top-10 listed firms in the region where AI and machine learning are having a demonstrable impact on their business.

Wellington-based Xero last year signalled AI and machine learning were at the heart of a new product suite aimed at taking advantage of the $1.4 trillion of transactions that passed through its platform in the year through March. Those new products have included automatic re-coding of transactions, no-coding invoices, and a chatbot on Facebook's messenger platform where customers can ask simple questions.

CLSA analyst Roger Samuel says those services give Xero the chance to boost its average revenue per user and cut customer churn rate by restricting them to premium packages, which are still ahead of its larger rivals, such as Sage and Intuit. He kept his 'buy' recommendation on the stock.

"As its AI functionality matures and with a wealth of financial data available at hand, Xero can potentially expand into peripheral services. Xero can receive fees from financial institutions for, among other things, customer referrals," Samuel said in the report. "Currently Xero is not monetising it, but this could change in the future and we estimate that the revenue upside could be in the order of $100 million-$150 million per annum."

Xero reported annual revenue of $295 million in the year ended March 31, 2017, and CLSA sees that rising to $716 million by 2020, with AI adding to the number of reasons why firms would choose the New Zealand firm over its rivals.

CLSA's Samuel says AI accounting software's "holy grail" is to generate cash flow forecasts and provide financial advice to users, which could be used to alert firms when they're facing a cash shortfall and need to tap some credit. Xero and other software developers are still experimenting, however, things could change in the foreseeable future as the technology matures, the report said.

Xero has been pitching itself as a vital cog in what it calls the financial web, where it acts as the intermediary between businesses and financial services firms, enabling small- and medium-sized enterprises to access capital more easily and free up transactions in an increasingly global economy.

Chief executive Rod Drury told BusinessDesk the move to Amazon Web Services a couple of years ago let Xero draw on the massive amount of data going through its platform, which has let its AI and machine learning products develop quite quickly.

Drury estimates Xero has a three-year headstart on its rivals and says the company has been encouraging its staff to use their education time to take courses on AI and machine learning.

"We're seeing the benefits of having a well-designed platform," he said. "We've got all that data and AI and machine learning bring that to life."

CSLA sees automation of basic accounting transactions as being a positive for the industry, with accountants and bookkeepers able to focus on value-added services.

Drury says Xero takes its leadership role in AI service seriously, acknowledging that it will see a shift in the workforce where more jobs are replaced by automation. While computers perform risk evaluation and complex work "really really well", Drury said people are better able to interpret data, build relationships, and develop strategies.

He points to Inland Revenue Department's business transformation plan as an example where this shift is taking place. As part of the IRD's implementation of a new IT infrastructure, it plans to drastically cut the size of its workforce, many of whom were in call-centre roles, which Drury sees as ripe for providing customer support for exporters.

"Those process jobs could be incredibly valuable for export companies providing services all over the world," he said.

The CLSA report delves into some of the wider consequences of artificial intelligence, and while it expects the new technology will create more jobs than it destroys, it says "the transition will be painful" and governments will be called on for help.