👉 Background: Xero launched cloud-based accounting software at the time when accounting software was mainly on CD-ROMs. And since 2006, Xero has grown to over 3.7 million subscribers in more than 180 countries.

👉 What happened: In November last year, Xero brought on a new CEO... And in her first annual report, she's announced a net loss of over $105 million for the 12 months to March. Yikes!

👉 What else: But it's actually been a really strong year for Xero. The majority of these losses were due to the 'write down' of two platforms that Xero owns (Waddle + Planday). But excluding these write downs, Xero's EBITDA was over $280 million. Now, its new CEO reckons Xero should be judged on the Rule of 40... rather than growth or profitability alone.

What's the key learning?

💡The Rule of 40 is the idea that a software company's growth rate and profit margin should exceed 40% when combined.

💡According to Bain & Co, software companies that outperform the Rule of 40 have valuations double that of companies that fall "below the line". They also achieve returns as much as 15% higher than the S&P 500.

💡In recent years, the 40% rule has gained widespread usage by Saas companies. But it ain't just companies - but also keen-eyed investors who use it as a high-level health check of a company. In 2023, Xero scored a bit over 35, so they still have work to do to reach 40.