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Xero hits $70m revenue target, doubles loss to $35m

LATEST: Analyst sharpens concerns about Xero’s US prospects, sees possible shareprice fall to mid-teens

Xero has nosed ahead of its target to increase revenue by 80% in FY 2014.

Revenue to March 31 grew 83% to $70.1 million, the company said in a statement this morning.

Revenue from monthly subscriptions to Xero's cloud accounting software reached an annualised $93 million as paid customers rose to 284,000 - up from the 250,000 reported in February and the year-ago 157,000.

The company has yet to finalise its profit/loss number. It expects a full-year net loss of $35 million.

Last year, it lost $14.4 million.

Xero had given not profit/loss guidance for the period, other than that it expected a "wider loss."

The company did not break down its spending but did say that headcount increased from the year-ago 382 to 758.

Late last year as staff hit 700, CEO Rod Drury told NBR he expected that number to double again over the next 18 to 24 months. 

The company had $210 million cash on hand following a $180 million capital raising in October, up from the year-ago $78 million.

No profit or revenue guidance was given in today's update.

Modest North America numbers
For the first time, Xero broke out numbers for the North American market. Analysts says cracking the US is the key to Xero justifying its heady market cap - as well as paving the way for a Nasdaq listing.

The company said it had 18,000 customers in North American (up from the year-ago 6000), generating $3.3 million revenue.

Recently, Intuit - which holds a near-monopoly on the North American small business accounting software market overall - said paid subscribers to its QuickBooks online product increased 45,000 to 591,000 in the three months to January 31.

Click to zoom.

Earlier, chief executive Rod Drury told NBR that his company could not mount a full-force push in the US until it added support for payroll, which has to be customised state-by-state. Since late last year it had been in the process of rolling out the feature for several states.

Xero is in the process of increasing its US staff numbers to around 200. It recently recruited Peter Karpas - formerly chief marketing officer at Intuit - to head its North American operation and the New York-based Chris Liddell to be its new chairman.

The company will deliver more detail with its annual report, due May 22.

Xero 12-month price history (NZX.com)

Shares rise
Xero has been the top perfomer on the NZX over the past 12 months, rising 229%. 

On March 6, Xero hit an all-time high of $45.01 in midday trading for a market cap of $5.74 billion. 

But over the past week the stock has pulled back by about 9%. 

An equity analyst who did not want to be named told NBR that Xero had been caught up in a global trend over the past fortnight to sell down tech and biotech holdings.

Goldman Sachs - sell
Another negative factor: Goldman Sachs initiated coverage (ahead of today's release) with a "sell" rating and a 12-month target of $32.23.

In early trading today, Xero [NZX:XRO] was up 2.15% to $38.00 (for a $4.85 billion market cap), reversing some of its recent decline.

Goldman analyst Robbie Aitken wrote, "Previously Xero provided a less expensive option to play the growth in cloud accounting software, but at current levels given we believe investors are already paying over the odds."

Ahead of today's operational update, brokers had the following ratings for Xero:

First NZ Capital: Outperform; 12-month target: $45.70
Goldman Sachs Sell; 12-month target: $32.23.
Woodward Partners Securities:  Reduce; 12-month target: $27.00
Forsyth Barr: Underperform; 12-month target: $24.75

ckeall@nbr.co.nz

More by Chris Keall

Comments and questions
23

Good result. Whether the shareprice is justified depends on the US growth continuing.

It's a given Xero will continue to grow in the US. It's a smart company with good people and a good product, and it has $210 million in the bank.

The question is whether it can grow enough to justify that $5b market cap.

See a bull argument here: Xero can win - First NZ analyst models share price scenarios from 'US fail' to 'US Blue Skies'

And a bear case here: Xero may not fully appreciate what it's up against in the US market - analyst, slapping on a sell

I was refering to the growth rate. 200% last year and this needs to maintain above 100% for the next 5+ years.

Australia being able to maintain over 100% growth is promising.

The growth rate in Aust, the UK and North America - is spectacular.

The adventure continues with the dream of global conquest alive and well.

Go Xero team.

Yes, I am a fan and an investor.

The 120% revenue growth in Australia is an out-and-out positive - especially given MYOB has been kicking back hard over the past few months.

The 154% revenue growth in North American revenue to $3.3 million is promising, but it's coming off a tiny base, and is still negligible in the schem of things (Intuit had $US782 revenue in its January quarter, the bulk of it from the US).

Drury recently said Xero has made good headway in Australia with its first-ever round of traditional advertising, including radio, print and bus ads.

He says his company is now looking at similar promotions in other territories but not the US - and you can understand why given the cost and scale. Xero estimates Intuit, which regularly advertises on US TV, spent $10 million on its Superbowl ad campaign alone.

It'll be tough to crack the US, but Xero's strategy of roping in accountants, working social media and so forth has worked in other markets. And of course, they not only have to crack it, but crack it big ...

At 40+ bucks per share never made a profit, and by the look of it not in the immediate future, you must have rocks in your head, and then when they do make a profit it will more than likely be a 5c dividend if you are lucky, now if you take your investment and chucked it in say Rabo Bank, how many years will you be in front by comparison??
Not for me thanks!!!

You may well be right. It will only take one of two overseas institutional invesors to get nervous and especially if they have bought in at a lower price to quit the stock and we will see a computer generated meltdown as all the other instos systems follow suit and bail out.

You cant keep on making a loss not paying a dividend and expect shareholders to hang in there. At $40 a pop even a 5% dividend means a cash payout of $2 a share and that would soak up all the cash reserves so that's not an option. The company needs to be making an after tax profit of at least half a billion a year to allow for growth and a decent return on capital for investors. At a $35 million loss its got a long long way to go.

Regardless of the share price Xero currently has, and how it is calculated, the growth is based on investors money, not profit. Whether investors buy or sell is based on their confidence of the future, whether that be a future possible dividend or an even larger share price, to which there is a limit. If confidence drops so does investment.

The dividend scenario you mention is not relevant to those investors who put in money to speculate on the share price. The mum's and dads who invested are probably holding out for a dividend. The speculators on the other hand, will keep in their cash until they see the share price approach it's peak. Knowing there are no more increases to be had, they will sell up.

Speculative money helps to provide funding while a business is growing and has not yet made a profit. If funding dries up before a profit is achieved the company usually implodes are gets bought out.

If new investment for Xero dries up or shrinks below the level required to sustain new growth, Xero's water wings will lose air and we will see if Xero can actually float or sink to the bottom.

The power that Intuit has, that Xero does not, is that Xero requires investment money to sustain growth. It cannot produce a cash surplus from trading like Intuit and cannot sustain itself from its operations.

At $70m turnover, and 758 employees it is running at less than $93k per employee, down from 130k per employee some time back. At some stage Xero will have to level off, and this will mean shedding staff, an act in itself that will bring about a loss of confidence.

Xero has produced the goods in form of a great easy to use software package, something to be really proud of. Lets hope that in an effort to rapidly expand and fly close to the sun, the wings do not melt in the heat. It would be a shame to fail or be bought up by Intuit for a tidy sum and then scuttled. Unless being bought and scuttled was all part of the plan. In which case the product being traded and sold was always the share price, not the accounting system.

So 200% volume growth in North America but only 154% value growth. Smacks of some discounting to buy market share doesn't it?

I'm presuming when you measure customer numbers at the end of the period and revenue throughout the period there is obviously going to be a bit of a lag.
Personally I just can't see how the current share price will ever be justified, getting out now would be a wise move for anyone who bought in low.

Probably a combination of the strong US dollar (the figures are in NZD) and more via accountants, rather that direct sales, which do attract a discount.

So it's almost 0.1% of the way towards catching up to its current market cap. Doubling the loss will surely double its market cap again!

To those who love to make their negative opinions known: Large US investor funds don't expect dividends, they go for growth - and they will be the ones who push XRO's future stock price. Xero may be based in NZ but it will slowly become more and more centered in the US. The growth XRO has had in the US is slow but it's compounding. This market is nothing like NZ, it is much more conservative and much more complicated. Different cities, counties and states have different income/sales tax rates and payroll laws. Xero is already rolling out localized versions starting with California. They have to get each one perfected before it rolls out. Patience is the game but the growth is definitely happening. Xero gets more and more clients, interest and press here every month - and it's expanding. There is no reason for them to beat Intuit/QuickBooks (and they're not even trying to). They just need to take some share (and grow it each year). QB has 100% of the market, they can't possibly keep it all.

Unlike in NZ the payoffs are almost unlimited. UK growth started off very slow for the first few years but is now accelerating. You will see the same scenario play out in the US.

Don't underestimate Rod and the team. They know what they are doing, are learning all the time, and are succeeding. And US success will lead to even more nations having versions of Xero. Canada, Singapore, Hong Kong, South Africa are just a few of the obvious. And then foreign language versions will appear.

Badmouth Xero all you want. it doesn't matter. It only shows you don't understand. You may now badmouth my comments, the US, the global markets, all foreigners and anything else. It has no effect and it won't change the continuous growth of Xero.

Agree, all very believable - but still a speculation.
What's not a speculation is the ridiculous market cap and the Pied Piper 'investors' who march to the tune of the stock pumpers.

Who's pumping it? Some of us buy. Some of you whine about it. I don't want you to buy. Why do you all put down speculation? That has always been how great business and fortunes have been made.

Stick with your "wah wah wah, it's not following my rules" complaining.
You're so smart you're anonymous. And always will be.

Eriq I feel it's you who will look foolish when you reflect on this post in 2 years time.

That sort of post is exactly what those near the end of the gold rush were saying...

Any way you look at it, XRO is now a high-spec stock. Why would a prudent investor risk their money when there are other accessible stocks out there with historical share growth as good as if not better than XRO, with demographics and potential at least as favourable as XRO, and which are already, or very close to, returning a profit.

Yeah, why would a prudent investor not make money from this. I'm still buying and still selling. I have faith on Xero delivering the goods later on and so far I cannot complain as I'm way way ahead from all of those whining they did not get on this bandwagon earlier.

Yup, because calling it a bandwagon makes it seem like a much more attractive investment.

I did a bit of a moan a few years back on a real estate website declaiming residential investment as a bubble and that I had put all my money into Rabo (9% at the time), Xero, Google and Apple.

Seems like the recent investor flock into Xero is the real estate investment crowd of 5-7 years ago - no knowledge, just jumping on the bandwagon...

Oh well, if it works for you I suppose.

How does the Juliet story go now?

The real question to ask here is now much return are the investors who provided the extra capital getting on their investment, and what sort of claim do they have over the company assets?

Then the truth will be told on the whether the share price reflects value or otherwise.

Can someone please inform us all!!

Xero US user base 18,000
Competitor ADDS 45,000 users in one quarter.
Enough said?

I happily sold @ $7 based on valuation and my projections. What do you think of that? ;-)

Expenses were already ramping way ahead of my expectations and I began to expect lower price / margin per sale in the US.

Obv I would have preferred to have sold now.

Oh to bet on yesterday's horse race.