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Xero talks up possible US listing as Drury updates on customers, forecasts revenue at AGM

A US listing appears seems to be on the cards for Xero.

In presentation to the company's annual meeting, CEO Rod Drury said the company, which reported $70.1 million revenue for FY2014 recently hit the $100 million annualised revenue mark, is forecasting an 80% lift in revenue for FY2015 on a constant currency basis, implying $126 million turnover.

"During the year we will pass through US$100m in annualised committed monthly revenue positioning us for a US listing when the timing is deemed right," the presentation says. 

That specific US dollar figure is significant because Mr Drury has previously told NBR that Xero has taken advice on a possible Nasdaq listing, and was told that it would make financial sense once revenue hit $US100 million.

The recent appointment of ex-pat Chris Liddell as Xero chairman has also been seen as a sign of a possible US listing. Woodward Partners Equities' Nick Lewis earlier told NBR the New York-based Mr Liddell is well-connected to major investors in the US and Europe from his time leading GM's post-bankruptcy IPO.

Profit-less Xero's revenue to market cap multiple is often remarked on.

But one slide in this afternoon's presentation — perhaps aimed at selling existing shareholders on the merits of a Nasdaq listing, or heebeejees over Xero's market cap, or both — points out Xero's value ($2.7 billion in US dollar terms) is not outlandish next to various listed US companies in the software-as-a-service (SaaS) space including Workday ($US15 billion) and Salesforce ($US23 billion), and that Xero's revenue is growing at a similar pace to their early years.

Profit-less Workday is forecasting $US750 million revenue next year; Salesforce lost $US232 million on revenue of just over $US4 billion in the 12 months to December.

Another SaaS company name-checked in the presentation, Netsuite (market cap: $US8 billion), lost $US70 million last year on $US414 million revenue. It's easy to see why Mr Drury might want to rub shoulders with such company, and in a market where dizzying revenue-to-market cap multiples are the norm for cloud contenders.

Customer number update
One possible wrinkle: Nasaq investors could have a could have a special focus on Xero's progress in North America.

The company most recently updated on paying customers on May 22, when it said it had 300,000.

Today, Mr Drury reported a new total: 334,000.

The company says it will gun for growth over profit until it hits the 1 million customer mark.

This morning, Mr Drury hinted at more detail on customer numbers amid controversy over allegedly slow progress in the key North American market, where Intuit is dominating both offline and cloud sales in its home market  (Intuit's most recent quarterly report says it has 624,000 QuickBooks Online customers, the vast majority in the US and Canada, and around 5 million total.).

But if a new Xero US customer number is being delivered, it's not in this afternoon's main presentation, which reiterates the regional breakdown delivered at the May 22/284,000 customer announcement, including the previously reported 18,000 for North America.

"The success of the company's going to be international, it's not just the US," Mr Liddell said after the meeting. "In terms of the US, it's just a great product. It's not going to happen immediately and, sure, Intuit's a formidable, large company in the US, but it's important to recognise that of something like 30 or 40 million small, medium businesses in the US, Intuit's customer base is five million. 

"There's 35 million who do something else, whether it's Excel spreadsheets or pieces or paper or localised software, so it's not only competing with Intuit, you're competing for people who've never had software before."

Shares [NZX:XRO] closed down 1.38% to $23.58 against a broader market rise of 0.30%.

RAW DATA: AGM presentation (PDF)

More by Chris Keall

Comments and questions

1) The targeted revenue growth rate of 80% is on what I read to be a constant currency basis. Well we don't live in a constant currency world. Maybe share with us what ACTUAL revenues are expected to be - it's sorta important, then the theoretical revenue.

2) Then goes on to talk about latest annualised run-rate revenue of $100m. Soon in other news will we be toasting that Xero hit the $10b mark in centennialised revenue (based on latest month of trading)?? Hope not.

3) Customer number graph on page 6 definitely starting to flatten - probably at a steeper rate than what its share price implies.

4) By Xero's own admission - QBO overtook XRO in monthly new additions in July and is pulling away quickly (look at how much the gap has widdened in recent months)

All up - a fine business, with fine people. But nothing in its financial performance or run rate can justify in any way whatsoever its huge share price - in my opinion.

See more on QuickBooks vs Xero customer numbers in NBR's paid story from this morning:

When does Microsoft take this thing out?

When it is trading at $7.50

It doesn't matter what share price is doing today. Fundamentally Xero is doing right things, in percentage terms Xero may show up double digit number instead of triple digits as in last year. I started my journey a while ago at $1.80, I haven't sold a single share till date.

There is a massive switch to cloud across US market, Intuit got lead with QBO. Xero may not be able to beat it, but the reality is Xero is recognised as Number 2 alternative. Across the board there is a massive switch from Desktop to cloud. Intuit got 80+% share in desktop. It won't be the case QBO, certainly it will not convert all of its desktop client base to QBO. I guess they may be a leader in US with 50 to 60% market share with cloud. In a worse case scenario Xero will undoubtedly capture 30 to 40% of market in united states. Race to "Number 2" position and the "Best alternative to Quickbooks" battle is already won by Xero. - Not just in US but across the globe. Listing in US will solidify Xero position further.

Take a look how much cash Intuit is burning just to retain it's lead position within US. Yet it got nowhere with price discounts in AUS, UK and NZ or rest of the world. Most of Xero achievements are little to do with price discounts, major advert campaigns. Round 2 of this accounting war is yet to be waged, I am sure Xero will have enough muscle and backers out there to support it.

Xero is delivering right numbers in all relevant markets. It's an unimaginable feet for 8 year old company to capture 23% of all small businesses registered in NZ, while MYOB = accounting on these shores.

I have never seen an NZ company crossing the ditch and beating a monopolist giant like MYOB and capturing 110k businesses there in span of 3-4 years.

Xero went in to UK and faced well capitalised SAGE and plethora of startups and achieved 50K businesses. All of this point to me that Xero is worth holding in my portfolio for long term ride. They are doing something right compared to other NZ companies I have seen before. Xero is destined to rewrite rules in this segment.

Markets are over valued at the moment but There are number of positive events I can see down the road in next 2 years.

- US listing adds more load on the demand side.
- Declaring profits and reinvesting them for growth
- Expanding in to other markets
- major distribution deals
- Strategic acquisitions
- Vertical/Horizontal merger offers from other vendors
- Ever expanding app ecosystem
- Expanding in to more value added services/platform hub ( this aspect is vastly under estimated by market - Accounting engine potential is not yet leveraged)

Just because bunch day traders and trading bots with few thousands shares think this stock is over valued doesn't mean long term value investors like me ditch the boat. Xero is here to stay and it will have substantial global foot print by 2020, It will be one of the top companies leading small business segment.

Thank you Rod and Management team, stay focused cos you got to kick some more buts.

$1.80 dude.

Wow, 1.80 dude, I love your flowery language of analysis.

8 years to capture 23% of SME and you said it is an amazing "feet"? It this a half empty or half full analysis? I can say,

"what, 8 years and you have only 23% market share? What are the other 77% not doing? If you are in NZ and you know the NZ environment and you want to conquer the world?"

Yes It took 8 years in NZ, due to the fact that they had to start with 0 line of code and bunch of unproven ideas. What was QBO doing all that time with every bolt in place? What was Sage doing in UK with all the cash?

When they head in to new market like Europe, Canada they got proven systems, fully built feature sets, platform. What would be different is that, they will face local competition. Then comes competitive advantage of App ecosystems, bank feeds, network effects, accountant focused tool kits... etc. Sure it will take less than 8 years to get 23%

What??? are you kidding me? They cannot even get the large market share in NZ and they want to goto Europe, Canada with their "proven system"?

A proven system with only 23% acceptance after 8 years in the market?

I can't think of any NZ business that has been able to achieve that kind of growth in such a short space of time - not a very intelligent comment 'Charlie Angels'

A great letter.... Please ensure that you send a copy to Rod and team.

QuickBooks online just rolled out a new software upgrade in NZ last Saturday. There were a few teething issues as expected, and the usual gripes about small changes in the platform, but overall a good upgrade package. The biggest change has been that it is now running within your browser, whereas previously QB online would launch from the browser to a separate desktop application. This has sped the program up and means it now functions in a browser environment more similar to that of Xero.

I have used QB online for a number of years, and also use Xero for a few clients that have jumped on that platform. I think Xero is much more user friendly due to its more streamlined / simplistic platform. QB online can be a pain for people to learn, but it seems to have a greater degree of technical complexity, which I think some people (accountants) like - provided they understand what they are doing.

An interesting space. QuickBooks has definitely sat up and noticed what is happening. And they are now moving fast to modernise their cloud platform. I guess the race is on - if they make it as user friendly as Xero, I suspect it will become harder for Xero to grab QB customers.

If last weekend’s upgrade is anything to go by, a lot of people don’t like change :)