Two of Xero's biggest rivals say they are taking Rod Drury's company seriously.
However, they're predicting tough times ahead – both for the New Zealand-based company and its investors.
Xero's market capitalisation has bewildered New Zealand market analysts this year, as the cloud accounting software company's value hit $500 million and sailed comfortably beyond, including a lift from this month's ASX listing.
At Thursday morning's opening share price (NZX: XRO) of $6.35 – after a 4.1% jump the previous day – the company was valued at $680 million.
This is just a week after it posted a half-year net loss of $7 million, double the previous period, while more than doubling revenue to $16.9 million.
Its regional revenue numbers make interesting reading.
New Zealand revenue in the six months rose almost 70% in the previous comparable period. But Australian revenue – now just $2.1 million behind New Zealand – more than tripled and United Kingdom income more than doubled.
Xero's real game, it seems, is offshore.
Ready for a fight
That is what Australian rival Reckon thinks. The ASX-listed company (ASX: RKN) is gearing up for the fight – it will release its own cloud-based offering in the first quarter of next year.
"I think you're starting to see Xero plateau in places like New Zealand," Reckon's Sydney-based chief executive Clive Rabie told NBR ONLINE.
With more than 500,000 customers, Rabie's company is the Australian No 2 to MYOB's one million customers.
MYOB is owned by Bain Capital, the US investment firm founded by unsuccessful presidential challenger Mitt Romney.
Reckon has grown by "Australianising" a range of personal and small-to-medium business accounting products developed by US giant Intuit.
It posted first-half revenue of $A48.2 million, for a profit of $A9.3 million, and at Thursday's share price of $A2.43 the company is worth about $A310 million.
But Reckon and the Australian accounting software market is about to get a shake-up.
Intuit quit its deal with Reckon earlier this year and plans to enter the Australian market itself next year. The perfect storm could be complete across the ditch if British company Sage also wades into Australia, as predicted.
All of this spells trouble for Xero, Mr Rabie says.
"You're going to start seeing people like ourselves and MYOB come to market with far more aggressive platforms. You're also getting quite a lot of the big players, like the Intuits, come into the market in Australia and throughout the world."
Let us remind ourselves Xero listed in 2007 at $1 a share, saying it would make a profit when it hit between 15,000 and 30,000 customers.
The company says it has 111,800 paying business customers at the end of September and Mr Drury says Xero is "absolutely in the growth phase".
10 years of investor pain
Two months ago, Xero had $30.6 million in the bank but Mr Rabie says at current growth rates it is probably going to run out of cash by September.
"If they continue getting money I think there's a possibility they could one day be a business which will be significant in this space, but I think that there'll be another 10 years of pain for investors.
"I think investors are going to have to put that kind of money into the business for many years."
He says Xero has some "absolute flaws", with enticements of free products, big commissions for on-selling accountants and a high "probably not sustainable" price.
The best option is to sell out to a bigger company – he uses Reckon as an example – so it can get access to the cash it needs to achieve gains in competitive overseas markets.
To justify its current share price, Xero has to start earning at least $50 million a year, he says.
"For me, I might as well put my money on the roulette table, or in the casino, because it might be a great hit but there's a quicker way to double your money."
Speaking from Intuit's Californian headquarters, global business division president Alex Lintner immediately adopts a complimentary tone about Xero, saying it has a "compelling offering".
But he warns cloud-based accounting software is exactly what Intuit is doing in the US and abroad. It already has 360,000 users for Quickbooks Online and growing.
The 30-year-old start-up
The listed company (NASDAQ: INTU) is a global behemoth, worth $US17.2 billion and with revenue of $US4.15 billion in 2012.
It has maintained a compound annual growth of 10% over the past five years.
Intuit first dipped into what Americans call "financial management" software for small businesses 20 years ago, but it has a reputation of continuous innovation.
This year it made Forbes magazine's annual list of the world’s 100 most innovative companies, with an article in September referring to it as "the 30-year-old start-up".
Mr Lintner says Xero will face a sterner test Stateside than in Australia and New Zealand, with the company having to show it can compete "with somebody who knows what they're doing".
Intuit is the world's largest accounting software company, he says, followed by Sage and MYOB. The next tier down is occupied by a slew of smaller companies, which Intuit's research puts at 23 right now, including Xero.
"Because of their market cap, Xero gets a lot of press," Mr Lintner says.
"They're very proud of the 100,000 customers. The hardest customers to get are always the first one or the first 1000 so I applaud them for growing so quickly to that number.
"But, in the big scheme of things, it's a small number of customers – just like the other 22 small ones."
Xero under surveillance
Mr Lintner adopts military language for its foray into Australia, saying it will put "people on the ground". Sales staff, presumably, not software-toting marines.
He doffs his cap to Xero when he says it has no such plans for New Zealand, because the popularity of Xero and other accounting products has blunted Intuit's popularity. The market is probably too small for Intuit to worry about, anyway.
Don't think the American giant is ignoring Xero, however.
Mr Lintner explains that in this quick-moving industry even the small players are taken seriously and watched closely.
"If they have a good idea we will adopt what is legal to adopt and we will try to do even better than they did. And we have the resources to do that.
"Xero has done a nice job innovating on some aspects. Well, let's see if they can keep this up. Because business is a bit like marathon running – it's not a sprint."
You expect rival companies to run each other down but it's interesting to note the respect Xero has earned from these profit-making, listed companies.
There is a feeling, however, Reckon and Intuit are circling each other more seriously than Xero, which is fighting in a lower weight class.
And they want to keep it that way.
"We respect them as competitors," Mr Rabie says of Xero.
"And we'll try to take them on as a competitor – we don't want to see them grow so steadily they take over the market."
XERO RECKON INTUIT
Year listed 2007 1999 1993
Revenue $16.9m 1HFY13 $A48.2m 1H13 $US647m 1Q13
Profit (loss) ($7m) 1H $A9.3m 1H ($US69m) 1Q
Share price (21/11) $6.33 $A2.40 $US58.17
EPS -$.0111 A7.1c 1H $US2.76
Market cap $678.5m (21/11) $A310m $US17.2 billion
Customers 111,800 More than 500,000 50 million
This article is tagged with the following keywords. Find out more about MyNBR Tags
- SecureCom buys Atmospheric, the Microsoft NZ Partner of the Year gone bust
- 9 Spokes accelerates efforts to get into US
- Sky will take a gamble and put Westworld, aka 'the next Game of Thrones' on Neon
- AngelEquity launches with three investment offers
- 'Real housewife' lawyers up, accuses Devoy of bullying, defamation
Most listened to
- 9 Spokes CEO Mark Estall on his company's progress since listing.
- BusinessNZ CEO Kirk Hope - Upbeat on the economy, but worried about private debt
- SecureCom director Greg Mikklesen on buying Atmospheric
- Balkan borders and Kashmir killings on Foreign Affairs Scope with Nathan Smith
- Ironically, Trump showed the lack of stamina he had accused Clinton of, says NBR's Rob Hosking