Drury discusses that lower growth forecast - and Xero's monolithic competition in the key US market

Rod Drury in a still from a XeroCon promo clip

KeallHauled

Chris Keall

Yesterday Xero caused a minor stir by forecasting 80% growth for its 2014 financial year (implying revenue of $70 million).

Last year, revenue grew 102%.

"You can’t fold a piece of paper an infinite number of times," CEO Rod Drury told NBR ONLINE this morning.

True, but with Xero's market cap at a heady $2 billion, wouldn't investors like a few more doublings yet?

On this point, Mr Drury stresses he told Xero's annual meeting growth would likely be over 80%. He tells NBR that figure is conservative, adding "From what we can see right now we’ll easily do more than that."

In September, his company will hold its first XeroCon event in the US - in San Francisco in a bid to capitalise on America's Cup buzz. It doesn't hurt that the city, and neigbouring Silicon Valley, are the largest venture capital and tech hubs, too.

The CEO says lay of the land in the United States is pretty simple: It's all Intuit, all of the time - Intuit being the Nasdaq-listed company (market cap: $US19.1 billion) that has two key products: Quicken (for personal accounting) and QuickBooks (for small business). It also sells tax preparation, point-of-sale and payroll software.

"QuickBooks just has a complete lock on the market. When people in the US think accounting, and they think QuickBooks," he tells NBR. 

US media articles put Intuit's market share variously between 85% and 94%. "QuickBooks is the market," Mr Drury summarises. "There's really little competition."

At its last detailed breakdown of customer numbers, Xero said had 11,000 of its 157,000 customers in the US and the rest of the world outside its key markets of Australasia and the UK. (Yesterday, Xero said its total paying customer count increased to 193,000 over the past three months, but did not go beyond the headline figure - it's natural to wonder if there's a US slowdown or Xero is holding back a number for an upside surprise at XeroCon SF).

That's a tiny beach-head. 

How do you attack a market that's so huge, and where Intuit has such a monolithic near-monopoly? Especially  now Intuit has a cloud-based product on the market?

Mr Drury is being in this position before. Xero overcame MYOB's stranglehold by winning over the hearts and minds of accountants (who in turn influence their clients' choice of software), and exploiting the fact the incumbent had to tend to a large base of customers using legacy offline software - distracting from efforts to push into the cloud.

He plans the same trick in North America, only a grander scale. Xero is going all out to get members of the accounting press and other influencers to XeroCon.

The CEO says Intuit has been complacencent, and late to the market with a cloud product that is unloved by accountants (QuickBooks Online was had its global launch in September 2012). On a recent conference call it claimed 400,000 QuickBooks online users Mr Drury says - but that included non-credit card subscribers, indicating trialists were in the mix, and in any case was a modest number by Intuit standards. [UPDATE: In its quarterly earnings released August 21, Intuit reported a modest 487,000 users of QuickBooks Online; again, it wasn't clear how many were free trialists.]

Mr Drury says Xero will launch a payroll product in the US in the new year, which will aid its effort.

Asked about the cost of customising software for the US market, the CEO says while accounting rules in the US a more complex, they are only slightly more so, and in any case a known factor, and stable. Payroll laws are substantially more complicated, he says, and subject to much more frequent changes.

Still, it's a much bigger country, where Xero's "word of mouth amplified by social media" strategy will be harder going. And Lord knows it's harder to make a splash in San Francisco. Last year I went to a Salesforce.com event in the city that featured Sir Richard Branson, Colin Powell, Tony Robbins, the Red Hot Chilli Peppers and Will.i.am, among others, but was still regarded as a warmup for Apple and Oracle events.

Beyond XeroCon, a US sales manager has just been hired, who will start in a few weeks, heading an expanding team that includes Xero President Jamie Sutherland, drafted in from Sage (big across the border in Canada, and worldwide). A global head of marketing has been poached from Google. 

2000 US accountants have completed Xero training events, the company said at its AGM. The largest accounting firm in California (and the 29th largest in the US), Armanino, has signed on as a partner, Xero says.

Xero has landed a five-star review in CPA Practice Advisor, and been talked up by influential tech blogger Rober Scoble (aka @Scobleizer), albeit in his day job at Rackspace, Xero's data centre host (hey, you've got work every  angle).

The ultimate move to get in with the locals could be a US listing. Mr Drury has previously told NBR he's taken advice puttiing Xero on the Nasdaq, and will consider it once the company tops $US100 million revenue.

Fighting one-handed
Xero finished the quarter with 500 staff, and is shooting for 700 within months.

Mr Drury says notes that's still small compared to MYOB (close to 1000), Sage (around 13,000) and Intuit (around 8000; the $US10 billion market cap Intiut made $US767 million of $US4.2 billion revenue in 2012, if you were wondering).

The tells NBR his company has made excellent progress "given we're still fighting with one hand behind our back. we haven’t finished our product yet. It gets easier as the product gets better and better."

The core Xero product will have all of Mr Drury's wish-list features by some time next year he says. From that point, Xero will concentrate on services beyond accounting - a key step to charging for services per employee (at the moment a monthly subscription covers a whole organisation), and lifting average revenue per user (ARPU).

Shareholders took Mr Drury's prediction of wider losses in FY 2014 in stride, and don't seem fazed by the slower growth forecast.

In early afternoon trading, Xero shares were up 0.18% to $17.10.

"We explained at the shareholder meeting we don’t just passively make a loss; we’ve raised a lot of money and we’re choosing to invest."

A lot of that investment is going into the US. Is it the make-or-break market for Xero; the one that will justifiy its towering market cap (or not)?

Mr Drury says no; Xero's NZ, Australian and UK operations are now covering their own sales, marketing and delivery costs, according to Xero's annual report, and slides shown at the AGM yesterday.

This hints the company could turn a profit if it was not for the US assault. But of course as he has flagged many times, the Xero founder wants his cloud product to conquer North America, and everywhere.

We'll have a little more idea how the US leg of the plan for world domination is going at XeroCon in September.

ckeall@nbr.co.nz

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2 Comments & Questions

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People should be able to rely on NZX releases to get price-sensitive information on future trading.

According to the article, Rod stressed to those present at the AGM that "growth would likely be over 80%" and "from what I can see right now we'll easily do more than that".

But from the NZX announcements and releases I can't see any of that. Not all shareholders were able to go to the AGM and those are highly price-sensitive statements. It just doesn't feel right.

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The slideshow linked to in the story, which was posted to the NZX, includes the "over 80%" statement, which Rod Drury built on in his later comments to NBR.

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