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Liddell signing points strongly to Xero Nasdaq listing - but analyst says it could be tough sell

Xero’s three new appoints have dramatically increased the likelihood the company will list on the Nasdaq, a key analyst tells NBR. Yet he remains wary the company’s high share price could derail an attempt at a US IPO.

Woodward Partners Securities’ analyst Nick Lewis tells NBR it is unlikely new chairman Chris Liddell - fresh from high-powered roles at Microsoft and GM - would have accepted the role unless a US IPO was firmly in Xero’s sights.

The two other appointments are new Xero director Bill Veghte, who runs HP's enterprise group from the US, and PayPal executive Peter Karpas, who will lead Xero's North American push.

Lewis says Liddell is highly regarded. And, through his instrumental role in GM’s $US20.1 billion NYSE listing in 2010, which included a heavy schedule of roadshows and presentations to large institutional investors, “He’s well connected to the buy-side investor community in Chicago, New York and London." He'll be very professional and give the buy-side a lot of confidence."

Intuit insider
The Woodward analyst is probably not on Rod Drury’s Christmas card list.

He has reduce rating on Xero, and a target price of $27.00. Last week, he told NBR the stock was over-priced, and the company possibly underestimating the challenge posed by giant US incumbent Intuit.

This morning, the Woodward man is gah-gah for Xero. Not for the share price, which he still sees as overheated (in late morning trading, shares [NZX:XRO] were up 2.33% to $40.84, for a market cap just over $5 billion), but the trio of new signings.

Mr Karpas’ background is “very compelling”, Mr Lewis says. (Xero's US president Jamie Sutherland - up until now its ranking staffer in North America - will report to Karpas, CEO Rod Drury told NBR this morning.)

Attention has focused on Karpas’ current role – GM of PayPal, but it’s his previous role that has Lewis jazzed: chief marketing office and product manager for Intuit. Karpas will bring key knowledge of Xero’s main rival.

Liddell's three strengths
And although a critic of Xero at times, Lewis can’t rave enough about the appointment of New York-based ex-pat Chris Liddell as chairman.

The Woodward analyst says the Kiwi has good three factors strongly in his favour.

He’s got tech experience – albeit with a mature tech from his time as Microsoft’s chief financial officer.

He’s managed a major Fortune 500 company IPO. As General Motors CFO, Mr Liddell played a major role in the company’s 2010 listing on the NYSE as it raised $US20.1 billion – the largest IPO in US history and twice the amount originally targeted, according to a Bloomberg account. The GM IPO experience means Liddell is well-connected with buy-side investors in Chicago, New York and London, Mr Lewis says.  “He’ll give them a lot of confidence.”

And thirdly, he’s a New Zealander. “That means he understands the culture of the company, and that’s important,” Lewis says.

Drury: Nasdaq "always in the playbook"
This morning, Drury told NBR a Nasdaq listing is “something that’s always been in the playbook.” A US IPO is not on the immediate horizon, or anywhere in Xero’s formal timeline, but the company has taken advice.  The CEO reiterates he sees $US100 million as the minimum revenue for making a Nasdaq listing viable. “We’ve got a lot of executing to go before we get there,” he said.

For now, too pricey
Now, the bad news – Lewis says NZX/ASX-listed Xero could look too pricey for Nasdaq investors – even with the US market in the throes of new tech boom.

“Let’s assume an IPO comes between in June and September,” Lewis says.

 “The investment bank that advices them would have its work cut out trying pitch a company with between $70 million and $80 million revenue and a market cap north of $5 billion. That’s a very high multiple, much higher than Salesforce.com and other SaaS [software as a service] businesses investors might compare Xero too.”

Salesforce [NYSE:CRM] lost $US270 million last year. It has a revenue ($US3 billion in 2013) to market cap ($US37 billion) multiple of 12.3, to Xero's 62.5.

But although it would be a tough sell, Lewis says Xero could argue it’s in a much earlier phase of its life than Salesforce, which was founded in 1999.

“And revenues will catch up, in theory,” he adds. “If revenue grows to $160 million next year cuts the multiple in half. They’ve done it before.” 

Another SaaS company, Workday [NYSE:WDAY], makes a more attractive point of comparison. 

The fast-growing cloud HR software outfit has a revenue ($US274 million in 2013) to market cap ($US16.6 billion) multiple of 60.6.

As Chris Liddell might be saying to potential Nasdaq IPO backers shortly, that's smack-bang in Xero territory.

Of course, many investors would rather focus on a price-to-earnings ratio, but in SaaS software at the moment, almost everybody's taking a bath. 

The good news, for Xero-boosters - Workday shareholders were totally unfazed by the company losing $US119 millin last year. They believe it can disrupt and ultimately reap big profits by dominatinig human resource software, just as Xero backer's hope Drury's company will do the same in the accounting space.


RATING XERO

Woodward Partners Securities:  Reduce; 12-month target: $27.00 
Forsyth Barr: Underperform; 12-month target: $24.75
First NZ Capital: Buy; 12-month target: $47.50
(Xero [NZX: XRO] closed Friday up 4.39% to $40.45)

XERO HALF-YEAR RESULT (reported Oct 3, 2013)

Loss: 17.1 million
Revenue: $30.3 million
Cash: $230 million
Customers: 211,300  (NZ: 85,500; Australia 79,100; UK 30,100; US/rest-of-world: 16,600)
Xero says it expects FY2014 full-year revenue of up to $80 million. See also NBR's report on Xero's Jan 31 NZX update: Xero customer receipts rise 14% in 4Q as cash burn creeps higher

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Comments and questions
2

One motivation might be that Rod is setting the structure in place to take a significant chunk of his money off the table without undue criticism? (i.e. looking to mitigate the 'key person' risk that many investors perceive exists).

One would think that regardless of any structure, a sell-down by him would be very damaging to the confidence of shareholders?

A good and balanced article, Chris. Well done.