Xero piles on customers, but widens its loss

For its year ending March 31, 2009, the online accounting software company suffered a net loss before tax of $6.8 million, 57% worse last year's $4.4 million loss.

Xero says it had 6000 customers by March 31, half of them signed in the final three months of the period. 2000 of the customers are in the UK, where the company recently signed a reseller deal with British Telecom.

Since March 31, its total number of customers has reached 7500.

Xero says in aggregate, its 7500 customers generate 250,000 revenue a month -  which would make its arpu (average revenue per user) $33 a month - still less than half that promised in the company's prospectus ahead of its IPO.

Operating revenue from customer subscriptions was $959,000 for the year ended 31 March 2009 compared with $134,000 for the previous year; a 616% increase.

Under Xero’s software-as-a-service model, customers pay a monthly fee to access its software over the internet.

Xero also received grant funding from New Zealand Trade & Enterprise of $125,000 (down from $216,000 in 2008). Interest earned was $494,000 (down from $789,000 in 2008).

Payments to suppliers and employees totalled $8,364,000 for the year ended 31 March 2009 compared with $5,488,000 in the prior year; a 52% rise as Xero’s staff expanded from 32 to 55.

The company is in the process of hiring a futher 36 more staff.

The net cash used for operations amounted to $5.1 million compared to $3.9 million for the previous year.

No dividend was recorded.

Chief executive Rod Drury tells NBR that Xero’s recent $23 million share placement - $18 million of which, from Craig Winkler, was unanimously approved in a special shareholder vote today - will be enough to fund the company for at least two years.

Mr Winkler - founder of Xero's arch rival MYOB - joined Xero's board today as part of the terms of the placement.

The company is seeking to raise further capital with a share purchase plan that offers New Zealand Xero shareholders the right to buy up to $5000 worth of extra shares. The purchase plan will close May 18.

Mr Dury will not put a time frame on when Xero will become profitable. In terms of scale, he says the company will hit profitability when its customer base reaches somewhere between 15,000 and 30,000.

Recent deals with Telstra in Australia and BT in the UK - each of whom will sell Xero subscriptions through websites that push small business services - are seen as a driver of further growth. The Telstra and BT deals kick in during July. A similar deal with Telecom here is already operational.

Mr Drury tells NBR that in the months ahead, Xero will focus on consolidating its relationships with Telstra and BT before moving on to attack its next target, the US.

The Xero boss is counting on a new board member - Dell global vice president of enterprise sales Andy Lark - to help crack the North American market.

Xero shares (NZX: XRO), which have risen sharply off a 52-week low of 67 cents over the past three months, reached as high as $1.56 on the NZX today ahead of the announcement.

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5 Comments & Questions

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This is a great company and I have high hopes for it. As an accountant I cannot wait for MYOB to be knocked off its perch by this excellent package. Keep your eyes on this one - and investors with a high threshold for risk should take a very good look at this company and its competitive advantage.

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As a seller of business software myself I consider Xero to be one of the least "risky" businesses on the NZX. They have proven over the last two years to have a robust, user friendly product that has gained rave reviews, credible partnerships and most importantly 7500 subscribers globally.

Sure they haven't made a profit yet, but this will change in less time than a lot of people think, given it's simple, effective business model. If we had more Xero's underway in this country we'd be a lot less reliant on beef and wool for our ecomomic survival.

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So far my experience is wonderful with Xero. We are a small US based company but on the road alot. We also all use MACs at work. Finding a software to assist all of our needs was not available until Xero came into play. Now as the bookkeeper, I wouldn't use anything else!!!

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Paul - your comments certainly strike me as someone who sells software, rather than someone who would invest in businesses. By every measure possible Xero is an investment for someone with a high threshold for risk. A new company with an unproven product (yes, I agree it's a great product, but it's very young), trying to break into an existing and very strong market. Xero is an investment I would take any day of the week, but it's not an investment I'd tell my parents to bet their retirement on.

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Chris - very good points. I wouldn't advise anyone to bet their retirement on any one investment, however I would (and have done) encourage my own parents to invest in Xero as part of a long term, diversified portfolio.

The definition of risk these days has pretty much been turned on its head anyway, with any potential investment needing to be scrutinised even more carefully than before. Xero is not Plus SMS. I'd welcome your opinion of what is not risky these days.

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