Xero buys payroll firm to boost Aust growth

CLAIRE ROGERS
Last updated 05:00 22/07/2011

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Wellington's Xero has bought Melbourne online payroll startup Paycycle for A$1.5 million – a deal Xero says will remove a roadblock to its growth across the ditch.

The A$1.5m (NZ$1.9m) purchase price comprises A$500,000 in cash and $1m worth of Xero shares, which will be vested over three years.

Chief executive Rod Drury said the deal was a good one for both parties.

Paycycle was set up to provide a payroll system that would be compatible with Xero software in Australia.

"They could only build a standalone payroll product because Xero was there. I think they always thought we would be their exit.

"They're an early-stage company and most of their customers are Xero customers anyway."

The online accounting software firm announced the acquisition at its annual meeting in Wellington yesterday and at the same time played down previous predictions that it would break even this year, saying it was firmly focused on growth.

Paycycle was founded in 2009 and has 750 customers using its system, which manages pay, leave, tax and superannuation.

Xero already integrates Paycycle's payroll software with its system but the deal would mean its core software had "fully featured" payroll capability – something customers in Australia had been asking for, Drury said.

Paycycle's six staff would stay on, he said. "It gives us some really good development capability as well.

"The payroll engine can potentially be used in other markets as well like the United States."

Xero's Australian revenues for the year ended March were $1.5m, five times higher than $283,000 the previous year.

The Paycycle software will continue to operate as a standalone product until early next year, when it will be integrated with Xero's software.

Xero increased business customers by 25 per cent to 45,000 since the end of March.

Revenue for the year ended March was $9 million, triple the previous year's revenues. However, operating expenses of $18m resulted in a net loss of $7.5m after tax, although that was an 11 per cent improvement on last year's loss.

The company said in May it was aiming to break even by the end of the year but Drury said it would continue its push for growth with shareholders' support.

"We still might get there but the business is going well – we've got plenty of cash, it's a growth opportunity and it just doesn't make sense to not make the most of it."

Xero had a strong cash position – reporting cash reserves of $16.9m for the year – and its small competitors were not well-funded.

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Drury said the US was home to 25 million small businesses – Xero's target audience – and they spent $800 billion on technology last year.

The company was leveraging its advisory board in the US, which includes Facebook backer and PayPal founder Peter Thiel, to gain ground there.

Xero also announced a digital mail partnership with New Zealand Post, which will see them give small to medium-sized businesses digital addresses and delivery services.

The company's shares made 9 cents yesterday, closing at $2.24.

- BusinessDay.co.nz

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