Analyst doubts Xero's future in US

TOM PULLAR-STRECKER
Last updated 05:00 05/04/2014

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Xero has appeased investors by meeting its annual sales target but one analyst fears for the company's prospects in the United States.

Woodward Partners analyst Nick Lewis forecast Xero's share price would fall below $20 if, as he expected, it failed to achieve significant success in the United States. Xero founder Rod Drury hit back, saying the firm was "very confident".

The cloud accounting software firm's revenues grew 83 per cent to $70.1 million in the year to the end of March after a strong fourth quarter.

Three-quarters of the way into its financial year, Xero had only just been on track to meet Drury's August forecast that revenue would grow at least 80 per cent.

Xero said its net loss would be about $35m, more than double last year's $14.4m loss, which was also in line with analysts' forecasts. The company will release its full audited accounts on May 22.

Nowhere has more riding on Xero's success than Wellington. Xero added an extra 376 employees during the year, taking its workforce to 758. About 100 of the new jobs were in Wellington, where spokeswoman Emma Izzat said it now employed more than 300 people.

Lewis said Xero's numbers were as expected, in light of the guidance it had provided. The broker was still finalising its forecasts but expected Xero would increase revenues a further 70 to 80 per cent in the 2015 financial year.

But Lewis said there was no indication yet that Xero was gaining "serious, tangible traction" in the United States, where it is competing against "monster" incumbent Intuit.

The value of its subscriptions on an annualised basis had risen to $93m by the end of March. Of that, $41m were being generated in Australia, $29m in New Zealand, $14m in Britain and $3.3m in North America.

Lewis said he would still like Xero to break out its figures for the US, given North America also included Canada and possibly Mexico.

"Although I wouldn't expect any serious volumes to come out of Mexico, they always talk about the US as their primary marketplace, so let's disclose what the US numbers are."

Intuit was not to be underestimated, as it was valued at US$22 billion, had 5 million customers and US$2.5b cash on its balance sheet and had beaten Microsoft in the desktop accounting market when it was still an aggressive start-up, Lewis said.

"I am afraid it is going to be a very serious struggle."

If Xero did achieve 70 to 80 per cent revenue growth this year, that would not be enough to justify its current share price, Lewis said.

"If the downside scenario I have painted comes to be, which is that Xero does not achieve significant market share in the US, then it's difficult to justify a share price above $20."

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Drury said Australia and Britain would be the engine room for Xero's growth over the next two years, and it had achieved what Intuit had not done in 25 years, which was "to beat the incumbents outside of the US".

Although it had already notched up 18,000 customers in North America, it had yet to really turn its guns there.

"It is far too early to tell about the US but every indication is positive," he said. "We have got $210m of cash. We are so much more formidable than we were 12 months ago."

Xero shares closed up 1.6 per cent at $37.80, about 18 per cent off their record high of $45.99.

- BusinessDay

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