Opinion & Analysis
OPINION: Xero is a very, very different company. Some 400 people queued patiently in light rain in Wellington's Taranaki St for the packed annual meeting expressly to hear messages of hope and reassurance that they were shareholders in a company that was on target to become a global force in the unlikely and unglamorous sounding world of software accounting.
Judging from the applause at announcements that the company was surpassing its own ambitious growth targets - and the bonhomie at the aftermatch function - most seemed delighted with their investment. And the share price - which had eased back before the meeting - rebounded. On Friday's weaker market it closed at $5.30, having nearly doubled since the latest capital raising (at $2.75) in February. This raised a total $35.6 million (it has $39m in the bank) to finance its growth strategy for the immediate future.
I can recall few annual meetings where shareholders were so enamoured of their investment in the 50 years and hundreds of annual meetings I've attended since I started reporting them as a teenager in Dunedin.
One was Brierley Investments in 1971 when a youthful RA Brierley (as he was then known) was considered a budding financial whizzkid, though he was offside with the financial establishment. Eighty-odd people crowded into an upstairs bar at the St George Hotel to drink copious amounts of a rough Aussie drop called Woodleys Wines, one of BIL's first Australian investments. However those early BIL shareholders were right on one thing: BIL did become a big growth stock for the next 20 years before things turned to custard.
Xero is a great rarity. Shareholders of most companies whinge. They bridle at any suggestion of increasing directors' fees. They question dividend policy and profitability. Where are the women directors? When are they going to appoint some? There is usually an argument over increasing directors' fees.
None of these issues were aired. Shareholders are aware they are investors in a riskier company: analysts at Forsyth Barr and Craigs have cautious recommendations on it mainly due to its high share price.
Xero has made no bones that it intends to put all its money and income into growth: profitability (and dividends) is unlikely soon. The group loss in the year to March 31 was $7.9m, up from $7.487m: no one knows when it will become profitable. Shareholders passed without demur the requested rise in directors' fees, to allow for the appointment of additional Australian and American board members.
Shareholders - and there were numerous women at the meeting - appeared content with the all-male team at the top table, though its appearance was brightened by company secretary Linda Cox.
Directors include chairman Sam Knowles (late of Kiwibank) and a group of major shareholders who dominate the share register including chief executive Rod Drury, Trade Me founder Sam Morgan, accountant Graham Shaw and Craig Winkler, a founder of Australian rival MYOB that was sold for a reputed $1.3bn to private equity. Winkler expressed confidence that Xero would knock the spots off his old company. (Shareholders were told Australia is now Xero's fastest growing market adding 10,000 customers since March 31). Soon to join the board is high-profile American entrepreneur Craig Elliot, and another American to help grow the US business.
Wealthy investors hold 81 per cent of the shares - they include US billionaire Peter Thiel who invested $4m in the company and Winkler who put in $18m.
Xero is a provider of low cost accounting software for smaller businesses and accounting practices that aims to provide them with relatively simple systems that facilitate record keeping and bank relationships on a single platform with common data, and be a one stop shop to lower customers' costs on a single ledger platform. It is a leader in using the Cloud - low cost overseas computer data systems. Some accountants see risks in so much information being out of sight and their reach.
Xero's investment model closely follows a common US one where investors want growth and accept no or low dividends. They want to see the company perform strongly, show rapid growth through sales and takeovers, and its success to be measured by a rising share price.
Xero is following this pattern closely. Its growth is accelerating - it added 22,000 customers (to 100,000) since March 31. Forsyth Barr estimates it will have 155,000 by the end of the financial year with revenues rising by 5.3 per cent to $41.7m and to $72.3m by 2014. It has become a major employer, especially in Wellington. Total staff numbers have risen from 113 to 260 in the past 16 months.
While takeover activity is rife in the tech sector inevitably some expect Xero to become a target: especially as some directors, including both Drury and Winkler have sold businesses extremely profitably in the past. However directors dismiss any suggestion of this, saying the aim is to make Xero a New Zealand based global giant.