Visit the full NBR website
HomeBusiness  

Xero doubles loss, signals greater losses ahead

Market darling Xero has almost doubled its half-year net loss to $7 million, while more than doubling revenue.

In its half-year to September 30, the listed cloud accounting software maker posted an after-tax net loss of $7 million, compared to a $3.7 million loss in the same period last year.

Operating revenue rose to $16.9 million in the six months, from $7.9 million during the same period in 2011, while cash and cash equivalents shot up to $30.6 million to $11.4 million.

The company has signalled it is on track to double revenue for the full year.

Xero also detailed several new projects, including tax products for Australia and rolling out its payroll product in the United States, which chief Rod Drury says will increase losses in the coming six months.

Losses down to hiring
Mr Drury told NBR ONLINE the larger loss was down to hiring of new staff – 130 in the last 12 months – to take the firm to 278 staff by October. It has another 100 roles open.

"It's not just adding a whole lot of people for people's sake, we've got a number of strategic projects – as an example we're doing tax for the Australian market.

"With MYOB faltering, being able to have a tax product towards the end of next year gives us a really good opportunity to even further accelerate that market."

Xero has more than doubled its Australian staff to 60 over the last year, he says.

In the six months, Xero's Australian revenue grew to $5.6 million, up from $1.8 million, while New Zealand revenue over the period was $7.7 million, compared with $4.6 million.

Paying business customers have lifted to 111,800 on September 30 2012, from 51,300 in the previous period.

Click to zoom. Xero's share price has jumped 127% in 12 months, taking its market value to $677 million (source: S&P Capital IQ).

Not swimming for safety
"We could swim for safety by the side of the pool but we're not," Mr Drury says.

"We're really building a company to compete with Intuit and MYOB and feel very comfortable in our position."

He would not say how long he thought the company's $30 million cash would last, but he said it would not be exhausted in the next year.

The company reviews its cash position each quarter.

"Obviously it's quite a lot of cash for a software company."

"With the cash we have the responsible thing to do is to continue to hire and grow the business while the opportunity's there."

He says the company is "absolutely in the growth phase" and its investments will drive a profitable business in the long term.

Xero shares (NZX: XRO) dropped 1.73% by 3.30pm to $6.25, erasing some of the gains from its dual listing in Australia.

dwilliams@nbr.co.nz

More by David Williams

Comments and questions

Great result announced today by Diligent. Those guys seem to understand that a business is about making money. The result by Xero.....

DIL has only stated making money in the last year. Xero will get there. Sales numbers keep going up and USA hasn't been tapped yet.

It would be unfair to suggest that Xero is somehow deficient because they are sacrificing earnings for growth – yet.

Their business model is a valid one and they have great growth in revenue, but they have not addressed the major question. WHEN will they convert their efforts from growth to profitability? What is the timeframe, or the level of marketshare, or the level of revenue that they consider the threshhold for management and directors to change course?

This hasn't been addressed yet to my knowledge, and it should be asked by Xero shareholders.

Perhaps profit is never going to be a priority for them ... maybe their focus & strategy is just to build up as big a user-base as possible, become the premier online accounting system in terms of numbers, then sell out to google or microsoft

While that is one option, they have decided to aim for a certain (large) critical mass. A some stage, sales will continue to increase and expenses will become static (ie, it no longer costs any additional money to service a new customer). This is the point that DIL is now at. DIL has the advantage that there aren't many competing products so its sales force doesn't need to be as strong as XRO who are trying to take market share from the incumbent.

DIL has the advantage that there aren't many competing products so its sales force doesn't need to be as strong as XRO who are trying to take market share from the incumbent.

So on that basis, Warren Buffet, were he interested, would be more likely to invest in DIL as it has the possibility of establishing a durable competitive advantage with a unique product/service with few competitors than XRO, that sells a one of many type product that is forced to compete on price as well as service and features level. That don't sound cheap to me.

Never a truer statement made.... it's a lottery play...

Don't tell me, you didn't buy any and all of your mates are ringing and asking why you talked them out of buying at $1

a lot of people make money in a ponzi scheme. Your not special if you did. Just don't keep holding onto your shares....

and why not?

I have no problem at all with them selling to google etc. I was just pointing out that might be the strategy. And yes actually I did buy shares at the initial offering.

As a multi-user customer (but not a shareholder) of Xero, I hope they press on with development. The product is excellent and the support is superb. Goood luck XRO

Also as a multi-user, their product is good but their support isn't . The support staff member we have had to suffer must have come from the IRD - heavy handed and bureaucratic. Their poor support is letting them down.

For goodness sake what is the obsession over Xero turning a profit. If you are so concerned with being in the black and earning your dividend get out of Xero and get into something else.

The opportunity, and the market, is absolutely huge. Look at the acceleration in growth and users and the US market hasn't even caught on yet. There's no need for them to worry about profit now because they have plenty of cash in hand, and a willing investor base who sees the big picture.

Any mug can look at the numbers and can see the trajectory and where this is all heading. Profitability for Xero is a switch - they can turn it on whenever they want.

Xero are coming under price pressure from MYOBs new product. They can't turn up the price at all without losing customers. In a price war MYOB can wear Xero down if Xero were to become a serious threat.

Xero doubles profit, adds 130 staff, fills coffers <-- a far better headline. Why the negativity? Are you just trying to wind us all up? The customer acquisition-led business model is well known, and if you want to reflect on a great case study then go have a look at Amazon.

Xero haven't doubled profit. They doubled revenue. There is no profit. I'm not saying that's bad, but Xero should communicate to shareholders what their threshhold for profitability is, and when that is likely to be.

Technically they have doubled profit - its just that it is a loss.

I dont think they need to communicate their threshold. They have clearly communicated their strategy. Any shareholder can get out now having made a good profit. It would be different if the shareprice had slumped and they were relying on shareholders goodwill to support.

Profit is a technical loss?

If I was an investor I'd be concerned about the sustainability of the Xero business plan. 30 mil doesn't seem enough to implement a global strategy. How many times will Drury have to go to investors for top ups? The strategy could end up being out on a limb with no way back due to unforeseen global circumstances that down grade the opportunities that the strategy is based on. The cyclical nature of business means that a growth strategy that takes the business past a certain point of sustainability exposes that business to risks beyond its ability to manage.

Concept stock with huge and consistance losses, prime target for short selling ...just wait for the right moment.

And you started selling at $1, then $2 then $3 and so on, so you have to console yourself by trying to tell the rest of us that you were right all along, just got the timing wrong, ouch!

Misery needs company

get out while share price good let some other chump deal with it price when the price is 0

When they refer to 111,800 business customers does equate to the total number of users or businesses? One business could have multiple users.

It refers to the number of businesses which is the number of paying customers. Since most businesses have more than a single user they have far more users than this.

111,800 Business - 300,000+ users.

Thanks. That's quite impressive and indicates that their average customer has about 3+ users.

I wonder if they are double counting... ie is a Xero Accounting customer also counted as a Workflowmax customer? or are they 2 seperate customers...? Also with 30M in the bank, a piece of their 'revenue' will be unrelated to actual product or trading activities. With a stock that is so out of alignment with established (even we 2.0) metrics, and share price.....

For those comments obsessed with making a short term profit at the expense of the longer term growth, Xero could disclosure what they believe is the estimated cost of delivering services to their existing customer base, not the current cost base which is obtaining 100% growth yoy and building a platform for x10 the volume of customers. It is a switch, they could be profitable, they raised money to go for growth, they have to spend it. IF they needed more capital - the high market cap means that further equity raised can be done at a very low level of dilution, it's a great spot to be in for the existing shareholders. / investors.

Mike

Xero has been operating for six years. Suggesting it is about time they should be able to make a profit (or at least give some indication of how they plan to do so) is not short term thinking.

Why would you invest in Xero when you can invest in their US competitor FreshBooks.com that has 10 x more customers, is profitable and already dominating cloud accounting in the US??

Know the industry well. Freshbooks started with online invoicing, bulk chunk of them are really users of invoice module, and most of them are there for free service. Freshbooks now realised that online invoicing is just small chunk of big accounting game and now trying to recast as accounting software. Building good General ledger and then Accountant focused tools, tens of external apps via API these are all in xero’s foundation. Freshbooks is at least 4 years behind in terms of product development (even if it did few acquisitions). Xero built its own online invoicing a month ago.

"One notable shortcoming of FreshBooks is the absence of any proper double-entry accounting (as of June 2012)." If building a viable accounting engine was *that* easy then the Accounting Saas space would be as profitable as the URL-shortening services market.

This is why the dual listing on the ASX was so important. It opens up the market base to investors that understand the type of company that Xero is, the potential market opportunity that lays ahead. There's a large number of media and out of touch investors in NZ that just don't get it, no matter how many times you whack them over the head with it.

The faster they can get a foothold in the USA and then onto the NASDAQ the better - that is almost a top priority I believe for Xero.

Freshbooks is not Xero's main worry in the USA though it is a threat. Intuit who provide Quickbooks (including an online version) is Xero's main threat.There is plenty of other competition out there too.

Profitability comes from doing hard things, unique things or better things. Ideally all three all while also keeping costs under control. Xero does well on the better parameter but gets few points for how hard it was to build, how unique it is or for keeping costs under control.

Xero faces a very challenging future - much, much harder than those buying shares at the moment realise.

Ive just had a look at them and $670m of market capitalisation for a loss is a joke. NZ "investors" are classicly ignorant. Eeven as a growth stock its need to be making $10-15m+ to justify that valuation. Even worse than Moa - at least thats only $40m for a loss-maker.

Yes it is a joke when you look at simple numbers on a page, but if that's all you're doing, then you have to wonder who the butt of the joke really is...

I just spoke to a friend in the US who almost choked when I told him we had an online accounting company doing 30M/-6M and worth $680M... with only 100k customers, and he's a serial web entrepreneur... He suggested sites like http://www.waveaccounting.com and www.freshbooks.com . Freshbooks have 5 million users... but I guess they must be doing something wrong because they aren't worth 680M... I know lots of people will have put their hearts and souls into making this product and they deserve better, this isn't a "growth stock" this is a bubble market play... I wonder if NBR or some of the analysts would run a comparison of like products in the markets Xero is playing in? Dont get me wrong I think its a great product (I use it) but our market is **** enough without having to be embarrassed further.

« Back to home page