Xero changes recruitment tactics as unsuitable US head, CFO depart, Drury says

Xero [NZX: XRO] boss Rod Drury says the accounting software developer has changed its tactics for hiring senior executives after the departure of a US chief executive who lacked urgency and a chief financial officer who didn't like to travel.

The departure of former North American CEO Peter Karpas in September, after six months in the job, and last week's announcement that US-based CFO Douglas Jeffries has left after just six weeks, unsettled investors. The shares dropped to a two-month low following news of Jeffries' departure and the company's annual results, prompting the ASX to ask Xero if it was complying with disclosure rules.

Drury says Karpas ticked all the boxes, having worked at both larger rival Intuit and run Paypal's small business arm in the US, but he didn't have the "urgent start-up mentality."

"The performance wasn't there, the numbers weren't there, boom," Drury told BusinessDesk. With Jeffries, the former CFO himself realised he had taken the wrong job.

"Within two months of him travelling around he realised it wasn't for him," Drury said. "He wanted to be in a business where all the chief executives were based in San Francisco. That's not our business."

"It's unfortunate he didn't realise that in the beginning because it's like coming into our business and setting a bomb off, but it really has no impact. It is a perception thing."

The mis-hires have prompted Xero to rely less on recruitment agencies for top executives and more on its own networks and shareholders, which include seasoned Silicon Valley venture capital firm, Accel Partners and Matrix Capital Management who contributed $147.2 million in equity capital in February. The company also taps the networks of its directors like Salesforce CFO Graham Smith and Hewlett-Packard executive Bill Veghte.

"What we found is when we get people from a recruitment process and not through our networks it is not as good, and the chemistry wasn't there - so better to work that out now and deal with it than not," Drury said. "It's eyes wide open because we don't want to get another one."

The US is the smallest of the company's four key markets behind Australia, New Zealand and the UK, but its fastest growing. In the year through March, its US customer base grew 94 percent to 35,000. The country has an estimated 24 million small businesses.

Xero has been forced to adjust to a more direct marketing model in the US, where many small and medium-sized businesses do their own accounts rather than outsource the work in what is a more litigious market where accountants tend to focus more on compliance issues, Drury said. More than half of its US customers now subscribe directly through the xero.com website, which has been simplified for end users.

By contrast, accountancy firms have been an important catalyst to sales growth in Australia and New Zealand, alerting clients to Xero's easy-to-use, cloud-based service.

Drury says Xero is still eyeing a Nasdaq listing as a way to boost its US profile. The company has reached one of its own pre-conditions, achieving more than US$100 million in annualised revenue, but would prefer to wait until it had gained more traction against rival Intuit in terms of winning customers.

Globally, Intuit has 841,000 subscribers to its QuickBooks online accounting software, compared with Xero's 475,000 customers.

Xero also plans to strengthen its push in the US by partnering with global-brand companies such as Google, Microsoft, Amazon, Wells Fargo, Bank of America, Visa, Mastercard, Verizon and Sprint. It hired former Microsoft executive James Maiocco as head of business development in November to help clinch the deals.

"We are nailing these big partnerships, so we don't have to build our brand on our own - that's a very logical strategy for a new entrant coming into a market," Drury said

Xero told the ASX this week that it was in compliance with listing rules after being asked whether it telegraphed a 96 percent blow-out in its full-year net loss as soon as it became aware of the deterioration. In its response, Xero said it didn't regard profit as the right measure of performance for an early stage, high-growth, loss-making, software-as-a-service company.

Drury emphasised that view at the two-day Xerocon conference in Auckland this week.

"If someone comes up and says when will you guys make a profit, I'm going to punch you in the face because we have a quarter of a billion in cash to invest," Drury said. "Our investors don't want us to put it in the bank, they want us to grow and hire so we build a much higher-value business later."

At March 31, the company had $268.9 million of cash. Drury said the company may reach $1 billion of revenue in four to five years, saying it is much harder to get from nought to $100 million than to make the next step to $1 billion.

"We think somebody needs to create the Facebook-sized company in small business - it could be us," Drury said. "This is the biggest monetisable opportunity on the web. We feel confident. We think we have got a real shot at being that hugely global significant company."

The company's shares last traded at $19.90, compared with its 2007 initial public offering at $1 apiece, and a record high of $45.99 in March last year.

(BusinessDesk)