Xero shares slump as annual loss widens

UPDATED: Xero [NZX: XRO], the cloud-based accounting software firm, says its annual loss widened even as sales rose, after it increased investment in product development, sales and marketing for future growth.

Shares were down 8.04% to $21.00 in early afternoon trading.  Milford Asset Management executive director Brian Gaynor says the share price drop reflected a single large sell order in an illiquid stock.

The net loss expanded to $69.5 million, or 55 cents per share, in the year ended March 31, from $35.5 million, or 29 cents, in the year earlier period, Wellington-based Xero said in a statement. Revenue increased 78 percent to $127.2 million while operating expenses jumped 96 percent to $167 million.

Xero is foregoing profits and dividends as it invests in expanding its accounting software service to overseas markets. The company estimates it has a 31 percent stake of the New Zealand market, 10 percent of Australia, 2 percent of the UK, and less than 1 percent of the North American market.

"We have emerged as the cloud accounting leader in three countries and are seeing positive momentum in the US market," said chief executive Rod Drury. "We are very excited about FY16 and expect strong growth to continue in all our core markets for the foreseeable future."

Xero added 403 staff in the past year, taking its total staff to 1,161. Some 214 of those staff were added to its product design and development area, which experienced 86 percent growth in the year, while 99 people were added to its sales and marketing workforce. The company said it expects a slower rate of employee growth this year.

The company's gross margin increased to 70 percent from 65 percent the year earlier as the cost of revenue declined to 30 percent of operating revenue, from 35 percent the previous year.

Xero's New Zealand subscription revenue rose 41 percent to $32.6 million as its paying customers rose 35 percent to 138,000. In Australia, revenue rose 104 percent to $56.5 million as customers increased 86 percent to 203,000 while in the UK revenue gained 91 percent to $19.3 million as customers advanced 77 percent to 83,000. In North America, revenue rose 133 percent to $7.7 million as customers increased 94 percent to 35,000.

"The US remains a significant and addressable opportunity with the majority of small businesses unserved by cloud accounting software," the company said.

Growth in North America is ahead of the expectations of some investors such as Milford Asset Management, which had forecast customer numbers in the region of 30,000 to 33,000.

"We think it's a good result," Gaynor says.

Xero said its US management team was formed in the second half of the year, led by US president Russ Fujioka, with customer growth in the second half 300 percent greater than the first six months.

Earlier today, Xero said its US-based chief financial officer Douglas Jeffries is leaving to pursue other opportunities after only two months in the role and its previous CFO Ross Jenkins will assume the role until it finds a replacement. In September, Xero's North American chief executive Peter Karpas left the business just six months after joining, which Drury said was because his skills were mismatched to the company's needs at the time as it sought to build presence in the crucial US market.

The company said it had $268.9 million of cash available to fund future growth and expansion, after it raised $147.2 million from Accel Partners and Matrix Capital Management in March. It used $88.4 million of cash and cash equivalents in operating and investing activities last year, compared with $48.4 million the previous year.

Xero shares are the best performer on the NZX 50 Index so far this year, having gained 41 percent, ahead of the benchmark's 3.4 percent rise. The company's stock slipped 0.9 percent to $22.80 in early trading today.

(BusinessDesk)