Xero tells ASX that profit is wrong metric to measure business

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Xero [NZX: XRO], the cloud-based accounting software firm whose shares have dropped 36 percent in the past year, has told the ASX it is in compliance with disclosure rules over its annual results while criticising media reports that focused on earnings rather than metrics such as cash burn and revenue per user.

The ASX sent Xero a please explain note on the heels of media criticism, asking how long before the annual results, which saw its net loss blow out by 96 percent to $69.5 million, had the company known about the deterioration and why hadn't it telegraphed that to the market sooner, given that the result was at variance with analyst forecasts. The ASX noted that Xero's shares closed at A$20.32 on April 23, when the results were released, from A$22.65 the previous day.

In answer, Xero told the ASX that it didn't consider the change in its net loss to be material because it was a software-as-a-service company in growth mode, meaning it was burning cash to build sales at the expense of profit.

"Xero is currently an early stage, high-growth, loss-making, SaaS company that derives almost all of its revenue from a recurring revenue business model," the company said. "Loss is less fundamental to the assessment of performance, as significant investment is required upfront to attain customers and drive future revenues in order to adequately capitalise on the growth opportunity and recurring business model."

Key indicators for Xero were trends in customer and revenue growth, cash burn rate, cash reserves and the ability to fund growth, and metrics typically applied to a SaaS company such as average revenue per user, costs of acquiring customers, annualised committed monthly revenue and customer churn, it said.

Xero's year-end cash balance of $268.9 million, which was 2.5 percent below the consensus of analyst estimates, the company said.

Also affecting the price of Xero's shares on the announcement day was the resignation of US-based chief financial officer Douglas Jeffries and the fact that, with limited liquidity, trading tended to be volatile, the company said.

Xero's New Zealand subscription revenue rose 41 percent to $32.6 million in the latest year 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.

Will the local bourse follow suit? NZX spokeswoman Kate McLaughlin tells NBR "NZX is unable to comment on individual issuers or whether specific investigations are underway or not. NZX Regulation can confirm it has not received any complaints in relation to Xero's results announcements released to the market on 24 April 2015."

The shares fell 2.7 percent to $20.10 on the NZX, and the stock is rated an average 'sell' based on five analyst recommendations compiled by Reuters, with a median target price of $20.

(BusinessDesk)