Xero widens first-half loss, concedes US did not execute to plan

Xero [NZX: XRO] the cloud-based accounting software firm, widened its first-half loss after spending more on staff and marketing.

The Wellington-based company's loss swelled to $24.5 million in the six months ended Sept. 30, from a loss of $17.1 million a year earlier. Sales rose 79 percent to $55.8 million, as its subscription revenue increased 85 percent to $52 million.

In the period it boosted staff numbers 70 percent to 993 employees, while its customers increased 76 percent to 371,000. Its annualised, committed monthly revenue rose 87 percent to $132.3 million.

In September its North American chief executive Peter Karpas left the business just six months after joining. The software developer wants a million customers, and is targeting growth in the US market where it sees the potential to take market share of an estimated 29 million small to medium sized business owners. In the six month period its customer numbers rose to 371,000.

In terms of its North America segment the company said "Xero did not execute to plan. Key leadership changes are being made in the region and Xero expects to accelerate growth over future periods."

The company has relocated chief financial officer Ross Jenkins to the US, and appointed John Forrester as vice president of US marketing, James Maiocco as general manager of business and corporate development (US/UK) and Angus Norton senior vice president chief product officer.

In the six months, it lifted paying North American customers 120 percent to 22,000, while the region's subscription revenue increased 131 percent to $3 million, for the segment to widen its loss to $9 million, from $7.7 million. That's compared to Australia, it's largest customer base, which turned to profit of $2.5 million, from a loss of $1.5 million as it increased paying customers 100 percent to 158,000, with subscription revenue rising 115 percent to $23.9 million.

Meanwhile, its New Zealand segment lifted its contribution 37 percent to $6.4 million, as its subscription revenue increased 42 percent to $15.1 million. Its UK unit widened its loss to $2.5 million from a loss of $170,000 as its subscription revenue rose 100 percent to $8 million. The rest of the world segment boosted its contribution 82 percent to $698,000 as it lifted subscription revenue 82 percent to $2 million.

The company last year raised $180 million in new capital to fund its US growth plans and is eyeing a US listing after it reaches annual revenues of US$100 million, expected in this financial year, and has tapped former Microsoft chief financial officer Chris Liddell as chairman. As at Sept. 30 it had 170.8 million cash on hand.

"There's been a bit of concern over our position in the US," Mr Drury tells NBR. A number of analysts have downgraded their 12-month targets for the company recently, citing what they see as slow progress in North America — home to 18,000 of Xero's 371,000 customers, a 4000 increase on March.

"Hopefully this will allay those concerns," Mr Drury says, referring to Maiocco and Forrestor's appointments.

"James was a real star at Microsoft ventures. He knows everybody in the Valley." Mr Maiocco would complement ex-Dell global and CBA exec Andy Lark, who was recently named Xero's new CMO, Mr Drury said.

Mr Norton was a senior manager at Microsoft NZ during the 1990s boom before moving to Seatle to work at the company's head office. He's returning to NZ to take on a chief product officer role.

Xero got off to a false start with one executive appointment in North America as its US CEO Peter Karpas was shown the door in September.