Drury says Xero shareholders support chasing sales growth

Drury says Xero shareholders support chasing sales growth before profits

By Jonathan Underhill

July 22 (BusinessDesk) – Shareholders of Xero Ltd. support the cloud-based accounting platform provider’s focus on chasing sales ahead of profits, chief executive Rod Drury says.

The Wellington-based company yesterday said it may not meet the target it has held since 2009 to break even this calendar year. It announced the acquisition of Australian online payroll firm Paycycle for A$1.5 million, including A$1 million of Xero shares and said it wants to “flexibly pursue options that will add shareholder value without being constrained by short-term profit guidance.”

The shares jumped 11% to $2.49 on the NZX today, adding to yesterday’s 4.2% gain, valuing the company at $205 million. Xero has declined 22% this year.

“The internet space now is white hot,” Drury told BusinessDesk. “All of our investors have said grow revenue as fast as you can.”

“We don’t need to solely drive towards profitability,” he said. “We’ll still driving to break-even as fast as we can.”

The number of paying customers has jumped 25% to 45,000 in the past three months, Xero told shareholders at their annual meeting yesterday. In the 12 months ended March 31, operating revenue tripled to $9.3 million, but expenses jumped about 40% to $18 million, resulting in a net loss of $7.5 million in the year.

Xero has about $15.9 million of cash on its balance sheet, which Drury says is “more than enough to execute our plan.”

The company said it has emerged from its start-up phase, so cash burn would expect to be abating from now. It may yet break even this year, Drury said. In its own material, the company says it has a world-beating platform, especially for smaller businesses.

Xero is “tempering people’s views,” says Rob Mercer, head of research at brokerage Forsyth Barr. Still, the company’s performance has “given us encouragement that they should have a reasonably good growth path.

Forsyth Barr doesn’t have a house rating on the stock, which isn’t in the benchmark NZX 50 Index.

“I think the timing is going to be quite good in terms of product that’s a lot cheaper and more flexible for small businesses in particular,” Mercer said. “They have got vision.”

Chairman Phil Norman told shareholders in Wellington the Paycycle purchase adds a missing component to Xero’s accounting software, and should make it easier to tap the Australian market.

Xero is paying A$500,000 in cash and AS$1 million in Xero shares, which will be vested over three years.

As a result, Xero is chasing ways to “add shareholder value without being constrained by short-term profit guidance,” Norman said in speech notes lodged with the stock exchange. “Shareholder value accretion will, ultimately, be a function of a very large customer base being monetised through a durable business model that delivers sound economic returns.”

Xero had previously flagged the current financial year to be the one where it breaks even. The company almost tripled revenue to $9.3 million in the 12 months ended March 31, though it made net losses of $7.5 million and $8.5 million in the past two years.

(BusinessDesk)

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