Monday, August 11, 2014

Share sag puts shadow over Xero’s global foray

Sally Rose for the Australian Financial Review writes: A significant amount of heat has come out of Xero’s share price since March with analysts divided over whether the company can pull off its ambitious push into the US and Britain.
Of the five analysts who officially cover Xero only one, James Schofield from First NZ Capital, has the equivalent of a “buy” rating on it.
Auckland-based Goldman Sachs analyst Robbie Aitken upgraded Xero to “neutral” on April 9, due to price change.
The stock had fallen sharply after a new product-pricing structure was poorly received by the market.
Macquarie initiated coverage of Xero this month with an “underperform” rating, describing it with the tagline “beautiful company, expensive stock”.
“We expect Xero to gain significant market share of the small business accounting software market. They have a compelling product and have gained a good market share in the countries they entered first. However, the current share price is factoring in too much upside,” Macquarie analyst Daniel Frost said.
Xero dominates the small business accounting software category in its home, New Zealand, with a market share upwards of 90 per cent. It has also been successful in attracting customers in Australia, where it encroaches on the leading home-grown rival MYOB.


The Kiwi company has never turned a profit and management is yet to provide any guidance on when it is expected to do so. Xero showed revenue of $NZ70.1 million ($64 million) in the financial year ended June 30, while reporting a net loss of $NZ35.5 million ($32.4 million).
Macquarie forecasts revenue will increase to $NZ236 million ($215.3 million) in the 2016 financial year, while net losses blow out to $NZ66 million ($60.2 million).
It is widely acknowledged among analysts that Xero has a good product and has been leaders in the shift to move accounting packages into the cloud with a software as a service (SaaS) model.
But it faces strong competition from established brands in Intuit, owner of QuickBooks in the US, and Sage in Britain.
Xero is chasing partnerships with accounting firms in the US and Britain to grab a foothold before SaaS solutions from Intuit and Sage are widely implemented.
Ties with H&R Block in the US and KPMG in Britain were announced earlier this year. It is too early to judge the efficacy of these as a tool for customer conversion.

Founder and managing director Rod Drury is on a mission to replicate Xero’s local success at a global level.
“We expect Xero’s cash-burn to increase as the company continues to push into the Australian and British arkets and builds its presence in the US,” Forsyth Barr’s Blair Galpin noted earlier this month. And he points out the competition is not standing still.
“Just as Xero has increased its investment competitors such as MYOB and Intuit are also increasing their focus on cloud services.”
MYOB has ironed out some kinks from its cloud-based service, while Intuit is taking on Xero on its home turf with aggressive pricing for QuickBooks in the Australian market.


Along with Macquarie and Forsyth Barr, EVA Dimensions analyst Andrew Zamfotis also has the equivalent of a “sell” recommendation on Xero. The New York-based Mr Zamfotis also covers Xero’s biggest global rivals Intuit and Sage.
The Australian Financial Review contacted other offshore analysts covering Intuit and Sage. While a couple of them had heard of Xero, none of them saw it as a threat to the incumbents.
It is almost two years since the company, which has been listed on the New Zealand Stock Exchange since June 2007, made its spectacular debut on the local boards.
After making its dual-listing on the Australian Securities Exchange in November 2012 Xero’s stock soared as much as 807.5 per cent before peaking at $42.20 in March this year. Since then the share price has lost 49.4 per cent to $21.34 at Friday’s close. The stock is still up 51.4 per cent over the past 12 months, compared to a 7.8 per cent gain in the broad All Ordinaries Index. Xero is ahead 359 per cent since listing.
At Xero’s financial results presentation a few weeks ago the company confirmed it is targeting a US listing in 2015. Mr Drury has been telling analysts and investors that going public in the US will be primarily an exercise in brand building rather than raising capital.
Among large institutional managers controlling shares in Xero, according to the latest Bloomberg data, were Fidelity Management, Credit Suisse, Vanguard Group, Baille Gifford & Co, BlackRock, and the Bank of New Zealand.


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