Xero shares drop 5.3% as US boss Peter Karpas quits / Shares fall as top US exec quits Xero

Suze Metherell for the National Business Review writes: Peter Karpas, Xero's [NZX: XRO] North America chief executive, quit just six months after joining, as the cloud-based accounting software company reassesses its US growth plans, said chief executive Rod Drury. The shares fell.

Karpas, former PayPal vice president and general manager of North America small and medium business, joined Xero as its North American head in late February this year. The Wellington-based company wants a million customers, and is targeting growth in the US market where it sees the potential to take market share of an estimate 29 million small to medium sized business owners.

"Peter came on and really helped us get our US strategy right so we understand that strategy, but the role moving forward wasn't really suited to his skills so we mutually agreed to move forward," Drury told BusinessDesk. "As we worked with Peter to establish our model he was kind of like 'hey I'm probably not the right guy for this right now' and maybe we were a year or two too early for his strategic stuff.

"It's important that if we see things aren't working out or are different, we change the strategy and have the courage to rip the bandaid off and to build the right long-term team," Drury said.

Shares of Xero were down

6.79%  percent to near-month low of $21.75 and have fallen some 51 percent since its intraday record of $45.99 in early March, in part due to a global selloff as investors began to question high valuations relative to earnings of tech companies.

The company's US growth plans have come under close scrutiny. Last month Deutsche Bank, the investment bank which part owns Craigs Investment Partners in New Zealand, initiated coverage of Xero, rating the stock a 'sell' and giving it a target share price of $18.90.

In the August note "Too much blue sky baked in" Deutsche analysts Stephen Ridgewell and Joshua Dale said the "market is pricing in a faster ramp up in US sales than is likely and that the share price is likely to de-rate" to $18.90 on a discounted cash flow basis. The company needs two to three more years to build its growth engine in the US, they said.

The US market is different to Xero's experience in New Zealand, Australia and the UK, and success will take longer, Drury said. The litigious nature of the US meant accountants didn't readily recommend software to customers, which had been part of Xero's sale strategy in other markets.

"The US accounting industry is a long way behind on cloud they haven't had a lot of innovation in the market and they're much more compliance focused," Drury said. "The US is going to be larger than we thought but it will take a few years."

The company also faces aggressive competition from incumbent Intuit, which runs QuickBooks. In July, Drury told shareholders at the annual general meeting in Wellington that everything Intuit did was now in response to Xero, and conversion of its 5 million desktop customers to the cloud wouldn't work. However some analysts have questioned whether the company has just shown its competitor what it needs to do to keep market share.

Drury said he expects the US market to accelerate over the next two years and the company would be making a number of key appointments over the coming three months.

According to Drury's AGM presentation, the company has 334,000 customers worldwide, two-thirds of which were in Australia and New Zealand, and 18,000 in North America. In August, it passed US$100 million in annualised committed monthly revenue, and expects subscription revenue growth to be about 80 percent.

Xero's stock surged late last year, when the company raised $180 million in October to fund US growth plans. The escrow period for those investors is coming to a close.

TOM PULLAR-STRECKER for BusinessDay writes:

Shares fall as top US exec quits Xero

Xero shares have fallen 5.5 per cent after the company announced the executive charged with overseeing its drive into the United States had stepped down after just seven months.

Xero appointed former PayPal vice-president Peter Karpas to head its business in North America in February. 

But Xero founder Rod Drury said this morning they had mutually agreed he was not the right person to take the business forward after a change in Xero's sales strategy there.

Drury returned from a visit to the US on Sunday. 

"What we have seen is the US accounting industry is quite a lot more conservative than our other markets," Drury said. 

Xero would concentrate on selling its software direct to small businesses and through partnerships, such as the one it signed with tax-compliance giant H&R Block in April, until the accounting sector caught up, he said. 

Drury said that meant the company needed a local leader with a different set of skills. The parting was amicable and he remained a huge fan of Karpas, he said. "We are really pleased with his maturity in saying 'I am not the right guy for this'." 

Xero said chief financial officer Ross Jenkins would fill the role until the company found a permanent replacement. 

Xero shares were trading down $1.26 at $21.70 in late-morning trading after the announcement. 

Drury acknowledged some investors might be nervous about the management change.

But it was "better in the early stage to get things right, build the best team and take that on the chin", he said. 

Xero's annualised monthly sales had now topped US$100 million (NZ$122m) and were growing at an annual rate of 80 per cent, which put it "best in class" in the global cloud-software market, Drury said. 

That was helping it attract top talent, he said. 

"You will see a number of new appointments as we build our go-to-market team for the US for 2015 and 2016." 

Karpas agreed to a short interview with Fairfax Media when he visited Xero's Wellington headquarters in March. But he said then it was too early to outline his plan of attack for the US market. 

Influential US accountant Michelle Long, who contracts to Xero's US rival, Intuit, but who had also flirted with Xero last year, said in July that she believed Xero had lost momentum in the US market. 

Her comments were backed by Woodward Partners analyst Nick Lewis but angrily rejected by Drury at the company's annual meeting that month. 

Xero last reported in March that it had 18,000 customers in North America which at the time represented about 6 per cent of its customer base. 

Drury said he did not think that market would take off for another year or two, during which time its main growth would be in Australia and Britain. 

The company said on Wednesday that its global work force had reached 900. It opened a new office in Parnell, Auckland, where Drury said it intended to take on a further 60 staff by June.

New Zealand managing director Victoria Crone said 80 New Zealand companies had developed add-ons to Xero's online accounting software and she estimated they together employed at least 1000 staff. 

 New Zealand Herald writes: Xero shares drop as US boss quits

Peter Karpas, Xero's North America chief executive, quit just six months after joining, as the cloud-based accounting software company reassesses its US growth plans, said chief executive Rod Drury. The shares fell.

Karpas, former PayPal vice president and general manager of North America small and medium business, joined Xero as its North American head in late February this year. The Wellington-based company wants a million customers, and is targeting growth in the US market where it sees the potential to take market share of an estimate 29 million small to medium sized business owners.

"Peter came on and really helped us get our US strategy right so we understand that strategy, but the role moving forward wasn't really suited to his skills so we mutually agreed to move forward," Drury told BusinessDesk. "As we worked with Peter to establish our model he was kind of like 'hey I'm probably not the right guy for this right now' and maybe we were a year or two too early for his strategic stuff.

"It's important that if we see things aren't working out or are different, we change the strategy and have the courage to rip the bandaid off and to build the right long-term team," Drury said.

Shares of Xero fell 5.3 percent to near-month low of $21.75 at 11am this morning and have fallen some 51 per cent since its intraday record of $45.99 in early March, in part due to a global selloff as investors began to question high valuations relative to earnings of tech companies.

The company's US growth plans have come under close scrutiny. Last month Deutsche Bank, the investment bank which part owns Craigs Investment Partners in New Zealand, initiated coverage of Xero, rating the stock a 'sell' and giving it a target share price of $18.90.

In the August note "Too much blue sky baked in" Deutsche analysts Stephen Ridgewell and Joshua Dale said the "market is pricing in a faster ramp up in US sales than is likely and that the share price is likely to de-rate" to $18.90 on a discounted cash flow basis. The company needs two to three more years to build its growth engine in the US, they said.

The US market is different to Xero's experience in New Zealand, Australia and the UK, and success will take longer, Drury said. The litigious nature of the US meant accountants didn't readily recommend software to customers, which had been part of Xero's sale strategy in other markets.

"The US accounting industry is a long way behind on cloud they haven't had a lot of innovation in the market and they're much more compliance focused," Drury said. "The US is going to be larger than we thought but it will take a few years."

The company also faces aggressive competition from incumbent Intuit, which runs QuickBooks. In July, Drury told shareholders at the annual general meeting in Wellington that everything Intuit did was now in response to Xero, and conversion of its 5 million desktop customers to the cloud wouldn't work. However some analysts have questioned whether the company has just shown its competitor what it needs to do to keep market share.

Drury said he expects the US market to accelerate over the next two years and the company would be making a number of key appointments over the coming three months.

According to Drury's AGM presentation, the company has 334,000 customers worldwide, two-thirds of which were in Australia and New Zealand, and 18,000 in North America. In August, it passed US$100 million in annualised committed monthly revenue, and expects subscription revenue growth to be about 80 percent.

Xero's stock surged late last year, when the company raised $180 million in October to fund US growth plans. The escrow period for those investors is coming to a close.