Tuesday, October 14, 2014

New Zealand Analyst Woodward Partners, "Xero's platform was "not as disruptive as it once was" / Xero defends US strategy

Tom Pullar-Strecker for Stuff.nz.co writes: The broking firm that most accurately predicted Xero's share price drop is questioning whether the cloud software firm should give up chasing growth in the United States.

Woodward Partners said Xero's board should be seriously questioning whether Xero's US strategy still made sense, or whether it should conserve its cash to consolidate its stronger positions in New Zealand, Australia and Britain.
But Xero chief executive Rod Drury said the suggestion the company should beat a retreat from the US was "the craziest thing we have ever heard" given Xero was "the fastest-growing software-as-a-service company in the world".
"We are just ignoring some of this stuff because it doesn't make sense to us," he said.
"We are doing so well, and the thought of us not chasing the US is just ludicrous."
Woodward analyst Nick Lewis warned in April that Xero's share price could fall below $20 if, as he expected, it failed to achieve significant success in the United States. At the time Xero shares were trading at $37.80, more than double their present price, though 18 per cent off their record high of $45.99.
In a new research note, Lewis and fellow analyst Cahn McKenzie questioned whether Xero should continue trying to win market share in the US, given the challenges and the company's rising costs.
The note was posted after Xero revealed it had only acquired 4000 customers in North America during the six months to September and Drury said the 1000-strong firm expected to hire at least another 500 staff over the coming year.
Woodward said the odds were too heavily stacked against Xero in the US, where the Wellington-based firm is competing against "deeply entrenched" accounting software incumbent Intuit.
Cloud accounting software was converging in terms of the functions it provided, so it was harder to make any particular product stand out and Xero's platform was "not as disruptive as it once was", it said.
Woodward forecast that, given its newly-stated hiring intentions, Xero would chew through its $170m in cash reserves by early 2016 unless it raised fresh capital or cut costs.
A US listing would be hard to pull off unless Xero grew meaningfully in the US market, the research note said. It speculated it was unlikely that Xero's major US venture capital investors, Valar Ventures and Matrix Capital, would "stump up once more".
Xero shares were unchanged at $17.50 during lunchtime trading today.
Drury said Wellington-based Lewis had got his cost assumptions wrong.
"It is disappointing having people from our own city who are taking these positions," he said.
"We haven't mis-executed at all. The only bother we have had is we got our US chief executive wrong and we are changing that."
Xero announced last month that former Paypal vice president Peter Karpas would step down from the role he had held for less than seven months.
"We are still signing up lots of US customers and we have only really started focusing on delivering US software since March," Drury said.
"Ninety-eight per cent of the market is still to play for. All the reviews would say we have at least as good technology [as Intuit] and we are delivering software a lot faster."
H&R Block, a US company that helps small businesses complete their tax accounts, entered into a partnership with Xero in April and Drury said it had got 25 customers on to Xero's software at the first of its 12,000 franchises.
"They were really happy," he said.
"We are doing fine and we have no concerns at all about the US. We just need to get our leadership right, which we are working on, and we are signing up customers and it is accelerating."
Meanwhile, businesses that regularly refuel vehicles at Z Energy petrol stations will be able to have their invoices automatically loaded to Xero's accounting software.
The companies said the arrangement would save thousands of Z Card customers time that they would otherwise have to spend manually entering transactions.

Xero has a similar arrangement with Warehouse Stationery.