Xero not short on chutzpah / Deutsche Bank NZ affiliate Craigs Investment Partners notes the incumbents are growing “as least as fast” as Xero in the cloud.

Tim Boreham for the Australian writes: IT must be something in that wholesome New Zealand milk, because the trans-Tasman “cloud” accounting software house, Xero, has never been short on chutzpah when it comes to growth prospects.

But when will it actually turn a quid?

Ahead of the key selling season in the UK, the US and NZ, Xero (XRO) today reported it had hit the 400,000 subscriber level, compared with 371,000 in October and 284,000 in May.

Seven years ago it had none.

“Support from both customers and partners has been humbling and exciting,’’ gushed CEO Rod Drury. “Together we have established Xero as one of the leading platforms on which to connect, collaborate and conduct their business.’’

Xero, indeed has come from the clouds with its purpose-built cloud offering, which caught traditional rivals such as MYOB, Sage and Intuit napping.

They appear to have been prodded awake.

In a note this week, Deutsche Bank NZ affiliate Craigs Investment Partners notes the incumbents are growing “as least as fast” as Xero in the cloud. “Xero’s marketing spend is tracking higher than our prior expectations and the overall picture is one of increasing competition.’’

In particular, Intuit’s cloud customer growth was 29 times greater than Xero’s, while Sage reported slightly higher growth than Xero in the UK.

In Australia, Xero’s biggest market, MYOB’s cloud growth was on par with Xero’s. So all round, the accounting software game has become a slugathon for the hearts and wallets of SMEs and their advisers.

Xero reported a net loss of $NZ24.5m on revenue of $NZ55.8m in the half year to September 2014, having spent $NZ38.3m on sales and marketing.

While revenue increased 80 per cent, gross margin was flat at 68 per cent.

Craigs foresees heavy losses for at least the next three years.

With the exception of First NZ Capital, five out of six brokers covering Xero rate the stock as a sell (or similar).

To a large degree, reality has already bitten given the stock hit $42 a share in March this year.

We last had Xero as a sell at $29 in May. While the current valuation looks more palatable, we’ll avoid this one pending next year’s mooted $2.5-3 billion MYOB listing.