Why XERO bought Monchilla....and now. Follow The Money. The Importance of XERO's IPO

We've received a few emails asking the following, "Why would Xero buy Monchilla for  $US 4,127,688 in cash + 238,490 Xero shares"?    We'll answer that!

a.  Xero has payroll for California, Texas, Utah, Virginia, Florida, New York, & New Jersey.  Xero's already serving the 4 largest State economies (and majority of the U.S. Economy) and not serving Ohio, Pennsylvania and Illinois with payroll for example is not what has kept Xero from gaining traction in the U.S.

b.  In September CEO & Founder Rod Drury said  "We're [Xero] really focusing on the California Market" -  @ 10:50 into the interview (in describing Xero's revised approach to the U.S. Market). [end].    Xero understands it was a misstep to approach the U.S. market as they did Australia and the U.K..   I believe Rod Drury when he says this above and that Xero wants to "get California right" and only then really push on to the other States.   

c."ZenPayroll and Xero form cloud-based accounting partnership to rival the likes of ADP and QuickBooks" - TheNextWeb.com April 2013

d. Jamie Sutherland Xero President of U.S. Operations. “Accounting and payroll go hand-in-hand, which is why finding the right partners is so important. In ZenPayroll, we found a company that truly saw the value of a simple, intuitive, and scalable financial solution.”  April 18, 2013 CPA Practice Advisor

e. Xero reported obtaining only 4000 new clients in the U.S. in the six months prior to September 30, 2014 and fired their U.S. CEO Peter Kapras.   We don't believe acquiring Monchilla resolves any of Xero's challenges (short or long term) in gaining traction in the U.S. Not having payroll for 43 U.S. States is not what has produced Xero's sales malaise in the U.S. market.

f. Be mindful, it was predictable months ago what we learned today, Nov. 7, that  Xero dropped from the MSCI Standard Index, to join the small cap   This is a significant setback for Xero as a potential U.S. IPO candidate and means their path to U.S. IPO is even more of a 'balancing act' and must have every detail in place (in Xero's profile).

Why did Xero make this move, and now?

Our thinking is as follows, if Xero wanted Monchilla and or their technology, they wanted it prior to November 2014 and could have bought Monchilla when Xero was in a more leveraged position last Summer or Spring. We don't believe the timing or stated foundation of this acquisition is coherent with the facts stated above (a, b, c, d, e, or f). For example we see minimal to no value added for Xero in this acquisition for what Rod Drury said is Xero's revised approach to the U.S. "focusing on the California Market".    

In October The Australian Financial Review reported Xero was working with Morgan Stanley and was in talks with Credit Suisse over its proposed US initial public offering (IPO), which it expected would be worth between $500 million and $1B. We believe the timing and purpose of this acquisition is driven by those meetings [Xero's IPO goals]. We're thinking it (offering payroll in all 50 States - not just in 7) was determined to be an essential box that needed to be checked - critical in the Investment Bank's packaging & presentation of Xero in the U.S. as an investment.   Call it essential "Window Dressing" in selling the narrative of Xero (for the U.S. investment bank).

Yes, the U.S. IPO is that important to Xero. Why? Be mindful Xero CEO Rod Drury has recently said Xero expected to hire at least another 500 staff over the coming year....to which New Zealand analyst Woodward Partners 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".

Xero knows every detail must be in place for Xero to pull off this U.S. IPO - including how they are packaged and presented in serving all 50 US States with payroll. Acquiring Monchilla checks that box...... the IPO plans can move forward... and now. Bravo Xero and we wish you well in realizing a U.S. IPO.

Xero dropped from the MSCI Standard Index, to join the small cap

Suze Metherell for Yahoo Finance writes:  A review of global indices by MSCI has added MightyRiverPower and Meridian Energy to the international investment advisor's main global index, while Xero has exited to a smaller cap index.

The semi-annual review of the MSCI Equity Indexes saw government-controlled energy generators and retailers, MRP and Meridian included in the MSCI Global Standard Index, exiting the MSCI Global Small Cap Index. Meanwhile, Xero, the cloud-based accounting software firm, departed the standard index, to join the small cap, while partially-privatised power company, Genesis Energy also debuted in the small cap index.

Investors who follow the indices are required to hold a certain amount of the stock, with changes causing selling and buying in new or departing stocks.

"Some investors are able to move in advance of these changes, others may need to wait till the changes have been announced, and they don't necessarily have to do it straight away," said Shane Solly, director at Harbour Asset Management.

Shares of Xero, which have dropped some 61 percent from their $45.99 March peak, rose 5.7 percent to $17.90, to be the day's best performer on the NZX 50 Index. The Wellington-based tech firm has come under selling pressure as investors have questioned its growth plans in the US market place.

"Xero is having a bit of a rally as people have been anitcipating this," said Solly. "While it is leaving the main index, it is going into a smaller index. There's been a number of hedge funds short-selling Xero, in anticipation of this, so some of them could be closing out or reducing there, which may explain the recovery in the stock price today."

State-controlled power companies have been popular with yield hunting investors, particularly after the incumbent National-led government returned for a third term at the Sept. 20 general election, shutting down the threat of regulation, which had been a cornerstone policy for opposition parties in trying to drag down power prices for consumers. Recently the companies have been announcing special dividends for shareholders.

Meridian, which has climbed 41 percent in the past three months, gained 1.2 percent in afternoon trading to a record $1.685. MRP, which has increased 22 percent over the past three months, rose 0.7 percent to a record $2.895. Genesis, which has gained 22 percent in the period, climbed 1.9 percent to a record $2.17.

"There a three drivers helping the stocks," Solly said. "The election, the index changes in the MSCI and the increase in special dividends."

The MSCI Global Micro Cap Index was also reviewed with DNZ Property Fund, Marlin Global and New Zealand Refining Co all exiting. There were 14 new New Zealand additions to the micro cap index, which included six out of the nine NZX floats this year, Intueri Education Group, ERoad, Scales Corporation, Vista Group International, Metro Performance Glass and Gentrack Group.

"You have seen some really interesting businesses come to the market and one thing New Zealand had been lacking was a breadth, now we've got it," Solly said. "A lot of these businesses are pretty attractive to global investors as well."

Other additions were Burger Fuel Worldwide, CDL Investments NZ, Foley Family Wines, Marsden Maritime Holdings, Michael Hill International, Millennium & Copthorne and Sanford. New Zealand Oil & Gas also exited the small cap index to join the micro cap index.

Australia : Cheap software fails to sell Intuit message / Intuit’s strategy of selling its cloud-based accounting system on the cheap in order to spur demand has backfired

Source: http://www.istart.com.au/index/HM20/AL211017/AR215937

iStart.com writes: 06 November 2014 Newsdesk: Intuit’s strategy of selling its cloud-based accounting system on the cheap in order to spur demand has backfired – and from the end of the year the $4.99 price tag seems set to revert to $35...

Until March 2012 Intuit’s accounting system was sold exclusively in Australia by Reckon, but the final link between the companies was severed this February, leaving Intuit to build its own local user base. To spur demand it has been offering the QuickBooks online, cloud-based accounting system for as little as $4.99.

But its sales strategies have only netted it around 7000 Australian customers – well behind its cloud-based rivals. The company has yet to tackle the New Zealand market.

While Intuit claims it has enjoyed fast growth percentage wise, it has come off a low base. Asked whether the pricing strategy had failed Intuit Australia managing director Nicolette Maury said; “What we are hearing from advisors is that the price seems too good to be true.”
However she said that the company was now “starting to see the momentum come through,” even though Intuit’s local user numbers are a distant fourth behind Xero, MYOB and Reckon.

Demand for cloud-based accounting systems has risen strongly – and according to a new report being released this week by CCH, 69 percent of Australian accountants use a cloud accounting platform with their clients. However there is still a huge untapped market among SME customers, as the report noted that only 27 percent of small and medium businesses in Australia had yet deployed cloud accounting systems themselves.

Terry Hicks, vice president and general manager for QuickBooks Online, who was in Australia recently said that Intuit’s strength remained in North America despite the company’s global ambitions. But he noted: “As a company we are extremely patient and we look at the progress we are making relative to our growth aspiration.”

He said that internationally “our biggest competitor is non-consumption” because of the proportion of businesses which had not deployed an accounting platform. Even in the US where he said that there were 30 million small businesses, only about 8 million of them yet use an accounting system.

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ExactCPA Comment:  We believe the motivation behind Intuit's $5/Mo pricing in Australia had more to it than "To spur demand".   Intuit wanted to force Xero to devote more resources protecting what they established in Australia and what is essentially their home market and less on efforts in the U.S.  

If you look, the term, start to finish,  of the Intuit $5 Australia pricing campaign parallels the decline of stock value of Xero.    Xero's market cap is less than half of what it was at the start of the $5 Intuit campaign and their sales in the U.S. came to a crawl over that period of time.  In fact Intuit @ 7,000 new customers in Australia probably gained more new customers in Australia than Xero did in the U.S. (reported as 4000 in the six months prior to September 30).  Further Intuit Stock is at 52-Week high levels.   

When you look at the state of Xero in the U.S. today....it is possible Intuit's $5 Australia campaign was quite successful (in possibly stymying Xero in the U.S.).

Frontier Secure Inks $100M Support Agreement with Intuit

David Delony for Five9 writes: Frontier Secure, a division of Frontier Communications, has announced that it has inked a new expanded strategic agreement with Intuit (News -Alert) to provider customer support for business customers using QuickBooks Online, QuickBooks Desktop, Payments and Payroll.

"Our working relationship with Intuit is strong. We have core alignment around a flexible workforce, a culture of experimentation, and executive decision-making based on data and analytics,” Frontier Secure senior vice president and general manager Kelly Morgan said. “This is a transformative customer service model where quick response to Intuit customer feedback improves service delivery and proactively demonstrates 'we care' excellence in solving problems.”

The three-year agreement is worth approximately $100 million in revenue. Even better, that amount can grow based on incentives and other business opportunities.

Frontier Secure will focus on supporting small businesses and accountants. These users depend on Intuit software but generally don’t have the resources to employ expert dedicated IT staff to troubleshoot their problems they way large companies can.

The company has been working with Intuit since 2012. Frontier Secure said it focuses on solving problems quickly and letting customers focus on their core business, establishing what it calls a “trusted neighbor” relationship.

In other news, its parent company, Frontier Communications, has also released its third quarter financial results. Frontier posted a net income of $42.0 million or $0.05 per share. “"We are very pleased to have achieved sequential growth both in residential and in business customer revenue in the third quarter," said Maggie Wilderotter, chairman and CEO. "This represents continuing progress in our objective of improving our revenue trajectory.”

The company also cited the Intuit deal as one of its major successes. Wilderotter said the company improved its market share in 81 percent of local markets. Frontier serves residential and business customers in 28 states and employs approximately 16,400 people.