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Xero sees 80% revenue growth this year, Intuit 'spooked'

Xero sees 80% revenue growth this year, Intuit 'spooked', says Drury

By Pattrick Smellie

Jul. 23 (BusinessDesk) - Cloud accounting software firm Xero updated shareholders at the annual meeting with a forecast of 80 percent revenue growth in the current financial year in constant dollar terms, and founder chief executive Rod Drury danged an American stock market listing as being on the cards once the company passes through the US$100 million annual revenue mark.

Drury declined to put an exact dollar figure on that forecast increase, but the company turned over $70.1 million last year, implying turnover in New Zealand dollars in the current financial year of around $126 million.

"We should be through a US hundred million trailing revenue and I think that puts you in the window for doing a US IPO if we choose to," he told BusinessDesk, although he told the meeting there would be no float in the current financial year.

The exact timing of a US IPO would depend on market conditions, said both Drury and incoming chairman and former chief financial officer at US giants Microsoft and General Motors, Chris Liddell. Drury talked up the significance of the company's decision to raise $180 million last year at a time when markets were ripe for such an offering, giving the company headroom and flexibility over timing of a US listing.

Xero shares fell slightly in trading on the NZX today, down 1.7 percent to $23.50, having pushed above $45 per share in February.

"We don't control the share price," Drury told the meeting in response to questions. "We have seen a rerating of Software as a Service companies. The good thing is we raised our money last year."

Reacting in part to a Fairfax Media report questioning Xero's momentum in the US, where it faces a battle with the incumbent accounting software provider Intuit, Drury belaboured not only a belief that Xero's cloud-based product suite is outgunning Intuit's attempts to move into the cloud, but also that the company will benefit from establishing strong positions in the Australian and UK markets before embarking on the US.

"The success of the company's going to be international, it's not just the US," Liddell told BusinessDesk after the meeting. "In terms of the US, it's just a great product. It's not going to happen immediately and, sure, Intuit's a formidable, large company in the US, but it's important to recognise that of something like 30 or 40 million small, medium businesses in the US, Intuit's customer base is five million.

"There's 35 million who do something else, whether it's Excel spreadsheets or pieces or paper or localised software, so it's not only competing with Intuit, you're competing for people who've never had software before."

Drury said after the meeting the company's cost of customer acquisition had not changed significantly in any of its markets, including the US, since figures were disclosed in the latest annual report, despite reports of Intuit discounting its fees to below Xero's.

The US market differs from New Zealand, Australia and the UK, where a route to market has been built through accountants, who are used by around 70 percent of SME's in each of those markets. In the US, only around 30 percent of small and medium-sized businesses used an accountant.

"A lot of people ask us about the US," said Drury. "Because we've got Australia and the UK really firing now, we can spend some time on it. We can take time. It'll take two or three years. We've got to build a brand. I think what we've learnt is we've got to build a direct business so we can go direct to small business and as they come on, they should tell their accountants and that should accelerate accountants further."

He expected customer acquisition costs to "trend down quite quickly as the (US) market matures" after an early heavy spend on the US management and marketing team, led by US chief executive Peter Karpas, formerly general manager for PayPal's North American small and medium enterprise business, and before that chief markleting and product management officer at Intuit.

Drury also told the meeting he believed Intuit was on the wrong track trying to replicate Xero's open software eco-system approach, which sees partnerships that build new applications onto the Xero platform, by buying out eco-system partners.

"Intuit is spooked," he told the meeting. "Most of the things they do now are responses to us."

It was trying to convert five million customers using a desktop software product onto a repurposed cloud offering, "which is not really a great product."

"Maybe in time it will be," said Drury, but both Microsoft and Apple had struggled to repurpose legacy products for cloud applications, whereas Xero "has the capital and we've already beaten them (Intuit) in three countries."

The meeting was attended by around 250 shareholders, who waved through a series of director remuneration arrangements, which raised the fee pool for directors by $350,000 to $800,000 and share allocations to both Liddell and another heavyweight US-based newcomer to the board, Bill Veghte, who told shareholders of a career in which he had developed the first versions of Microsoft Office and Xbox and now heads up Hewlett Packett's US$28 billion per year enterprise group.


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