By Jenny Ruth
May 17 (BusinessDesk) - Xero’s chief executive still sees a future for the accounting software company in the US but he’s careful to dampen expectations of what’s possible.
Yesterday’s results showed Xero had 195,000 customers in North America at March 31, up 48 percent from 132,000 a year earlier.
The incumbent it is challenging in the United States, Intuit, doesn’t report its third quarter results until next week but it had 3.9 million subscribers to its online QuickBooks product at Jan. 31, of which 2.9 million were in the US.
That means Xero remains the largest player in the global market excluding the US with 1,623,000 customers, but that Intuit, with 980,000 customers outside the US at Jan. 31 outside the US, is catching up fast.
Steve Vamos says there’s plenty of room for both companies. “If you combine us with them, it’s still not anywhere near what you would call” a mature market.
Xero is bringing to the US the same capabilities that have worked elsewhere. “We just have to be patient about it,” Vamos says.
He’s clearly practiced his next line, because he spouted it both in the conference call with analysts and the interview he gave BusinessDesk, and the double-negative used both times is significant.
“There’s nothing that leads me to believe that we can’t build a good business in the US.”
But that’s immediately followed by a warning: “I’m absolutely not wanting to set expectations at unrealistic levels.”
Xero is now putting the emphasis on building relationships with accountants and bookkeepers and the ones it has already signed up can reach a million small businesses, Vamos says.
He is continuing the repair-work and reset his predecessor and Xero founder Rod Drury had realised was needed after the company bungled its initial push into the US.
Back in the first half of the decade, Drury had been telling anybody who would listen how backward US accountants were in terms of embracing the internet and the wonders of technology.
Rather than using the tried-and-true marketing strategy Xero has used everywhere else of working with accountants, getting them onside and letting them convince their small business clients they should adopt Xero’s software, Xero was going to go over their heads and go straight to small businesses.
Three years later, Drury told the 2016 annual shareholders’ meeting that Xero needed to gain traction in the US before attempting a Nasdaq listing, something he’d been talking about for a couple of years.
At March 31 that year, Xero had 62,000 North American customers and by November 2016, Drury was admitting that “the US is really hard.”
By then, Xero had reset its US strategy to working through accountants, although Drury was still saying they had been slower to adopt cloud computing than accountants in Australasia and Britain.
There’s no disputing Xero is the number one player in New Zealand, Australia and Britain.
The latest results showed the company lifted subscriber numbers in New Zealand by 17 percent to 351,000 – given Statistics New Zealand estimates that there are about 530,000 small businesses, defined as employing fewer than 20 people, in New Zealand, that looks like a very big market share.
But Vamos says Xero defines its market somewhat differently, not including one-man-band businesses and seeing its reach going as high as businesses with up to 100 employees.
The company’s own estimate is that its total addressable market in New Zealand is about 620,000 businesses, putting its current market share at about 55 percent, and Vamos says it is the most penetrated market for accounting software in the world.
The incumbent in Australasia, MYOB, that Xero caught napping – and Xero has had MYOB founder Craig Winkler as an investor and sitting on its board since 2009 – doesn’t disclose its New Zealand numbers separately but it had 628,000 online customers in Australasia at Dec. 31 compared with Xero’s 1.08 million at March 31.
In Britain, where Xero’s subscriber numbers grew 48 percent to 463,000 in the year ended March, it was already clear back in October 2015 when Xero passed the 100,000 customer mark that it was going to be the number one player in that market too.
The incumbent there, Sage, will release its results over the weekend, New Zealand-time, but it’s been some time since it even looked like it was even trying to compete.
Indeed, by mid-2017, country managing director Gary Turner was already saying that Intuit was the one to beat in Britain, though the US company still significantly lags Xero’s progress.
Craigs Investment Partners analyst Stephen Ridgewell says the British results were the standout in Xero’s latest earnings report, helped by Xero’s purchase of Instafile, a British tax filing and compliance tool.
Vamos says that the deadline the British tax office, Her Majesty’s Revenue & Customs, set of making tax digital by April 1 this year also helped fuel Xero’s growth.
But the Instafile acquisition also “showed our partners that we’re serious.”
New markets – Singapore, Canada, Hong Kong and South Africa, the latter three which the company entered in earnest in the last 12 months – are starting to become more significant.
Subscriber numbers in Xero’s “rest of the world” category that those countries are still part of, rose 43 percent to 83,000 while revenue rose 55 percent – the company’s overall revenue growth of 36 percent to $552.8 million also exceeds its total 31 percent subscriber growth.
Vamos says Xero’s target for addressing non-English-speaking markets is another three-to-five years off.
“But we’ve got plenty to do and lots of opportunities in the markets we’re in, so plenty of work to do in the next couple of years,” he says.
Xero reached another milestone with the latest results which was so expected it hardly rated a mention: it was free cash flow positive in the year ended March for the first time.
While the company still reported a $27.1 million bottom line loss, up from a $24.9 million net loss the previous year, free cash inflow was $6.45 million, 1.2 percent of revenue, compared with a $28.5 million outflow the previous year.
Xero says it expects free cash flow in the current financial year will be similar as a proportion of revenue as in the year just gone.
It’s clear investors liked what they saw in the results. Xero shares, which now trade only on ASX although it remains headquartered in Wellington, New Zealand, reached a record A$60.93 yesterday before closing at A$60.15, a 10.8 percent increase from the previous day.