Surprise departure at Xero

Peter McIntyre.
Peter McIntyre.
Eight-year-old cloud accounting company Xero - which is yet to post a profit - has again reported big gains in revenue and customers numbers, but almost doubled its after-tax loss for the year.

The bigger surprise for the market to absorb yesterday was the sudden departure of chief financial officer Doug Jeffrie, after just two months, which followed the unexpected departure of its US chief executive Peter Karpas last year.

Beneath the positive headline numbers, analysts were unexcited by the result, noting expenses for the company came in almost $20 million higher than expected.

For its year to March, Xero posted a 96% increase in after-tax losses to $69.5 million, but remains in a strong cash position to fuel further expansion, holding $268.9 million.

Xero posted operating revenue up 77%, from $70.1 million a year ago to $123.9 million, paying customers rose 67% to 475,000 and its subscription revenue grew 81% to $120.9 million.

Xero chief executive Rod Drury said the company had focused on adding 400 people to the company, now totalling 1161, for critical mass around the globe.

''We're extremely proud to have done that while continuing to drive strong revenue and customer growth across all markets,'' he said in a statement.

Forsyth Barr broker Andrew Rooney said while the critical customer numbers for Xero were in line with expectations, at 475,000 against the 473,000 forecast, ''nothing in the results excited''.

''The key difference, however, was in the expenses line, which came in about $19 million higher than expected,'' Mr Rooney said.

Craigs Investment Partners broker Peter McIntyre noted Xero provided no firm guidance, other than it expects ''strong growth'' to continue in 2016 and staff growth would moderate.

Mr McIntyre said given the unexpected management change and weaker margin, he expected a negative reaction on the share price, which fell 7.2%, or $1.66, to $21.34 after the announcement.

Mr Rooney said Xero's ''cash burn'' for operating and investing for the year was $88 million, compared with $48.5 million the previous year, which he said highlighted just how critical its $149 million share issue in March was for the company, leaving its cash balance near $270 million.

Mr McIntyre said while top-line growth continued to impress, margins were weakened due to indirect cost ramp-up.

''Xero spent more money to achieve growth than we had anticipated, with the earnings before interest and tax loss of $77 million,'' he said.

Mr Rooney noted Xero's full accounts would not be available for another month and its costs for depreciation, on buildings, and amortisation, for capitalised software development, had not been split from expenses.

In the US market, Mr Rooney had expected client numbers to be low.

''We had forecast low numbers and these were delivered ... Not a good result for Xero,'' he said.

''Realistically it will take time before Xero can ramp up growth in this market. Meanwhile, its competitors will continue to improve products and gain momentum.''

He said Australia and the UK were the ''key sources of growth'' for 2015 and and 2016.

While Xero continued to do well in Australia, it has only just released its payroll product for the UK and New Zealand markets.

''This should accelerate take-up in the UK. However, that was one market Xero could have positively surprised in, and hasn't done so,'' Mr Rooney said.

Mr Drury said Xero had emerged as ''the cloud accounting leader'' in three countries, was seeing positive momentum in the US market and he expected ''strong growth'' to continue in all core markets ''for the foreseeable future''.

simon.hartley@odt.co.nz

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