Xero shares savaged after $69.5m loss

Xero chief executive Rod Drury. Photo: Dean Purcell.

Shares drop 9.35 per cent but chief executive says company still considering US listing at ‘optimal time’.

Xero chief executive Rod Drury says he is still considering listing on the US stock exchange but will wait for the "optimal time" to do so, following the release of the company's full-year result yesterday.

"We could [list soon] but no hurry as we have plenty of capital so we can pick the timing," Drury said. "We think we need to show more traction before it's a slam dunk, great to have the options," he said.

"With [ the available] cash we have de-risked the business and can ensure we go at the optimal time."

The market reacted negatively to the result yesterday with the company's shares closing down 9.35 per cent at $20.85, as the firm reported a wider annual loss even as sales rose, after it increased investment in product development, sales and marketing.

The net loss expanded to $69.5 million in the year ended March 31, from $35.5 million the previous year. Revenue increased 78 per cent to $127.2 million, while operating expenses jumped 96 per cent to $167 million.

Xero is forgoing profits and dividends as it invests in expanding its accounting software service to overseas markets. The company estimated it had a 31 per cent share of the New Zealand market, 10 per cent of Australia, 2 per cent of the UK and less than 1 per cent of North America.

Drury said he was expecting the loss as a percentage of revenue to start decreasing now the company was at scale.

"As we have so much capital, investors want to see us invest for long-term growth," Drury said. "Of course [we] would love to get to profitability as soon as we can, but not at the expense of growth. We did our biggest hiring spurt last year, so the loss widened. This year we can slow that down and with our revenue growth the cost and revenue lines will cross over."

Xero added 403 staff in the past year, taking its total to 1161. The company said it expected a slower rate of employee growth this year.

The company's gross margin increased to 70 per cent from 65 per cent the year earlier as the cost of revenue declined to 30 per cent of operating revenue, from 35 per cent the previous year.

Xero's New Zealand subscription revenue rose 41 per cent to $32.6 million as its paying customers rose 35 per cent to 138,000. In Australia, revenue rose 104 per cent to $56.5 million as customers increased 86 per cent to 203,000, while in the UK revenue gained 91 per cent to $19.3 million as customers advanced 77 per cent to 83,000. In North America, revenue rose 133 per cent to $7.7 million as customers increased 94 per cent to 35,000.

"The US remains a significant and addressable opportunity with the majority of small businesses unserved by cloud accounting software," the company said.

"What we are really focused on now is automated selling, marketing and sales automation - that is the key to large markets," Drury said.

Xero said its US-based chief financial officer, Douglas Jeffries, was leaving to pursue other opportunities after only two months in the role and its previous CFO Ross Jenkins would assume the role until it found a replacement.

In September, Xero's North American chief executive Peter Karpas left the business just six months after joining, which Drury said was because his skills were mismatched to the company's needs at the time as it sought to build presence in the crucial US market.

The company said it had $268.9 million of cash available to fund growth and expansion, after it raised $147.2 million from Accel Partners and Matrix Capital Management in March.