Xero annual loss widens as investment ramps up

Businessman Rod Drury, chief executive of Xero. Photo / Jason Oxenham.

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 Xero's full year result this morning.

"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.

"With [$250 million] cash we have de-risked the business and can ensure we go at the optimal time."

The cloud based accounting software firm, said its annual loss widened even as sales rose, after it increased investment in product development, sales and marketing for future growth.

The net loss expanded to $69.5 million, or 55 cents per share, in the year ended March 31, from $35.5 million, or 29c, in the year earlier period.

Revenue increased 78 per cent to $127.2 million while operating expenses jumped 96 per cent to $167 million.

Xero was foregoing profits and dividends as it invested in expanding its accounting software service to overseas markets.

Xero chief executive Rod Drury joined us us for a live chat. See the replay below: App users tap here

The company estimated it had a 31 per cent stake of the New Zealand market, 10 per cent of Australia, 2 per cent of the UK, and less than 1 per cent of the North American market.

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 staff 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 with Drury adding that he was excited for the challenge.

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

"We have a great product so challenge is get it in front of millions of people. I'm really excited by that challenge."

Drury said each of Xero's four main markets had good leadership and were focused on their individual markets but said while showing growth in the US was important, growth in the coming year would come from Australia and the UK.

Xero said its US management team was formed in the second half of the year, led by US president Russ Fujioka, with customer growth in the second half 300 per cent greater than the first six months.

Earlier today, Xero said its US based chief financial officer, Douglas Jeffries, is leaving to pursue other opportunities after only two months in the role and its previous CFO Ross Jenkins will assume the role until it finds 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 future growth and expansion, after it raised $147.2 million from Accel Partners and Matrix Capital Management in March.

It used $88.4 million of cash and cash equivalents in operating and investing activities last year, compared with $48.4 million the previous year.

Xero shares are the best performer on the NZX 50 Index so far this year, having gained 41 per cent, ahead of the benchmark's 3.4 per cent rise.

The market has reacted negatively to the announcement so far with Xero shares slipping 8.78 per cent today to $20.98.

See today's Xero investor presentation outlining its full year financial results:here: