Xero shares under $20 after downgrade

Xero founder and chief executive Rod Drury. Photo / APN

Xero shares fell sharply this morning after Goldman Sachs slapped a sell recommendation on the New Zealand accounting software developer

The brokerage said Xero's customer growth in the United States had been disappointing and the company's major rival in that country, Intuit, is experiencing increased success with its Quickbooks offering.

The technology stock dropped 5 per cent through the key $20 threshold to $19.90 in early trading.

In a research note Goldman analyst Robbie Aitken said the firm's latest trading update showed "solid trends" in this country, Australia and Britain.

However, the 4000 US subscribers Xero had secured during the first half of its current financial year was disappointing, he said.

"We believe structural factors will lead to slower growth in the US at a time when [Intuit] is having renewed success with its Quickbooks Online offering."

Yesterday's trading update came three weeks after the company announced the sudden resignation of its recently appointed US chief executive, Peter Karpas.

Goldman, which previously had a neutral recommendation on Xero, has a 12-month price target of $18 on the stock.

Wellington-based Xero had 22,000 paying customers in North America as of September 30, up from 10,000 a year earlier, according to yesterday's trading update.

Paying customers in New Zealand rose 38 per cent from their September 2013 level to 119,000, while Australian customers doubled to 158,000 and UK customers increased 103 per cent to 61,000.

Xero had a total of 371,000 customers at the end of last month, 76 per cent up on the same time last year.

Chief executive Rod Drury said he was disappointed by the view Goldman had taken in its latest research note.

"We're one of the best Saas [software-as-a-service] companies in the world," Drury said.
Xero's annualised revenues are now running at $132.3 million, up 87 per cent on the same time last year.

"I'm sure that if we're not the best we're in the top one or two in the world at those growth rates," Drury said. "We're doing exactly what we said we'd do. We said we'd focus on New Zealand and Australia for the last couple of years and those are massive markets and they're paying off."

He said Xero was well-positioned against Intuit's "execution".

"[Goldman's view] doesn't reflect the picture we see," Drury said. "We've beaten Intuit in three markets."

He said New Zealand-based analysts didn't understand "the significance of what we're doing".

Deutsche Bank maintained its sell rating on Xero following yesterday's update, saying growth was "extremely weak" in the US but strong overall.

Deutsche lowered its 12-month price target from $18.90 to $18.50.

Xero also announced yesterday it had secured high-profile expat New Zealander Andy Lark to become its chief marketing officer.

The company expects a net loss of $25 million of the six months to September 30.