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Rapid customer growth for Xero with continued financial losses

24 May 2013

Xero, the cloud-based accounting firm, widened its annual loss in line with is guidance while using cash reserves to double revenue and paying customers.

The net loss was $14.4 million in the 12 months ended March 31, from a loss of $7.9 million a year earlier, the Wellington based company said in a statement. Operating revenue rose 102 percent to $39 million.

Shares of Xero have climbed from just 85 cents in May 2008 to $13.90 today, rewarding shareholders who have subscribed for some $180 million of equity including its 2007 initial public offering. The company now has a market value of $1.6 billion, putting it is the same league as Fisher & Paykel Healthcare and leaving some investors struggling to apply conventional valuation models.

Operating expenses grew 97 percent to $55.95 million. Wages and salaries accounted for the biggest share of operating expenses, jumping 93 percent to $34.5 million including share-based payments, as Xero took on workers to drive sales growth.

The company's accounts show Xero's biggest sales gains came from Australia, where revenue from external customers jumped to $13.9 million from $5 million. To achieve that, the company's operating expenses in Australia rose to $12.7 million from $5.6 million. Pretax earnings were $1.2 million across the Tasman.

New Zealand remained the biggest market, with annual revenue rising to $16.9 million from $10.3 million, while operating expenses climbed to $10.7 million from $6 million, leaving a pretax earnings contribution of $6.2 million. In the UK, sales rose to $5.5 million from $2.7 million and expenses climbed by a similar amount to $5 million from $2.6 million, for an earnings contribution of $478,000.

The rest of the world, including the US where it has established a beachhead in San Francisco and Los Angeles, lifted revenue to $2.7 million from about $1.3 million. But that was wiped out by operating expenses that jumped to $4.8 million from $1.2 million, resulting in a pretax loss of $2 million.

Overall, Xero's paying customers rose from 78,000 to 157,000, of which 46 percent were in New Zealand, 32 percent in Australia, 14 percent in the UK and 7 percent in the rest of the world.

The company has ample funds to chase its sales growth following the sale of $60 million of new stock to US investors Peter Thiel's Valar Ventures and Matrix Capital Management last November, which lifted cash at bank to $78 million as at March 31.

"There is no doubt the company has delivered for many shareholders already and it's natural that some may think the business is mature and the value captured," chief executive Rod Drury said in the statement. "However, we believe we're just at the beginning of a massive market shift as small businesses globally realise the benefits of connected cloud solutions."

He didn't give guidance for 2014.

Business Desk

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