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Xero shares extend decline, as investors digest FY, US CFO departure

Shares of Xero have dropped to the lowest level since the cloud-based accounting software firm announced its $147.2 million capital raising in February, as investors digest its full year result and the sudden departure of another US-based executive. 

On Friday, the Wellington-based company said its annual loss widened to $69.5 million, in the year ended March 31, from $35.5 million a year earlier, as its increased spending on product development, sales and marketing for future growth, offset a rise in sales. Revenue increased 78 percent to $127.2 million while operating expenses jumped 96 percent to $167 million.

It also announced its US-based chief financial officer Douglas Jeffries has left the company after only two months in the role.

"Topline revenue was probably where people expected it to be but profit margins were down because costs went up more quickly than people expected," said Mark Lister, head of private wealth research at Craigs Investment Partners. "When you lose a CFO and they've only been there for a pretty short space of time the market was never going to take an announcement like that well." 

The software developer is forgoing profit as it chases a million global customers and is targeting growth in the US market where it sees the potential to take market share of an estimated 29 million small-to-medium sized business owners. The company's share price has been on a rollercoaster ride, climbing as high as $45.99 in March last year, before dropping to a low of $15 in October, as investors weighed Xero's cash burn and its US growth aspirations. 

Today, the shares dropped as low as $20, and recently traded at $20.60, extending Friday's 9.4 percent decline. The stock climbed from the $15 mark in February to as high as $26.49 in March, when the company raised $147.2 million from US-based tech investors Accel Partners and Matrix Capital Management. On Friday the company said it had $268.9 million of cash available, after its March cash injection, to fund future growth and expansion. 

"There was a little bit of a knee jerk reaction to see that price spike after the capital raise in March," Grant Williamson, director at Hamilton Hindin Greene said. The share price has "now started to drift off, the momentum is certainly back on the down side. The result we saw last week has done nothing to improve the share price in the short term."

US-based Jeffries is leaving to pursue other opportunities, while previous CFO Ross Jenkins will resume the role until a replacement is found, Xero said. Jefrries's sudden departure follows Xero’s North American chief executive Peter Karpas, who left the business in September, just six months after joining. At the time, chief executive Rod Drury said it was because Karpas's skills were mismatched to the company’s needs at the time as it sought to build presence in the crucial US market.

Both Lister and Williamson said the sudden departure of senior executives spooked US investors.

"I come back to the CFO resignation as well, that doesn't help confidence in the stock," Williamson said.