Christopher Adams

Christopher Adams is the Markets and Banking reporter for the New Zealand Herald

Xero 'just getting started'

Shares in tech-firm that's yet to make a profit hit an all-time high, pushing its value over $2 billion

Rod Drury admits that Xero's soaring share price means the business faces increasingly high expectations from investors. Photo / APN
Rod Drury admits that Xero's soaring share price means the business faces increasingly high expectations from investors. Photo / APN

Xero may have become a $2 billion company yesterday, but chief executive Rod Drury says the Kiwi accounting software provider is "just getting started" and will begin a major push into the United States later in the year.

"It still feels like early days," he said. "We've got a wall of innovation in the pipeline."

But Drury admits that Wellington-based Xero's soaring share price means the business, which is yet to turn a profit, faces increasingly high expectations from investors.

Shares in the firm hit an all-time high of $17.56 yesterday, before closing at $17.49, valuing the company - which listed only six years ago - at $2.05 billion.

"We're feeling very excited, but with valuations like this there's a lot of expectation and that just means we have to keep working harder and keep executing," said Drury, whose 18.5 per cent stake in Xero is now worth more than $378 million.

"This is a once-in-a-lifetime opportunity to build a real significant company from New Zealand and so far it's playing out as we hoped."

Xero, which posted revenue of $39 million and a net loss of $14.4 million in the year to March, now has almost twice the market capitalisation of New Zealand logistics giant Mainfreight, which posted a $65.75 million adjusted profit in its last full financial year.

Its valuation is approaching that of Sky TV and has already surpassed online auction website Trade Me, which reported a profit of $75.5 million in the year to June 2012.

Milford Asset Management executive director Brian Gaynor said Xero could, within the next few years, become New Zealand's biggest company in terms of market capitalisation.

That title is now held by Fletcher Building, which was worth $5.8 billion yesterday.

Xero's share price has risen about 130 per cent this year, making it the top-performing NZX stock, on the back of expectations that the company will one day turn its customer growth into profit.

It has been only four months since the firm's market capitalisation hit $1 billion.

Gaynor, whose firm holds shares in Xero on behalf of clients, said the massive rise in the company's share price was being driven by United States-based investors who were more interested in customer acquisition than the more traditional methods of analysing businesses, such as earnings multiples.

"It's perceived that Xero is making huge progress in terms of customer reach and acquisition of customers," he said.

The number of paying customers doubled to 157,000 in the year to March 31, with the bulk of those clients based in Australia and New Zealand.

Drury said overseas investors, particularly those in the US, wanted exposure to cloud-based technology like Xero's.

Cloud computing means users' information is stored in data centres rather than on their personal devices.

"In US investor circles they're seeing this massive transition to the cloud like we've seen in mainframes [the computers that pre-dated PCs] to mini computers," Drury said.

He said a XeroCon conference that will take place in San Francisco in September would be the company's "big launch" in the US.

"We'll have a whole day to show people in the US the breadth of what we've done for the last seven years," Drury said. "At the moment we're building payroll in the US, opening offices in Denver and New York."

In its last full year Xero reported sales of just $2.7 million in the US and the rest of the world, excluding Australia, New Zealand and Britain.

Mint Asset Management portfolio manager Shane Solly said Xero was a company that polarised investors.

"There's certainly a bunch of people who are very passionate about this stock and they're not necessarily traditional investors," Solly said. "It's one of those firms that has benefited from enthusiasm for rapid growth technology businesses. The management team continue to deliver on the strategy they've put out there."

Xero announced the appointment of a head of global marketing - Jeremy Wood, a former Google staffer - and a chief platform officer, Duncan Ritchie, on Wednesday.

- NZ Herald

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