Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: Xero shows other companies how it's done

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Shareholders get an optimistic view... and a superbly run meeting

Xero chief executive Rod Drury told shareholders at the annual meeting that the company is working on ways of cracking the American market.  Photo / Mark Mitchell
Xero chief executive Rod Drury told shareholders at the annual meeting that the company is working on ways of cracking the American market. Photo / Mark Mitchell

Xero, which held its annual meeting at Te Papa on Thursday, is head and shoulders above most New Zealand companies for meeting organisation and clarity of message.

The meeting was superbly run and chief executive Rod Drury gave a clear outline of the company's strategy and objectives.

Shareholders were also incisive, one attendee making some particularly pertinent comments, followed by an excellent question, towards the end of proceedings.

The answer to this question, which is revealed later, will determine whether Xero will become a successful global company and continue to be a star sharemarket performer.

Drury met shareholders at the entrance with a broad smile and the comment "we are having fun".

He looked remarkably well for an individual who must work nearly 25 hours a day, eight days a week.

The 90-minute meeting was peppered with repeated comments that "our products are cool" and "we are just getting started".

The Soundings Theatre at Te Papa is an excellent venue for a large annual meeting, and chairman Sam Knowles started his address with an outline of the agenda, including the time that would be given to each item and the targeted finishing time.

Knowles kept to the timetable, even though Drury went beyond his allotted time.

The chairman said that the board had four main focuses: Is the company meeting its performance targets? Does it have enough cash? Does it have the right people? Does it have the right culture to achieve its global objectives?

He then asked each of the independent directors to give their view of the company. This is a far more interesting approach than the comments Auckland shareholders demand from directors standing for re-election.

New director Craig Elliott, who has worked in Silicon Valley since 1985, said he was very enthusiastic about Xero's prospects, as most of its competitors had old technology.

Xero had introduced fresh products that customers loved and his timing in joining the board couldn't have been better.

Craig Winkler, who co-founded MYOB, said his experience in small and medium sized companies was helpful to Xero and Graham Shaw, who chairs the audit committee, said he had four main focuses - the proper use of cash, continued software development, effective foreign exchange management and ensuring there were no system outages.

Sam Morgan's view was that the biggest challenge facing the company was its pace of growth - in other words, when did the company press the button to move faster.

Xero has put its foot on the accelerator in Australia, where its customer numbers have gone from 16,000 to 51,000 over the past year.

Morgan said Xero was huge compared with Trade Me, which had only 40 staff when sold to Fairfax, against more than 500 employees for the accounting software company.

Drury addressed the meeting after the formal resolutions were passed.

He made the humorous comment that it was great to have three overseas active directors - Elliott from Silicon Valley, Winkler from Melbourne and Morgan from Nelson.

Drury stood out front, away from the lectern, and for 54 minutes delivered a passionate and enthusiastic outline of his company.

His first comments were "we are having a huge amount of fun" and he had "never felt more confident".

In the past 12 months customer numbers had gone from 100,000 to 193,000, staff had increased from 260 to 507, revenue had expanded more than 100 per cent to $64 million on an annualised basis and the company had $69 million of cash.

Xero was a 24 hours a day, 365-day a year business with no weekends and no Christmases. It was a large loss-making company and "the New Zealand media is waiting for us to fall over".

He criticised the National Business Review for its negative views on the company.

But the rest of his address was extremely positive and he emphasised that Xero had raised new capital from investors who want the directors to adopt an aggressive growth strategy.

Overseas investors fully endorsed this strategy and Australians now owned 32 per cent of the company compared with 4 per cent before its ASX listing in November.

The company could be profitable if it eased back on its growth strategy but it would report a bigger loss for the March 2014 year because it planned to increase, rather than decrease, its investment in growth.

Drury is correct in saying that the company could become profitable by reducing its growth expenditure but this would have a devastating effect on the share price because most of its shareholders, particularly from overseas, want Xero to go for growth.

He said the company was doing very well in New Zealand and Australia, where it is generating profits, but the UK was a sleeper. However, it was beginning to make an impact there.

The US market is far tougher as it is up against Intuit, which offers QuickBooks. Intuit has revenue of more than US$4 billion, 8500 staff and a Nasdaq value of US$19 billion.

Drury said Xero was taking a sniper-like approach to the US. The signs were good, but it had to translate this into sales.

He said: "We have to prove to you guys this year" that the company could succeed in the US.

The CEO finished his dynamic address with the comments that Xero had massive opportunities and now offered a "wall of innovation" to its customers.

The key question came from a shareholder who wanted to know how Xero would react to a strong competitive response from US companies, particularly Intuit.

She said she had personal experience of the fiercely competitive US market, and believed Intuit would not concede an inch to Xero.

This was clearly the key moment of the meeting as Drury remained seated and gave a measured response.

He agreed that Intuit had upped its US advertising, was organising customer conferences to deter potential clients from meeting the New Zealand company and was entering Australia to take on the Wellington-based company.

But QuickBooks was not an online offering, its products weren't great and Xero had a seven-year lead time in its online developments.

Drury's final comment was that he was fully aware of the competitive response in the US and was ready for it.

Finally Knowles refused to answer a question from a shareholder who wanted to know when the company would reach its one million customer target.

He said the time scale was difficult to predict because it depended on the amount of money the board decided to invest in the company's growth strategy.

Directors had every reason to feel happy as their collective shareholdings were worth more than $800 million at Thursday's $17.10 closing share price, up from $5.20 immediately after last year's annual meeting.

Although Drury and his fellow directors are very pleased with Xero's performance, they know that the company's biggest challenge, the US market, lies ahead. Although it has $69 million in cash and an army of more than 500 staff to take on this market, it will be no pushover.

Whatever the outcome, Drury has shown us that New Zealand companies can be successful in the cloud computing world and we should be extremely grateful to him for demonstrating this to us.

It would be great to see him hold next year's annual meeting in Auckland because our companies could learn a great deal from him about meeting organisation and the clarity of message delivered to shareholders.

• Brian Gaynor is an executive director of Milford Asset Management which holds Xero shares on behalf of clients.

- NZ Herald

Brian Gaynor

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the Financial Markets Authority (FMA) in 2011. He is also a Portfolio Manager at Milford Asset Management.

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