Xero shares dive as US head quits

Company acts quickly to try to solve issues around cracking market in US

Xero shares plummeted 8.36 per cent yesterday, wiping nearly $240 million off its shareholder value following the announcement North American chief executive Peter Karpas has left, just six months after taking on the role.

Xero's US expansion plans have previously been tipped as a key to the company's high valuation, but despite yesterday's announcement, chief executive Rod Drury said the company was still on track to continue its growth in the United States.

"Obviously it's not an ideal situation to change a CEO, a US leader, but I think the positive sign is we're a lot further on, we know what we're doing, and we're building the right team," Drury said. "We're not scared to make the big moves to get things right."

Drury said the decision for Karpas to leave was mutual. As the company started to look ahead and eye partnering opportunities it had become clear that Karpas didn't have the right set of skills for what the company needed, he said. He added that it was important that the company was able to change tack and make changes if things were not working.

Drury said there were several possible replacements the company was considering.

Forsyth Barr analyst Blair Galpin said the announcement was a reflection that the company's US growth plans were taking longer than they had initially hoped, although he also did not see this as a major concern.

"The company has been signalling for some time if you look at the language that the US market was taking longer than they originally thought to crack," Galpin said. "So this is really probably a function of that. It's probably not a major surprise it more just reinforces that view."

Galpin said the company had done well to act quickly to try to solve any issues they might have had with their short-term strategy.

Drury noted that while growth had been slower in the US, the company was now building up a strong brand awareness, which he said would help boost numbers in the coming year.

The company is looking to target an estimated 29 million small to medium businesses in the US, but Galpin noted the business model in the US was quite different to New Zealand. He said that in New Zealand, accountants tended to readily endorse accounting software, however in the US this was far less prevalent due to litigation risks.

Galpin added it was too early to tell how well the company would continue to track in the US.

"This announcement really supports the view that we have, and that many others do, that the market opportunity is there but the certainty, or how well Xero is going to succeed in that market, it's going to be quite some time before that becomes apparent," Galpin said. "Really the test is going to be the next six to nine months, how well Xero does in Australia and particularly how well it does in the UK in the market there."

According to Galpin, the market expectation from Xero in terms of growth was focused mostly on Australia and to a lesser extent this year the UK, with UK growth expected to ramp up in the coming year, followed by the US.

"It takes time to build your brand awareness up and I think the reality is Xero is still very much in the game [in the US]", Galpin said.

Xero is still aiming to list on the Nasdaq next year and will also introduce Payroll to its New Zealand and Australian customer base.

Xero shares closed at $21.10c, down $1.86.