Increased investment drives Xero NZ$69.5m net loss

Increased investment in product development has contributed to an annual net loss after tax of NZ$69.5 million for New Zealand cloud accounting software provider Xero, despite an 81 percent jump in subscription revenue during the financial year.
Written by Leon Spencer, Contributor

New Zealand cloud accounting software provider Xero has reported a net loss after tax of NZ$69.5 million for the year ending March 2015, according to its latest financial results (PDF).

This is despite an 81 percent boost in subscription revenue to NZ$120.9 million for the year, and a 77 percent surge in operating revenue, to NZ$122.5 million.

The company, which is dual listed on the New Zealand Exchange and the Australian Securities Exchange (ASX), told shareholders on Friday that its net loss after tax for the period increased by 96 percent on the previous period's figure, reflecting increased investment in product development, sales, and marketing.

According to its annual financial report, Xero spent NZ$49 million on product design and development over the year, well over the NZ$18.4 million it spent during the previous year.

The company hired an additional 403 employees to its operations, with its global footprint now standing at 1,161. According to its annual report, 214 of these new employees were hired for product development.

Meanwhile, Xero spent NZ$93.5 million on sales and marketing, up from the previous year's NZ$55.1 million, and NZ$24.5 million on general costs and administration, up from the previous period's NZ$11.7 million.

Despite these expenses contributing heavily to Xero's annual net loss, the increase in the company's operating expenses has been offset by growth in its customer base and operating revenue.

Xero's 475,000 paying customers -- as of the end of March -- represented a 67 percent boost over the previous year's tally, and played a major role in the company's 77 percent operating revenue boost for the year.

Meanwhile, the company reported NZ$268.9 million in cash available as of the end of March, to fund future growth and expansion.

Xero estimates that it now holds around 31 percent of market share in its home country, with 138,000 customers, while it claims 10 percent of the market share in Australia, with 203,000 customers.

In the United Kingdom, Xero said it claims 2 percent market share, and while it holds less than 1 percent of market share in its field in the US, its US growth strategy is clearly paying off, with the company seeing a 93 percent jump in its North American customer base, to 35,000.

During the second half of the year, Xero's US management team was formed, headed up by its US president Russ Fujioka, with a focus to ensure a solid foundation for North America to enable it to scale. During the second six-month period, customer growth was 300 percent greater than in the first six months.

"Strong growth is expected to continue in these markets, and Xero has focused on building infrastructure to support its expansion in the US market," the company told shareholders. "The US remains a significant and addressable opportunity with the majority of small businesses unserved by cloud accounting software.

"Xero is well positioned to meet this need through its complete small business accounting solution, purpose built for the cloud and mobile devices," it said.

In February, Xero received NZ$132.9 million from Silicon Valley-based equity firm Accel Partners, and an additional NZ$14.3 million from its largest investor, Matrix Capital Management, to help drive its US growth.

This investment followed comments by Xero chairman Chris Liddell in July last year that listing publicly in the US would be a "logical step" for the company as it works to broaden its international reach beyond Australia, the UK, and its home country.

However, last month it was reported by Reuters that Xero had moved to push its plans for a US listing into 2016 at the earliest.

Also last month, it emerged that Australian accounting software provider and Xero's main rival in the local market, MYOB, is planning to return to the ASX by May, with its proposed IPO expected to raise up to AU$833.8 million, giving the company a total enterprise valuation of AU$2.69 billion.

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