Xero shares drop 5.3% as US boss Peter Karpas quits

Friday 12th September 2014

Peter Karpas, Xero's North America chief executive, quit just six months after joining, as the cloud-based accounting software company reassesses its US growth plans, said chief executive Rod Drury. The shares fell.

Karpas, former PayPal vice president and general manager of North America small and medium business, joined Xero as its North American head in late February this year. The Wellington-based company wants a million 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.

"Peter came on and really helped us get our US strategy right so we understand that strategy, but the role moving forward wasn't really suited to his skills so we mutually agreed to move forward," Drury told BusinessDesk. "As we worked with Peter to establish our model he was kind of like 'hey I'm probably not the right guy for this right now' and maybe we were a year or two too early for his strategic stuff.

"It's important that if we see things aren't working out or are different, we change the strategy and have the courage to rip the bandaid off and to build the right long-term team," Drury said.

Shares of Xero fell 5.3 percent to near-month low of $21.75 and have fallen some 51 percent since its intraday record of $45.99 in early March, in part due to a global selloff as investors began to question high valuations relative to earnings of tech companies.

The company's US growth plans have come under close scrutiny. Last month Deutsche Bank, the investment bank which part owns Craigs Investment Partners in New Zealand, initiated coverage of Xero, rating the stock a 'sell' and giving it a target share price of $18.90.

In the August note "Too much blue sky baked in" Deutsche analysts Stephen Ridgewell and Joshua Dale said the "market is pricing in a faster ramp up in US sales than is likely and that the share price is likely to de-rate" to $18.90 on a discounted cash flow basis. The company needs two to three more years to build its growth engine in the US, they said.

The US market is different to Xero's experience in New Zealand, Australia and the UK, and success will take longer, Drury said. The litigious nature of the US meant accountants didn't readily recommend software to customers, which had been part of Xero's sale strategy in other markets.

"The US accounting industry is a long way behind on cloud they haven't had a lot of innovation in the market and they're much more compliance focused," Drury said. "The US is going to be larger than we thought but it will take a few years."

The company also faces aggressive competition from incumbent Intuit, which runs QuickBooks. In July, Drury told shareholders at the annual general meeting in Wellington that everything Intuit did was now in response to Xero, and conversion of its 5 million desktop customers to the cloud wouldn't work. However some analysts have questioned whether the company has just shown its competitor what it needs to do to keep market share.

Drury said he expects the US market to accelerate over the next two years and the company would be making a number of key appointments over the coming three months.

According to Drury's AGM presentation, the company has 334,000 customers worldwide, two-thirds of which were in Australia and New Zealand, and 18,000 in North America. In August, it passed US$100 million in annualised committed monthly revenue, and expects subscription revenue growth to be about 80 percent.

Xero's stock surged late last year, when the company raised $180 million in October to fund US growth plans. The escrow period for those investors is coming to a close.

BusinessDesk.co.nz

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