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Xero is 'a giant in the making' in the US - Fisher Funds

Friday 26th July 2019

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Xero’s North American operations are “a giant in the making” and the market “is not properly appreciating the opportunity” the accounting software company has in the US and Canada, says Fisher Funds portfolio manager Sam Dickie.

Dickie recently returned from a trip to North America during which he met nearly 10 Xero executives, some of its accountant partners and its largest global competitor, Intuit, the incumbent provider in the US.

He also attended the Xerocon event in San Diego in June which was attended by more than 1,000 accountants, customers and other partners.

“We came away more convinced the market is still not properly appreciating the explosive growth opportunities” Xero has in non-core cloud accounting revenue such as from its recent tie up and revenue sharing arrangement with Stripe for payments, Dickie says in a newsletter to Fisher investors.

Such non-core revenue currently accounts for 5 percent of total revenue but is growing at 85 percent compared to the 33 percent growth of Xero’s core accounting revenue, he says.

Intuit had more than 4.2 million subscribers to its online QuickBooks product at the end of April with 1.1 million of those outside the US.

The latest data from New Zealand headquartered but ASX listed Xero showed it had 195,000 US subscribers and 1.82 million in total, showing it is still ahead of Intuit outside the US.

But Dickie says although Xero’s US operations still amount to a small business and less than 10 percent of the company’s revenues, “given the partner strategy in the US – selling via accountants versus selling direct previously – is now well entrenched and, coupled with strong growth in the Canadian business, we believe North America can grow in excess of group revenues in the future.”

Xero’s subscriber growth in the year ended March in the US was 48 percent while overall group growth was 31 percent.

“The cloud accounting software market is huge and is very under-penetrated. We think cloud accounting penetration in that market is less than 15 percent which compares to around 50 percent penetration in NZ,” Dickie says.

“This is a market that Intuit thinks could be as large as 25 million subscribers. Intuit themselves think that there is room in the market for another large but second placed player,” he says.

“We agree. Even if Xero just gets to a 15 percent market share – leaving Intuit with 85 percent – Xero can grow 20 times in the US market before the market is saturated.”

Dickie says the excitement at Xerocon about Xero’s business in Canada “was palpable. Xero only entered the market in the past year or two but the Canadian cocktail party was the best attended cocktail party at Xerocon.”

Xero doesn’t split out its Canadian subscriber figures but “we think it is growing significantly faster than any other country off a low base. The total addressable market in Canada is larger than the Australian and New Zealand markets combined,” he says.

Xero had 1.08 million Australasian subscribers at March 31.


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