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Xero board grapples with growth/profit tension as new product suite beckons

Wednesday 12th July 2017

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Xero's board is still balancing the tension between chasing new growth and getting the books in black, with new technology and the migration to Amazon Web Services paving the way for the accounting software provider to chase new revenue streams with an expanded product range. 

Shareholders today voted to increase the board's fee pool to $1.4 million from $850,000, which will let the Wellington-based company take on two or three new directors in the UK or potentially the US. Chairman Graham Smith, presiding over his first meeting, held in Sydney, told shareholders the boost will help Xero "attract and retain directors of the highest calibre in different countries" and that there were no plans to materially lift current director pay. 

Smith told BusinessDesk before the meeting that the board is constantly trying to balance up the cost of chasing new growth with generating profits, which is tough in the software-as-a-service space which typically needs investment ahead of revenue coming in the door. 

"Management is looking to the board to help them test that strategy and critique that strategy," Smith said. "We're trying to make sure in the long-term is of most benefit to shareholders - that's our job."

That includes testing and challenging the company's allocation of resources, its leadership, and how much it spends looking to boost market share. 

Analysts are predicting Xero will post a maiden profit in 2019 after crossing the 1 million subscriber mark last year, and chief financial and operating officer Sankar Narayan today affirmed Xero's guidance for operating metrics to keep improving in the coming year with the view to breaking even on a cash flow basis from its existing resources. 

Chief executive Rod Drury thanked investors for giving Xero the space to develop back-office functionality that enabled it to cope with an extra 300,000 new customers in the last year alone that pushed the firm over its targeted 1 million subscriber number. 

Xero's migration of its core platform to AWS last year has enabled the software company to draw on the massive amount of data going through its system. That's seen Xero pitch itself as a vital cog in what it calls the financial web, where it acts as the intermediary between businesses and financial services firms, enabling small- and medium-sized enterprises to access capital more easily and free up transactions in an increasingly global economy.

Smith anticipates artificial intelligence and machine learning will form the foundation for Xero to differentiate its products, something Asian broking firm CLSA acknowledged when it named the company among the top 10 listed firms in the region where AI and machine learning are having a demonstrable impact on their business.

When asked about a potential US listing, something Xero has mooted as a possibility for several years, Narayan told shareholders they were happy with their dual-listings in New Zealand and Australia in the short- to medium-term. 

Xero's NZX-listed shares slipped 0.3 percent to $25.81 today, and have jumped 48 percent so far this year, outpacing the 11 percent gain on the benchmark S&P/NZX 50 index over the same period. 


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