Thursday 9th November 2017
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Shares of Xero and NZX fell after the cloud-based accounting software firm said it would delist from the local stock market in favour of an ASX listing to broaden its pool of investors and analysts.
The announcement is a blow to NZX, which has struggled to stem a flow of New Zealand companies across the Tasman and has little in the way of a pipeline of new firms coming to market. In October, total equities on the NZX fell 5.3 percent from a year earlier to 162 and there were no IPOs or compliance listings. In the year-to-date, IPOs or compliance listings have amounted to $480 million, dwarfed by the $2.77 billion of new debt securities.
Xero fell 4.6 percent to $32.50 and has surged 95 percent this year, the third-best performance on the S&P/NZX 50 Index behind A2 Milk and Synlait Milk. NZX fell 3.3 percent to $1.16 and is up 14 percent this year.
Matthew Goodson, managing director at Salt Funds Management, said the announcement "was completely left field, particularly with (chief executive Rod) Drury being a former director of NZX."
"It's not as though Xero isn't already trading at a premium," he said. "At 11 times forward revenues at this stage of its development, that's right up there with most tech companies globally." With stock markets increasingly dominated by index traders, "there has been forced selling by passive investors" of Xero shares and there may be a "messy several months" as those index flows continue, he said.
Drury did heap praise on the NZX in announcing the departure. "They've been fantastic for us for the last 10 years," he told BusinessDesk. "It has taken no options off the table for us and we've been able to dual-list."
The company said it will keep its headquarters in Wellington but shift its listing across the Tasman to encourage a broader range of analyst and broker coverage and increase its relevance "to a more diverse range of large investors". The move was in the best interests of the company and its shareholders, it said.
NZX said in a statement that it was "naturally disappointed that Xero has decided to leave the local market."
"Xero’s listing on the NZX has extended beyond the benefits of solely raising capital. It has supported Xero’s growth aspirations, with the company successfully leveraging its local listing to reinforce its brand and compete globally. NZX is pleased to have played a pivotal role in this."
Salt Funds' Goodman said it is possible Xero could drop out of the NZX 50 ahead of its departure date because it has signalled its commitment to leave, spurring a selloff by index-weighted investors. The decline in its stock is "in anticipation of those very significant flows to come." The decision to delist from the NZX was "not about cost at all" because the costs of maintaining the listing were minuscule against the size of its business.
Xero's net loss was $21 million in the six months ended Sept. 30 from a loss of $43.9 million a year earlier, it said in a statement. Earnings before interest, tax, depreciation and amortisation was $5.4 million compared with an ebitda loss of $25.9 million a year earlier. Its ebitda margin turned positive at 3 percent from negative 19 percent a year earlier. Operating revenue jumped 37 percent to $187.8 million.
Goodman said the numbers were largely as expected, given the company gives regular guidance updates. Its results for the US "showed no progress whatsoever" even though much of the company's valuation upside depends on that market, he said.
In North America subscribers rose 43 percent to 110,000 while operating revenue climbed 22 percent to $14.5 million. The company breaks down its earnings figures to ANZ and international, with ANZ making a segment contribution of $69.7 million in the first half while international recorded a loss of $11 million. In the year-earlier first half, the international loss was $20 million.
Xero first listed in June 2007 and topped 1 million global subscribers in 2017. Today it said subscribers have risen to about 1.2 million.
Gross margin widened to 80 percent in the first half from 75 percent a year earlier and Xero said today that further improvement is expected "through economies of scale and automation". The company recorded positive operating cash flow of $6.1 million in the first half, a $19.4 million improvement on a year earlier.
The company reiterated that UK customers rose to 253,000 as at Sept. 30, from 212,000 six months earlier. Xero added 79,000 UK customers in the 2017 financial year, where it had been teaming up with the major banks and building an active accounting and bookkeeping sales channel. It has more than 518,000 subscribers in Australia and more than 271,000 in New Zealand, its biggest markets, while in its rest-of-the-world segment it had 47,000 (up 62 percent).
Annualised committed monthly revenue (ACMR) rose 38 percent to $416.9 million, with international ACMR jumping 50 percent and ANZ region by 32 percent. It held about $23 million of cash as at Sept. 30, down from $27.7 million as at March 31. In addition today, Xero said it has arranged a stand-by bank facility of $100 million with Bank of New Zealand and ANZ Bank New Zealand, although it has no plans to draw down on it at this stage.
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