Online accounting software group Xero is headed for 1 million subscribers well within the next six months as its losses continue to narrow.
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More than half the Kiwi upstart's client base is in Australia and New Zealand, where it claims to be the market leader. It sees the UK as its "next growth engine" but has only a modest presence in the key US market, where the incumbent, Intuit, is working to defend its dominance.
"Early next year - the first quarter", is when Xero will top 1 million subscribers, the group's co-founder Rod Drury said, "with significant upside in cashflow during the second half".
At the end of September, Xero had 862,000 paying subscribers, up 37 per cent on a year ago. Revenue per subscriber edged up 5 per cent to $NZ29.30, which helped the gross margin reach 75 per cent, up 1 percentage point.
Overall, revenue rose 48 per cent to $NZ137.2 million ($130 million), hurt by the strength of the New Zealand dollar while costs were pressured by the shift to Amazon Web Service (AWS) from Rackspace.
Importantly, cash burn continued to slow, with its cash balance declining to $NZ137.9 million from $NZ184 million at the end of March as operating cash outflow fell to $NZ13.4 million from $NZ23.4 million.
At the same time, spending on product design and development reached $NZ43.9 million, up from $NZ33.5 million, of which about two-thirds is capitalised. The company is working to reduce its cash burn to avoid raising fresh funds from investors.
Spending on product design and development was headed above $NZ100 million annually, Mr Drury said, with one constraint being the lack of software engineering and development talent.
"We're always looking" for talent, he said. "Post-Brexit and now we're on AWS, we're seeing a lot of people coming here," Mr Drury said. "You can now move to New Zealand, to Australia, and do world class development work. You don't need to be in Seattle or San Francisco."
The group's Australian and New Zealand clients are supporting the business, since this is where it generates the bulk of its revenue, with $NZ96 million earned in the half alone as it lifted its subscribers by 167,000 to to 592,000. Analysts are concerned that Xero's traction may have negative consequences for rival MYOB's online drive.
In the UK, Xero has 164,000 subscribers and 77,000 in the US, where Intuit has moved aggressively to build its online presence.
"Ex the US we are two times bigger" than Intuit, Mr Drury said, while in the UK, the incumbent, Sage, was only shifting its offline software users to its online product.
"We're the largest cloud operator in the UK market," he said. "We've defended our position against deep price discounting, and we're continuing to outperform in terms of our share of the revenue in the market."
Cyclical drivers in the UK included the government driving the tax system online and other regulatory factors, the group said.
Analysts at Credit Suisse and Morningstar have "outperform" ratings on Xero shares, with a 12-month price target of around $NZ21 a share.