The boss of cloud accounting software business XERO FPO NZ (ASX: XRO) has told the Fairfax press he expects the business could list in the US some time in the "next couple of years".
The renewed speculation has been prompted by the wild success of the recent Atlassian IPO on the Nasdaq exchange that has seen the Sydney-based software specialist land a market value of more than $7 billion.
Xero is Wellington-based and like the mighty All Blacks it's punching above its weight for New Zealand on the global stage as it takes on powerful international players like Intuit, Myob Group Ltd (ASX: MYO) and Sage.
The business has been growing its small-to-medium-sized enterprise client base in New Zealand and Australia thanks to its reportedly market-leading product, while the UK also recently passed 100,000 subscribers with a strong outlook and large addressable market.
Investors though have been concerned about the cash burn versus the revenue growth as rising operating expenses contributed towards an H1 FY16 EBITDA loss of $33.8 million. Revenues though remain on a strong upward trajectory growing 71% year-on-year, while the growth rate of cash outflow is now steadily falling.
The business also continues to grow gross margins to 74% in H1 FY16 as it benefits from scale, while for much of the calendar year ahead investors will be focused on progress in the giant US market.
In the cloud accounting space in the US Xero is taking on powerful incumbent Intuit and progress so far has been moderate, although the most recent half may go down in history as a turning point with growth starting to accelerate.
The company more than doubled US subscribers over the prior corresponding six-month period, but that was coming off a tiny base and it still has a long road ahead in the competitive US market. However, Xero probably only needs to win a moderate share of the large cloud accounting market from Intuit or others in order to justify today's valuation.
If Xero is able to outperform moderate expectations in the US then the share price may enjoy a strong couple of years, with the prospect of it then looking to list on the Nasdaq to much hype at a bumper valuation as its founder Rod Drury recently suggested.
At today's valuation of $17.60 and given the outlook it looks worth a small investment for those happy to move higher up the risk curve in the search of bigger returns.
