Market Overview

Xero Aggressively Targets Underpenetrated Cloud Accounting Market

Xero Aggressively Targets Underpenetrated Cloud Accounting Market

Cloud adoption has become one of the most noticeable shifts in business in recent years, but accounting has lagged its peers in following the trend. 

About The Company

The Wellington, New Zealand-based Xero (OTC: XROLF) is helping pioneer the cloud accounting revolution, which is changing the way small businesses operate. 

According to the Small Business Administration, small businesses that use cloud apps are growing their net profitability 30% faster than those that don’t. Accounting partners that offer proactive client advice on apps are growing their profitability 60% faster.

Global cloud adoption by small businesses is a heavily underpenetrated market, with less than 10% of small businesses in North America adopting cloud accounting services and under 20% of global small businesses having moved to cloud accounting.

The U.S. Opportunity 

Xero is looking to change this in the United States and Canada, given that in its home territory of Australia and New Zealand, over 50% of small businesses have taken to cloud accounting.

CEO Steve Vamos told Benzinga at the company’s Xerocon conference this week that Xero is unfazed by the competition in the U.S. given the growth potential in the market. 

“There is a large opportunity in the Americas and the United States; many small businesses are not currently served," Vamos said. 

Xero is not focused on Intuit Inc. (NASDAQ: INTU) much at all, the CEO said.

"What we are focused on is: how do we partner with accountants and bookkeepers to help them transform their practice, and at the same time bring their clients on?" 

'Our Playbook Is Different'

The Xero playbook is different from Intuit's and more connected to accountants and bookkeepers, Vamos said. 

"It is at the heart and soul of everything we do." 

If the marketplace was 100% penetrated, it would be a different conversation, but many businesses are still using Excel spreadsheets for bookkeeping, he said. 

“The fact that [cloud accounting] is 10-15% penetrated — we don’t need to worry about Intuit,” Vamos said. “In newer markets, it is about executing the fundamentals to make us successful.”

Xero has partnered with numerous fintech companies and payment service providers, with the company’s platform effectively acting as an app store and one-stop shop for a small business.

This week, the company announced a partnership with Silicon Valley payment processor Stripe, and it has an existing partnership with Visa Inc (NYSE: V).

How Xero Stands Out

Xero’s cutting-edge approach to accounting has the firm constantly creating new partnerships and exposing its customers to new players in the industry that can help give them a technological advantage, the company's CEO said. 

In addition to working toward greater cloud adoption for small businesses, Xero is also looking to shift the perception of the accounting industry as a whole through its company culture, Vamos said. 

Xero puts on three yearly conferences, and they are clearly catering to a different audience. With swings, photo booths and pingpong tables, some have gone as far as to call it "Coachella for Accountants."

Many of Xero's partners are single-partner firms running a small business, and that can be lonely, said Tony Ward, Xero's Americas president. 

"Here, they get a sense of community," he said. “It feels different than other conferences, almost like a party.”

CEO Vamos said he is most excited about the low levels of global penetration of cloud accounting and the opportunity in the Americas. At the same time, the potential for massive future growth comes with its own set of problems, he said.  

“To get to where we want to go, it requires a lot of work and a lot of change all the time, so it’s a really dynamic, fast-changing environment. Even though we love what we do and we love our progress, we know we have a lot of work to do everyday.”

Related Links:

Morgan Stanley Drops Bearish Intuit Stance, Points To Tax Season Catalysts

Stifel: 3 Reasons To Like Intuit

Photo courtesy of Xero. 


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