Xro - xero

[CJ]

Well said, CJ. I will add that such companies do not necessarily need to reduce costs to quickly turn cashflow positive. Just keep them in a stable situation and let the increasing customer base widen the disparity between expenses and revenue.

My point there was if the US rollout doesn't work, they could scale back their US opertions quickly, and be cashflow positive from NZ and Australia. They wouldn't be worth $1.7B but they would be a viable company going forward.

I suspect security breaches and major outages will be some of the issues. We have already had a little taste of this in NZ with the recent Telecom/Yahoo!Xtra email issues.

I believe them using Rackspace, a specialist provider, decreases the risk of this rather than them doing it inhouse.

[Banksie]

I believe them using Rackspace, a specialist provider, decreases the risk of this rather than them doing it inhouse.

That is good news - Rackspace are recognised as one of the industry leaders in the managed hosting and cloud infrastructure markets.

http://www.gartner.com/technology/re...t=130412&st=sg

[CJ]

One of the fundamental mistakes investors make is to confuse a great company for a great stock investment.

The same goes for any company. Apple is a great company but its share price has dropped from $700 to in the $400.

Buffett tries to find great companies that are undervalued. So while XRO may (or maynot) be a great company, I personally feel it is currently overvalued. I will reassess when the next customer data comes out.

[maddog]

Turmeric

Can you please give me some examples of companies that have grown rapidly while at the same time losing a lot of money, then cut costs (presumably getting rid of a lot of staff) and achieved profitability.

I can't think of any significant examples but there may be some. I would have thought Xero's plan will be to stabilise costs while revenue keeps on growing and eventually outstrips the costs.

At the moment costs just keep on going up ahead of revenue and have done so for six years. Eventually, if Xero is to be successful in the long term, that has to change.

[CJ]

Can you please give me some examples of companies that have grown rapidly while at the same time losing a lot of money, then cut costs (presumably getting rid of a lot of staff) and achieved profitability.

Facebook - didn't cut costs I dont think but it went from massively negative cashflow to massively positive cashflow as its growth in revenue exceeded its growth in costs.

[maddog]

Thanks CJ

There are many examples like Facebook. Amazon is I believe another.

However, I keep seeing people saying Xero will grow and then cut costs to achieve profitability. I just don't buy that strategy. The companies that cut staff are ones that are in trouble. Once you start cutting staff, customers are much more likely to lose faith in a company and good staff leave seeking more stable opportunities elsewhere.

My view is that if Xero is to be successful it has to change to a pattern where revenue growth outstrips cost growth. So far they have not shown they have the ability to do that or given any plan for how to do so. In the meantime investing in Xero is an act of faith.

[blackcap]

NOt that much of a parrallell but does anyone remember a company called Nokia from 4 years ago?

[CJ]

Maddog - it was probably me who said they could cut costs. But that is a worst case scenario with a (say) 5% probability. They have a good track record of tapping new equity when they need more cash to fund growth.

[Arbroath]

No, I have the same problem with XRO as I do with LINK (LinkedIn) - think they are awesome companies, but the share price is going to make them a crap investment. For those who got in at the beginning they had a great ride, but to get in at this point would be stupidity as history always repeats for these types of companies. Even the most successful companies on the planet couldnt escape being brought back to earth.

My sentiments exactly - from an investment perspective these types of companies are highly questionable.

[maddog]

Hi Turmeric

Just going back to your 4.22pm comment yesterday that: "for the last financial year revenue grew faster than costs":

In percentage terms you are correct - I just did a quick calculation and Xero's revenue grew by 101.5% whereas costs grew by 96.1%.

In absolute terms it was the other way around. Revenue grew by $19.66m whereas costs grew by a considerably higher $26.202m. That was what was behind my earlier comment that at the moment "costs just keep on going up ahead of revenue". For Xero to ultimately prove to be a successful company that gap has to close.

And CJ - I agree that Xero has a great record at raising equity. In the short term Xero is in no danger of running out of cash despite its negative cash-flow. However, equity eventually wants a return. If it doesn't the equity of savvy investors finds another home. Xero is flavour of the month at the moment. That won't always be the case unless it really is different this time.