New Zealand-based Xero (XRO +0.66%), a cloud-based accounting software company, had a tough time breaking into the U.S. market. In this video clip from "What in the World" on Motley Fool Live, recorded on Feb. 4, Fool Australia's chief investment officer Scott Phillips and analyst Ryan Newman discuss a few ways that Xero and other tech businesses could set themselves up for international success.
Scott Phillips: What are some of the top two or three risks that potentially face not only Xero as a business but an investment in Xero at today's price?
Ryan Newman: Yes, I mentioned before the United States. It is a tough market to crack. It was always going to be a tough market to crack, but I think ultimately I would say that that market is essentially lost. One of the risks here is that Xero continues to really press and try to I guess eke out as much as they can from it.
I think that would be a mistake and focusing its resources on markets where it can win and is winning would be a better thing to do. I guess that partly comes down to the competition side of things as well. Xero really was that first mover in the cloud accounting space, but QuickBooks by Intuit (INTU +2.70%) has really done a tremendous job internationally as well. They've really caught up, so competition is a big threat here.
I would say innovation is another one, so when you've got competition you want to make sure that you're staying on top of that, and that requires dollars. It requires resources pumped into development and that development doesn't always necessarily work out, so it might be for nothing or it may just be that it stymies Xero's margins over time.
The last one I'll mention as well I'd say is probably involuntary customer churn. I don't think many customers would voluntarily churn or take themselves off Xero's platform, but the fact that Xero focuses predominantly on small and medium-sized businesses some of these businesses are actually more prone to suffering through an economic recession for instance.
This was one of the risks coming into the COVID-19 pandemic. We actually did trim some of their position at pro at that time because we thought a lot of its customers unfortunately may suffer the consequences of lockdowns and be the first to go under. That's what I would refer to as involuntary customer churn, something to watch out for.
Philips: Yeah, I like it. Really important matter, really important risk to be mindful of, it does remind to just do a quick tangent. We look at other tech companies sometimes and say they're spending all this money to grow, to expand. Why don't they slow down to make some profit? In hindsight, it's probably fair to say that Xero missed the trick. Deliberately or otherwise, maybe it was outside of its range of control or maybe it wasn't but had it got to the U.S. more quickly before as you say QuickBooks by Intuit grabbed that market.
Maybe we're looking at a very different scenario here and it really is. The problem of doing the beauty of digital software is it can be all that really quickly. Things happen really fast compared to the old school of making more cars, or steel mills, or whatever. You develop yourself something excellent anyway, but also it means definitely everyone else can as well and so being first into those markets, grabbing that market really quickly costs you a fortune.
But, if you don't do it as we possibly see in the U.S.; I don't know if it's the right characterization, feel free to disagree but it strikes me as had they maybe taken a different view and said, "We need to fight this war on more front because if we don't, someone else is going to get there first." We might see a very different story with Xero today had they been there, a year, two years, three years earlier than they really tried hard to push into and maybe that cost them that market.
