Xero’s rapid growth not necessarily a negative for rival MYOB

The accounting software market is seen to be growing as a whole, with higher prices also helping industry participants.

Xero shares closed up almost 6 per cent on Thursday as its interim net profit increased 76 per cent to $95m.

But while its major lift in Australian customers could spell bad news for the Kohlberg Kravis Roberts-owned rival MYOB, analysts believe that this is not necessarily the case.

KKR is tipped to place MYOB on the market next year after efforts to sell the business to ANZ in 2022 for more than $4bn collapsed in the final hour.

The buyout fund purchased MYOB when it was listed for $2bn in 2019 and there had been some chatter in the market that it had lost its way as rival Xero went from strength-to-strength.

But even though Xero was growing market share in Australia, it did not necessarily mean that MYOB was losing customers. In fact, the understanding is that its accounting software subscriber numbers are also on the increase.

The market was seen to be growing as a whole, with higher prices also helping industry participants.

And the view from Xero’s result is that it now looks to be shifting from market share growth to cash profit, which could see its growth trajectory level out.

Xero grew its subscription base by 10 per cent for Australia for the six months to September 30 compared to the previous corresponding half-year.

That is 84,000 net additions after churn is factored in.

Australia accounts for 44 per cent or 1.86 million of its 4.18 million subscribers.

The question is when the MYOB business comes back up for sale KKR can command a similar price from other buyers like it did from ANZ, with top four banks known to pay up on acquisitions.

According to IBISWorld, MYOB generated $616.9m in revenue last year and made a $527m loss, while carrying $1.96bn of debt.

But the company is in a growth phase and, like The Access Group, has also been embarking on acquisitions.

According to IBISWorld, MYOB has 7.8 per cent of the software publishing market share in Australia, behind Xero with 11.2 per cent. Atlassian is the industry giant with 54.4 per cent ahead of Wisetech with 13.6 per cent.

Local companies like MYOB and Xero, predominantly Australia-based, dominate the accounting software segment, since the products need to adhere to local regulations, tax laws and reporting requirements.

Growth in the segment has fuelled widening profit margins, particularly as local publishers acquire other companies to expand their global reach.

Sage, based in the UK, is the world’s third largest supplier of enterprise resource planning software and the largest supplier to small businesses.

As earlier reported, it would likely see MYOB as a good fit for its business, providing an opportunity to expand back into the Australia market.

The Access Group, also based in the UK, purchased Sage’s businesses in Australia and Asia in 2021. It, too, could be a buyer, as could global software company Constellation Software, which has seen its share price increase almost 50 per cent in the past year in Canada.

The Access Group has been making small acquisitions in the Australian market, buying ChangeGPS at the start of the year.