Xero Limited changes tack in the U.S.

Cloud accounting business Xero Limited (ASX: XRO) this morning reported it is to write off NZ$16.2 million worth of its U.S. investments as it bids to deepen its push into the U.S. online accounting market.

The asset write off is because Xero has decided to team up with payroll platform Gusto to offer payroll service platforms to customers across all 50 U.S. states.

In effect Xero will halt attempts to develop its own in-house U.S. payroll product as it’s not worth the financial cost or all round effort, when a partner like Gusto offers a potential short cut to achieving the same goal.

Xero has invested heavily in winning market share in the giant and complex U.S. market, but as at March 2018 had only signed up 132,000 customers. This is a respectable result, but perhaps not the return on investment the group had hoped for especially in the context of its runaway success in Australia, New Zealand and the United Kingdom.

Xero has found the U.S. market harder than others as each state has different payroll tax requirements, while the important sales channel of small business accountants has been harder to harvest.

Moreover, the dominant small business accounting platform provider in the U.S, Quickbooks operated by Intuit, is a deep-pocketed and entrenched leader that has a strong product offering. In Australia, Xero has other rivals including Myob Group Ltd (ASX: MYO) and Reckon Limited (ASX: RKN), but has been able to establish itself as a popular market leader.

The software-as-a-service business now has more than 1.4 million subscribers across 180 countries and given its product offering is in the online accounting space it’s reasonable to assume it has a lot of growth ahead of it yet.

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Motley Fool contributor Tom Richardson owns shares of Xero.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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