This Upstart Gives Intuit a Run for the Money in Cloud Accounting

December 23, 2015, 5:39 PM UTC
PJ Warren

Intuit is racing to convert its existing small-business customers to using cloud editions of its accounting applications. Xero, a fast-growing cloud accounting software purveyor from New Zealand, is determined to slow it down. The net result is that both companies are reporting rapid customer growth for their online services.

Consider the latest numbers from both.

At the end of its first fiscal quarter (ended Oct. 31), Intuit (INTU) had close to 1.16 million subscribers for QuickBooks Online, the cloud edition of its flagship accounting software program for small businesses. Almost 80% of those customers are actually new to Intuit, in that they weren’t previously using one of its packaged software products, according to Intuit’s latest earning report.

Intuit’s goal is to reach 2 million subscribers by the end of its fiscal year 2017. It has about seven quarters to pull that off. It’s well on its way to that target, but Xero, a well-funded challenger that accelerated its U.S. market push in a big way in February, is also growing rapidly.

As of Sept. 30, the end of the first half of its fiscal year, Xero reported close to 600,000 subscribers. The large majority of its customers hail from Australia, the United Kingdom, and New Zealand. Indeed, Xero leads when it comes to international business, based on adoption figures shared by both companies. It has a far smaller North American footprint than Intuit, with just 47,000 subscribers at the end of its first half.

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Xero stock trades publicly in Australia and New Zealand, but the company has been hinting about an initial public offering in the United States. Back in February, it raised more than $110 million from Accel Partners and Matrix Capital to fund its U.S. expansion, and Peter Thiel was an early investor. The company employs about 1,300 people worldwide, with about one-fifth of them now working at offices in Seattle and San Francisco.

In a recent interview, Xero CEO Rod Drury told Fortune that his company is on track to generate approximately $135 million for its current fiscal year (after currency conversions), but his goal is to reach $1 billion “as quickly as possible.” (Here’s the company’s latest investor presentation for more details.) For perspective, Intuit reported $4.2 billion for its fiscal year ended August 2015.

IDC research analyst Christine Dover said there’s plenty of upside for both companies in the fast-growing cloud accounting software market. “There are many small businesses that are not using current or modern software,” she said. “There’s a lot of opportunity that is untapped for both Xero and Intuit.”

One of Xero’s marketing strategies, like Intuit’s, is to court accountants and other financial advisors that help small businesses with their books. “Accounting is still the fundamental system of record for small businesses,” he said.

WATCH: Why small businesses are embracing apps for tax prep and accounting.

One of Xero’s biggest assets is an impressive network of partnerships that connects Xero’s service with other fast-growing cloud applications. Examples include digital payments systems from Stripe, Square, and PayPal; expense management tools from Expensify; and e-commerce systems such as Shopify and Bigcommerce. “These strategic partnerships are deep and specific,” Drury said.

The idea is to get companies to think of Xero’s service not just as an accounting tool but as a broader system for managing business processes—everything from marketing campaigns to vacation requests to payroll and other employee benefits. “As we move from the back office to build front office applications, there is a massive opportunity for growth,” Drury said.

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