Key Highlights

  • Operating revenue rose 31% to NZ$2,753.1 million for FY26, or 28% in constant currency.
  • Pro forma revenue growth was 50%, treating Melio as owned for both full periods.
  • The Melio Acquisition gives Xero a payments product aimed at the large US small-business market.
  • Annualised monthly Recurring Revenue is a key measure of contracted subscriptions.

How does a cloud accounting company known for subscriptions become a payments Business as well? For Xero (ASX:XRO), the answer is the Melio acquisition, which the company completed during its year to 31 March 2026 and which now shapes both its reported numbers and its guidance.

The central development: Melio changes the mix

Xero provides online accounting software to small businesses and their advisers, chiefly in Australia, New Zealand and the United Kingdom, with growing efforts in North America. Melio is a US business-payments platform. Buying it gives Xero a payments product aimed at the large US small-business market, where Xero has historically had little share.

The effect is visible in the results. Management cites pro-forma revenue growth of 50%, meaning growth as if Melio had been owned for the whole of both periods; that is a company-defined figure rather than a statutory result. Annualised monthly recurring revenue, a measure of contracted subscription run-rate, reached A$3.27 billion, up 37%.

Results and operating performance

Xero ended the year with 4.92 million subscribers, up 11%, after net additions of 506,000. Average revenue per customer rose 23% to A$55.44, and average monthly churn was 1.14%. Part of the revenue-per-customer increase reflects the new payments revenue and pricing changes, so it should not be read purely as a like-for-like gain.

Profitability was more mixed. EBITDA rose 24% to A$789.5 million and adjusted EBITDA, which strips out one-off items, rose 18% to A$757.4 million. Free Cash Flow rose 9% to A$554.0 million. The company points to one-off Melio Transaction Costs of A$50.6 million, partly offset by a A$90.5 million foreign-exchange translation gain on the acquisition funds booked in other income.

Gross Margin fell to 83.9% from 89.0%, a 5.1 percentage point decline, which is consistent with payments revenue carrying higher direct costs than software subscriptions. Xero reported a Rule of 40 score (revenue growth plus free cash flow margin) of 48.5%, up from 44.3%.

Guidance and Capital management

The EBITDA range includes up to about A$55 million of additional US Brand spending, weighted toward the second half. Other guidance items were a product Capitalisation rate of 40% to 45% and Depreciation and Amortisation of about A$465 million. Guidance is management's expectation, not a result.

A buyback of that kind supports per-share metrics but does not by itself change the business's growth outlook. The company has also stated an FY28 aspiration, set in June 2025, for revenue more than double FY25's A$2,103 million excluding any revenue synergies; the FY27 guidance midpoint sits well on the way toward that goal, though it is an aspiration only.

Sector and competitive position

Xero competes in a market where the incumbents are encouraging. In the United States, Intuit's QuickBooks dominates small-business accounting, and payments rivals and banks are active in bill payment. In Australia and the UK, Xero competes with MYOB and Sage respectively, along with a range of specialist tools. Its strengths are a large partner network of accountants and bookkeepers, an app marketplace and high retention, with monthly churn around 1.1%.

The Melio deal is a bet that embedding payments into accounting workflows increases revenue per customer and makes the platform harder to leave. The company says it added about 110,000 US customers, including new Melio direct-payments customers, but the announcement does not by itself show how much of that growth is cross-sold to existing Xero users compared with Melio's own customer base.

That debate is unresolved and should be treated as a sentiment risk rather than a measured outcome.

How Xero translates AI features into pricing or retention is a point to follow in later results.

Risks and developments to monitor

Gross margin trend as payments mix grows.

The scale and timing of incremental US brand spending, and whether it converts into subscriber growth.

Competitive responses from Intuit and others in the US market.

Foreign-exchange movements, given NZD reporting and international revenue.

Regulatory exposure in payments, including licensing and Fraud obligations.

Subscriber growth and churn, which anchor the subscription base.