Highlights

• Operating Revenue for the half was NZ$1,745 million, up 46 per cent on a reported basis and 27 per cent on a pro-forma basis.

• Xero added a net 226,000 subscribers, taking the base to about 5.15 million.

• FY27 operating revenue guidance was raised to NZ$3,770 million to NZ$3,830 million.

• Xero announced an on-market share buy-back of up to A$1 billion over 12 months.

How did Xero (ASX:XRO) manage to raise its full-year outlook only six months after giving it? The answer lies in its interim result for the six months to 30 September 2026, released on 12 November 2026. Encouraging revenue growth, a lower cost ratio and a larger US payments Business led the cloud accounting company to lift its FY27 revenue guidance. It also announced an on-market share buy-back of up to A$1 billion.

The result is the first full half to include Melio, the US payments business Xero bought in October 2025. That makes it a key test of whether the Acquisition is working.

What Xero reported for the first half

Xero reports in New Zealand dollars. Operating revenue for the half was NZ$1,745 million. On a reported basis that was 46 per cent higher than a year earlier, a figure boosted by the Melio acquisition. On a pro-forma basis, which treats Melio as if it had been owned in both periods, growth was 27 per cent, or about 22.5 per cent in constant currency.

Adjusted EBITDA was NZ$362 million, up 23 per cent on a pro-forma basis. Free Cash Flow was NZ$238 million, also higher on a pro-forma basis.

The customer base grew by 226,000 net additions to about 5.15 million subscribers. Average revenue per customer (ARPC) rose to NZ$62.21. That reflects price changes, product upgrades and the higher-value US payments business.

Operating expenses fell to below 69 per cent of revenue, by the company's measure. That ratio matters because Xero has long balanced spending on growth against Margin expansion.

What the business does and where revenue comes from

Xero sells cloud-based accounting software to small businesses and their accountants and bookkeepers. Most of its revenue comes from recurring monthly subscriptions, alongside payments and other services delivered through its platform.

Australia remains the largest market, with half-year revenue of NZ$670 million and 91,000 net customer additions, according to the investor presentation. The United Kingdom contributed NZ$419 million in revenue and 85,000 net additions.

The United States, long Xero's hardest market, is now much larger. Pro-forma US revenue was NZ$365 million, and the region had about 455,000 subscribers.

Why Melio matters

Melio is a US bill-pay and payments platform for small businesses. In the half it generated payments revenue of NZ$283 million, about 16 per cent of group revenue, according to the investor presentation.

The deal moved Xero beyond subscription accounting into transaction-based payments revenue. It also brought a lower gross margin. Group gross margin fell to 76.0 per cent from 79.1 per cent a year earlier, a decline consistent with the larger share of payments revenue.

Management has kept its target for Melio to reach adjusted EBITDA breakeven on a run-rate basis in the second half of FY28. Until then, Melio dilutes group profitability. This helps explain why adjusted EBITDA grew far more slowly on a reported basis than revenue did.

The upgraded outlook

In May 2026, with its FY26 result, Xero guided to FY27 operating revenue of NZ$3,620 million to NZ$3,730 million. It has now raised that range to NZ$3,770 million to NZ$3,830 million. The adjusted EBITDA range has narrowed to NZ$880 million to NZ$920 million, from NZ$860 million to NZ$920 million.

Xero now expects to reach a pro-forma "Rule of 40" outcome of about 40 per cent in FY27, a year earlier than it previously planned. The Rule of 40 is a common software benchmark that adds revenue growth to a profitability margin.

The company also raised its FY28 aspiration to revenue above NZ$4.6 billion, excluding revenue synergies. Its earlier aspiration was above NZ$4.2 billion. These are company targets, not reported results, and depend on execution and market conditions.

Capital management and the buy-back

It will be funded from existing cash and expected free cash flow, and includes an amount to offset expected share-based compensation dilution in FY28.

It follows an earlier A$550 million programme.

At 30 September 2026, Xero reported cash of about NZ$1.15 billion and net Debt of about NZ$844 million, according to its presentation. A US-dollar revolving Credit Facility drawn earlier had been repaid.

Sector conditions and competition

Global software stocks have been re-rated during 2026, partly on investor concern that generative AI could disrupt established software models.

Xero is trying to make AI part of its offering. It reported nearly 400,000 organisations using its generative AI features each month, and it has expanded its JAX assistant. Whether these tools help retain customers and lift ARPC over time remains to be seen.

Competition is significant. In the US, Intuit's QuickBooks is the dominant incumbent. In Australia and the UK, Xero competes with MYOB, Sage, Intuit and newer Fintech and payments providers. Melio also competes with other bill-pay and embedded-payments platforms.

Risks and what to watch

Several uncertainties remain. Melio's path to breakeven depends on payment volumes, take rates and cost control in a competitive US market. Lower gross margins from payments could weigh on group profitability if growth slows.

Shareholder sentiment on governance is another factor. At the August 2026 annual meeting, about 70.6 per cent of votes were cast against the advisory remuneration report.

Currency movements also affect reported figures, given Xero's NZ dollar reporting and its large Australian, UK and US operations.

Upcoming items to monitor include:

- progress of the buy-back - second-half delivery against the upgraded guidance, given the expected higher weighting of US Brand spending - the FY27 full-year result, scheduled for 20 May 2027