Highlights

  • Xero increased FY26 operating revenue by 31% to NZ$2.75 billion and generated NZ$554 million in free cash flow, although statutory net profit declined due to acquisition-related impacts.
  • The Melio acquisition accelerated US growth and increased average revenue per customer, but initially reduced group margins and contributed to higher integration costs.
  • Xero is focusing on artificial intelligence, payments and international expansion as it targets its next phase of growth across Australia, New Zealand, the United Kingdom and the United States.

Xero Limited (ASX: XRO) completed FY26 with strong revenue momentum, expanding customer numbers and growing cash generation, while investors continued to assess the impact of its Melio acquisition and broader transformation strategy. The company’s latest financial year highlights a transition period as Xero moves from a pure cloud accounting platform toward a broader small-business financial services ecosystem.

Revenue growth remains strong as Xero expands its platform

Xero reported FY26 operating revenue of NZ$2.75 billion, representing growth of 31% compared with the previous year.

On a constant-currency basis, revenue increased 28%.

Excluding the contribution from Melio, organic revenue growth remained strong at 21% on a reported basis and 19% on a constant-currency basis.

The company continued to expand its subscription base, with total customers increasing 11% to approximately 4.92 million.

Annualised monthly recurring revenue (AMRR), which provides an indication of future subscription revenue potential, increased 37% to approximately NZ$3.27 billion.

Average revenue per customer increased 23% to approximately NZ$55.44, supported by higher-value products, payments adoption and the contribution from Melio.

The combination of customer growth and increased revenue per subscriber remains central to Xero’s long-term growth strategy.

Melio reshapes the growth profile

The acquisition of Melio represents one of the most significant strategic changes in Xero’s recent history.

Melio provides payment automation capabilities, particularly in the United States market, where Xero has been seeking to strengthen its position.

The acquisition helped accelerate US expansion and contributed to higher customer adoption of payment-related services.

However, the integration also affected short-term profitability.

Melio generated approximately NZ$205 million in operating revenue during FY26 but recorded a net loss of approximately NZ$111.7 million.

Management has positioned the acquisition as a long-term investment designed to increase Xero’s exposure to payments and strengthen its position in the US market.

The company expects Melio to reach adjusted EBITDA breakeven on a run-rate basis during the second half of FY28.

Profitability impacted by acquisition costs

While revenue growth remained strong, statutory earnings declined.

Xero reported statutory net profit after tax of approximately NZ$167.4 million, down from NZ$227.8 million in the prior year.

The decline was largely influenced by Melio-related impacts and investment activity.

However, excluding Melio, Xero reported underlying profit growth of approximately 23%.

Adjusted EBITDA increased 18% to NZ$757.4 million.

The adjusted EBITDA margin declined to approximately 27.5%, compared with around 30.5% previously.

The reduction was primarily linked to consolidating Melio’s lower-margin payments business into the group.

Management has argued that the acquisition adds strategic value by increasing total gross profit dollars and expanding Xero’s position in the US payments ecosystem.

Gross margin debate remains central

One of the key investor discussions around Xero is the impact of payments on margins.

Group gross margin declined by 5.1 percentage points to approximately 83.9%.

Management attributed the decline mainly to Melio’s payments-focused business model.

The company noted that organic gross margins remained stronger at approximately 89%.

This creates a strategic trade-off.

Payments services can increase customer engagement, improve retention and expand Xero’s addressable market.

However, payment businesses typically operate with lower margins compared with pure software subscription models.

The long-term question is whether additional payment revenue and customer value creation outweigh the initial margin dilution.

Cash generation remains a strength

Despite the pressure on statutory profit, Xero continued to generate strong cash flows.

Free cash flow reached approximately NZ$554 million, up 9% year over year.

This represented a free cash flow margin of approximately 20%.

The company’s cash generation provides flexibility to invest in technology, expand internationally and manage acquisition-related costs.

As of 31 March 2026, Xero held approximately NZ$1.93 billion in cash and short-term deposits.

Net debt stood at approximately NZ$383 million, representing moderate leverage relative to earnings capacity.

The company also authorised a share buyback program of up to A$550 million during FY27, primarily intended to offset dilution from employee share-based compensation.

Global expansion strategy continues

Xero’s long-term strategy is built around its “3x3” framework:

  • Accounting
  • Payments
  • Payroll

Across three priority regions:

  • Australia and New Zealand
  • United Kingdom
  • United States

The strategy aims to increase customer engagement by expanding beyond accounting software into broader financial workflows.

Australia and New Zealand remain the foundation

Australia and New Zealand continue to represent Xero’s largest revenue base.

The region generated approximately NZ$1.39 billion in revenue during FY26, increasing 18%.

Australia contributed approximately NZ$1.15 billion, while New Zealand generated approximately NZ$244 million.

These markets are more mature, meaning future growth is expected to come increasingly from product expansion, pricing, payments adoption and customer retention rather than rapid subscriber growth.

United States becomes the key growth market

The United States represents the largest strategic opportunity for Xero.

US revenue increased significantly during FY26, reaching approximately NZ$332 million.

The company added around 110,000 US customers during the year.

Management highlighted improving organic growth momentum in the region, with US growth accelerating over recent years.

The Melio acquisition is central to this strategy because it expands Xero’s payment capabilities and increases its relevance among small businesses requiring integrated accounting and payment solutions.

However, the US market remains highly competitive, with strong domestic accounting software providers and established financial technology platforms.

Artificial intelligence becomes a major strategic focus

Xero has positioned artificial intelligence as a major opportunity for improving customer productivity.

During FY26, approximately 2.6 million customers used at least one AI feature.

Around 513,000 customers used newer generative AI tools.

The company reported strong adoption of its AI assistant, JAX (Just Ask Xero), with customer interactions increasing significantly during the year.

Xero also highlighted its automated bank reconciliation technology, which processed more than 40 million transaction lines with accuracy above 97%.

These applications demonstrate practical use cases where AI can reduce manual accounting work.

AI opportunity also creates disruption risks

While AI provides growth opportunities, it also introduces strategic uncertainty.

Xero believes its proprietary financial data, customer relationships and trusted position create advantages in developing AI-powered accounting solutions.

The company has expanded AI capabilities through partnerships and new products, including integration with advanced AI models and tools designed to allow accountants to create customised workflows.

However, AI could also increase competition by allowing new platforms to automate accounting processes traditionally managed through software subscriptions.

Xero itself identifies technological disruption, including artificial intelligence, as a material business risk.

The long-term outcome will depend on whether AI strengthens customer dependence on Xero or reduces barriers for competitors.

FY27 outlook focuses on continued investment

For FY27, Xero guided toward:

  • Operating revenue of approximately NZ$3.62 billion to NZ$3.73 billion
  • Adjusted EBITDA of approximately NZ$860 million to NZ$920 million

The company expects continued investment in:

  • US market expansion
  • Product development
  • Artificial intelligence capabilities
  • Payments infrastructure

Management also expects additional US brand investment and continued integration work related to Melio.

The company’s longer-term objective is to more than double FY25 group revenue by FY28, excluding revenue synergies.

Governance and investor sentiment remain areas to monitor

Although Xero’s operational performance has remained strong, investor sentiment has been affected by several issues.

The market continues to debate:

  • The impact of Melio on margins
  • The pace of US growth
  • AI disruption risks
  • Executive remuneration concerns

Shareholder dissatisfaction was reflected in a significant protest vote against the remuneration report at the 2025 annual meeting.

The company has also faced scrutiny around executive share transactions.

These issues have not changed Xero’s strategic direction but remain important factors influencing market confidence.

Valuation now reflects higher expectations and execution risk

Xero remains one of Australia’s leading technology companies, but its valuation is increasingly dependent on successful execution.

The investment case now relies on several key assumptions:

  • Melio successfully reaches profitability
  • US growth continues accelerating
  • AI improves customer engagement
  • Payments expansion creates additional value
  • Margins recover over time

The company has a strong subscription base and significant cash generation, but investors are closely monitoring whether the next phase of growth delivers sufficient returns on recent investments.

What investors should watch next

The next important milestones for Xero include:

  • Progress toward Melio profitability
  • US customer and revenue growth
  • AI product adoption
  • Margin recovery
  • FY27 revenue and EBITDA delivery

The first half FY27 result will provide an early indication of whether the company’s investments are translating into stronger operating leverage.

Xero’s FY26 performance showed a business still growing rapidly, but also one entering a more complex phase where strategic execution matters as much as revenue expansion.