Key Highlights

  • Operating revenue rose 31% to about NZ$2.8 billion, or 28 per cent in constant currency.
  • Adjusted EBITDA rose 18% to NZ$757.4 million, and free Cash Flow was NZ$554 million, up 9 per cent.
  • Subscriber growth of 11 per cent alongside revenue per customer growth of 23 per cent.
  • More than 500,000 customers used its generative AI features.

Xero Limited (ASX:XRO) reported FY26 results and set out guidance that balances US growth against the cost of expansion. How is Xero balancing growth in the United States against the cost of getting there, and what does its latest guidance imply? In its FY26 result, for the year ended 31 March 2026 and released on 14 May 2026, the cloud accounting company reported encouraging revenue growth driven by the Melio acquisition, but net profit fell. For FY27 it has guided to higher revenue and EBITDA while spending more on the US brand. Understanding that trade-off is the key to understanding the company today.

The central development: Melio and the US

Xero's long-standing strategy has been to build a subscription base among small businesses and their accountants, then add paid services around it. Melio, a US Business payments platform acquired in 2025, accelerates that approach by adding payments capability in the world's largest small business market, where Xero has historically been a smaller player.

The FY26 numbers show the effect. Operating Revenue rose 31% to about NZ$2.8 billion, which was 28% in constant currency. Excluding Melio, organic growth was 21%. US revenue was up 240% on the reported basis, though that figure is dominated by the acquisition; on a pro-forma basis, as if Melio had been owned in both periods, US growth was 30%. Global payments revenue rose 53%. The pro-forma figure is the more useful guide to underlying US momentum.

Operating performance

Xero reports in New Zealand dollars. Beyond revenue, FY26 delivered adjusted EBITDA of NZ$757.4 million, up 18%, and free cash flow of NZ$554 million, up 9%. Net profit after tax was NZ$227.8 million, down 27%, with the company pointing to Melio-related Acquisition costs. Subscribers reached 4.92 million, up 11%, with 506,000 net additions, and average revenue per customer rose 23% to NZ$55.44.

That last figure matters. Subscriber growth of 11% alongside revenue per customer growth of 23% indicates pricing, product mix and payments are all contributing, although part of the ARPU increase is likely to reflect Melio revenue and currency effects.

Management also highlighted artificial intelligence: more than 500,000 customers used its generative AI features and 2.6 million used some AI feature during the year. These are usage figures, not revenue, and the company did not tie them to a specific financial contribution in the material we reviewed.

FY27 guidance

Guidance is management's expectation, not a result. For FY27 Xero expects operating revenue of NZ$3.62 billion to NZ$3.73 billion and adjusted EBITDA of NZ$860 million to NZ$920 million. That range includes up to NZ$55 million of additional US Brand spending. At the midpoints, revenue would be about 30% above FY26 and EBITDA about 17% higher, so the guidance implies some Margin dilution as Melio is consolidated for a full year and brand Investment ramps up.

Reading the margin

Adjusted EBITDA of NZ$757.4 million on revenue of about NZ$2.8 billion implies a margin of roughly 27%, while the FY27 midpoints imply about 24%. The point for readers is that Xero is deliberately choosing growth and brand building over margin expansion in the near term, while free cash flow of NZ$554 million shows the underlying business remains cash generative.

Sector position and competition

Xero competes with Intuit's QuickBooks in the US and North America, MYOB in Australia and New Zealand, Sage in the UK, and a range of local providers. In its home markets it is well established. In the US it is a challenger, which is the reason for the brand spending and the Melio purchase: payments and bill-pay features give small businesses another reason to put their finances on the platform and give Xero a transaction-based income stream on top of subscriptions.

The sector is also being reshaped by AI. Software that automates bookkeeping tasks could improve product value and efficiency, but it also raises questions about whether subscription pricing per seat or per business will hold. Investors have been sceptical of expensive software stocks more broadly this year.

Risks

The main risks are integration and execution of Melio in a competitive US market, where QuickBooks is entrenched. Marketing spend could rise further without matching subscriber gains. Currency movements affect reported results, given Xero's revenue in several currencies and reporting in New Zealand dollars. Reported profit has already shown the cost of the acquisition, and Amortisation and integration expenses may continue to weigh on statutory Earnings even if EBITDA grows. Pricing power is another consideration; Xero has lifted prices in the past, and ARPU growth could slow if customers push back. Finally, AI could either help or disrupt the model.

What to watch

The next scheduled financial milestone is the half-year result for the six months to 30 September 2026. Xero has historically reported in mid-November, but we have not confirmed the date for 2026. Investors will look for pro-forma US growth, net subscriber additions, ARPU, free cash flow conversion and whether the company remains on track for its FY27 ranges. Progress on Melio cross-selling and the effect of brand investment on US subscriber growth will be central. The pace of buyback activity may also indicate how management weighs Capital returns against acquisitions.

In summary, Xero's FY26 combined encouraging underlying growth with a lower reported profit, and its guidance shows a business choosing to invest for scale. Whether that choice pays off will depend on US execution over the coming years.