Key Highlights

• Xero (ASX:XRO) reported results for the year to 31 March 2026 on 14 May 2026.

• Operating Revenue was NZ$2.75 billion, up 31 per cent, with organic growth of 21 per cent once the effect of acquisitions is stripped out.

• Adjusted EBITDA was NZ$757 million, up 18 per cent on a reported basis and 30 per cent organically.

• Melio lifts revenue, but it also carries lower margins, which is why reported gross Margin was 83.9 per cent against roughly 89 per cent on an organic basis.

How is Xero (ASX:XRO) turning a larger customer base and its Melio Acquisition into more encouraging cash generation? Based on its latest full-year results, the answer is a combination of rising revenue per customer, steady subscriber additions and a deliberate push into United States payments, although the company is also spending heavily to make that expansion pay off.

Xero (ASX:XRO) reported results for the year to 31 March 2026 on 14 May 2026. All figures below are in New Zealand dollars, the currency in which the company reports.

Why the latest result matters

The headline numbers show a Business that has changed shape within a year. Operating revenue was NZ$2.75 billion, up 31 per cent, with organic growth of 21 per cent once the effect of acquisitions is stripped out. Adjusted EBITDA was NZ$757 million, up 18 per cent on a reported basis and 30 per cent organically. Free Cash Flow reached NZ$554 million.

The gap between reported and organic figures is the story. Xero completed its purchase of Melio, a United States bill-payment platform for small businesses, during the period. Melio lifts revenue, but it also carries lower margins, which is why reported gross margin was 83.9 per cent against roughly 89 per cent on an organic basis. Investors reading the result need to separate the underlying software business from the newly acquired payments operation.

What Xero does and where the revenue comes from

Xero sells cloud accounting software to small and medium-sized businesses and their accountants and bookkeepers. Most revenue is subscription based, so the key drivers are the number of subscribers and the average revenue per customer.

At 31 March 2026 Xero had 4.92 million subscribers, after adding 506,000 net new customers in the year. Average revenue per customer rose 23 per cent to NZ$55.44. Melio contributed NZ$4.24 of that figure, so a meaningful part of the uplift reflects the acquisition rather than price rises on the core product alone.

The earlier half-year report, covering the six months to 30 September 2025, gives useful context. Operating revenue was about NZ$1.2 billion, up 20 per cent, net profit after tax was NZ$135 million, and free cash flow was NZ$321 million. Subscribers stood at 4.6 million, and price increases helped lift average revenue per user. Australia and New Zealand remained the largest region by revenue, with international markets growing faster.

The Melio bet in the United States

Melio is central to the company's FY28 aspirations, which include significantly accelerating United States revenue growth. In the half-year report, Xero said Melio's underlying revenue grew 68 per cent to NZ$183 million, in line with expectations, and that its bill-pay offering would be rolled out to all Xero customers in the United States from December 2025.

The commercial logic is straightforward. Xero already holds a customer's accounting data, and adding the ability to pay suppliers inside the same system creates new revenue from payments activity. The risk is that the United States is a large, competitive market in which Xero has historically been a smaller player than local incumbents.

Management has been open about the cost of the push. Melio is targeted to reach run-rate EBITDA breakeven in the second half of FY28, which means it is expected to dilute profitability until then.

Outlook and guidance

For FY27, Xero has guided to operating revenue of NZ$3.62 billion to NZ$3.73 billion and adjusted EBITDA of NZ$860 million to NZ$920 million. The EBITDA range includes up to NZ$55 million of Investment in building the Xero Brand in the United States.

Put simply, guidance implies encouraging top-line growth, partly from a full year of Melio, with profit growing more slowly because of the Marketing outlay. Guidance is management's expectation rather than a certainty, and the company has said outcomes depend on execution and market conditions.

Sector conditions and competition

Small-business software is a competitive field. Xero competes with Intuit's QuickBooks in the United States, with MYOB in Australia and New Zealand, and with a range of local providers elsewhere. Accountants and bookkeepers act as an important distribution channel, and their preferences can shape adoption.

Pricing is another lever. The 15 per cent rise in average revenue per user reported at the half-year was helped by price increases, and further increases can support revenue but may test customer loyalty if competitors hold prices steady.

Risks and uncertainties

Several risks sit alongside the growth story. Integration of Melio is the most visible one: combining products, teams and customer bases across countries takes time and can distract management. Currency movements matter too, because Xero earns revenue in Australian, United States and British dollars and other currencies while reporting in New Zealand dollars.

Brand investment in the United States is also a bet that spending will translate into subscribers at an acceptable cost. If customer acquisition proves more expensive than planned, margins could come under pressure.

Finally, investors should note that the gross margin has shifted lower because of the Melio mix. That is not a flaw in itself, but it means historical margin comparisons need care.

What to watch next

The next scheduled event is the half-year result for the six months to 30 September 2026.

Points of interest will include subscriber additions, average revenue per customer, the contribution from Melio, progress against the FY27 guidance ranges and any update on the path to Melio breakeven. Free cash flow conversion will also be closely watched, given that cash generation is the measure on which Xero has been building its case.

A balanced view

Xero's latest results show a software company with a growing subscriber base, rising revenue per customer and encouraging cash generation. At the same time, the acquisition-led expansion in the United States adds execution risk and temporarily weighs on margins. The picture is one of a company investing for scale rather than harvesting profit, and the outcome will depend on how well that investment converts into durable recurring revenue.