Xero Limited (ASX:XRO) is a global cloud-based accounting and financial management platform serving small businesses and their advisers. FY26 marked a significant change in the company's Earnings mix as the integration of Melio expanded Xero's exposure to Business payments in the United States. Revenue increased substantially and customer numbers continued to rise, but reported profit moved lower as acquisition-related costs, financing expenses and other items offset part of the operating growth.

FY26 revenue reaches NZ$2.75 billion

Xero reported Operating Revenue of approximately NZ$2.75 billion for the year ended 31 March 2026, representing growth of 31%.

The result incorporated a contribution from Melio following its Acquisition and reflected continued growth across Xero's established accounting platform.

Organic revenue growth remained materially lower than the reported group growth rate because the Melio contribution was included for only part of the comparative period.

Adjusted EBITDA increased to approximately NZ$757 million.

Free Cash Flow also increased to around NZ$554 million.

The combination of higher revenue, EBITDA and cash generation showed continued operating expansion even though statutory profit followed a different direction.

Reported profit moves lower

Net profit after tax declined to approximately NZ$167 million in FY26.

The difference between revenue growth and reported profit reflects the effect of costs that sit below operating earnings measures such as adjusted EBITDA.

The Melio acquisition changed Xero's financing, Amortisation and integration cost profile during the year.

Acquired intangible assets also introduce accounting charges that do not appear in adjusted EBITDA.

This means Xero's FY26 result needs to be assessed across several measures rather than through revenue growth alone.

Revenue showed the scale of expansion, adjusted EBITDA reflected operating profitability before selected items, while free cash flow provided another measure of how the enlarged group converted earnings into cash.

Subscribers approach five million

Xero ended FY26 with approximately 4.92 million subscribers.

The company added more than half a million subscribers during the year.

Customer growth remains an important part of Xero's Economics because the accounting platform is primarily subscription based.

New subscribers increase recurring revenue, while additional products and pricing changes can raise the amount generated from existing customers.

Average revenue per user increased materially during FY26.

However, the inclusion of Melio means comparisons with earlier periods need to account for the changing mix between accounting subscriptions and payments-related revenue.

The combination of subscriber growth and higher revenue per customer supported the increase in annualised recurring revenue.

Melio changes Xero's growth profile

Melio was the largest structural change to Xero's business during FY26.

The US-based platform allows small businesses to manage Accounts Payable and make business payments through digital channels.

Its addition extends Xero beyond accounting software into a broader combination of accounting and payments.

Melio contributed approximately NZ$332 million of revenue during FY26.

The reported increase in Melio revenue was particularly large because the acquisition timing affected the comparison with the previous period.

For this reason, Xero has also highlighted organic and pro forma growth measures when discussing the enlarged business.

These measures help separate underlying customer and product growth from the accounting effect of adding Melio to the group.

United States becomes more important

The acquisition strengthens Xero's strategic position in the United States.

Xero has historically held a larger market presence in Australia, New Zealand and the United Kingdom than in the US.

Melio provides a larger payments footprint and another way for Xero to reach American small businesses.

The company added approximately 110,000 US subscribers during FY26, while organic US revenue growth remained substantial.

The strategic objective is to combine accounting, invoicing and payment capabilities within a more integrated financial-management platform.

Successful execution could increase the number of services used by each customer.

However, the US expansion also requires Investment in product development, distribution and customer acquisition.

Payments lower the group gross margin

The addition of Melio also changes Xero's Margin profile.

Traditional cloud accounting software typically generates high gross margins because the incremental cost of serving another software subscriber is relatively low.

Payments businesses carry a different cost structure.

Transaction-processing fees and payment-network costs mean a greater share of payment revenue is absorbed before reaching gross profit.

As a result, Xero's group gross margin declined during FY26 as payments became a larger proportion of revenue.

This does not necessarily indicate weaker economics across the accounting platform.

Instead, it reflects a change in business mix.

Future margin performance will therefore depend partly on how quickly payments scale and whether Xero can generate additional revenue from customers using both accounting and payment services.

Payment volumes expand

Payment activity increased materially following the Melio acquisition.

Xero's broader payments and invoicing operations processed a substantial Volume of transactions during FY26.

Higher payment volume expands Xero's addressable revenue opportunity because transaction-based income grows as customers move more payments through the platform.

The company has also introduced integrated bill-payment capabilities in the US, allowing customers to manage and pay bills directly within Xero's ecosystem.

The strategic objective is to reduce the need for small businesses to move between separate accounting and payment systems.

A more integrated platform can improve customer retention and create additional revenue opportunities, although it also exposes Xero to operational and regulatory requirements associated with payments.

Australia and New Zealand remain core markets

Australia and New Zealand remained important contributors to Xero's FY26 revenue.

The company continued increasing revenue across these established markets through subscriber growth, product adoption and pricing.

These regions provide a large installed customer base and remain central to the group's recurring subscription revenue.

Xero has also expanded its product range for larger and more complex businesses.

During 2026, the company introduced Xero Ultra in Australia, extending its offering toward medium-sized businesses requiring more sophisticated reporting and financial controls.

The initiative broadens Xero's addressable market beyond its traditional focus on smaller businesses.

UK business continues expanding

The United Kingdom also delivered higher revenue during FY26.

Xero has built a significant accounting-software presence in the market and continues to expand its relationships with accountants and bookkeepers.

The adviser channel remains important because accounting professionals can influence software adoption across large portfolios of small-business clients.

This gives Xero a distribution model that differs from selling directly to individual businesses alone.

The combination of accountants, bookkeepers and direct users supports customer acquisition while also increasing the importance of maintaining product reliability and compatibility with regulatory requirements.

AI becomes part of the product strategy

Artificial intelligence became a more visible part of Xero's product roadmap during 2026.

The company introduced additional AI tools designed to help customers retrieve financial information, automate workflows and analyse business data through natural-language interactions.

Xero also integrated Claude into its platform during 2026, allowing eligible users to work with financial information through conversational interfaces.

The company has continued developing its own AI capabilities alongside external integrations.

For Xero, the opportunity is to use AI to reduce manual accounting work while making the broader platform more useful to small businesses and advisers.

The financial impact will depend on adoption, pricing and whether new capabilities improve retention or generate additional revenue.

FY27 revenue guidance points to further growth

Xero expects FY27 operating revenue of approximately NZ$3.62 billion to NZ$3.73 billion.

The guidance reflects a full-year contribution from Melio alongside continued growth across Xero's established business.

Adjusted EBITDA is expected to be approximately NZ$860 million to NZ$920 million.

The guidance therefore points to further growth in both revenue and operating earnings.

However, the relationship between the two measures will remain influenced by the greater contribution from lower-gross-margin payments revenue.

Integration spending and the financing structure associated with Melio will also continue influencing measures below adjusted EBITDA.

Capital allocation remains important

The Melio acquisition represents a substantial allocation of Capital and changes how Xero needs to balance growth investment with cash generation.

The company continues investing in product development, artificial intelligence, international expansion and integration.

Cash generated by the business must therefore support several priorities simultaneously.

Xero has also announced a significant share-buyback program.

The effect of that program needs to be considered alongside acquisition funding and continued investment in the enlarged platform.

Capital allocation will remain particularly important while management works to demonstrate that the Melio transaction can increase long-term revenue and earnings sufficiently to justify its acquisition cost.

What could shape FY27 performance?

The integration of Melio will be one of the most important operating factors during FY27.

Xero needs to continue growing payment volumes while maintaining subscriber momentum across the accounting platform.

US customer growth will be particularly relevant because expanding in that market is a central reason for the Melio transaction.

Gross margin will also provide information about how the changing revenue mix is affecting profitability.

Subscriber numbers, average revenue per user and free cash flow will show whether higher revenue is translating into broader economic gains.

Artificial intelligence introduces another variable as Xero adds automation and conversational tools to the platform.

FY26 ultimately marked a transition from a predominantly accounting-software company toward a broader accounting and payments platform. FY27 will show how quickly Melio can contribute to sustainable group earnings as its revenue becomes part of Xero for a full financial year.