Xero Limited (ASX:XRO) reported its full year results for the year ended 31 March 2026 on 14 May 2026, with all figures in New Zealand dollars. Operating Revenue rose 31% to $2,753.1 million (28% in constant currency), lifted by the Acquisition of US bill payment platform Melio. Customers grew 11% to 4.92 million, with 506,000 net additions compared with 254,000 a year earlier, and average revenue per customer increased 23% to $55.44.

Adjusted EBITDA rose 18% to $757.4 million and EBITDA rose 24% to $789.5 million. Annualised monthly Recurring Revenue increased 37% to $3.3 billion, or 25% on an organic basis. Free Cash Flow grew 9% to $554.0 million.

Not every measure moved higher. Operating Income fell 13% to $316.1 million, net profit after tax declined 27% to $167.4 million from $227.8 million, and gross Margin eased 5.1 percentage points to 83.9%. Xero is a global small Business platform that combines accounting, Payroll and payments for small businesses and their accountants and bookkeepers.

Comparisons with FY25 need context. Net customer additions rose 99% on a reported basis, but excluding the removal of long idle subscriptions in the first half of FY25, additions of 506,000 compared with 414,000, an increase of 22%. Annualised monthly recurring revenue growth of 37% compares with 25% on an organic basis and 20% in constant currency.

Recent Development

In its 14 May 2026 market release, Xero explained that operating income was affected by Melio-related costs, including $50.6 million of transaction costs, and that a $90.5 million foreign exchange translation gain on acquisition funds sat in other income. Excluding acquisition-related costs, the Operating Expense to revenue ratio was 70.5%, in line with guidance, and operating income was broadly flat.

Regionally, Australia and New Zealand revenue rose 18% to $1.4 billion with 2.8 million customers and average revenue per customer of $48.89. International revenue rose 47% to $1.4 billion, or 25% organically, with 2.2 million customers. US core revenue increased 240% (30% organically excluding Melio), and the UK grew 26% with customers up 14%. Xero added 110,000 US customers, and pro-forma US revenue growth was 50%.

On product, Xero signed an agreement with Anthropic to integrate Claude into its platform, adding a connector to Claude.ai released to customers in May 2026, alongside its existing OpenAI partnership. Its Just Ask Xero assistant has reconciled more than 40 million bank transactions at a reported accuracy of 97%, and adoption of new generative AI features reached 500,000 users. Xero also announced XeroForce, a natural language agent builder that is currently in invite-only alpha, and Ultra, a top-tier plan in Beta in Australia with general availability planned for late June.

On Capital management, the Board authorised the purchase of shares equal to up to A$550 million in FY27 to offset dilution from share-based compensation, using an intragroup structure that follows New Zealand financial assistance processes. Average monthly churn was 1.14%, and the total lifetime value of customers rose 17% to $21.0 billion.

Chief Executive Sukhinder Singh Cassidy said the Melio integration unites accounting and payments on one platform and that the company delivered EBITDA growth while absorbing the acquisition. International average revenue per customer rose 28% to $63.74, and Australia and New Zealand ARPC rose 17% to $48.89, or 9% in constant currency. Xero's Earnings webcast was held at 10:30am AEST on 14 May 2026.

The release also noted that free cash flow of $554.0 million compares with $506.7 million a year earlier, and that total lifetime value grew 11% in constant currency, compared with 17% at reported rates.

Sector Context

Xero sits in small business financial software, a segment where customers increasingly expect accounting, payments and automation on one platform. The release positions the Melio integration as a step beyond single-job workflows in the US by joining accounting and payments, and cites Xero's strategy of focusing on three jobs to be done in its three largest markets: Australia, the UK and the US.

AI is a central theme. Xero described its proprietary data, compliance capability and 20 years of infrastructure as foundations, and outlined three commercial principles for AI: bundling features into existing plans, offering standalone add-ons and adding usage-based pricing over time. In the UK, revenue included some early flow from Making Tax Digital for Income Tax, showing how regulation can influence software demand.

Risks and Uncertainties

The figures point to several pressure points. Operating income, net profit and gross margin all declined, and the Rule of 40 outcome was 48.5% reported but 36.0% on a pro-forma basis that includes Melio for a full period. Xero said it expects below Rule of 40 results on a pro-forma basis before FY28.

FY27 adjusted EBITDA guidance includes incremental US Brand spend of up to about NZ$55 million, and earnings are expected to be weighted to the second half. The FY28 aspiration to more than double FY25 revenue of NZ$2,103 million excludes anticipated revenue synergies of about US$70 million and is subject to the qualifications set out in the release. Pro-forma figures are unaudited, and the share purchase structure relies on New Zealand legal processes.

Currency also matters for interpretation. Reported revenue growth of 31% compares with 28% in constant currency, and reported lifetime value growth of 17% compares with 11% in constant currency, so Exchange Rate movements contributed to headline growth.

What to Watch Ahead

Xero guided FY27 operating revenue to a range of $3,620 million to $3,730 million and adjusted EBITDA to a range of $860 million to $920 million. Product Capitalisation is expected to remain in its long-term range of 40% to 45%, and Depreciation and Amortisation is estimated at about $465 million.

Investors can follow the general availability of Ultra, progress on XeroForce, US customer growth as Melio features roll out, delivery of the A$550 million share purchase authority, and progress toward the FY28 aspirations of more than doubling FY25 revenue and delivering better than a Rule of 40 outcome.

The Bottom Line

Xero's FY26 update paired higher revenue, EBITDA, customers and cash flow with lower operating income, profit after tax and gross margin, mainly linked to the Melio acquisition. FY27 guidance and the US integration are the next reference points.