Xero Limited Earnings Call Highlights Growth and Payments

Xero Limited ((AU:XRO)) has held its Q4 earnings call. Read on for the main highlights of the call.

Xero Limited’s latest earnings call struck an upbeat tone, with management highlighting powerful top-line growth, expanding payments volumes and rising profitability, even as the Melio acquisition temporarily dents Rule of 40 optics and gross margin percentages. Executives balanced confidence in AI-driven product momentum and U.S. expansion with candid acknowledgment of near-term integration costs and heavier brand investment.

Strong Top-Line Growth and Revenue Outlook

Operating revenue jumped 31% year-on-year to $2.75 billion in FY26, with 21% growth on an organic basis underscoring healthy underlying demand. Management guided FY27 revenue to a range of $3.62–$3.73 billion, outlining a credible path to more than doubling group revenue from FY25 levels by FY28 if execution stays on track.

Profitability, Cash Flow and Balance Sheet Strength

Adjusted EBITDA reached $757 million in FY26, representing a 27.5% margin and roughly 30% organic EBITDA growth as efficiency gains flowed through. Free cash flow came in at $554 million while net debt was kept just under $400 million, leaving leverage at about 0.5 times adjusted EBITDA and giving Xero ample flexibility for investment.

Customer Growth and Rising ARPC

Xero closed FY26 with 4.90 million customers after adding 506,000 net new accounts, reflecting 11% headline growth and 10% organic expansion despite tougher macro conditions. Average revenue per customer climbed to $55.44, up 23% year-on-year, as Melio added $4.24 at the group level and delivered around a $50 uplift per customer in the U.S. market.

Payments Scale and Transaction Revenue Mix

Total payment volume surged to $62 billion, split between $28 billion from Xero invoicing and $34 billion from Xero BillPay and Melio, highlighting growing penetration in financial workflows. Payments and invoicing revenue reached $535 million, rising 53% on a pro forma basis and taking transactional revenue to 18% of group revenue, up from just 7% in FY23.

International Expansion and U.S. Momentum

International revenue advanced 47% to $1.36 billion, with the U.K. delivering 26% revenue growth alongside a 14% customer increase as Xero deepened its footprint. In the U.S., organic revenue accelerated 30%, and on a pro forma basis including Melio, revenue hit NZD 530 million with gross profit of NZD 186 million, up 50% and 36% respectively, indicating strong traction.

Gross Profit Growth and Margin Dynamics

Gross profit dollars rose to $2.31 billion, up 23% year-on-year and 21% organically, generating an extra $436 million of gross profit to support future investment. While organic gross margin stayed around 89%, headline margin slipped 5.1 percentage points to 83.9% due to the faster-growing payments and media mix, a trade-off management framed as value-accretive.

AI Adoption and Product Innovation

Around 2.6 million customers used at least one AI feature in the past year, and usage of newer generative tools grew to 513,000 customers from 300,000 as adoption ramps. Auto bank reconciliation processed more than 40 million transaction lines at over 97% accuracy, while JAX chat usage per customer climbed 115% and internal AI tools were used by most employees and nearly all engineers.

Improving Unit Economics and LTV Metrics

Total lifetime value increased by $3 billion, or 17%, to nearly $21 billion excluding Melio, highlighting the compounding effect of higher ARPC and strong retention. Customer acquisition cost per gross add stood at $735 with a payback period of 14.4 months, and international LTV to CAC improved to 3.5 times, suggesting more efficient go-to-market execution abroad.

Capital Allocation and Dilution Management

The board approved a program to offset up to AUD 550 million of share-based compensation dilution, signaling attention to shareholder returns alongside growth spending. Management reiterated a disciplined capital allocation framework, prioritizing product innovation, a balanced approach to buy, partner or build decisions and targeted go-to-market outlays.

Rule of 40 Headwinds from Melio Integration

Xero reported a headline Rule of 40 of 48.5%, but on a pro forma basis including Melio’s full-year impact, the metric drops to about 36%, below the favored 40% threshold. Leaders stressed this dilution is temporary and tied to the payments acquisition, stating they anticipate recovering to above 40% by FY28 as scale, margins and synergies improve.

Melio Losses and Integration Costs

Melio delivered rapid revenue growth, with combined revenue up around 240% to $332 million, but generated higher second-half losses and share-based compensation effects that weigh on near-term earnings. Management framed Melio as a strategic asset in U.S. payments and expects it to reach run-rate adjusted EBITDA breakeven by the second half of FY28, though some earnings volatility is likely.

Headline Gross Margin Compression from Payments Mix

The shift toward payments-led and media-related revenue compressed headline gross margin by 5.1 percentage points, but this reflects mix rather than underlying pricing pressure. Executives emphasized that organic margins remain robust and argued that lower-percentage payments revenue still adds attractive gross profit dollars and supports stickier customer relationships.

Customer Support Challenges and Australian Outages

Intermittent outages in Australia, particularly affecting tax filers, drew apologies from management and resulted in credits for impacted users, highlighting the operational risks of scaling cloud platforms. While overall filings stayed above last year’s levels, Xero acknowledged customer frustration and the remediation costs, marking reliability as a clear focus area.

U.S. Brand Investment and Near-Term Margin Pressure

FY27 guidance includes up to AUD 55 million of incremental U.S. brand spend as part of a multi-year effort to build awareness in a key growth market, increasing costs upfront. This investment is expected to tilt earnings more heavily toward the second half of FY27 and temporarily pressure acquisition metrics, with the goal of improving long-term LTV to CAC economics.

Churn Trends and Customer Mix Effects

Monthly recurring revenue churn edged up to 1.14%, nearly back to pre-pandemic levels of 1.15%, driven by a greater share of higher-churn direct-channel customers. Core cohort churn remained steady at 0.81%, suggesting customer quality is intact even as acquisition mix changes slightly elevate headline churn metrics.

Guidance and Forward-Looking Outlook

For FY27, Xero guided operating revenue to $3.62–$3.73 billion and adjusted EBITDA to $860–$920 million, with growth expected from ARPC gains, customer additions and early AI monetization. Management highlighted strong payments momentum, seasonally stronger second-half earnings, and a roadmap to restoring the Rule of 40 above 40% and bringing Melio to breakeven by FY28 while maintaining healthy leverage.

Xero’s earnings call painted a picture of a business leaning into growth, payments scale and AI innovation while absorbing the inevitable growing pains of integration and brand investment. For investors, the story hinges on whether robust revenue expansion, strong cash generation and improving unit economics can more than offset temporary margin dilution on the path to FY28 targets.