Xero Limited Signals Strong Growth in Earnings Call

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

Xero’s latest earnings call struck an upbeat tone as management highlighted rapid growth in revenue, customers, and payments volumes alongside strong cash generation and rising AI adoption. Executives also acknowledged near-term headwinds from the Melio acquisition, lower headline gross margins, and stepped-up U.S. brand spending, but framed these as deliberate investments to sustain long-term scale and profitability.

Strong Top-Line Growth

Operating revenue surged 31% year-on-year to $2.75 billion in FY’26, with 21% organic growth underscoring healthy underlying demand despite currency and acquisition noise. Management guided FY’27 revenue to a range of $3.62 billion to $3.73 billion, and reiterated a pathway to more than doubling group revenue from FY’25 levels by FY’28.

Robust Profitability and Cash Generation

Adjusted EBITDA climbed to $757 million in FY’26, translating into a 27.5% margin and roughly 30% organic EBITDA growth as scaling helped absorb investment. Free cash flow of $554 million and net debt just under $400 million left leverage at about 0.5 times adjusted EBITDA, giving the company ample balance sheet flexibility for product, growth, and capital returns.

Customer and ARPC Expansion

Total customers rose to 4.90 million, with 506,000 net additions representing 11% headline and 10% organic growth as Xero continued to win share among small businesses and advisors. Average revenue per customer increased 23% to $55.44, helped by Melio, which added $4.24 to group ARPC and delivered an estimated $50 uplift per U.S. customer through payments adoption.

Payments Scale and Transaction Revenue

Total payment volume hit $62 billion, split between $28 billion from Xero invoicing and $34 billion from Xero BillPay and Melio, highlighting growing penetration of embedded payments. Payments and invoicing revenue reached $535 million, up 53% on a pro forma basis, lifting transactional revenue to 18% of group sales versus just 7% in FY’23 as the business shifts toward higher-volume, payments-driven monetization.

International and U.S. Acceleration

International markets delivered 47% revenue growth to $1.36 billion, with the U.K. recording 26% revenue growth and 14% customer growth as cloud penetration deepened. In the U.S., organic revenue growth accelerated to 30%, while pro forma revenue, including Melio, reached NZD 530 million, up 50%, and pro forma gross profit climbed 36% to NZD 186 million, underscoring the region’s strategic importance.

Strong Gross Profit Dollars, Stable Organic Margins

Gross profit grew 23% to $2.31 billion, adding $436 million in incremental gross profit dollars and demonstrating the scalability of Xero’s subscription-led model. While the reported gross margin declined due to payments and media mix, management stressed that organic gross margin held around 89%, indicating that core software economics remain intact even as transaction volumes expand.

AI Adoption and Product Momentum

Roughly 2.6 million customers used at least one AI feature over the past year and 513,000 tapped newer generative AI tools, up from 300,000, suggesting fast user uptake. Auto bank reconciliation processed more than 40 million transaction lines at over 97% accuracy, while chat tool usage surged and internal AI adoption reached the vast majority of employees and engineers, supporting productivity and product innovation.

Improved Unit Economics and LTV

Total lifetime value increased by $3 billion, or 17%, to nearly $21 billion, excluding Melio, reflecting richer cohorts and rising monetization. Customer acquisition cost per gross add was $735 with a 14.4‑month payback, and international LTV to CAC improved to 3.5 times, pointing to stronger acquisition efficiency as scale and brand recognition grow.

Capital Allocation and Dilution Management

The board authorized a program to offset up to AUD 550 million of share-based compensation dilution, which management expects to execute in a capital-efficient manner while maintaining balance sheet strength. The team reiterated its framework of disciplined spending across product innovation, build-or-buy decisions, and go-to-market initiatives, signaling a continued focus on returns and shareholder value.

Rule of 40 Impacted by Melio

On a headline basis, Xero reported a Rule of 40 of 48.5%, but when Melio’s full-year impact is included pro forma, the metric drops to around 36%, reflecting the acquired unit’s current losses. Management emphasized that they expect to rebuild back above the 40% threshold by FY’28 as Melio scales, losses narrow, and the combined business better balances growth and profitability.

Melio Losses and Integration Drag

Melio delivered strong revenue expansion, with combined revenue rising about 240% to $332 million, but also logged heavier second-half losses and sizable stock-based compensation charges. Xero expects Melio to reach run-rate adjusted EBITDA breakeven by the second half of FY’28, implying a near-term drag on group margins and some volatility as integration and growth investments play through.

Headline Gross Margin Compression

The group’s reported gross margin fell by 5.1 percentage points to 83.9%, primarily due to the growing share of payments-led and media revenue that carry structurally lower percentage margins. Management stressed that this is a mix effect rather than deterioration in underlying economics, as high-margin software still anchors the model and payments drive incremental profit dollars despite lower percentage margins.

Customer Support Challenges in Australia

Management addressed intermittent outages in Australia that affected some customers, including those filing with the local tax authority, and acknowledged the frustration created. The company offered credits and other remediation, noting that overall filing levels remain above last year’s, but also signaled a renewed focus on resilience and support to protect brand trust in a key market.

U.S. Brand Investment as a Near-Term Headwind

FY’27 guidance includes up to AUD 55 million of incremental U.S. brand spending as part of a multiyear program to cement Xero’s position in a large addressable market, which will put pressure on near-term contribution margins and push more earnings into the second half. Management believes this investment will ultimately enhance LTV to CAC ratios and support durable growth in what they see as a critical long-term growth engine.

Slight Uptick in Churn from Mix Shift

Monthly recurring revenue churn edged up to 1.14%, close to pre-pandemic levels of 1.15%, with the increase tied mainly to a larger share of direct-channel customers who tend to show higher early churn. Underlying cohort churn held steady at 0.81%, suggesting customer quality remains solid and that the higher headline churn reflects acquisition mix rather than a deterioration in customer satisfaction.

Forward-Looking Guidance and Outlook

For FY’27, Xero guided operating revenue of $3.62 billion to $3.73 billion and adjusted EBITDA of $860 million to $920 million, driven by continued ARPC gains, customer growth, and early AI monetization, even after including the planned U.S. brand spend. Management expects results to be weighted to the second half given Melio phasing and seasonality, and reiterated plans to lift the pro forma Rule of 40 back above 40% by FY’28 as Melio approaches breakeven and payments momentum remains strong.

Xero’s earnings call painted the picture of a software and payments platform still in high-growth mode, backed by solid profitability, cash generation, and rising AI usage across its base. While Melio-related dilution, lower reported gross margins, and heavier U.S. marketing spend will weigh on near-term metrics, management’s guidance and capital discipline suggest a firm focus on scaling efficiently and compounding value over the next few years.