Xero: Maximising Long-Term Value Creation

Australia | 10:30 AM

Xero's FY25 revealed robust revenue-per-customer and a promising outlook for international expansion.

-Xero's in-line FY25 result reveals investments for future growth
-Strong second half ARPU growth, rising UK/US subscribers
-Payments are a potential growth engine, suggests Macquarie
-Highest-ever Rule of 40 score at 44%

By Mark Woodruff 

Global cloud accounting SaaS provider Xero's ((XRO)) FY25 result and FY26 outlook proved broadly in line with consensus expectations.

While FY26 operating expense guidance was higher than anticipated, analysts appear supportive of the company's strategy to invest further in brand building, particularly in the US market. Certainly, Citi commends management's ability to prioritise top-line growth while continuing to expand margins.

The company now has 4.4m subscribers with an average revenue (ARPU) of NZ$54.08.

Robust growth in the average revenue per user was driven by multiple levers, explained management, including improved product mix across new and existing customers, pricing changes to reflect product value, and continued payments growth.

Across Australia and New Zealand, the UK, North America, and some South-East Asian markets, Xero provides accounting plus business services to small businesses and their advisers.

Management continues to focus on its 'Win the 3 by 3 strategy' by improving its offerings for the three most critical jobs for small businesses --accounting, payroll and payments-- in its three key markets.

Revenue rose by 23% year-on-year in FY25 to NZ$2.1bn, or 20% in constant currency terms, while adjusted earnings increased by 22% to NZ$641m.

Operating profit jumped 48% to NZ$356m, missing the consensus forecast by -3%, while expenses ended up in line with expectations at 71.8% of FY25 revenue, below guidance for 73%.

While revenues in Australia and New Zealand were slightly below consensus, offsets were provided by 'beats' in the UK and US, explains UBS.

Specifically, second half UK and US subscriber growth was strong, with Citi observing the International division's ratio for lifetime value to customer acquisition cost (LTV/CAC) on the improve.

Supporting management's decision to increase its focus (and investment) in the US market, the highlight for Goldman Sachs was the stronger-than-expected International segment. 

Subscription growth shows the diverse nature of Xero's business, suggests Morgans, with the original New Zealand business growing second half subscriptions by 5% year-on-year, while businesses in the UK and North America advanced by 18% and 25%, respectively.

In raw number, the UK added 79,000 net subscriiber adds in the second half, the strongest second half since FY22, notes Citi, while North America added 35,000, the strongest half year growth since FY19.

Reinforcing Morgan Stanley's positive investment thesis, the results not only revealed double-digit subscriber growth, but also high single-digit ARPU gains, on top of a near-record low churn in subscribers.

Positively, the company enjoys a strong Rule of 40 score, a net cash position, and a sizeable and expanding total addressable market, highlights the broker.

Rising ARPU

Morgans considers strong second-half ARPU growth in North America as a key positive, with both ARPU and revenue outperforming expectations. Momentum in the region is expected to build as Xero continues to refine its value proposition and sharpen its sales execution, which should increasingly resonate with prospective customers.

UBS identifies four drivers underpinning Xero's ongoing ARPU and revenue growth: consistent price increases, a UK tax compliance initiative, the acquisition and rollout of the Syft analytics platform, and growing adoption of payments solutions.

From July 1, management is implementing an average 10% price increase in Australia, coinciding with a shift to new subscription plans.

Meanwhile, the next phase of the UK's Making Tax Digital program is accelerating digital adoption among small businesses and accountants, reinforcing demand for Xero's offering.

Syft is expected to enhance Xero's value proposition for these customers by providing advanced reporting, forecasting, and analytics capabilities, helping to support upgrades to higher subscription tiers.

Payments

As noted, UBS also sees payments as supporting ongoing ARPU growth for Xero.

Indeed, Macquarie sees early evidence payments are a potential growth engine for Xero, providing the company's largest addresseable market (TAM) at circa NZ$59bn, mostly in the US.

This broker explains tailwinds should arise from President Trump's digitisation of payments, an accounts receivable partnership with BILL in the US, and positive commentary around adoption of UK payments for Xero.

Payments should also benefit from around 90% earnings (EBIT) margins, the broker estimates, for Xero's partnership with global payments processor, Stripe.