Australia | Nov 18 2025
This story features XERO LIMITED.
For more info SHARE ANALYSIS: XRO
The company is included in ASX50, ASX100, ASX200, ASX300, ALL-ORDS and ALL-TECH
Despite strong underlying growth in the core accounting business, lower cost guidance and the general approval of analysts, shares in Xero fell after first-half results.
-Xero’s interim reveals strong growth for the core accounting business
-Operating expense guidance down, Melio aspirations confirmed
-Loss-making Melio to keep Xero's growth below Rule-of-40 level until FY28
-Re-rating likely requires tangible evidence of successful Melio integration and execution
By Mark Woodruff
Cloud accounting software provider Xero’s ((XRO)) value proposition continues to resonate strongly across the A&NZ region, which accounts for over half of group revenue, but the key question remains whether this success can be replicated across the United Kingdom and North America.
Xero’s core accounting business delivered strong underlying growth in the first half, with faster-than-expected execution across several near-term growth initiatives. Gusto (payroll) went live ahead of schedule and the recent acquisition of digital payments platform Melio closed earlier than anticipated, with the US rollout slated for December.
Full-year FY26 operating expense guidance improved to 70.5% versus the previous 71.5%, and management reiterated longer-term aspirations tied to the Melio acquisition. FY25 revenue is expected to more than double by FY28 while maintaining “greater than Rule-of-40” outcomes.
Melio enhances Xero’s product suite, expands its payments capabilities, and will hopefully accelerate scale across the North American market.
Subscriber growth is gradually improving from a low base in the larger North American market, Morgans observes, while the UK’s mandatory ‘Making Tax Digital’ program is providing a structural tailwind.
Negative reaction to results
The recent sell-off in high-growth stocks like Xero has been broad-based, driven by rising bond yields, macroeconomic uncertainty, and a market rotation into value sectors.
Given the -28% share price fall since the Melio acquisition announcement in late-June, and the -11% decline in the four weeks prior to first half results, analysts at Jarden were surprised by the additional -9% drop after the release, noting it came despite solid operating momentum.
Ord Minnett believes investors reacted to higher-than-expected guidance for the operating expenses-to-revenue ratio, which was interpreted as implying roughly a -5% downgrade to FY26 earnings (EBIT).
Also, A&NZ’s lifetime value-to-customer acquisition cost (LTV/CAC) ratio declined to 10.7 in the period from 11.6 in the prior year.
While this is mathematically correct, Jarden notes the 8% rise in lifetime value per subscriber to $4,899 more than offsets the -17% deterioration in acquisition cost to -$458, underscoring continued efficiency in customer economics.
Although revenue recognition in the International segment was around 90% due to higher discounting, Macquarie explains the six-month discount period reduces subscriber lifetime value by only -0.8%, while effectively supporting subscription growth.
North America revenue ‘missed’ which RBC Capital attributes to weakness in Canada and ARPU discounting, given North America subscriptions were in line with expectations.
Despite the above real or imagined disappointments, Macquarie now has increased confidence in management’s ability to achieve its FY28 target of more than doubling sales.
In a more cautious take, Morgans believes it may take time for management to rebuild investor confidence in Melio’s strategic value and to restore Xero to Rule-of-40 growth levels.
Revenue, subscribers and ARPU
Xero’s growth is driven by both subscriber volume increases and rising ARPU via the introduction of new products and price rises.
The company’s cloud-based small business accounting platform, which brings together core business tools such as accounting, payroll, and payments, generates revenue primarily through recurring subscription fees.
Xero’s SaaS model is supported by an extensive ecosystem of third-party app integrations and bank connections, allowing small businesses and their advisors to manage finances and automate processes.
In the first half, operating revenue grew 20% year-on-year (18% in constant currency) to NZ$1.194bn driven by a combination of subscriber expansion and higher ARPU.
Total subscribers reached 4.59m, up 10% year-on-year, with net subscriber additions of 176,000 in the half versus just 26,000 in the prior period, which had been depressed by a one-off purge of long-idle accounts.
A&NZ delivered NZ$663.7m in revenue, up 17% year-on-year, with subscriber numbers reaching about 2.7m.
The International segment (which encompasses the UK, North America and Rest of World) grew even faster, with revenue rising 24% to NZ$530.5m as subscribers climbed to 1.9m.
ARPU expanded in both segments, especially internationally where higher-value offerings and price changes drove a 19% year-on-year increase in ARPU to NZ$54.08.
Group ARPU climbed to NZ$49.63 per month, a 15% increase reflecting price increases and uptake of higher-tier offerings. Australian, UK and New Zealand price rises within the half contributed more than 50% to this increase, Macquarie highlights.
Subscriber growth in A&NZ has remained steady over the past three halves, Morgans highlights, while the UK continues to record year-on-year improvement in subscriber additions. Management now also discloses US subscribers and revenue, and these operations continue to improve on an underlying basis.
Costs versus revenue
Healthy top-line growth, combined with disciplined cost control, improved Xero’s operating leverage.
Management guided to an expenses ratio of 70.5% for FY26 (including Melio) and the market has interpreted this to mean an underlying earnings (EBIT) outcome of NZ$364m for FY26 versus the consensus estimates for NZ$410m, explains Ord Minnett.
Operating expenses accounted for 72.8% of revenue in the first half (excluding one-time acquisition costs), down from the mid-70s range a year earlier.
In June this year, management announced Xero’s largest-ever acquisition, a deal to buy the US/Israeli small business payments platform Melio, to accelerate the company’s North American expansion.
At the time, management noted the transaction would fill a critical gap by integrating bill pay capabilities into Xero’s accounting software.
Melio’s revenue grew 68% year-on-year to around NZ$183m, while customers rose by 7,000 in the half.
Management plans to roll out Melio’s bill pay services to all US customers by December to begin realising synergies from the deal.
While Xero continues to improve cost control, Citi notes overall revenue growth has moderated, with constant-currency growth easing to 18% year-on-year in the first half, down from 23% a year earlier.
Subscription revenue growth slowed from 20% in the second half of FY25 to 18%, though the broker expects momentum to recover as front-book mix improves and the Melio integration drives expansion.
Profitability metrics improved alongside growth. Adjusted earnings (which excludes one-off items) came in at NZ$350.9m, up 12% from the first half of FY25. On a reported basis, earnings were NZ$377.9m (up 21%) aided by a foreign exchange gain related to the Melio funding.
Net profit after tax jumped 42% to NZ$134.8m buoyed by that currency gain and the higher revenue.
Xero’s subscriber churn remained low at around 1.09% monthly. Macquarie explains a churn increase was expected given plan price changes, noting the level still remains below the pre-covid average of 1.15%.
Xero also generated NZ$321.1m in free cash flow (FCF) for the half, expanding its free cash flow margin to 26.9% from 21% a year prior.
Morgan Stanley highlights the combination of slightly higher ARPU and improving FCF generation helped lift the Rule-of-40 metric to 44.5% (excluding Melio) in the half versus 44% last reported.
Including Melio’s impact, Xero is expected to return to Rule-of-40 performance by FY28, following two years of temporary dilution from integration-related losses, the broker explains.
Outlook
Macquarie describes Xero as a great growth story, noting the share-price reaction to the first-half results does not reflect the strength of the business while the stock trades at around 25 times this broker’s two-year forward earnings forecast.
Morgan Stanley acknowledges Xero may have paid a premium for Melio but considers the acquisition strategically sound, with clear long-term value potential.
This broker adds tangible evidence of successful integration and execution will be needed before the shares can meaningfully re-rate.
UBS remains positive on Xero’s medium-term growth outlook and considers the current share price an attractive entry point for investors. The revenue outlook is for a 22% revenue compound annual growth rate (CAGR), with 17% for core accounting.
This broker expects ARPU growth to be supported by annual price rises along with higher product attachments.
There are six daily covered brokers in the FNArena database generating research on Xero, of which five have a Buy (or equivalent) rating, while Morgans sits at Accumulate, midway between Buy and Hold.
The average target price of the six brokers fell to $200.05 from $211.67 prior to the interim results, implying nearly 70% upside to the share price of around $118 on Tuesday, November 18th.
While most price targets are set between $230.30 (Macquarie) and $194 (UBS), Morgans is the outlier with $141, which has a negative impact on the average.
Outside of daily coverage, buy-rated Jarden reduced its target to $183 from $196, while RBC Capital is at Sector Perform with a $185 target.
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