Xero Inc (ASX:XRO) has posted one of its strongest profit performances in years for the half-year to September 30, 2025 (H1 FY26), even as its share price fell 4% to $134.80 as investors focused on softer metrics in North America and broader weakness in global tech stocks.
The cloud accounting provider lifted operating revenue 20% (18% in constant currency) to $1,194 million. The operating expense to revenue ratio was 72.8%, excluding the impact of its Melio acquisition, or 77% including transaction costs.
Adjusted EBITDA rose 12% on the prior corresponding period to $350.9 million, with reported EBITDA of $377.9 million. Free cash flow came in at $321.1 million, with the free cash flow margin expanding to 26.9 per cent from 21.0 per cent a year earlier. On Xero’s preferred “Rule of 40” measure, which combines revenue growth and free cash flow margin, the company delivered a 44.5 per cent outcome for H1 FY26.
Exceuting its strategy
Chief executive Sukhinder Singh Cassidy said the result showed Xero was executing on its strategy across its portfolio of large markets, highlighting progress against its “3x3” strategy, the early completion of the Melio acquisition, product development and go-to-market initiatives. She also pointed to opportunities to use generative AI, including the rollout of expanded features through JAX, Xero’s AI financial “superagent”, to add value for customers and internal operations.
The company is shifting its focus towards higher-value customers rather than pure subscriber growth, while using the Melio Payments acquisition — its largest deal to date — to deepen its push into the US market.
RBC Capital Markets analyst Garry Sherriff said core earnings were in line with expectations and described the update on New York-based Melio as solid. However, he noted that North American revenue was weaker than anticipated, citing softness in Canada and ARPU discounting, even as subscriber numbers in the region broadly matched forecasts.