How Xero’s AI and Melio Deal Could Quadruple Its Market by 2035

AI Strategy and Market Opportunity

Xero Limited (ASX – XRO) has presented a comprehensive investor briefing that highlights its strategic focus on artificial intelligence (AI) to expand its software-as-a-service (SaaS) total addressable market (TAM). The company projects a near fourfold increase in TAM by 2035, driven by AI-enabled automation and insights that help small and medium-sized businesses (SMBs) operate more efficiently and unlock growth opportunities.

Central to this vision is Xero’s role as a trusted 'system of record' for SMB financial data, leveraging proprietary data and partnerships with leading AI providers like Google and OpenAI. The company has embedded AI features such as automated bank reconciliation, AI-driven invoice generation, and smart financial insights, which have already delivered tangible time savings and improved business management for over two million subscribers.

Melio Acquisition Accelerates US Growth

Complementing its AI ambitions, Xero has integrated Melio, a US-based payments platform, to strengthen its presence in the lucrative US SMB payments market, estimated at US$29 billion. Melio’s platform offers seamless accounts payable workflows, multiple payment methods including instant and same-day options, and a strong customer satisfaction rating with a Net Promoter Score of 45.

The acquisition enhances Xero’s unit economics in the US, with combined subscription and payments revenue driving average gross profit per user from approximately NZ$30 to NZ$45 monthly over three years. This synergy supports Xero’s 3x3 strategy, focusing on accounting, payments, and payroll across Australia, the UK, and the US.

Financial Disclosures and Forward Guidance

Xero provided new pro forma financial disclosures for the combined US business, showing robust revenue growth and improved gross margins. US revenue increased significantly year-on-year, with payments revenue growing faster than subscription revenue, reflecting successful monetisation of Melio’s capabilities. Total payment volume (TPV) and gross take rates have also improved, underpinning profitability prospects.

Importantly, Xero expects Melio to achieve adjusted EBITDA breakeven on a run-rate basis by the second half of FY28, supporting the group’s aspiration to exceed the Rule of 40; a key metric combining growth and profitability. The company will transition to providing forward guidance based on adjusted EBITDA from its FY26 results announcement, replacing the previous operating expense ratio framework.

Integration Progress and Strategic Outlook

Integration efforts between Xero and Melio are advancing rapidly, with unified go-to-market teams and consolidated offices. The combined entity is embedding Melio’s BillPay functionality within Xero’s platform, aiming to scale efficiently and capture more SMB customers in the US through both direct sales and syndication partnerships.

Xero’s leadership emphasises the company’s differentiated AI strategy, deep domain expertise, and trusted customer relationships as competitive advantages that position it well for sustained growth. The briefing also highlighted plans to deepen AI value in products and expand payments scale, reinforcing Xero’s commitment to innovation and market leadership.