Xero turns strong H1 momentum into A$1 billion buy-back

Strong H1 performance unlocks A$1 billion capital return

Xero Limited (ASX:XRO) has paired a sharp upgrade to its FY27 outlook with an on-market buy-back of up to A$1 billion, giving shareholders two material signals from its half-year results: management sees stronger earnings momentum ahead, and the board believes the share price does not reflect the company’s long-term value.

Revenue for the six months to 30 September 2026 rose 46% to NZ$1.745 billion, or 27% on a pro-forma basis that treats Melio as part of the comparative period. Pro-forma adjusted EBITDA increased 23% to NZ$361.6 million, while pro-forma free cash flow rose 32% to NZ$238.1 million. The buy-back is expected to run over the next 12 months and will be conducted at the company’s discretion, subject to market conditions and prevailing share prices.

The programme comes on top of a recently completed A$550 million buy-back designed largely to offset share-based compensation dilution. Xero reported NZ$1.15 billion in cash and short-term deposits at 30 September, while the investor presentation said its remaining US$200 million revolving credit facility had since been repaid and was fully undrawn.

Melio adds scale, but weighs on statutory measures

The headline numbers are more complicated once Melio enters the frame. Reported adjusted EBITDA rose only 3%, free cash flow fell 26% and net profit after tax dropped 86% to NZ$18.5 million, reflecting the full six-month inclusion of the loss-making payments business and associated accounting effects. Xero’s adjusted NPATA fell 34% to NZ$81.1 million, although the pro-forma comparison showed a 159% increase.

Melio’s contribution is nevertheless central to the improved outlook. International revenue rose 79% to NZ$950 million on a reported basis, or 33% pro-forma, while US revenue reached NZ$365 million, up 51% pro-forma. Xero said Melio payments performance was stronger than expected and reiterated that Melio is expected to reach adjusted EBITDA breakeven on a run-rate basis in the second half of FY28. The acquisition had previously been positioned as a route to greater US payments scale in the Melio integration strategy.

Guidance rises as Rule of 40 target arrives early

Xero now expects FY27 operating revenue of NZ$3.77 billion to NZ$3.83 billion, up from its previous range of NZ$3.62 billion to NZ$3.73 billion. Adjusted EBITDA guidance has moved to NZ$880 million to NZ$920 million from NZ$860 million to NZ$920 million. Management attributed the revenue upgrade mainly to stronger Melio payments performance and a weaker New Zealand dollar, with constant-currency growth expected at 24% to 27%.

The company now expects a pro-forma Rule of 40 outcome of around 40% in FY27, earlier than its previous expectation. Xero also lifted its FY28 revenue aspiration to more than NZ$4.6 billion, excluding revenue synergies, from more than NZ$4.2 billion previously. These are outlook and aspiration statements rather than guarantees, and delivery depends in part on payments growth, price increases, cost discipline and a reduction in Melio’s losses.

Customer growth and AI adoption broaden the platform

Xero added 226,000 net customers during the half, taking its reported base to 5.15 million. Average revenue per customer rose 25% to NZ$62.21, annualised monthly recurring revenue increased 41% to NZ$3.84 billion, and underlying churn was 0.83%. The company’s Australian and New Zealand revenue rose 20% to NZ$795 million, while the UK continued to benefit from Making Tax Digital and the US product suite expanded with Payroll powered by Gusto.

AI adoption is becoming a more visible part of the growth story. Xero said monthly JAX chat users had increased sixfold, more than 100 million transactions had been reconciled through automated bank reconciliation, and usage of Smart Document Capture had risen about 4.5 times since launch. It also introduced Xforce by Xero in beta, a service combining partner consultants and forward-deployed engineers to help accounting firms build automated workflows. The commercial model remains under development, spanning bundled features, standalone add-ons and potential usage-based pricing.

The immediate test is whether the strong operational performance can translate into the cash generation required to fund both the buy-back and continued investment in AI, payments and the US market. Xero’s next milestones are less about announcing ambition than showing that Melio can move towards breakeven while the group sustains its upgraded FY27 revenue and EBITDA ranges.