Xero Limited

Thank you, Operator. Good morning from Sydney, Australia. Thank you for joining our investor briefing today covering Xero's financial and operating results for the full year ending March 31st, 2025. I'm Sukhinder Singh-Cassidy, and I'm with Claire Bramley, our newly appointed CFO. Our first agenda item is a summary of Xero's performance for the full year. I'll then pass to Claire to cover our financial results in more detail before I finish with strategic priorities and Xero's outlook. After that, we'll move to Q&A. So, moving to a summary of our results on slide five. We're really pleased with our FY25 results, and in particular, our ability to deliver strong financial outcomes while executing our strategy with focus and purpose. You'll see that we continue our track record of strong macro resilient revenue growth with each of our large markets contributing. This, along with another meaningful increase in profitability through disciplined capital allocation, has led us to generate another greater than rule of 40 outcome. I'm going to touch on the key metrics here, and Claire will discuss them in more detail later. Revenue grew 23% to $2.103 billion year-on-year. Adjusted EBITDA of $641 million is up $114 million, or 22% over last year. Together, the strong operating result and improved free cash flow generation resulted in a Rule of 40 outcome of 44.3, up by 3.3 percentage points year over year. Moving to the next slide, Xero is a macro-resilient business. We have a large book of recurring subscription revenue spread across our global portfolio that enables us to consistently deliver strong top-line growth. You can see this in the chart on the left. The charts in the middle and on the right show our key revenue drivers, Subscription and ARPU growth. We provided both reported and underlying subscribers and ARPU on the slide. However, I'll talk to underlying, which excludes the impact of the removal of long idle subscriptions. This program completed in H1 with 160,000 subscriptions removed. On this underlying basis, subscriber growth was 10% and ARPU 11%, both strong outcomes. I'll now spend a few minutes outlining the regional contributions to revenue growth. As I said earlier, we saw each of our largest markets, Australia, the UK, and the US, make a strong contribution. ANZ continues to deliver robust growth, which reflects the strength of this heritage market. I'll talk to these outcomes on an underlying basis or before the impact of the removal of long idle subscriptions. We delivered 21% revenue growth year on year. Within this, subscribers grew 9% and ARPU grew 9%. Australia made a strong contribution with revenue growing by 24%. Subscribers were up 10% year-on-year, adding a further 184,000 underlying net subscribers. New Zealand grew revenue by 11%, with net additions of 24,000 subscribers up 4% year-over-year. Despite this being low growth relative to our less penetrated markets, it is double the level of growth in small business creation over that period. This is a great outcome in a market with high cloud penetration, reflecting our strong brand presence and product offering, alongside our ability to continue to bring small businesses to the cloud and offer more services. Turning to the international segment, which is home of our two largest markets, the UK and the US, We saw that both these markets were strong contributors to the 24% revenue growth or 20% in constant currency we saw in FY25. Within this, subscribers grew 12% and ARPU grew 13%. The UK delivered strong growth reflecting good execution. Revenue increased 25% or 21% in constant currency. Subscribers were up 12% year-on-year with net additions of 128,000. This reflected the team executing well in the absence of any regulatory tailwinds. Kate Hayward is doing an excellent job leading the UK, while Alex von Schurmeister shifts his focus fully to emerging markets and plan day, which now reports to him. We expect the next phase of MTD for income tax to provide further tailwinds for subscriber growth in calendar year 2026. While many of these customers are non-employing SMBs, they're important for Xero and our AV partners to serve. We will provide functionality to meet their needs through our Xero Simple product, which leverages our existing cash book for these customers. At the same time, we'll maintain our focus on adding higher value subscriptions for our primary segments. North America continues to see good momentum with improved product velocity supporting revenue growth of 21% in constant currency. Subscribers grew 11% year-on-year with net additions of 47,000. We're pleased with this momentum, but there is still work to do to fully capture this opportunity. The acceleration we've achieved in product delivery gives us confidence and we continue to spend incrementally more on brand each half. As we've said, before any significant step up in brand investment decisions are made, we want to feel like the full product offering is strong across the three by three and we plan for a multi-year investment and return horizon within these capital allocation plans. In Canada, subscriber growth was limited, reflecting the continued, subdued backdrop with a lack of adoption momentum and tailwinds. The rest of the world delivered another good period of revenue growth, with revenue up 22% or 19% in constant currency. Total subscribers grew 11% year-on-year, with net additions of 31,000. South Africa was the largest contributor. So in summary, in our international regions, you can see the clarity of our strategy as we focus on the 3x3, while continuing to support growth opportunities in our other markets. This next slide brings the key financial outcomes together as we balance growth and profitability. If we move from left to right, the chart on the left shows strong growth in adjusted EBITDA year-on-year, up 22%. This contributed to a strong free cash flow margin of 24%, which you can see in the middle charts. Adding this to revenue growth, which we use the 20% constant currency metric for, results in a rule of 40 outcome, increasing another three percentage points to reach 44%. We're really pleased with this outcome. It demonstrates how we've continued to deliver revenue growth supported by disciplined investment to grow profitability, while at the same time adding value for customers.

Thank you, Sakinda, and good morning, everyone. It's a pleasure to be here and to present my first set of results at Xero. I'm excited to join a company with such a clear purpose, strong customer focus, and global ambition. It's a privilege to share what is a great set of results. I look forward to connecting with many of you in person over the coming weeks and months. Now let's dive into the details, starting with top-line revenue growth. We've maintained strong, broad-based revenue growth across our portfolio. with good performance in both subscription and platform revenues. Core accounting revenue grew by 23% or 21% in constant currency. We are very encouraged by strong subscriber growth across all our key markets. When combined with ARPU expansion, driven by pricing and an improved product mix, this forms a powerful engine for sustainable growth. Platform revenue growth accelerated to 29% year on year, or 26% in constant currency, and represents 11% of total operating revenue. Turning to the strategic focus areas of payments and payroll, we are seeing stronger execution and growing momentum. In payments, our efforts have centered on two key areas, expanding payment methods, including buy now, pay later, online bank transfers, and bill pay capabilities. and enhancing the customer experience, for example, by reducing friction with innovations like tap-to-pay powered by Stripe. These upgraded offerings and experience are reflected in our performance. Total payment volume grew 37% year-on-year, and payment revenue grew 65% year-on-year. This growth reflects both higher volumes and improved unit economics. driven by a higher take rate as we hit key growth and product development milestones. This uplift represents a one-time step change and is not expected to recur in fiscal 26. The number of employees paid through zero payroll was up 6% year-on-year across Australia, the UK, and New Zealand. Australia continues to be our most mature and penetrated payroll market, with more than 2.5 million employees paid monthly with ongoing additions being a major growth driver. To further accelerate growth, we are focused on increasing penetration in the UK and New Zealand through plan enhancements and targeted product investment, such as the new UK payroll dashboard. In these markets, we are also evolving our go-to-market strategy to better enable our teams to identify accountants and bookkeepers who can benefit from payroll. Overall, we are very encouraged by the momentum in platform revenues, particularly in payments where we see a huge town opportunity of nearly $60 billion. This strength in payments, alongside the timing of Australian price increases, resulted in a stronger H1 revenue contribution in fiscal 25. This creates a tougher revenue growth comparison in H1 of fiscal 26. Let's now turn to our staff metrics beginning with AMRR. We have continued to grow AMRR, which has now passed $2.3 billion, up 22% year-over-year, reflecting ongoing top-line momentum. Looking at the relationship between AMRR and revenue growth over the past three years, AMRR has historically served as a baseline, with realized revenue exceeding this by approximately $150 million in prior years. AMR represents the annualized subscription revenue at a specific point in time and acts as our starting point for the year. After any currency impacts, any revenue above this baseline, driven by subscriber growth or ARPU expansion, reflects incremental gains realized over the subsequent 12 months. With regards to ARPU, ARPU growth remains strong at 15%. This momentum reflects our focus on driving value per subscriber, not just through pricing, but also through product mix. Price changes continue to play a key role in ARPU growth. However, over the past year, we've embedded a dedicated internal pricing team that's now implementing a more strategic, medium-term pricing approach that better links price increases to the delivery of new customer value. As we continue to enhance our product, pricing will remain a key monetization lever. That said, it's encouraging to see that in fiscal 25, product mix contributed more significantly to ARPU growth than it did in fiscal 24. A one-off ARPU uplift occurred due to the removal of long idle subscriptions. Excluding this effect, ARPU mix still improved, underpinned by three key drivers. Stronger direct channel performance, with the performance marketing team driving more growth ads into business edition plans, supported by targeted promotions that encouraged higher tier adoption. Improved business edition uptake in Australia and the UK following the launch of our new plans. Better mix within our partner channel as we shift towards smaller, more frequent sales motions and improve alignment between accountants and bookkeepers and the right product plans. These early results, especially in the front book, are promising. However, there's still more work ahead to do as we continue to build our go-to-market and marketing capabilities to fully realize the potential of this opportunity. Platform-attached growth was fueled by strong momentum in payments. Looking ahead, there is substantial white space, most of which lies within our international segment. Moving to Chen. Demonstrating the inherent resilience of the small business sector, our underlying churn remained low at 1.03% per year. This strong performance aligns with the positive trends we continue to observe through key indicators like healthy business formation rates and SME confidence across our regions. Our experience during COVID demonstrated that in times of uncertainty, SMB customers valued Xero's real-time cash flow information so highly that they retained their subscriptions for even longer than normal. This backdrop, along with our globally diversified portfolio, fosters cautious optimism regarding the current environment. However, we remain vigilant and will continue to monitor the situation closely. As we consider the long-term value customers bring to Xero over time, we focused on balancing all key growth drivers, including new subscriptions, ARPU expansion, gross margin, and retention to support sustainable LTV growth. In fiscal 25, we added $2.4 billion in LTV, reflecting a strong performance across all drivers. LTV per subscriber grew 9% over the year to $4,066, In line with ARPU growth, this was a good outcome with improvements in growth margin and continued ARPU expansion comfortably offsetting churn. For reference, at the group level, the average timeframe a customer stays with Xero is over eight years, which is excellent. Customer acquisition cost per growth ad has increased, reflecting a deliberate and disciplined approach to capital allocation. we have robust guardrails in place, including region and segment-specific targets for payback periods and return on investment. Our focus remains on subscriber value, and we're willing to invest more to acquire higher-value customers. To illustrate how these dynamics are playing out, we can look at our use of discounts as an acquisition tool. Across regions, we run A-B tests across cohorts and customer segments to understand the impact on growth and retention. So far, we've observed strong conversion into higher tier plans and improved retention rates among discounted customers, even after their promotional periods end. These outcomes point to better long-term values, reinforcing the effectiveness of this approach. Moving on to operating expenses. We successfully delivered a fiscal 25 OPEX ratio of 71.8%, consistent with our guidance. While we improved efficiency, we strategically invested to support growth across our segments. For fiscal 26, our focus remains on driving strong growth through continued investment, leading to an anticipated OPEX ratio of around 71.5%. We have provided some extra disclosure in the presentation on the non-recurring expenses that contribute to this. We also expect the ratio to be higher in the first half of fiscal 26 compared to the second half due to the following factors. On the cost side, the phasing of the non-recurring expenses, timing of zero-con, alongside other planned investments is driving up costs in the first half of the year. Secondly, given this is a ratio, it is important to remember that in line with normal seasonality, we generate more revenue in the second half, as effects of things like pricing changes and subscriber growth flow through. We will maintain a disciplined and returns-based framework for capital allocation, consistently prioritizing initiatives that drive top-line growth. This has driven a continued strong improvement in revenue per FTE. Our sales and marketing costs increased 23%, which resulted in a flat year-over-year percentage of revenue of 31.6%. Excluding zero-con expenses, sales and marketing as a percentage of revenue saw a slight decrease to 30.8%. Incremental investment was strategically focused on our international markets, particularly through enhanced digital performance marketing initiatives to drive top-of-funnel growth. Shifting to product investment. Our product design and development costs represented 29.4% of revenue. I want to highlight a distinction between our gross product costs and our P&L expense. Our total of gross product and development costs, excluding depreciation and amortization, grew by 24% year-over-year, exceeding our P&L expense growth of 17%. This higher growth in total investment underscores our capital allocation strategy to accelerate product velocity, particularly within our 3x3 strategic focus areas. This strategic emphasis was a key highlight of our zero-cons in London and Nashville, where we announced significant product updates, which Sukhinder will elaborate on. Finally, G&A expenses remained flat year-on-year at 10.8% of revenues. Our strong 22% adjusted EBITDA growth clearly demonstrates the positive return of our disciplined capital allocation framework. This framework aligns with our Rule of 40 aspirations, guiding our teams to invest strategically in capturing the significant $100 billion total adjustable market across our regions while delivering profitable growth. We are also increasingly considering frameworks like Rule of X to inform our decisions on the trade-off between margin expansion and revenue growth, given the substantial opportunity ahead. This EBITDA growth has also translated into robust free cash flow, which increased to over $500 million, with margins expanding to 24.1%. This performance allowed us to deliver another outcome exceeding the rule of 40 in fiscal 25. I want to highlight a couple of key aspects of our cash generation. Firstly, we continue to generate net cash interest receipts due to our balance sheet structure. Secondly, we have fully utilized the balance of our accumulated New Zealand tax losses. However, we have proactively planned our tax payment profile to manage this transition. Our strong cash generation has further strengthened our balance sheet. The increase in cash generation combined with a net new fund from our convertible note refinance, were the primary drivers of the increase in Xero's total net cash position to $683 million. Including short-term deposits, we currently have approximately $2.3 billion in available liquidity, which is invested at market interest rates. Our term debt liability solely reflects the 1.625% coupon convertible notes maturing in June 2031. While these financing costs slightly impacted our net cash flow over the year, this remains a very attractive funding source. It provides valuable optionality for strategic organic or inorganic investments at a lower cost than traditional bank debts. The flexibility afforded by our convertible note funding coupled with our continued strong cash generation and the growth we are achieving results in a very robust balance sheet. This strength provides us with the flexibility and optionality to continue our build, partner, or buy approach, enabling us to pursue the substantial growth opportunities ahead. In summary, fiscal 25 has been a year of strong execution and significant achievements delivering excellent financial results while strategically investing in key growth areas. Our disciplined approach has yielded demonstrable returns and the resilience of our customer base remains strong. This success is a testament to the team's dedication and provides a solid foundation for future growth. Thank you for your time. I will now pass back to Sukhinder. Thanks, Claire.

Before we jump into strategic themes, I would like to do a quick look back at what we've achieved since 2023. I'll then talk to our FY25 to 27 strategy and update you on a recent few moves we've made. Then we'll look next to the year ahead. I wanted to pause for a moment to take a look back on the actions we've taken over the past two years against the commitments we made to you when I first started as CEO. These were to be more focused, more dynamic, more measured and more balanced in how we approach our investments and execution at Xero. There are so many highlights on here, but I'll just call out a few. Firstly, being more measured in our overall growth and cost profile was a key priority. Our early right-sizing of Xero and the completion of our U.S. review demonstrated our commitment to benchmarking and reviewing whether our capital was being allocated as effectively as it could be. We also exited or impaired non-core or low-performing businesses, including Waddle, WorkflowMax, and PlanDay. We made new investments in adding key global talent, including Diya Jolly to lead our product and technology efforts, Ashley Hansen-Greck as our CRO, and Mike Strickman as our CMO to help us improve product velocity and build our new GTM playbooks across a global portfolio of products and markets. Our FY25-27 strategy, Winning on Purpose, demonstrates our efforts to become more focused as we introduced our 3x3 strategy, our opportunity to build those new GTM playbooks, our future-focused bets, and our goal of driving a people, purpose, and performance-oriented culture. As our zero cons kicked in, you saw Dia and the team improving product velocity to deliver more value for our customers, from solving key product market fit needs like UK tax, or U.S. end-of-period reconciliation to new customer experiences like tap-to-pay and JAX. Our first rule of 40 was delivered in FY24, demonstrating our commitment to become more balanced, and we've since delivered that two more times, in the first half of 25 and full year 25. You saw Ashley, Mike, and Angad's teams work to remove long idle subscriptions, simplify product plans, start to focus on product mix and not just volume of customer acquisition. Overall, we've become more dynamic and data-driven with our GTM investments and returns. Deepening and broadening our leadership bench globally has been key to all of this. Alongside key XLT hires, Xero's senior leadership team across all functions and all geos has been an investment we feel good about, as we've built a global community of highly tenured leaders and newly joining talent who are all focused on the opportunity ahead. We've achieved a lot, we've moved at pace, and we'll continue to do so. So let me now move on to talking about how we've progressed our strategy in fiscal year 25. As you know, our vision and purpose are constants at zero. Successfully delivering against these is key to achieving our aspiration, which I'll cover in a few moments. Our winning on purpose strategy, which you saw us lay out at investor day in February 2024, has four key pillars. Win the three by three, Build a winning GTM playbook for Xero's next chapter. Win the future, which is about focus, best, and innovation. And lastly, unleash Xero and Xero's to win. These four pillars are underpinned by our disciplined capital allocation framework for investment. This tightly aligns with our strategy, our Rule of 40 aspirations, and our build, buy, or partner approach as we pursue organic or inorganic opportunities. We're making great progress executing our strategy with focus and purpose. We've made a number of moves in the first 12 months of it being in place, which we'll highlight on slide 25. There are three key moves here that I want to spend some time on, which show our disciplined approach to capital allocation that's closely aligned to our strategic priorities. Firstly, we accelerated product delivery through working hard to build product ourselves, but also through partnerships and our acquisition assist. This has enabled us to deliver important product features to help customers across our three largest markets, Australia, the UK, and the U.S., to complete their three most important jobs to be done, accounting, payroll, and payments. Secondly, we made a series of changes to help us build a winning GTM playbook for this next era. As we said, we completed the removal of long idle subscriptions. We also simplified and streamlined our subscription plans, making it easier for new customers to find, use, and grow with Xero. We introduced new sales motions as we aim to deliver improved mix. As Claire said, we've made encouraging progress on this, particularly in the front book, and we still have a lot more to do with the back book of existing customers. We launched our partner assist channel and introduced AB segmentation to better enable our Salesforce to deepen relationships. We've also announced and launched our B2B marketing engine to turbocharge demand in the AB channel. And we've seen our direct channel accelerate from our investment in becoming more sophisticated in performance marketing. Thirdly, we're allocating capital to long-term as we look to win the future to focus strategic investments in AI and mobile. We're really excited about unlocking value for both our customers and internally with AI. We launched and rolled out Jax in beta to all of our BE customers in less than 12 months. We've also made great progress in our mobile product with improved design and purchase buy flow supporting sign-on success. And we're also enabling our people to move faster for customers and to do the best work of their lives. so we can unleash zeros to win. During the year, we introduced a new performance management framework intended to drive focus and connection to our purpose and strategy through a robust goal-setting process. We also added key senior hires and launched a new and improved employee insight tool to support engagement. You can see our investment is disciplined and aligned to our strategy. Coming back to our investment in 3x3, on the next slide, I'll talk in more detail about the product investments we've made during the year. As I said, we've accelerated our product delivery. This slide shows the results of our investments to complete the three most important jobs to be done in our three largest markets. In accounting, we launched Zero Simple for the UK's making tax digital for income tax tailwind. We've continued our momentum in the US, adding more bank fees and added end of period reconciliation. We are excited to announce that we've also signed an agreement with Plaid, a US-based financial data aggregator to extend our direct bank fees coverage even further. We've also improved our UK tax offering for partnership tax capabilities. In addition, we launched early access to SIFT analytics in the US and the team has well progressed in its plans to roll this out to all of our core markets. In payroll, we enhanced Australian auto super capabilities and launched rostering by deputy into beta. We've added a payroll manager dashboard for UK ABs and progressed the Gusto embedded partnership for our U.S. customers. Payments is also one of our biggest opportunities. As Claire said, it has a huge, nearly $60 billion TAM. We're seeing strong growth in this area as we've expanded ways to pay and enhance the customer experience within Xero. We've launched Tap to Pay for Xero Mobile, and we've migrated customers, all of them, to our new invoicing product. We expanded UK bill payments through our relationship with Cresco and put our bill integration into full release in the US. So we're really excited about the value we've added for customers and we'll continue to unlock opportunities in these core areas to deliver more value going forward for customers and support revenue growth. I'll now talk to our focus areas for the year ahead. Our FY26 priorities are aimed at accelerating the execution of our strategy. To do this, we plan to focus on five key areas. First, delight customers more by focusing on making our end-to-end SB and AB journeys even more seamless. We also want to improve the communication of our customer value, and you'll see us doing this through the Long and the Short of It website that includes all the products we launched in the past year and gives you a guide to what's coming next. We want to accelerate our customer value. This means delivering the right product to the right customers at the right time, using our new product plans to make sure they're getting the most out of Xero. Leveraging our recent SIFT acquisition and our fast-growing payments business will be key to deepening our relationship and value with customers in the coming year. In our GTM strategy, we'll maintain our focus on delivering in all our regions within the 3x3, while continuing to drive our new GTM partner playbooks, building out our partner marketing plan and focusing on quality acquisition and mix. We'll invest in driving AI throughout Xero to customers and internally to redefine how our customers work and how we work ourselves. And we'll continue to unlock our talent for scale by evolving our operating model and developing and retaining talent while reinforcing our culture. As I said, we have made great progress over FY25 with our win-the-future strategic priority to deliver a leading AI experience for SBs and ABs. In less than 12 months, we have taken JAX, our AI business companion, from prototype to launch to beta access by 100% of our BE customers. Meanwhile, alongside the original invoicing tasks, we have added new features to JAX, such as giving customers answers on how to best use Xero within the AI companion. This has been enabled by our world-class AI team led by Etan Charan. We have and will continue to be targeted in our hiring to support our existing capabilities across data science and machine learning so we can execute on our AI strategy. Looking ahead into FY26, we want to accelerate delivery of AI solutions for our customers. We plan to launch drafts for AVs to support their workflows too, and to continue to broaden the value of Xero's core offerings by leveraging GenAI more across the experience for small businesses. Internally, we're scaling the use of GenAI tools to increase productivity in areas such as sales enablement, marketing content generation, and product development, alongside customer service. Overall, our focus for this coming year, externally and internally, is first on engagement and utility. AI monetization with customers is a clear opportunity in longer term, and we'll share more about that when we're ready. So to summarize, we have a leading team, a strong base, and an ambitious AI agenda to pursue for FY26. And this brings me to our FY26 outlook. Total operating expenses as a percentage of revenue is expected to be around 71.5 in FY26. As Claire explained, there's some non-recurring elements in this, and we expect some seasonality with the ratio expected to be higher in the first half than the second half. Of course, in addition to this, we continue to pursue our aspirations that we first shared with you at our investor day in February, 2024. These are to be a world-class global SaaS business from our very strong position today. We have the opportunity to double the size of this business and deliver rule of 40 or greater performance. And we will focus on high quality growth, which has a balance between subscriber growth and ARPU expansion. And as I said before, these aspirations are powerful and they're purposeful. and we will continue to pursue them aggressively over the short, medium, and long term. To wrap up, there are three key themes from today's FY25 presentation. Strong macro-resilient revenue growth with all large markets contributing, continuing to deliver a greater-than-rule-of-40 outcome, reflecting continued investment with discipline, and strong execution against our FY25-27 strategy while delivering more value for our customers. Before I conclude, I would like to acknowledge our teams around the world as I really want to thank them for all their hard work as we continue to do all we can to support our customers and partners. That concludes our presentation. I'll now pass over to the moderator for your questions.

Thank you. We will now have a question and answer session. Just a reminder, if you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. Your first question comes from Eric Choi with Barron Jelly. Please go ahead.

Good morning. Thanks for the question. I'll just ask one. Just at the investor day, I think one of the key financial metrics you guys were targeting was an improvement in the long-term OPEX to sales ratio. And it looks like you're definitely delivering that in 26 on an underlying basis. And I was just wondering, when you roll around to FY27, though, will you be targeting an improvement versus the 71.5% headline FY25 number, or will it be an improvement versus the 69% to 70% underlying FY25 number? And I was just thinking maybe it's the former because it makes sense to ramp up U.S. investment as sort of your product betas come out of beta and it makes sense to do marketing, but I'd be really interested in your thoughts. Thanks very much.

Thank you, Eric. Yeah, this is Claire. So I'll start with your question. So I'm Yeah, we're very pleased with the performance of our OPEX ratio in fiscal 25. And as you said, in our guidance, we've laid out a 71.5% guidance for fiscal 26. So what I would just remind people in that there are some non-recurring items. We have some additional disclosures in our presentation that talk about that, that does make up that 71.5%. And as we've said in those disclosures, the majority of those are non-recurring. However, as you're thinking about looking out into the future, what I would do is take a step back and say we're really focused, as we laid out in Invest Today, on investing for growth. And I think you've seen that performance happen in the last couple of years. We're very happy with the Rule of 40, which shows that we are taking a disciplined approach to drive free cash flow margins. of 24% in fiscal 25, but also delivering that top line growth of 10% in cost and currencies. We're planning to continue that trend, disciplined approach, focus on our three by three strategy to really drive overall growth, but with the aspiration of rule of 40 as we continue forward.

Thanks, Claire. I'll jump back in the queue. Thank you. Thank you.

Your next question comes from Gary Sheriff with RBC. Please go ahead.

Hi, Sukhinder, and welcome, Claire. Just a question on North America. Can you maybe just give us a sense on where we are in that product roadmap in terms of the product offering? I'm just trying to get a better understanding on what's holding Xero back in terms of product gaps to better penetrate that North American market?

Sure. Thanks, Gary. This is Sukhinder, of course. So I think as we identified, if you recall, mid-year at Zerocon, we talked about the release of end-of-period reconciliation. We talked about the improvement of bank fees. And I would say on core accounting, you know, we definitely see improved product market fit, and that's great. We also want to continue to build the full stack of a competitive product. And so we put bill pay alongside invoicing, which we already have as a job, just into beta release. with Bill, so that's another key component of that three by three. And then we've also talked about Gusto, really being able to have an embedded payroll offering inside the core zero experience. So these are three things that we look at, core accounting, both sides of the payment engine, payments in, payments out, workflows and payment processing, and then we look at payroll being an end-to-end experience. I think we are continuing to ramp brand spend incrementally, we've said that, we're pleased with the performance, but We really do want to feel like we have the opportunity for a full and sticky experience if we're going to significantly increase that brand spend. And as you likely know, brand or top of funnel spend will need to be a multi-year investment if we want to really move awareness up significantly, which would be a long-term goal.

Understood. Thank you.

Your next question comes from Nick Basile with CLSA. Please go ahead. Morning team, thanks for the opportunity.

Just a question on AI. You've outlined some comments around Just Ask Xero and how there's plans to embed that further as it comes out of the beta version. Where are you seeing sort of incremental opportunities, not so much on the internal side, but the external side to broaden that product capability out and ultimately monetize it going forward? Thanks.

Sure. Thanks, Nick, for the question. So first of all, as you probably can imagine, we're really pleased with getting Jaxx from pre-launch at Investor Day, prototyped. out to a beta launch, out now as available in beta to 100% of our BE subscribers globally. And its core functionality today is around invoicing and help in setup and usage of Xero. Those are sort of the two jobs it does well today. I think as we look forward, we really want to increase its utility across all the jobs on the platform. So you can read into that, imagine the jobs that exist on Xero today. It's everything from bank reconciliation to insights and analytics powered by SIFT, So if you think about JAX being, I would say, more fully capable across all of the small business experience, that's one key focus. The other key focus, of course, is we have A-B experiences, right? We have A-B products, and we know that our accounting and bookkeeping customers are also excited to have JAX as a companion inside of some of their workflows from Xero. So that's the second focus. Now, you hit on monetization last. Yes, we do see a long-term opportunity to monetize, and that means long-term, not in multiple years, but we do see the opportunity in the coming years. I do think our first job is to keep expanding the utility of the product, and that is where we're focused for 26. I have no doubt that there will be monetization opportunity with AI, but first we want to deliver some more value.

Okay, thanks very much.

Your next question comes from Tom Beadle with Jarden. Please go ahead.

Good morning. Thank you for the opportunity. I've got a question for Claire. What are your first impressions and what things might you look to change? I thought it was really interesting that you mentioned the rule of X earlier. What might that look like in terms of targets and the revenue multiplier? Does that indicate a change in thinking in that Xero might prioritise revenue growth even more than what the market's thinking? I guess I'm also interested just in your views around capital management and allocations. You've obviously got half a billion dollars of free cash flow, which is probably only going to grow. What might you do with that? And also, do you think the convertible is an efficient form of funding? Thanks.

Yeah, thanks, Tom, for the question. And I just want to say I'm very excited to be here. Clearly, Xero had a fantastic year. strong macro resilient growth with all of the markets contributing. But at the same time, that was dropping through from a profitability and free cash flow standpoint as well. So, you know, with an adjusted EBITDA growth of 22% and a roll of 44%, clearly great results. So wonderful time to be joining Xero. So excited to be here and to continue the momentum going forward. I think you mentioned about the rule of X. I think it's important that we do have that balance between being able to drop operating leverage to the bottom line, but at the same time, really investing in growth. You know, we are making great progress with our three by three strategy, you know, as the kinder laid out in our prepared remarks, but we have got more work to do. And so it's really important that we continue to invest from a product standpoint, invest in sales and marketing. But at the same time, make sure that we're doing that in a disciplined, returns-based approach. And I think that's the one thing I can commit to. That's what we'll be focused on. Everything that we do, we'll be doing, you know, focused on the returns, focused on value to customers, and really thinking about profitable growth. I think when it comes to capital management and capital allocation, I don't come in with a different view. I think what the team laid out at Invest Today is, with regards to the balance of building, partnering, and buying, I think is the right approach. Again, focused on strategy, focused on returns, focused on customer value. And what I would say is that the fact that we have got a balance sheet that gives us optionality is a really good position to be in. So thanks for the question, and I'll pass it over to the operator.

Actually, I'll add one more thing, Tom. I'm obviously, you know, CEO of Xero. I'm really pleased by Claire's arrival. This is her first introduction to the market. And first of all, again, we want to thank Christy Godfrey-Billy for an amazing nine years with Xero and really excellent results. But one of the things I think that's really important is we, you know, as we continue to grow and get more sophisticated across our global portfolio, Claire's experience was really important to us. Claire is a global executive who spent time in pretty much every part of the world with HP, including in Europe, understands obviously all the markets in which we operate and compete. And so having her here is like a key talent addition for us as we seek to navigate, you know, how we grow, double, triple, quadruple, whatever the aspiration is over time from here, just having seen the scale she has and the complexity of businesses. as a public company CFO and also across HP. Really, really important addition to the team.

Thank you. Your next question comes from Andrew Gillies with Macquarie. Please go ahead.

Thanks, guys, for the opportunity. I just kind of wanted to follow up sort of on that US growth opportunity. Obviously, you know, second half sub-growth sounds like it was a little bit better, but we haven't fully launched, you know, all of the partnerships yet. Can you maybe, particularly on Gusto with payroll, are you able to price that embedded function independently of partner pricing once it goes live? And how important is partnerships being fully launched for that growth story in the US? Thanks.

Sure. Well, thank you, Andrew, for the question. We do control retail pricing to our customers in our plans. of products we bring to market, whether they're white label, whether they're billed, or of course, if they're bought, like in the case of SIFT. So while we don't disclose our business deals with a bill or gusto or deputy, it is fair to say that we take into consideration how we want to monetize when we're doing these partnerships and how we want to build, you know, plans that incent people to try these products that we're embedding. So I do think you can expect that what we're trying to realize is obviously our food growth, of course, in partnerships, we don't own the product fully, so there's some commercial arrangement with the provider. But we do have the ability to price and to try and drive acquisition and merchandising of those products, which is important.

So just as they're kind of going into full launch, do you expect that to sort of drive an improvement in the customer experience? And if you could give us a feel for kind of the delta and how much that's changed over the last five months, because you've obviously done a lot, that would be really helpful.

Sure, sure. Let me tackle both of those. So first of all, do I think it's important to have a full value proposition in the U.S.? Absolutely. You know, SMBs, you know, we know, care about those three by three jobs close together. And of course, it allows you to build a fuller, you know, a fuller plan and fuller customer value, including LTV, which in turn allows you to invest, you know, in CAC. And so this is why we think it's so important to have a full offering. Because acquisition marketing in the U.S., I'm sure I don't need to tell you, is expensive. And we want to build sustainable economics, even if, you know, it will require big investment in the U.S., and it will, to keep growing customers. We want to believe that that's against a sticky proposition. So that's part of being disciplined and not just going when people want us to go, but when we feel like, you know, we have that offering. So that's what I would point you to.

Okay, perfect. And one quick final one, if I may. Just the commentary in the outlook around, you know, the balance between subs growth and ARPU growth. Given the penetration in ANZ, can I kind of expect that you are sort of more positive on the international opportunity, you know, relative to history?

Oh, my goodness. I'm excited about all the opportunities. I mean, our flagships, markets, and ANZ, they serve many needs for us. Number one, there is continued growth in opportunity. And we continue to see subscriber growth in Australia. We believe that there's much more deepening of the product and engagement that we can do. As an example, SIFT hasn't even launched in Australia yet. This is our biggest base of customers, and we have a whole new analytics suite we want to bring to the market. So you can imagine that there's much more we can do to deepen customer engagement while subscriber growth continues to be nice. It's also, I would always say, and I say it internally, it's our lead horse. There are many things we get to try in Australia and New Zealand first, given our leading position in this market, our deep history in this market. So I would just say it is a leading opportunity for Xero, even as we, of course, have under-penetrated international markets. So I think we're equally excited about both. They offer different opportunities in the portfolio, and we will continue to look to provide more and more value in the ANZ market.

Thanks. Your next question comes from Kane Hennin with Goldman Sachs. Please go ahead.

Good morning, guys. Just back on the OPEX guidance, I mean, you've obviously deliberately putting in a second decimal place into that range. I mean, should we read that as you've got a lot more confidence this year of hitting that level of spend relative to the last few years when you've been a bit below the initial guidance? And then just sort of the follow of that, just within that OPEX guidance, I think you indicated you've been incrementally growing the North America brand spending through this year. I mean, is that how we think about what's captured in 26 or is there capacity for something more significant within that guidance?

Yeah, thank you, Cain, for the question. And yes, around 71.5% is the guidance that we've given. We've obviously given you our best view as we see how we're planning to invest in growth as we move forward, also the impact of those non-recurring items. So, yeah, just trying to make sure that we are all aligned on the around 71.5% as we move forward. And I would just draw people's attention to those additional disclosures around non-recurring items, but also linearity that I called out in my prepared remarks and in the disclosures with regards to the timing of some of those investments, because we anticipate the first half to be higher than that 71.5% and the second half to be lower related to investments that we're making like Zerocon, but also some of those non-recurring items. I think with that, I'm going to pass over to Sikinder on the US questions. Sure.

So I think, I hope I addressed this in my prepared remarks also. We do plan for incremental spend in the U.S. this year. We keep, you know, we keep continuing to invest in a rateable way. One of the commitments we made to you all was we're going to invest rateably against the opportunity. And I would not read into it that, as I said, when we are ready to spend more in the U.S. in a stepped up brand investment, it will require, you know, a multi-year approach and we will plan for it accordingly.

The next question comes from Siraj Ahmed with Citigroup. Please go ahead.

Thanks. Hi, Siraj and Claire. First and second, just in terms of the U.S. subs growth, can you just unpack that? It did improve and looked like it was quite strong half net ads. Was that just better retention or better gross ads or was it just a factor in the subs growth? And then maybe one more, just from the rule of X government, Claire, for both Sukhinder and Claire, sort of, I mean, if you look at this year, rule of 40, there's more free cash flow driven than revenue growth. Sounds like you want to link to more revenue growth. And so just, is this a flag of more M&A, just focusing on the revenue side? Because you want to own more of the tech stack. Thanks. Sorry, product stack, thanks.

Got it. So a couple of things. Why don't I have Claire first talk? to the rule of X, and then I'll take the former question.

Yeah, as you said, Suraj, I mean, our rule of 40 in fiscal 25 was 44%, with 20% coming from the top line and 24% coming from our free cash flow margins. I think that, I mean, that is a good balance, I believe, between top line growth and bottom line growth as well. And that's what we plan to continue. So we want to continue to invest for that top line growth to maintain the But we are still very focused on free cash flow margins and being able to deliver profitability growth as well. So I'd say the balance that you see is a good balance and we continue to maintain that balance over time. So just because we're talking about the rule of X doesn't mean that we plan to make any changes. Material changes or anything in our approach, we continue to invest in growth, make sure those investments across the board are very much linked to our strategy and about driving value to customers.

Okay, and I'll pick up on the first question about U.S. subs growth. So first of all, our U.S. subs growth was not impacted by SIFT. The acquisition was completed in December, and early access of SIFT to U.S. customers happened just around March, April. I think you can probably find the date that we talked about it on LinkedIn and other forums. So SIFT is only now in beta, but that's very fast off the acquisition, and we're very pleased with that. But it did not influence U.S. acquisition in 25. I think U.S. acquisition in 25, first of all, there's some seasonality in our numbers, as there always is. But number two, remember, we have been incrementally increasing our spend. So, you know, we are investing ratably as we see product improvement. And so we are pleased with the subs growth. As you know, we also undertook long idle growth. cleanup, if you will. So we're focused on kind of smart acquisition using our dollars wisely as we improve the product.

Just to clarify, the SIFT standalone was not an impact as well, right?

No, the SIFT standalone was not a big impact this year because we only have a quarter of SIFT's numbers in ours. And by the way, you know, Again, we're mostly excited about the opportunity to grow SIFT. Of course, there's this great standalone business they have, but relatively speaking, the opportunity for us is to integrate SIFT into all of our offerings and get it to customers in an integrated way with the Xero product.

Claire, can I ask a quick follow-up, if that's okay?

Yes, sure, go ahead.

So that $150 million number that you mentioned, AMR to revenue, just can you, because there's a big FX benefit in this closing AMR. Is that the way we should be thinking for next year as well, even if that FX deal is for 31st March?

Yeah, so what we've... Oh, go ahead.

Go ahead, Sriraj. Sorry. No, that's it. That's it. Thanks a lot.

We intentionally shared the historical trend that we see between our entry point of AMRR and revenue growth in the subsequent 12 months. We do think that AMRR is a good starting point as you think about our revenue growth into next year. And then in addition to that entry point, you do have obviously subs growth and ARPU expansion that will continue to grow it further. So that's why we share that information. And so, you know, we think it is a good starting point, a good base. You can see we provided the historical information so that you can see the historical trends. There's a few things that, for example, to take into account as you look at the trend in fiscal 25. So with regards to kind of workflow max, for example, so just bear that in mind in our 25 numbers. But overall, we think it is a good starting point and you can build up from there based on ARPU expansion subscriber growth.

Great, thanks.

Thank you. Your next question comes from Roger Samuel with Jefferies. Please go ahead.

I've got a question about your customer mix across all regions, in particular in the UK where you've launched Zero Simple for MTB for income tax. So can we expect some ARPU headwind in the UK because it's a lower priced product? And I'm just also curious about your view on ARPU mix in Australia and New Zealand as well. It looks like you're targeting... higher value customers as opposed to just chasing stuff alone. And I've got a follow-up question as well.

Thanks. Sure. We seem to be on a trend where there's like three questions for one. All good. Hey, Roger. It's Sikander. So first of all, let me just speak to Mix overall, and then I'll go to the UK. As you can see, what you can read through in Mix, across the portfolio is first of all sales motions globally that do encourage us to focus on value not just volume of subs sold so that that motion is happening everywhere and obviously from different bases of opportunity right in Australia we see the opportunity of course to deepen you know product capabilities through deputy through SIFT and other things which expand ARPU but also as I said that selling motion in the front book and is we're starting to see some nice green shoots. And then ultimately, we still have a lot more to do to tackle the back book. Now that we've freed up our sales teams with segmentation to spend more time with customers, it helps them start to think about how to sell the back book and help the existing base understand the value of zero. Speaking specifically, I think, to one other question you had, which was, remind me, I think was about... What about the UK? Yes, about the UK. Sorry. So I just missed it for a moment. I do think it's fair to say that the Zero Simple product will create probably subs of lower value to the average ARPU of, you know, Global Zero. If you just think about, you know, the Business Edition product, you know, on a simple basis, Zero Simple is below the price point of that product. And we do know that MTD... for income tax is targeting a very, a much smaller SMB, which with lower revenues, and that's why you need a more affordable product. So I think it is fair to say that while there will be, we expect, you know, some tailwinds on subscriber growth, I think all things being equal, that is not really like the core segment that buys, you know, the business edition plus, plus, plus are, you know, are more premium editions of product. It's likely to come in with a simpler edition. That's a fair characterization.

All right. Got it. Maybe just one follow-up for Claire. I mean, there were a lot of questions before around the Rule of 40. Can you just clarify that zero would be prepared to dip below the Rule of 40 in some periods if you see some investment options?

Yeah, I think as laid out in the S&A, Roger, the Rule of 40 is an aspiration. So we're maintaining that as an aspiration rather than a guidance. And I think, you know, going back to some of the comments I made recently, I think the We know that it's important to have that balance between investments, operating leverage and top line growth. So we will continue to invest to drive both top line revenue growth and profitability growth. So yeah, just a reminder on the rule of 40 as laid out in best today is kind of an aspiration rather than a specific guidance.

All right, got it. Thank you.

Thanks. Your next question comes from Paul Mason with E&P. Please go ahead.

Hey, Tim, just a quick one for me on making tax digital. Just your expectations around when the subscriber sort of interest will pick up related to it. There's obviously the 1st of April date and maybe the lead into that and then the actual form filing date, which I believe is in June. So just your initial thoughts on how the wave of subscribers might come through.

Hey Paul, it's Sukhinder. I think it's fair to say that historically we've seen these, these come through later relative to a deadline rather than earlier. So, so I think overall my expectation is like people aren't rushing to the gates a year ahead of, you know, a deadline to meet the mandate. And I think historically we've seen that in the past as an exam. And as a reminder, The AB product, Zero Simple for ABs is out already. Zero Simple for SBs directly is out this summer. But yes, I think it's fair to say nobody really rushes early towards meeting a deadline. Thank you.

Your next question comes from Rowan Sundram with MST Financial. Please go ahead.

Hi, Fikinda and Claire and team. Thanks for this. Just the one for me. Most of my questions have been answered. Just around the maybe any early learnings or observations around the JAX take-up and usage and where that gives you confidence for the future, I guess, in terms of monetization. Thank you.

Sure. Thank you for the question. It's a good one. So, first of all, I think our early learning in getting JAX out was more pleased. I think customers... So first of all, and there's one other learning I want to share, but first of all, for those who leaned in and self-identified to become early adopters of JAX, it's almost exactly what you'd expect. As an early adopter, they want more. So that early adopter profile we saw, which is different from making JAX available to a bunch of people who may or may not be technology adopters. So I would note there is two classifications of behavior, I think, with AI, and I'm sure we're not alone in experiencing this. There's those who are leaned forward, And then they want more of whatever you're giving them. And there's those who are going to be, you know, slow adopters. And I think it's fair to say we have both within our base. So even though it's available to 100%, that doesn't mean 100% take it up at the same rate of engagement. So to the early adopters, it was very much more pleased. I think then, as I noted, we expanded JAX to be able to give you help in setting up zero. And I think that's important because we see that use case very successfully in our customer service. in our customer service use of AI, right? As I think we noted last year, customer service has been accelerating its use of AI and set up questions are a perfect example of where, you know, Gen AI and Zero Central has given great returns. So it was a no brainer to extend that same functionality into JAX. But obviously that's what's leading us hard into wanting to provide more utility and more jobs within the Zero platform that can be enabled by JAX in response to the feedback we've seen. Thanks, Agenda.

Your next question comes from Srihar Singh with Bank of America. Please go ahead.

Hi, Agenda. Hi, Claire. Thank you. Just two questions from my side. One on customer mix. Can you talk about the opportunity to grow the share or contribution of ultimate plans as a share of your total subscriber base? Where I'm coming from is these are high-value subs, and if we can retain them in zero for that would actually drive an uplift in your ARPU. And in that context, what are some of the features do you need to build in your ultimate plan to retain these high-value subs? Is it multi-entity or an AI agent or multi-currency? That'll be helpful. And second question on New Zealand subs growth, 4% growth there. Just double-checking, is that in any way indicative of subs growth in Australia three or four years out Or is there something else playing out in New Zealand? Thank you.

Got it. Why don't I take the question on customer mix and specifically the ultimate plan, and then Claire will pick up on New Zealand subs. First of all, you are right to identify that there is lots of opportunity in our bigger plans. And historically, I would say these have been underpenetrated. I think you make rightly the point that we have many large customers who are using ultimate. who would like, I think the features they look for, advanced analytics, yes, multi-entity, multi-currency are in there, transaction limits. You know, how many, let's say, invoice volume can they put through the platform? These are the types of things that we see as asks or requests from larger customers. But I would note that that ultimate customer who's on Xero today is there because relative to the next best alternative, Xero is a very cost-effective option. And they often use the ecosystem to, I would say, enhance things that we may not have, whether that's multi-entity or what have you. So I would say, relatively speaking, it's a very attractive segment. I would say historically we have been under-penetrated there and we see that as a future opportunity and I've mentioned some of the things that would be attractive to them. Keep in mind some of what is in SIP's advanced plans would also be very attractive to that customer base.

Yeah, I'll just take the question on subs to your point, the underlying subs growth of 4% in New Zealand with revenue growth of 11%. I think everyone is aware that it is one of our most penetrated markets. was in line with our expectations. We still got opportunity there to grow, but with that high penetration that we've had now for a little while, I think we were very much happy and expecting around that 4% on underlying subs and also 11% in terms of revenue growth.

Thank you.

Your next question comes from Eric Choi with Baron Joey. Please go ahead.

Oh, thanks very much. Just a quick follow-up on revenues. And I wanted to pick up on Claire's comments earlier. I think Claire mentioned first half 26 will cycle a tougher PCP comparison because of the Aussie pricing timing and other reasons. And so I just wanted to confirm, when we're thinking about second half 26, does that also cycle easier PCP comps because workflow max and model are completely out and then you've got a full six months of idle subs out as well? Because if that's the case, like if I just take your AMRR and assume that for first half 26, and that's very, very conservative, you'd already be doing 20% revenue growth in first half 26. And then just thinking about second half 26, it doesn't really seem like there should be a reason why the revenue growth rate should dip in second half 26 versus first half 26. I know you won't comment on specific numbers, but is there any kind of logical key pieces I'm missing there?

No, I think, Eric, thanks for your question. And to your point, I'm not going to comment on the specifics on fiscal 26, but I will remind you that we do have a tougher compare. And that's mainly coming from kind of if you're looking at our payments business and the strong performance and step change that I mentioned in my prepared remarks in the first half of the year. So that's what's creating that, I would say, tougher compare in H1 of fiscal 26. And just also a reminder that the majority of our revenue and the growth due to historical seasonality is second half weighted. So revenue in the second half historically is higher than in the first half. So I think just reiterating some of those comments that I made in my prepared remarks.

Yeah. And just to add, Eric, you also hit on two other key factors, long idle and workflow max removal. Yes. Thank you for picking that up. those are all things that were in first half of last year that are no longer with us.

Awesome. That was really helpful. Thank you. Thanks, Eric.

That is all the time we have for questions today. I'll now hand back to Secundus and Cassidy for closing remarks.

Well, thank you again, everyone who joined today's call. We really appreciate the questions. We appreciate the time and most of all, your support. So we look forward to chatting again soon and thanks for giving us the time today.