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.