Xero Limited

Thank you for standing by and welcome to the Xero Limited 2026 Interim Results Conference Call. I am joined by Xero's Chief Executive Officer, Sikinder Singh-Cassidy, and Chief Financial Officer, Claire Blamley. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the call over to Sikinder Singh-Cassidy, Chief Executive Officer of Xero. Please go ahead.

Good morning from Sydney, Australia. Thank you for joining our investor briefing today covering Xero's financial and operating results for the half year ending September 30th, 2025. I'm Sikinder Singh-Cassidy and I'm with Claire Bramley, our CFO. Our first agenda item is the summary of Xero's performance for the half year. I'll then pass to Claire to cover our financial results in more detail before I finish with strategic priorities in Xero's outlook. After that, we'll move to Q&A. So moving to a summary of our results on slide five. We're very pleased with our H-1 fiscal 26-year results, which clearly demonstrates our sustained revenue momentum and execution against our strategy. We continue to achieve strong revenue growth across our 3x3 portfolio. This, along with another meaningful increase in profitability, enabled us to again deliver above the rule of 40, demonstrating strong cash generation. I'm going to touch on the key metrics here, and Claire will cover them in detail later in the presentation. Operating revenue grew 20% year-on-year to reach $1,194,000,000, or 18% in constant currency. This strong growth comes despite a tough prior period comparison. Adjusted EBITDA was 351 million or up 12% year-over-year. Finally, our solid operating results and strong cash generation resulted in a Rule of 40 outcome of 44.5%, an increase of 0.6 percentage points year-over-year. I'll now spend a few minutes outlining the regional contributions to revenue growth. We saw each of our largest markets, Australia, the UK, and the US, make a strong contribution. ANZ remains a core component of our portfolio and continues to deliver robust quality growth off a large base. You can see the sustained performance reflected in our results. We delivered 70% revenue growth year over year. This was the result of continued subscriber and ARPU expansion, with subscribers up 7% and ARPU growing 12% year over year. Australia continues to drive strong revenue growth up 19%. subscribers were up 9% year over year. Australia is making good progress in a highly penetrated market, continuing to add new features to support ARPU expansion while delivering solid subscriber growth off an already large base. Its GTM playbook is evolving to progress new customer mix, but as we've said before, moving the back book of existing customers is a longer-term opportunity. New Zealand delivered quality growth in what is our most easily penetrated market. Revenue grew by 8%, with net subscribers up 4% year over year. This is a positive result and ahead of economic growth in this mature market. Overall, the performance of AMZ reflects the strength of our core market relationships and our ability to drive growth through strong execution and a focus on customer value. Turning our focus now to the international segment, which covers the UK, North America, and our rest of world markets, I want to note that this segment is fundamental to our future scale and is executing strongly against our strategic priorities. International revenue grew by 24% year over year. Looking at the individual markets, in the UK, we delivered robust performance with 25% revenue growth. Subscriber growth remained strong at 13%. We saw early indications of tailwinds related to HMRCs, regulatory changes flowing through. We anticipate the majority of the market benefit will come over the next few periods. We are excited, as this will support subscriber growth, but we remind you that there is a negative impact on ARPU as smaller businesses adopt our lower-priced compliance offerings. North America continues its momentum, delivering 21% revenue growth, despite the headwind of no revenue from XeroCon this past. Adjusting for this, growth was 26%, a great result. Subscribers grew 15%, a good outcome in what is typically a seasonally weaker half. I will talk about our Melio acquisition shortly, but keep in mind that the deal immediately provides a step change in the scale of our U.S. business, and we're really excited about its ability to accelerate growth in the U.S. Finally, our rest of world markets grew revenue by 22% with subscriber growth of 11%. In summary, strong execution in the international segment is building a solid foundation for sustainable, high-quality growth in these markets. This slide brings the key financial outcomes together, showing how we are successfully balancing growth and profitability while delivering above-limit 40 outcomes. We're consistently delivering EBITDA and free cash flow growth, which is contributing to strong cash flow generation. The free cash flow margin reached 26.9%, which you can see on the metal chart. Adding this to revenue growth, where we used the 18% constant currency metric, resulted in our Rule of 40 outcomes increasing another percentage point to reach 45%. We are very pleased with this result, which demonstrates our ability to deliver sustained revenue growth supported by disciplined investment to grow profitability, while at the same time adding value for our customers. Before I hand to Claire, I want to briefly acknowledge the completion of the Emilio acquisition in October. We're incredibly excited to bring our two businesses together, and I'll discuss this in more detail later in the presentation. Now I'll hand over to Claire to walk us through the financial results.

Thank you, Sikinda, and good morning, everyone. It's a pleasure to be here to present our financial results for the first half of fiscal 26. We have delivered another strong half. As Sikinda said, Our results show sustained revenue momentum across our portfolio of businesses and the effective execution of our strategy, allowing us to deliver another above-rule-of-40 outcome of 44.5%. Starting with revenue, we have a large recurring revenue base spread across a global portfolio, which enables us to consistently deliver strong top-line growth. Despite the tougher criteria comparisons, we maintained strong revenue growth this half of 20% year-over-year. Subscriber growth was 10%, to reach just shy of 4.6 million subscribers at the end of the period. RFU growth was 15% on a reported basis, noting that our RFU disclosures are based on the end-of-period foreign exchange rates. On a constant currency basis, RFU growth was 8%. The continued balance growth in both subscribers and ARPU drives our AMLR, which I'll talk about on the next slide. AMLR reached $2.7 billion. This represents a 26% year-over-year growth, or 19% in constant currency. AMLR, like ARPU, is calculated using end-of-period foreign exchange rates. The AMLR exit rate sets a strong foundation for growth. The short-term discounts and hedging are excluded from this number and will impact how this translates into full-year 26 revenue. We saw both impact our revenue growth in the first half relative to AMLR growth. We are continuing to deliver very healthy gross profit, with gross profit margins at 88.5%. The slight reduction year over year reflects our continued investment in our customer experience. Now let's look more closely at the drivers of our 10% RP growth in the first half, which you can see on slide 12. Price changes reflect monetization of the significant value we have added to zero through new features and capability improvements. Price increases typically happen in the first half of the year throughout Australia, New Zealand and UK regions. So we expect pricing to contribute more significantly to our food during this period. The specific price changes across our plans reflect a more strategic and segmented approach. This is evidenced by our decision to hold prices flat on all lower end Ignite plans in each of these markets. Moving to product mix. We are seeing positive results from our grow to market strategy. with new customer mix incrementally improving in the UK and US as our targeted sales motions become embedded. In Australia, there have been some headwinds as we added payroll back into our lower-tier plans. This has seen some customer shifts towards these plans. While overall we have made progress on our new customer mix, as Vikinda mentioned, back-book progress remains an opportunity in the longer term. Across all regions, we are continuing to evolve our direct go-to-market channel to support our focus on mix. We are successfully targeting higher-value customers through applying short-term promotional discounts and deepening our lead generation through avenues such as partnership and affiliate marketing. Finally, platform revenue growth continued to drive ARCU expansion, largely due to strong payments progress. So let's turn to that. It is worth reminding you the payments contribution in the first half was entirely from our existing accounts receivable offering, as the Melio acquisition did not complete until October. We continue to see excellent momentum, with payments revenue growing 40% year on year, mainly from continued strong TPV growth of 35%. This revenue has been generated across our 3x3 and reinforces our confidence in the value of providing integrated payments and accounting to SMBs. Employees paid through zero payroll increase 5% year-on-year. This lower growth rate reflects the deep penetration and large existing customer base we have in Australia. We are looking forward to the opportunity to start driving payroll penetration in new, untapped markets, such as in the US. where our embedded offering with Gusto goes live in December. Now let's look at customer retention. MRR churn was 1.09%. This remains below our long-term pre-pandemic average of 1.15%. The slight increase from the last half in part reflects our decision to incrementally allocate investment to the direct channel, as well as target growth in our international segment. As we've noted before, while these segments have structurally higher churn, they also typically attract higher R2 customers, which aligns with our strategy to optimize the total value of each subscriber. Our focus on the value of a subscriber is shown in our LTV, which expanded to $19.56 billion, with LTV per subscriber increasing to $4,261. With regards to your acquisition metrics, customer acquisition costs per gross ad was $757, with a healthy and efficient payback of 15.2 months. The increase in CAC aligned with our strategic focus on attracting higher value subscribers to drive mix, rather than just focusing on volume. We are investing in data-driven tools and building our internal capabilities across digital performance marketing to drive our direct channel. We are also continuing to leverage our partner-facing teams to better support our accounting and bookkeeping customers. This resulted in an LTV to CAC ratio of 5.6, slightly down from the prior period, driven mainly by the AMZ region, which remains at an industry-leading ratio of 10.7. Let's move to operating expenses. The OPEX ratio excluding acquisition costs was 72.8% in the half. We have revised our fiscal 26 outlook and now expect the full year ratio to be around 70.5%. Within this, we've added media, adjusted for currency, and importantly realized some efficiency benefits while continuing to fund investments for growth. Our capital allocation framework remains disciplined and returns-based, which in turn aims to deliver improvements in efficiency. As you can see through our revenue per FTE, which increased 16% year-on-year. As we realize this efficiency, we are able to decide the proportions that we reinvest in line with opportunities we see and our rule of X approach. Now let's turn to the key investment areas for the half. Sales and marketing costs were 31.7% of revenue, a reduction of 0.3 percentage points year-on-year. This reflects disciplined investment in digital performance marketing as we continue to strengthen our internal capabilities. Product design and development costs grew 18% year-on-year, equal to 28.2% of revenues. Gross product spend, which includes capitalized costs, grew 24%, equal to 34.6% of revenue. This reflects our continued focus on product velocity, including hiring domain experts to support our new AI capabilities. Our capitalization rate was higher at 47.4%. This was driven by more developer time being spent on releasing new products and features. many of which we announced at Zero Con Brisbane. General and administration costs were 12.9% of revenue, an increase of 2.4 percentage points. As we flagged at our fiscal 25 results, this increase was expected and is primarily due to higher executive personnel costs associated with the accounting treatment of option and sign-on equity grants announced last year. The majority of these non-cash costs are not expected to recur in fiscal 2017. Moving down to the bottom line, our sustained revenue growth and disciplined capital allocation delivered an adjusted EBITDA of $351 million for the half, a 12% increase year-on-year. Our adjusted EBITDA margin was 29.4% down 2 percentage points. driven by the non-recurring G&A expenses and investment in sales and marketing previously mentioned. Adjusted EBITDA excluding total share-based payments improved by 0.8 percentage points to 38.8%, demonstrating the continued positive operating leverage in the business. Our profitability and discipline translated into strong, free cash flow. We generated $321 million of free cash flow in the half. This represents a free cash flow margin of 26.9%, a significant step up from 21% in H1 of fiscal 25. The high-quality recurring nature of our business continues to deliver very strong cash realization from customers. Our payments to suppliers and employees grew only by 10%. This lower cash outflow relative to OPEX growth was partly due to the timing of some vendor payments, as well as the higher proportion of non-cash share-based payments. We saw a $25 million increase in net interest received, reflecting the higher cash balances held prior to completion of the media acquisition. This benefit is temporary, as we have now completed the transaction. Finally, there was a limited impact on tax payments in H1. as we depleted prior year tax repayments. We will enter a more normal New Zealand corporate tax payment rhythm in the coming periods, which will impact future cash tax payments. It's worth keeping these factors in mind as we head into the second half. A strong cash generation further strengthens the balance sheet. We ended the half with a net cash position of $3.2 billion, supported by the net funds raised for the NEO acquisitions. Following the completion of the media acquisition, our pro forma balance sheet shows a net debt position of approximately $0.5 billion, with a pro forma net debt to EBITDA of approximately 0.9 times. This reflects our commitment to maintaining a strong balance sheet, while also creating a clear pathway for meaningful deleveraging. It also ensures we retain flexibility to continue pursuing our build, partner, and buy approach to capabilities. It is important to note that the shift to a net debt position will increase interest costs and reduce interest received in the second half of fiscal 26. This change in our balance sheet position will create a headwind through our rule of 40 performance in the second half of the fiscal year compared to the first half. With regard to the completion of the Melio acquisition, slide 21 outlines the consolidated go-forward business showing Melio included on a pro forma basis for the first half of fiscal 26 compared to the same period last year. The disclosure here is intended to help with the understanding of the combined business on a life-for-life basis. We won't be providing separate performance metrics for Melio going forward. Its revenue contribution will form part of the new US region, of which you can find more details in the appendix. In the first half of fiscal 26, underlying Melio revenue growth reached 68%, driven by the addition of around 7,000 new customers since the second half of fiscal 25, and by an increased usage per customer. Together, these delivered an 18% lift in underlying TPV. This strong growth will support the scaling of our U.S. business, as shown in pro forma revenue growth of 53% year-over-year. Turning to profitability, pro forma EBITDA reflects Melio's current scale and maturity. I'll walk through a few of the key drivers of this result and why we remain confident in the scale opportunity and the returns it can generate over time. Melio's growth margin has been broadly consistent with fiscal 25. That's mainly due to the timing of product-led syndication additions. We are clear on the drivers to expand margin going forward through leveraging scale, syndication, payment mix, and subscription growth. Operating expense growth reflected a planned investment in sales and marketing to support this growth opportunity. We expect to see scale benefits come through as Rio continues its rapid growth. There are also two future considerations not included in the pro forma that I want to call out. First, it doesn't reflect the shift to a net debt position or the non-cash amortization of acquired intangibles we highlighted at completion. Second, the accounting treatment of MEDEO's management earn-out and incentive plans will add about $10 million in operating expenses in the second half of fiscal 26, which isn't reflected here. The pro forma Rule of 40 came in at 39.8%, a really solid outcome. While it does face some headwind from the shift to net debt, we remain very confident in our ability to deliver against fiscal 28 Rule of 40 and revenue growth aspirations. To close, the first half has been another strong period of execution for Xero. We're delivering high-quality revenue growth, strong cash generation, and remain well-positioned to keep investing with a disciplined rule of X framework to capture the significant opportunity ahead. Thank you for your time. I'll now hand back to Sikinder.