Xero Limited’s Earnings Call Highlights Strong Growth

Xero Limited ((AU:XRO)) has held its Q2 earnings call. Read on for the main highlights of the call.

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Xero Limited’s recent earnings call conveyed a generally positive sentiment, underscored by strong revenue growth across key regions and successful strategic initiatives, such as the Melio acquisition. While challenges like increased churn and regional issues in Canada were acknowledged, the overall financial health and strategic positioning of Xero remain robust.

Strong Revenue Growth

Xero reported a remarkable 20% year-over-year increase in operating revenue, reaching $1.194 billion. This growth, which stands at 18% in constant currency, highlights the company’s ability to sustain momentum despite challenging prior comparisons.

Regional Success

Australia led the charge with a 19% revenue increase, alongside a 9% rise in subscribers. The UK and North America also posted impressive performances, with revenue growth of 25% and 21%, respectively, showcasing Xero’s strong foothold in these markets.

International Segment Growth

The international segment, encompassing the UK, North America, and other global markets, experienced a 24% revenue increase year-over-year. This growth underscores Xero’s effective execution against its strategic priorities.

Melio Acquisition and Integration

The acquisition of Melio, completed in October, is poised to accelerate Xero’s growth in the U.S. market. Plans are underway to integrate Melio’s bill pay services into Xero by December 2025, which is expected to enhance the company’s offerings.

Rule of 40 Achievement

Xero achieved a Rule of 40 outcome of 44.5%, marking an increase of 0.6 percentage points year-over-year. This metric indicates strong cash generation and balanced growth, reinforcing the company’s financial health.

Churn Increase

The earnings call noted an increase in MRR churn to 1.09%, reflecting targeted growth in higher-churn segments. While this presents a challenge, it is part of Xero’s strategic approach to market expansion.

Challenges in Canada

Revenue growth in North America fell short of expectations, partly due to a subdued market in Canada and the absence of revenue from Xerocon. This regional challenge highlights areas for potential improvement.

Impact of Noncash Costs

General and administration costs rose by 2.4 percentage points, driven by higher executive personnel costs, which impacted overall EBITDA margins. This increase in noncash costs is a factor for investors to monitor.

Forward-Looking Guidance

Xero’s forward-looking guidance remains optimistic, with a reported 20% year-over-year increase in operating revenue and a 12% rise in adjusted EBITDA to $351 million. The company’s strategic acquisition of Melio is anticipated to bolster U.S. operations, despite a potential shift to a net debt position affecting the Rule of 40 performance in the latter half of fiscal ’26. Overall, Xero’s strategic balance of revenue growth and profitability underscores a positive outlook for sustained financial performance.

In conclusion, Xero Limited’s earnings call painted a picture of robust financial health and strategic growth, with strong performances across major regions and promising strategic initiatives like the Melio acquisition. Despite challenges such as increased churn and regional issues in Canada, Xero’s overall outlook remains positive, with a focus on sustaining its growth trajectory.