The company is shifting its focus towards long-term growth, moving away from simply increasing subscriber volume and instead targeting high-margin, high-value customers.
The accounting platform posted a 42% rise in net profit to NZ$134.8 million and recorded a 54% increase in free cash flow for the half-year ending 30 September. Despite these strong results, investor concerns about slowing user growth and the methodology behind profit calculations led to a share price drop of more than 9%.
Originating in Australia and New Zealand, Xero has evolved from a small startup into a global, publicly listed software provider currently worth over $23 billion. Its earlier growth strategy centred on expanding the user base rapidly. Now, the company is prioritising customers who contribute higher average revenue, especially in competitive overseas markets such as North America. This marks a shift where operational efficiency and tailored services take priority over raw sign-up numbers.
Key performance figures illustrate this change in direction. Average revenue per user increased by 15% to NZ$49.63, while net new user additions fell 5%, totalling 186,000. Overall subscriber growth reached 10%, although that pace has slowed. Nonetheless, Xero delivered a Rule of 40 result of 44.5%, which is above its previous half-year figure and supports claims of sustainable expansion. The business also revised its forecast for operating expenses relative to revenue, reducing the ratio from 71.5% to 70.5% on the back of various cost-efficiency measures.
Central to Xero’s updated strategy is the NZ$2.5 billion acquisition of Melio Payments, a New York-based firm offering accounts payable services to small businesses. This is Xero’s biggest acquisition and is intended to strengthen its position in the US market. The deal connects Xero with key payment networks such as Shopify and Capital One, introducing a new revenue stream and transforming the product into a broader financial platform. If successfully integrated, management expects this acquisition could help double US revenue by 2028.
Despite these developments, the market remains cautious. Some analysts have questioned the company's reliance on certain accounting practices, such as capitalising nearly 50% of research and development expenses, which may inflate reported profit. Others see the decline in subscriber growth as a warning sign amid intensifying competition. However, broader trends in the industry, including a shift towards advisory services and increased automation, could support the company’s long-term success if execution remains strong.
