Xero first-half profit crashes to $18.6m, but it lifts outlook and announces A$1 billion buyback

Xero first-half profit crashes to $18.6m, but it lifts outlook and announces A$1 billion buyback

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The buyback includes A$550m to prevent dilution from share-based compensation, but Xero said it also wanted to return capital to shareholders because “the board believes the current share price does not reflect Xero’s long-term value”.

Shares closed at A$70.86 yesterday.

The stock has fallen 49.4% over the past 12 months. The tumble started with the announcement of the Melio deal, but has been amplified by concerns about AI (artificial intelligence)-powered competition.

In an ASX filing this morning, Xero said the Melio costs were expected.

“Melio is currently a loss-making business, reflecting its stage of maturity and journey to scale.”

Melio was on track to break even, on an adjusted ebitda basis, in the second half of FY2028.

Xero’s operating revenue for the six months to September 30, which saw rounds of price increases over multiple products and territories, jumped 46% to $1.745b.

The Wellington-registered, ASX-listed cloud accounting software firm, whose chief executive, Sukhinder Singh Cassidy, is based in San Francisco, quotes its financials in New Zealand dollars.

Xero lifted its FY27 full-year revenue outlook to between $3.77b and $3.8b from the previous $3.62b to $3.73b, which it said “largely reflects stronger Melio performance” plus foreign exchange benefits from the weaker kiwi dollar.

Full-year adjusted ebitda is now expected to be between $880m and $920m, from the previous $860m to $920m. The boost was put down to “payments growth momentum” and cost cuts, including layoffs.

New Zealand had “a lower level of growth compared to other regions”, Xero said in an ASX filing.

The relatively low growth – a 6% increase to $125m revenue for the six months to September 30, was attributed to New Zealand being a mature market for the company.

But another mature market, Australia, saw 23% growth in revenue to $670m.

Britain saw 24% revenue growth to $419m.

The United States, where gains from the Melio acquisition were concentrated, saw revenue increase 51% to $365m.

Rest-of-the-world revenue was up 23% to $165m.

Going into the half-year result, Morningstar analyst Roy van Keulen had an A$100 fair valuation on Xero’s shares.

Van Keulen told the Herald that Xero had overpaid for Melio in its latest bid to break into the US market, where rival Intuit would be hard to dislodge. The money was better spent on Britain and other more approachable markets.

However, he also thought the threat from an AI “vibe-coded” alternative was overblown. Investors had oversold the stock.

In August, Singh Cassidy’s $30.9m remuneration package drew criticism from the NZ Investors Association (formerly the NZ Shareholders Association).

NZIA head Oliver Mander said half of the incentive payments in Singh Cassidy’s “US-style” pay package were service awards, or bonuses simply for staying with the company”.

“We don’t really love it. It’s just based on tenure,” Mander said.

Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.

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