Xero’s 86% profit slide comes with an A$1 billion buyback attached

Xero’s first-half result reads like two companies stapled together. The accounting software business that built the brand is throwing off cash. The US payments platform it bought to crack America is still burning it. Management’s answer to that tension is a buyback of up to A$1 billion, and investors should be clear about what they are being sold.

For the six months to 30 September, Xero posted a 46 percent revenue jump and an 86 percent profit fall, with revenue hitting $1.745 billion and net profit shrinking to $18.5 million from $134.8 million. Reported adjusted EBITDA rose just 3 percent to $361.6 million, or 23 percent on a pro-forma basis that puts Melio in both periods.

Chief executive Sukhinder Singh Cassidy framed the buyback as a value call, saying “current market valuations do not fully reflect Xero’s long-term value and growth potential.” She has a point on price. The stock was down 49.4 percent over the prior 12 months before the result.

Melio is the whole story

The profit collapse has one cause. Melio contributed $283 million, or 16 percent of revenue, in its first full half under Xero ownership, and it is still loss-making. This was visible in May, when FY26 net profit fell 27 percent to $167.4 million and the FY26 filing showed Melio carrying a $111.7 million net loss, with gross margin down 5.1 points to 83.9 percent because payments revenue is simply lower-margin than SaaS subscriptions.

The core business, by contrast, is in good shape. Organic free cash flow excluding Melio rose 26 percent to $639.7 million in FY26. Xero did not need to buy growth to survive. It chose to.

In August, a column in The Press called the deal “less like disciplined capital allocation and more like a company wanting a marquee American win driven by ego and hubris,” noting roughly US$2.5 billion up front plus half a billion in earn-outs. Harsh, but management’s own guidance supports the scepticism: Melio is now expected to reach run-rate EBITDA break-even only in H2 FY28, nearly three years after the deal closed.

A cash-rich company now carries debt

The acquisition rewired the balance sheet. At FY26, net tangible assets per share swung from NZ$6.62 to negative NZ$3.02. Xero now reports net debt of $843.9 million, about 1.1 times adjusted EBITDA, against $1.149 billion in cash and deposits, and says the buyback will be funded from excess cash and expected free cash flow while keeping that ratio healthy.

That leverage is manageable. It is not nothing. A company that was comfortably net cash two years ago is now returning a billion Australian dollars from a geared position.

The metrics flatter the half

Most coverage repeated that Xero’s Rule of 40 score leapt to 54.9 percent. That figure compares a half with Melio against one without. On a like-for-like pro-forma basis the number is 36.1 percent, still below the benchmark, though management expects to reach around 40 percent for FY27, a year earlier than planned.

The guidance upgrade deserves the same caution. RBC Capital Markets said the $100-150 million revenue upgrade was “almost entirely offset by higher costs, suggesting lower quality revenue growth.”

Part of the buyback pays for staff shares

Here is the nuance missing from the confidence narrative. Last year’s A$550 million buyback was explicitly designed to offset dilution from share-based compensation. In May, Berkeley Advisory seized on that wording, arguing that employee share pay, routinely added back as “non-cash” in adjusted EBITDA, is real enough to require cash to undo. “A cost that requires cash to reverse is not economically free,” it concluded.

If the new programme follows the same policy, a chunk of the A$1 billion is maintenance, not a bet on undervaluation. Shareholders should ask management to say how much.

There are genuine bulls. Analyst Van Keulen told the NZ Herald “the buyback makes sense to us, given we already thought shares were undervalued,” while also arguing Xero overpaid for Melio and should have spent the money on Britain and easier markets.

Churn at the top adds noise

Shares jumped 12 percent on the same day Xero confirmed CFO Claire Bramley will leave on 31 January 2027, less than two years into the role and the third executive exit in six months. Losing the finance chief midway through a leveraged integration and a billion-dollar capital return is not ideal timing.

What to watch next

Xero is not in trouble. The core business is strong, customers keep coming and the share price had fallen far enough to make a buyback defensible. But this is both confidence and financial engineering. The real test arrives over the next 18 months: whether Melio hits break-even on schedule, whether pro-forma Rule of 40 genuinely clears 40, and how much of that A$1 billion simply mops up staff share issuance. Until then, read the pro-forma tables, not the press release.

Sources

• RNZ: Xero revenue surges, but profit slumps following Melio acquisition (2026-11-12)
• Xero: H1 FY27 Results ASX Release (2026-11-12)
• Xero: H1 FY27 Investor Presentation (2026-11-12)
• Forbes Australia: Xero launches $1 billion stock buyback plan as CFO exits (2026-11-12)
• NZ Herald: Xero first-half profit crashes to $18.6m, but it lifts outlook and announces A$1 billion buyback (2026-11-11)
• NZ Herald: Xero profit drops 27% as Melio losses hit result, shares slide on ASX (2026-05-14)
• ASX: Xero Limited FY26 Annual Report and Appendix 4E (2026-05-14)
• The Press: About the timing of that blanket price increase email (2026-08-04)
• Berkeley Advisory: Xero Limited (ASX: XRO) FY26 analysis (2026-05)