With assistance from my AI junior analyst.
Xero’s FY26 report was **strong** overall, but the clearest read-through on Melio is “good strategic traction, weak near-term profitability.” Also, the acquisition was much larger than $1b: Xero agreed to pay US$2.5b upfront, with up to US$500m more in contingent consideration, and completed the deal on 15 October 2025.[1][2][3]
## Group results
Xero reported FY26 operating revenue of NZ$2.753b, up 31% headline and 21% organically, while adjusted EBITDA rose to NZ$757m, up 18% headline and 30% organically. Free cash flow was NZ$554m and Rule of 40 reached 48.5, which shows the core business remained strong even after absorbing Melio.[1]
The strongest regional acceleration was in international markets, where revenue reached NZ$1.361b, up 47% headline and 25% organically. In the US, reported revenue was NZ$332m, up 240% headline, 30% organically, and 50% on a pro-forma basis, which is the clearest sign that Melio materially changed Xero’s US growth profile.[1]
## Melio scorecard
| Area | What FY26 showed | Why it matters |
|---|---|---|
| Revenue growth | Melio revenue grew 58% on a pro-forma basis in FY26. [1] | Demand and monetisation look strong rather than merely “acquired growth.” [1] |
| US scale | Direct US customers reached 424k, and direct US customer ARPC rose to 89 per month on the pro-forma disclosure. [1] | Melio appears to be lifting both customer value and Xero’s relevance in the US. [1] |
| Payments engine | Pro-forma total payments revenue reached NZ$535m, up 53%, and consumption-based revenue rose to 18% of group revenue from 7% in FY23. [1] | This shifts Xero toward a higher-growth payments model, not just subscriptions. [1] |
| ARPC uplift | Group ARPC rose to 55.44, with Melio contributing 4.24, or about 40% of the uplift. [1] | Melio is already visibly increasing revenue per customer. [1] |
| Profitability | Group gross margin fell to 83.9%, while organic gross margin was 89%, with Melio causing a 5 percentage-point mix effect. [1] | Melio is growing fast, but it is structurally lower-margin than Xero’s core SaaS business. [1] |
## What concerns me
The main negative is that Melio is still dilutive to profitability and cash conversion. Xero disclosed that adjusted NPATA included Melio losses of NZ$111.7m since 15 October, including fair-value acquired amortisation, and those losses did not generate a positive tax offset.[1]
You can also see the drag in margin quality: reported free cash flow margin was 20.1%, but pro-forma free cash flow margin was only 13.3%, and pro-forma Rule of 40 was 36.0 rather than the reported 48.5. In plain terms, Melio is helping growth a lot more than it is helping profits right now.[1]
## Assessment
My read is that Melio is performing well operationally but has not yet proven attractive financially at the purchase price. The evidence for “operationally well” is strong revenue growth, higher US scale, strong payments TPV and take-rate expansion; the evidence for “not yet financially proven” is lower gross margin, ongoing losses, and management only guiding to Melio adjusted-EBITDA breakeven on a run-rate basis in H2 FY28.[2][3][1]
That means the acquisition case still depends on execution over the next two years, especially US brand spend, payments penetration, and converting Melio’s growth into margin. Based on this report alone, I’d call Melio a promising but still expensive acquisition that is boosting Xero’s strategic position faster than it is boosting shareholder economics.[1]
