The Xero Ltd (ASX: XRO) share price is rebounding on Thursday morning. At the time of writing, the cloud accounting platform provider's shares are up 3% to $179.13.
This is a big improvement on its early action, which saw its shares drop 2.5% to $169.51.
This follows the release of its full year results before the market open.
Xero share price higher on results day
For the 12 months ended 31 March, Xero reported a 23% (20% in constant currency) increase in operating revenue to NZ$2.1 billion.
Xero's annualised monthly recurring revenue (AMRR) grew 22% to NZ$2.4 billion for the year thanks to solid growth in subscribers and average revenue per user (ARPU).
Adjusting for the removal of long idle subscriptions, subscribers increased 10% or 414,000 and ARPU was up 11%. This meant that Xero finished the period with 4,414,000 subscribers and an ARPU of NZ$45.08.
The company's operating expense to revenue ratio was 71.8% for FY 2025, which resulted in it posting a 22% increase in adjusted EBITDA to NZ$640.6 million for the 12 months.
Xero's free cash flow generation was very strong for the year. It reported free cash flow of NZ$506.7 million, which represents a free cash flow margin of 24.1%. This is up from 20% in the prior period.
As a result, the company once again delivered a greater than Rule of 40 outcome, with 44.3% in FY 2025. The Rule of 40 is the sum of annual revenue growth percentage in constant currency and free cash flow margin percentage.
Finally, on the bottom line, Xero posted a 30% increase in net profit after tax to NZ$227.8 million.
How does this compare to expectations?
Xero's result is a touch short of expectations, which explains why its share price was falling at the open.
For example, the consensus estimates was revenue of NZ$2.1 billion, EBITDA of NZ$653 million, net profit of NZ$246 million, and guidance for an FY 2026 operating expense ratio of 69.3%.
While its revenue was in line, its earnings weren't. Its operating expense ratio guidance was also a miss. More on that below.
Management commentary
Xero's CEO, Sukhinder Singh Cassidy, was pleased with the 12 months. She said:
Our FY25 results demonstrate Xero's macro-resilient growth and effective execution of our strategy. Our focus on balanced profitable growth has enabled us to again deliver strong EBITDA growth and a greater than Rule of 40 outcome.
We have achieved this while maintaining strong momentum across our strategic pillars and, importantly, have increased our product velocity to bring more value to customers through our focused 3×3 strategy. All this is underpinned by our continued investment in our product and people, and operating discipline to deliver on our aspirations.
Outlook
Xero advised that its total operating expenses as a percentage of revenue is expected to be around 71.5% in FY 2026. It notes that this ratio is expected to be higher in the first half versus the second half.
Unfortunately, the market was looking for a lower figure of 69.3%. This miss is likely to have led to some of the share price weakness in early trade.
Looking further ahead, it has reaffirmed its aspirations outlined last year. It said:
Xero continues to focus on the aspirations outlined in February 2024: to be a world-class SaaS business; and Xero believes it has the opportunity to both double the size of its business and deliver Rule of 40 or greater performance, over time. As Xero grows, it will also seek to be more balanced between subscriber growth and ARPU expansion.
The Xero share price is up over 40% since this time last year.
