Xero Ltd (ASX: XRO) shares are on the move on Thursday.
In morning trade, the cloud accounting platform provider's shares are down 5.5% to $132.11.
This is despite the release of a strong half year result before the market open.
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Xero shares tumble on results day
For the six months ended 30 September, Xero reported an impressive 20% increase in operating revenue to NZ$1,194 million.
This was driven by ANZ revenue growth of 17% to NZ$663.7 million and a 24% jump in International revenue to NZ$530.5 million.
Management advised that this reflects a 10% lift in subscriber numbers to 4.59 million and a 15% jump in average revenue per user (ARPU) to NZ$49.63. With respect to the latter, Xero's ARPU is now NZ$46.39 in the ANZ market and NZ$54.09 in International markets.
Growing at a slightly quicker rate was its EBITDA, which increased 21% to NZ$377.9 million and its net profit after tax, which grew 42% to NZ$134.8 million.
And with its free cash flow margin expanding to 26.9% from 21% in the prior period, Xero continued to deliver a greater than Rule of 40 outcome of 44.5%. The Rule of 40 is the sum of constant currency revenue percentage growth with the free cash flow margin percentage.
How does this compare to expectations?
According to a note out of Macquarie, its analysts were expecting Xero to report revenue of NZ$1,212 million and EBITDA of NZ$344 million.
So, while its top line was a touch softer than Macquarie's estimate, its EBITDA was comfortably ahead of expectations.
Management commentary
Xero's CEO, Sukhinder Singh Cassidy, was pleased with the company's performance during the six months. She said:
Xero's H1 FY26 results reinforce our ability to deliver as we continue to do what we said we would do, in line with our strategy. We have demonstrated strong momentum, with our portfolio of large markets and our products contributing to our macro-resilient growth. We have continued to deliver above Rule of 40 outcomes and generate significant cash, underpinned by our disciplined allocation of capital.
Singh Cassidy also spoke positively about Xero's future, adding:
We're executing our strategy effectively, keeping our customers at the heart of everything. We have delivered key wins against our 3×3 strategy, the successful early close of our acquisition of Melio, continued product velocity and solid go-to-market progress. As a leading global SaaS business — long powered by machine learning and AI — we see generative AI technology as a significant opportunity to create more value for both our customers and internally at Xero.
We are excited about the newly expanded features being rolled out through JAX — our AI financial superagent — orchestrating multiple new capabilities all within our trusted environment. As we continue to evolve, we are committed to our aspiration to be a world-class SaaS business and remain excited about Xero's future.
Another positive that has failed to stop Xero shares from falling today relates to its costs. Management advised that total operating expenses as a percentage of revenue is now expected to be around 70.5% in FY 2026. Xero previously expected this ratio to be around 71.5%.
