Xero Limited has successfully evolved from a regional accounting software provider to an emerging global SMB platform, delivering exceptional FY25 results that validate its "balanced profitable growth" strategy. Operating revenue surged 23% to NZ$2.1 billion while free cash flow expanded 48% to NZ$507 million, demonstrating the inherent operating leverage in the subscription model. The company achieved a Rule of 40 outcome of 44.3%, placing it among elite SaaS companies globally.

The strategic execution of the 3x3 initiative (three core products across three key markets) is gaining momentum, with ARPU growing 15% to NZ$45.08 driven by product mix improvements and payments adoption. The ANZ segment continues as the profit engine with 73.9% contribution margins, while the International segment shows promising improvement to 36.6% margins as it scales toward mature market economics. Regulatory tailwinds, particularly Making Tax Digital compliance in the UK, drove 25% growth in that market and demonstrate the non-discretionary demand created by government digitization mandates.

However, significant execution risks remain, particularly in the critical US market where Xero maintains sub-5% share despite years of investment. The Gusto partnership for embedded payroll launching in FY26 represents a potential inflection point, but breaking QuickBooks' network effects requires sustained multi-year commitment. Share-based compensation surged 59% to NZ$151.9 million, creating dilution pressure that constrains margin expansion despite operational improvements.

Xero Limited is a leading cloud-based accounting software platform founded in New Zealand that serves over 4.4 million subscribers across 180+ countries. The company provides an integrated suite of business tools including accounting, payroll, and payments solutions designed specifically for small and medium businesses (SMBs) with 1-100 employees. Headquartered in Wellington and listed on the ASX since 2012, Xero has evolved from a pure accounting software provider into a comprehensive small business platform.

The company operates a subscription-based SaaS model with monthly recurring revenue from cloud software subscriptions comprising 94% of total revenue (NZ$1.98 billion in FY25). Xero monetizes through tiered subscription plans based on features and usage, with additional revenue streams from financial services partnerships, app ecosystem revenue shares, and conference events. Average revenue per user reached NZ$45.08 in FY25, up 15% year-over-year, driven by product mix improvements and payments adoption.

Xero's FY25 performance represents a watershed moment in the company's evolution, delivering 23% revenue growth to NZ$2.1 billion while achieving meaningful profitability inflection. The growth was remarkably balanced between volume (10% subscriber additions excluding long idle removals) and price/mix (11% ARPU expansion), indicating healthy demand dynamics rather than reliance on aggressive pricing. Subscription revenue, comprising 94% of total revenue, grew 21% while other operating revenue surged 50%, driven by payments adoption and financial services integration.

Profitability metrics showed even more impressive improvement, with EBITDA margins expanding 140 basis points to 30.4% despite a 59% increase in share-based compensation to NZ$151.9 million. The company achieved exceptional cash generation with free cash flow growing 48% to NZ$507 million, representing a 24.1% margin and enabling a Rule of 40 outcome of 44.3%. This performance validates management's "balanced profitable growth" philosophy and positions Xero among elite SaaS companies globally.

Segment performance revealed the geographic maturation story, with ANZ delivering 21% revenue growth at industry-leading 73.9% contribution margins, while International accelerated 24% growth with improving 36.6% margins. The UK market's 25% growth, driven by Making Tax Digital compliance solutions, demonstrates the revenue acceleration from regulatory mandates. The removal of 160,000 long idle subscriptions with minimal revenue impact highlights management's focus on metric quality over vanity metrics.

Our financial projections model Xero's continued evolution toward mature SaaS economics, with revenue growth decelerating gradually from 20% in FY26 to 15% by FY30 as the law of large numbers takes effect. The forecast assumes ARPU growth of 8-10% annually through continued pricing power, product mix improvements, and payments adoption, while subscriber growth of 8-12% reflects both market expansion and share gains in International markets growing faster than mature ANZ.

Operating leverage assumptions drive margin expansion from 30.4% EBITDA currently to 39% by FY30, primarily through International segment maturation and economies of scale in customer acquisition and infrastructure utilization. Free cash flow margins are projected to expand from 24% to 35%+ as capital intensity moderates from 15% to 10% of revenue and tax shields normalize following full utilization of accumulated losses in FY25.

Our DCF analysis yields a base case fair value of NZ$174.82 per share, representing approximately 10% downside from current trading levels of NZ$193.47. The valuation framework centers on Xero's demonstrated ability to balance growth and profitability, with revenue growth modeled to decelerate from 20% in FY26 to 15% by FY30 while EBITDA margins expand from 30.4% to 39% through International segment maturation and operating leverage.

The weighted average cost of capital of 12.6% reflects Xero's risk profile as a high-growth SaaS company with geographic concentration and competitive execution risks. Terminal value assumptions balance conservatism with Xero's structural advantages, applying a 4% perpetual growth rate that reflects GDP-plus pricing power and continued cloud adoption. The DCF methodology receives 60% weighting given Xero's predictable subscription model and demonstrated cash generation.

The primary risk to our investment thesis remains Xero's ability to achieve meaningful penetration in the US market, where structural disadvantages including limited brand awareness and QuickBooks' entrenched accountant relationships create significant barriers. Without material US success, the company's long-term revenue doubling aspiration becomes challenging, potentially capping valuation multiples below global SaaS leaders.