Xero : Annual Report – FY23

Xero Annual Report 2023

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XERO LIMITED

Annual Report

2023

Contents

ABOUT THIS REPORT

Xero Annual Report 2023

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About this Report

About this Report	1
Highlights	2
About Xero	3
Chair's Review	6
CEO's Review	10
How Xero Creates Value	14
Strategy	16
Material Matters	18
Key Risks	19
Inputs
People and Culture	25
Customers, Partners and Ecosystem	35
Platform, Technology and Data	43
Social and Environmental	51
Financial	59
Governance	62
Our Performance	69
Audit Report, Financial Statements and Notes	83
Directors' Responsibilities Statement	122
Disclosures	123
Remuneration Report	131
Corporate Directory	156

Xero's Annual Report for 2023 has been prepared with reference to the International Integrated Reporting Council (IIRC) Framework and has been structured around five key inputs into our business, or capitals as referred to by the framework:

People and Culture - Diverse world-class leadership and talent supported by an equitable and inclusive culture and working environment to do the best work of their lives

Customers, Partners and Ecosystem - Trusted connections with the community of small business customers, partners including small business advisors, ecosystem developers, and other stakeholders including governments and regulators

Platform, Technology and Data - Xero's systems, processes and other knowledge and intellectual property drive innovation at speed to create beautiful products and generate insights

Social and Environmental - Responsible practices across everything we do as a business, including social and environmental impact

Financial - Allocation of capital including revenue and cash flows to optimise financial performance, and access to capital to support the execution of Xero's strategy and long-term value creation

At Xero, we understand the deep connection between our long-term financial performance, social and environmental impact, and organisational culture.

Materiality

This report covers matters material to value creation as identified through stakeholder consultation and a materiality assessment conducted in accordance with the IIRC Framework. For information about the material matters identified and our stakeholder engagement process, please refer to Material Matters on page 18.

Reporting suite

Xero's Annual Report 2023 should be read in conjunction with the other materials that comprise our 2023 annual reporting suite. These are available at Xero's Investor Centre:

Investor Presentation and Databook available at www.xero.com/about/investors/financial-info

Governance and leadership at www.xero.com/about/investors/governance,where full copies of Xero's Corporate Governance Statement, Modern Slavery and Human Trafficking Statement, charters, key governance policies, and full biographies for the board of directors and executive leadership team can be found.

Additional information about Xero's sustainability activities and performance can be found at www.xero.com/sustainability

Throughout this report we have hyperlinked other websites and documents that may be useful. To download a hyperlinked copy of this report, please visit our Investor Centre at www.xero.com/about/investors

Company and reporting information

Xero is listed on the Australian Securities Exchange (ASX) and is a New Zealand incorporated and domiciled company. This means that while the ASX Listing Rules apply to Xero, certain provisions of the Australian Corporations Act 2001 (Cth) do not.

As a New Zealand company, Xero's annual report is primarily governed by the Companies Act 1993 (New Zealand). The Remuneration Report is not intended to fully replicate

the statutory disclosure requirements of an Australian company's remuneration report, as these requirements do not apply to Xero. However, the information provided goes beyond New Zealand requirements to provide greater transparency and insight into our remuneration practices.

This report covers the activities of the Xero Group's global operations. Except where otherwise specified, statements should be read as pertaining to the activities of Xero Limited and its subsidiaries (Xero or Xero Group).

Some parts of this report include information regarding Xero's plans and strategy, and include forward-looking statements about Xero and the environment in which it operates that involve risks and uncertainties. Actual results and the timing of certain events may differ materially from future results expressed or implied by the forward-looking statements contained in this report.

All amounts are in New Zealand dollars (NZD) except where indicated.

Non-Generally Accepted Accounting Principles (non-GAAP) measures have been included as Xero believes they provide useful information for readers to assist in understanding the Xero Group's financial performance. Non-GAAP financial measures should not be viewed in isolation or considered as substitutes for measures reported in accordance with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS).

References to the year, period or FY23 are to the financial year ended 31 March 2023. References to the comparative period or FY22 are to the financial year ended 31 March 2022. References to H1 FY23, or the first half, refer to the six-month period ended 30 September 2022. References to H2 FY23, or the second half, refer to the six-month period ended 31 March 2023.

2	Xero Annual Report 2023

Highlights

Operating revenue

$1,399.9m

Up 28% YoY

Subscribers

3.741m

Up 470,000 YoY

Annualised monthly recurring revenue

$1,553.8m

Up 26% YoY

Total subscriber lifetime value

$13.4b

Up $2.5b YoY

Gross margin percentage

87.3%

Flat YoY

Xero set science based

emissions reduction targets for Scope 1, 2 and 3

Overall emissions intensity per FTE down 42% from FY20 base year

Net loss

$113.5m

Up $104.4m YoY

Adjusted EBITDA

$301.7m

Up $93.0m YoY

Operating income

$57.3m

Up 61% YoY

Free cash flow

$102.3m

Up $100.2m YoY

Total available liquidity

$1.1b

Cash on hand, short-term deposits and undrawn committed debt facilities

Xero named number one global tech company for gender equality by Equileap

Xero's total global community contribution was more than

$3.5 million

ABOUT XERO

About Xero

Xero was founded in 2006, leading the charge to bring cloud accounting tools to small businesses globally. The launch of Xero meant accountants and bookkeepers could collaborate with their small business clients in real time through our open platform to monitor their financials, simplify core compliance and run their business.

Since our launch, Xero has grown into a global small business platform that services accountants and bookkeepers and small business customers directly. In addition to our core accounting solution, our platform extends to payroll, workforce management, expenses, projects, payments and other solutions depending on the region. Xero has an extensive ecosystem of connected apps and connections to banks and other financial institutions helping small businesses access a range of solutions from within our platform.

In FY23, Xero generated total operating revenue of

$1.4 billion and ended the financial year with 3.74 million global subscribers in Australia, New Zealand, North America, the United Kingdom and more than 180 additional countries across our online platform.

Our vision remains to be the most insightful and trusted small business platform. This is about offering a fully integrated platform that gives customers powerful insights about their business, drives more meaningful discussions with their advisors, and helps them to make more informed business decisions. Our vision is supported by our three strategic priorities, outlined on pages 16-17.

Our people

Our global team is driven by our purpose to make life better for people in small business, their advisors and communities around the world. Our objective is to enable our people to do the best work of their lives by aligning and embedding our purpose, values and culture within all our business activities.

Our values and accompanying 'Xero Way' behaviours (shown right) reflect not only how our people work with each other, but how we interact with people and organisations outside of Xero.

Xero Annual Report 2023

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Our values

#Human

Xeros are authentic, inclusive and really care

• Kind and assume best intent
• Inclusive, approachable and show empathy
• Are willing to be vulnerable, share fears, failures and learnings

#Challenge

Xeros dream big, lead and embrace change

• Are curious and think big
• Welcome challenging conversations and do it with respect
• Lead and embrace change, seeking new and better ways

#Team

Xeros are great team players

• Champion Xero's purpose and priorities
• Work together to do what's best for Xero and our customers
• Appreciate and celebrate each other and success

#Ownership

Xeros deliver on our commitments

• Do what we say we will do
• Own our mistakes and take positive action
• Move fast to get the right things done

#Beautiful

Xeros create experiences that people love

• Create experiences that inspire and delight
• Do high-quality work
• Go the extra mile

"Xeros" is a term used to refer to Xero employees internally

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Xero Annual Report 2023

ABOUT XERO

ABOUT XERO

Xero Annual Report 2023

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Our customers

Our focus is on the significant opportunity to drive digital adoption in the small business sector as we continue to grow Xero for the long term.

Xero's objective is to enable our customers to make informed decisions through real-time access to information, along with powerful insights that digital tools enable. This helps our customers to save time, reduce complexity, manage compliance, and better manage their cash flow.

We continuously engage with our customers and partners to help drive further awareness and adoption of digital technologies, such as cloud accounting, across the small business community. Our Xerocon events provide an opportunity for our partner community to connect with their peers and learn more about Xero's latest tools, features and updates to help them better serve their clients and run their practices. We also run roadshow events across our regions, aimed at connecting with the local community and providing education about our platform and the benefits it offers.

For customers, we also provide support within the Xero platform to help them get the most out of the product, and we offer a 24/7 customer support portal called Xero Central. Xero Central has a range of content including how-to articles, videos, community discussions and the option to raise a case with our customer experience team if they need further support.

We continuously collect feedback from customers to help inform the design and development of additional or enhanced functionality to ensure we meet our customers' evolving needs.

Our relationships with partners

The close relationships we have with our partners, from accountants and bookkeepers to third party apps, banks and financial service providers, are an important part of how Xero operates.

Our network of accounting and bookkeeping partners continues to be a key factor to our success across our markets as we work together to introduce Xero to more small businesses.

We continuously engage with our customers and partners to help drive further awareness and adoption of digital technologies, such as cloud accounting, across the small business community

Our ecosystem of connected apps has evolved with the introduction of the Xero App Store. The Xero App Store offers small businesses an easier way to discover and buy apps on the Xero platform, while giving app developers a better way to grow their business, with access to greater insights, tools and billing payment capabilities.

Our sustainability

We are committed to building a sustainable business for the millions of customers we serve, their advisors, our communities, our shareholders and our employees. We are focused on reducing our impact on the environment, and are proud to be certified carbon neutral by the Australian Government's Climate Active program annually since FY20 for our owned and operated businesses globally1.

In FY23, we set the following emissions reduction targets in line with climate science, aligned to the goals of the Paris Agreement:

• 42% reduction in Scope 1 and 2 emissions from a FY20 base by FY30
• 17% reduction in Scope 3 emissions from a FY20 base by FY30
• Net-zerono later than FY50 (with fewer than 10% of total emissions that require abatement through offsets)

Our targets were designed with Xero's growth ambitions in mind and were established through extensive modelling to provide clear direction to reduce our greenhouse gas emissions across Scopes 1, 2 and 3.

We recognise we have a responsibility to help small businesses become more sustainable. Through our work with Cogo and Ecologi, and by providing access to education and other tools, we are taking steps to help small businesses play their role in supporting the transition to

a net-zero economy.

Inclusion is critical to succeeding as a sustainable business, and we are proud that our commitment to gender diversity and inclusion (D&I) was recognised in FY23 through Xero's inclusion in the 2023 Bloomberg Gender-Equality Index. This is the fourth consecutive year Bloomberg has recognised Xero's commitments to gender D&I.

Reflecting our progress in a number of areas, in FY23, Xero was included in the Dow Jones Sustainability Index (DJSI) for the second time.

For more information on our approach to sustainability, see the People and Culture and Social and Environmental sections on page 25 and 51 of this report or visit our website www.xero.com/sustainability

Our products

Xero's small business platform includes a range of integrated products, such as:

Accounting and compliance software Core accounting and compliance software for small businesses and their advisors, providing a

trusted, digital system of record, making accounting, tax and other compliance simpler, smarter and more seamless, and allowing small business owners to have greater control and visibility.

Software for small business operations

Software for small businesses that helps them simplify day-to-day operations to better run their business in areas beyond core accounting and compliance needs, such as managing

inventory, payroll and employees.

Software for accountants and bookkeepers

Software that helps advisors manage their workflows, serve existing small business clients and support their compliance needs while enabling them to identify and attract new clients.

Access to financial services for small businesses

Software for small businesses to manage cash

flow, take and make payments, and scale their business with increased confidence.

Integrations that provide access to
third party software	31

Third party integrations with ecosystem app partners to create an open platform for small businesses and their advisors.

1 Xero applies for Climate Active carbon neutral certification annually in arrears in October. In FY23, our certification for FY22 was maintained. We will report the outcome of our FY23 certification application in the FY24 Annual Report

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Xero Annual Report 2023

CHAIR'S REVIEW

Chair's Review

David Thodey, AO

Chair of the Board

Dear shareholder

Xero has delivered a strong operating result in FY23 within another year of challenging macroeconomic conditions. We are seeing more small businesses placing their trust in Xero's digital platform to run their business, manage their cashflow and meet critical compliance needs.

CHAIR'S REVIEW

The long-term opportunity for cloud accounting remains significant and under Sukhinder's leadership, Xero is well positioned to take advantage of this. However, the higher interest rate environment and the revaluation effect of companies in our sector has meant there has been greater scrutiny on expenditure, growth and profitability. This, along with inflationary pressures, has meant we have increased our focus on our operating costs and the returns that we generate from our investments.

In March 2023, we announced a program to streamline Xero's operations, realign the business to drive greater operating efficiency, and better balance our growth and profitability. This required an organisational restructure to strengthen our ability to deliver value for all our stakeholders, and position Xero for the future. We believe we are now better placed

to become a higher performing global SaaS company and generate disciplined growth. We will continue to foster Xero's unique, purpose-driven culture, and we are committed to providing the right level of support to our people whose roles have been impacted by the changes we have made.

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Fostering and preserving trust

Our purpose, to make life better for people in small business, their advisors, and communities around the world, remains our driving force.

Trust is central to our vision, purpose and values. We build this trust by striving to act with integrity and authenticity and by upholding high standards of governance.

We recognise that we must be vigilant in protecting our customers' data and acknowledge this challenge requires constant focus. Keeping customers' data secure and handling it responsibly is critical to building and operating a trusted platform. We take a multi-layered and risk-based approach to managing security through the use of cutting- edge security technology, a robust security risk management process, and working to keep security considerations front of mind for all our people. We are resolute in our focus to continuously improve our approach to security - given the constantly changing nature of the external threat landscape

In this higher interest rate environment and with our increased focus on operating efficiency, we have taken action to streamline our business. We have also revalued our recent acquisitions, reflecting the current valuation backdrop and the operating performance of these businesses. While this has negatively impacted our FY23 EBITDA, we are confident we are well positioned to balance growth and profitability in the coming years.

Small businesses around the world continue to operate in a complex environment. The Xero Small Business Insights (XSBI) program (now available in five countries) uses anonymised and aggregated data to track the performance of small business and improve understanding of the sector. XSBI shows that small businesses in many of our markets started 2023 in a more challenging position than in 20221. They continue to navigate inflationary and interest rate pressures, and slowing economies, while adapting to the ever-changing needs of their customers.

In this challenging environment, Xero's cloud-based subscription product enables small businesses to work more effectively and efficiently. The value customers place in their Xero subscription is demonstrated by our delivery of strong top-line results and subscriber growth, alongside consistently low churn.

We remain confident about the future growth opportunity for our company.

Xero's next chapter

Xero is one of only a few technology companies of its size and global reach listed on the Australian Securities Exchange. As our global footprint grows, the skill set and experience required of our management team continues to evolve. Our growth ambitions were at the centre of the Board's global recruitment process for a new CEO following Steve Vamos' decision to retire after almost five years. The Board and all the Xero team thank Steve for his significant contribution to Xero. After considering a number of exceptional candidates, we were pleased to appoint Sukhinder Singh Cassidy as Xero's new CEO in November 2022. Sukhinder formally took over from Steve in February to lead us through our next phase of growth.

Sukhinder is an experienced global technology executive with more than 25 years' leadership experience. She has held various leadership positions, including as President, Asia Pacific & Latin America at Google; President at StubHub; founder of the Boardlist; founder of Joyus, where she was CEO; and co-founder of Yodlee. Sukhinder also brings extensive public and private board experience with multiple companies. Sukhinder's expertise in building products and scaling go-to-market businesses across virtually every global region is critical to leading Xero in our next chapter.

It is our intent to continue to grow our global executive capabilities as Xero grows.

We also understand the deep connection between our long-term financial performance, social and environmental impact, and organisational culture. This year, we have again prepared our Annual Report with reference to the International Integrated Reporting Council (IIRC) Framework. The report is structured around five key inputs into our business, or capitals, as referred to by the framework.

Trust is central to our vision, purpose and values. We build this trust by striving to act with integrity and authenticity and by upholding high standards of governance

• and regularly introduce new capabilities and process enhancements to further strengthen our security posture.

You can read more about Xero's responsible data use practices and our approach to cybersecurity risks and protecting data on pages 46-47.

The quality of customer data in the Xero platform allows us to provide trusted insights based on anonymised and aggregated data. We use this data to deliver XSBI to share an informed perspective on the small business economies in the UK, Australia, New Zealand, and as of this year, Canada and the US. XSBI is trusted by government agencies to support their policy making decisions that impact small business. Institutions that engage with XSBI include the Office for National Statistics (UK) and the Reserve Bank of Australia (RBA).

1 January 2023 Xero Small Business Index for Australia, New Zealand and the UK