There have been out of season results over the past month, which in conjunction with global macro developments have seen aggregate ASX 200 EPS forecasts for FY26 lowered. 

After results from the Big 4 Banks and industrials, operational updates in the resources sectors, as well as ‘Liberation Day’ tariffs (which have been partially walked back), the ASX 200 is now expected to deliver EPS growth of 6% in FY26. This is down from forecasts of 8% growth at the start of April.

However, we note that the market's downward EPS revision was predominantly driven by the resources sectors (particularly energy), which are  exposed to slowing global economic activity, although sectors including IT, Discretionary, Utilities and Financials have also contributed to lower EPS revisions.

Key results from the Focus Portfolio over the last month have included ResMed (3Q25), Westpac (1H25), ANZ (1H25), Macquarie Group (FY25), Aristocrat Leisure (1H25), Xero (FY25) and TechnologyOne (1H25). Pleasingly, the Focus Portfolio has experienced no thesis breaks over the course of this out-of-cycle reporting season. This report provides a detailed view of Aristocrat and Xero’s 1H25 and FY25 results, with both companies still core holdings of the Focus Portfolio. 

Aristocrat Leisure is held in the Focus Portfolio at a weight of 4%

Aristocrat Leisure’s (ALL) 1H25 result fell short of consensus expectations, resulting in the stock trading -11% lower on the day (it has since partially recovered). Notably, ALL generated NPATA of $733m (+6% YoY), meaningfully below consensus of $811m. The key drivers of the miss were a weaker-than-expected fee-per-day outcome in North American Gaming Operations, and softer outright EGM (electronic gaming machine) sales in Rest of World (RoW) markets.

Consensus was too high – Aristocrat previously flagged a 2H25 skew

While ALL fell short of expectations, this was partially a consensus issue, given ALL already flagged at its AGM that: 1) 1H25 fee per day would fall YoY; 2) NPATA growth would be 2H-skewed; and 3) the Plarium sale would be dilutive to earnings in the near-term. Looking forward, we remain confident  ALL’s growth will accelerate in 2H25, given:

• Outright sales will accelerate after new product launches – Outright EGM sales in ROW were softer due to the timing of new product releases, with customers holding off on purchases before highly anticipated launches in 2H25 (Baron Upright cabinet, new titles like Phoenix Link). Given the strong early demand for these releases in North America, we have confidence this will translate to an acceleration of outright sales in the ROW next half.  
• Fee per day decline to reverse – ALL’s North American Gaming Operations fee per day fell by -5% YoY to US$52.73, driven primarily by product/channel mix shifts (i.e. growth in lower fee products/channels e.g. Class II), as well as some weakness in gross gaming revenue (GGR). However, ALL has retained its market-leading fee per day and expects these factors to begin to unwind in 2H25, supported by new product releases.

Medium-term fundamentals unchanged

Leaving aside the noise around the 1H25 result, our view on the key drivers to ALL’s medium/long-term earnings growth outlook remains unchanged, including: 

• Continued land-based gaming share gains – a key highlight was the continued strength of its North American Gaming Operations business, which posted yet another half of market share gains, underpinned by its market-leading games due to industry-leading design and development investments. 
• iGaming opportunity – we have confidence that Aristocrat Interactive will achieve its US$1bn revenue target by FY29, given the company’s existing industry/customer relationships, its track record of successfully scaling new verticals (e.g. Pixel United), and its vast portfolio of existing best-in-class IP that will be leveraged.
• M&A firepower – ALL’s balance sheet is very strong following its Plarium sale (net debt / EBITDA of just 0.2x), allowing it to pursue strategic/accretive acquisitions.

The risk/reward is attractive post-pullback

With ALL’s fundamentals unchanged, its valuation is attractive at a 12 month forward PE of 22.5x, given its EPS CAGR from FY25-30 is expected to be ~11%. Furthermore, it operates in an attractive industry, where its core exposure, US land-based gaming, has steadily and consistently grown its GGR with a five-year CAGR of 7.6%, with ALL able to grow above-system due to consistent market share gains. The industry is also incredibly resilient, having only three years of negative growth in the past three decades.

Xero is held in the Focus Portfolio at a weight of 3%

Xero’s (XRO) FY25 results highlighted the continued strength of its underlying drivers, reassuring the market that it can continue growing its subscriber base while raising prices. Furthermore, the result demonstrated that management is astutely balancing out revenue growth and free cash flow generation. Overall, this result gives us further conviction in Xero’s ability to pull the multiple levers it has available to maintain strong growth in an industry that continues to benefit from cloud adoption and digital transformation tailwinds. 

Xero continues to flex its pricing power

In recent years, Xero has exercised its pricing levers to great effect, which was demonstrated again in this result. Its average revenue per user (ARPU) of NZ$45.08 was well above expectations ($41.53). However, consensus forecasts remain conservative, despite multiple upgrades. To illustrate ‘the Street’s’ tendency to significantly underestimate Xero’s ARPU, FY28 ARPU consensus a year ago is below FY25’s actual ARPU. 

However, before recent years, the company had left its pricing levers idle for a long period of time, letting volume drive its growth, so it retains a long runway for price rises. This is demonstrated by its peer Intuit, which has a considerably higher ARPU after consistently raising prices. This is a pathway Xero can follow and is underappreciated by consensus.

Pricing isn’t affecting volumes

Crucially, this result allayed concerns that Xero would become over reliant on pricing, as subscriber growth held up well. Stripping out the effect of removing long-idle subscribers, underlying growth was +10% vs the pcp, which is roughly in line with FY24 growth, a strong result. Consequently, we learned that pricing is not a shift in focus (from volume growth), but rather an additional focus, with volume growth still a key pillar of the growth story.

Rule of 40 – the benchmark or just a new baseline? 

Xero continues to surprise to the upside on the Rule of 40 (R40) metric (constant currency revenue growth + FCF margin of at least 40%), which it reached in FY24, years earlier than expected. Xero achieved 44.1% in FY25, significantly beating consensus of 39.7% (FY25e R40 was just 31% a year ago). This was driven by strong FCF margins, which demonstrates that Xero can maintain strong revenue growth while expanding profitability and without overspending on software development capex.

We believe there is a strong case for consensus upgrades. Forecasts of a return back down to 40% is too conservative, as Xero has the ability to expand its margin while maintaining strong revenue growth.

Higher opex isn’t a major concern and remains as a key lever

The key drawback to the otherwise-strong result was higher-than-expected operating costs, contributing to its earnings miss. A part of this was due to the timing of an increase in share-based compensation, which is largely non-recurring. However, it partially reflects Xero’s investment in driving subscriber growth, which we are comfortable with. This is because at any point in time, Xero has the ability to shift its focus and move its cost base much lower. Figure 14 illustrates the large step-down in P/E if opex/sales (currently ~72%) was (hypothetically) reduced to move in line with mature peers (45.4%).

Xero is well placed to grow and expand profitability

In summary, we expect strong growth to continue to be driven by robust subscriber growth (HSD to LDD) and consistently increasing ARPU, against the backdrop of attractive industry conditions. Despite the currently high forward multiple, Figure 14 demonstrates the underlying value that is able to be generated and is overall still attractive for a company that is expected to grow its EPS by 37.5% p.a. (CAGR) to FY30, with the potential for upgrades.