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Atlassian (NASDAQ:TEAM) Surprises With Q3 Sales, Next Quarter Sales Guidance Is Optimistic


Full Report / April 28, 2022
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IT project management software company, Atlassian (NASDAQ:TEAM) beat analyst expectations in Q3 FY2022 quarter, with revenue up 30.2% year on year to $740.4 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $717.5 million at the midpoint, 3.38% above what analysts were expecting. Atlassian made a GAAP loss of $31 million, down on its profit of $159.8 million, in the same quarter last year.

Atlassian (TEAM) Q3 FY2022 Highlights:

  • Revenue: $740.4 million vs analyst estimates of $703.8 million (5.2% beat)
  • EPS (non-GAAP): $0.47 vs analyst estimates of $0.32 (46.8% beat)
  • Revenue guidance for Q4 2022 is $717.5 million at the midpoint, above analyst estimates of $694 million
  • Free cash flow of $312.2 million, up 58.1% from previous quarter
  • Customers: 234,575, up from 226,521 in previous quarter
  • Gross Margin (GAAP): 83.8%, down from 85% same quarter last year

Founded by Australian co-CEOs Mike Cannon-Brookes and Scott Farquhar in 2002, Atlassian (NASDAQ:TEAM) provides software as a service that makes it easier for large teams of software developers to manage projects, especially in software development.

Atlassian’s software platforms such as Jira, Confluence, Trello and Bitbucket, help staff at diverse organisations manage, maintain and develop their technology stacks, as well as drive and track collaboration more generally. For example, Jira Core is a project and task management solution that anyone in an organization can use to plan, track, and report on projects, splitting each task up into multiple steps, and facilitating code review and testing. Meanwhile, Confluence provides a workspace on the cloud for individuals to collaborate on their projects and Bitbucket is used to store and deploy codebase.

Atlassian is somewhat remarkable amongst software companies for its low touch, or self-serve sales process. Although the company now has enterprise advocates to help its larger customers, it operated for many years by relying heavily on word of mouth marketing. With time, its ubiquity has become a strength, as so many technology workers have become accustomed to its products. Because Atlassian has a number of products, it has a wide array of competitors,

The future of work requires teams to collaborate across departments and remote offices. Project management software is both driving this change and benefiting from it. While the trend of collaborative work management has been strong for a while, the Covid pandemic has definitively accelerated the demand for tools that allow work to be done remotely.

Because Atlassian has a number of products, it has a wide array of competitors, even if a few of them offer an equally comprehensive suite. Notable competitors include Microsoft (NASDAQ:MSFT), which owns Github, a competitor to Jira, and Asana (NYSE:ASAN) which is arguably a competitor to Confluence and Trello.

Sales Growth

As you can see below, Atlassian's revenue growth has been very strong over the last year, growing from quarterly revenue of $568.7 million, to $740.4 million.

Atlassian Total Revenue

And unsurprisingly, this was another great quarter for Atlassian with revenue up 30.2% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $51.9 million in Q3, compared to $74.5 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Atlassian is expecting revenue to grow 28.2% year on year to $717.5 million, in line with the 29.9% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 21.5% over the next twelve months.

Customer Growth

You can see below that Atlassian reported 234,575 customers at the end of the quarter, an increase of 8,054 on last quarter. That is a little slower customer growth than last quarter but still in line with what we are used to seeing lately, suggesting that the company still has decent sales momentum.

Atlassian Customers

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Atlassian's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 83.8% in Q3.

Atlassian Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.83 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a great gross margin, that allows companies like Atlassian to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that Atlassian is doing a good job controlling costs and is not under pressure from competition to lower prices.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Atlassian's free cash flow came in at $312.2 million in Q3, down 13.3% year on year.

Atlassian Free Cash Flow

Atlassian has generated $733.3 million in free cash flow over the last twelve months, an impressive 28.1% of revenues. This robust FCF margin is a result of Atlassian asset lite business model, scale advantages, and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

Key Takeaways from Atlassian's Q3 Results

With a market capitalization of $61.7 billion, more than $1.28 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We enjoyed the positive outlook Atlassian provided for the next quarter’s revenue. And we were also excited to see that it outperformed Wall St’s revenue expectations. On the other hand, there was a slight slowdown in customer growth. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. But investors might have been expecting more and the company is down 3.8% on the results and currently trades at $250 per share.

Is Now The Time?

When considering Atlassian, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are a number of reasons why we think Atlassian is a great business. While we would expect growth rates to moderate from here, its revenue growth has been strong, over the last two years. On top of that, its impressive gross margins are indicative of excellent business economics, and its very efficient customer acquisition hints at the potential for strong profitability.

The market is certainly expecting long term growth from Atlassian given its price to sales ratio based on the next twelve months is 20.9x. But looking at the tech landscape today, Atlassian's qualities as one of the best businesses really stand out and we still like it at this price, despite the higher multiple.

The Wall St analysts covering the company had a one year price target of $400.8 per share right before these results, implying that they saw upside in buying Atlassian even in the short term.

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