IT project management software company, Atlassian (NASDAQ:TEAM) reported Q3 FY2023 results beating Wall St's expectations, with revenue up 23.6% year on year to $915.5 million. The company expects that next quarter's revenue would be around $910 million, which is the midpoint of the guidance range. That is slightly below analyst expectations. Atlassian made a GAAP loss of $209 million, down on its loss of $31.1 million, in the same quarter last year.
Atlassian (TEAM) Q3 FY2023 Highlights:
- Revenue: $915.5 million vs analyst estimates of $901.8 million (1.52% beat)
- EPS (non-GAAP): $0.54 vs analyst estimates of $0.33 (62.5% beat)
- Revenue guidance for Q4 2023 is $910 million at the midpoint, below analyst estimates of $918.9 million
- Free cash flow of $349.7 million, up 139% from previous quarter
- Customers: 259,775, up from 253,177 in previous quarter
- Gross Margin (GAAP): 81.6%, down from 83.9% 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.
As you can see below, Atlassian's revenue growth has been very strong over the last two years, growing from quarterly revenue of $568.7 million in Q3 FY2021, to $915.5 million.
This quarter, Atlassian's quarterly revenue was once again up a very solid 23.6% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $42.7 million in Q3, compared to $65.3 million in Q2 2023. 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 19.8% year on year to $910 million, slowing down from the 35.8% 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 19.9% over the next twelve months.
You can see below that Atlassian reported 259,775 customers at the end of the quarter, an increase of 6,598 on last quarter. That is a little better customer growth than last quarter and in line with what we have seen in previous quarters, demonstrating the company has the sales momentum required to drive continued growth. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is running smoothly.
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 81.6% in Q3.
That means that for every $1 in revenue the company had $0.82 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still 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.
Cash Is King
If you have followed 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 $349.7 million in Q3, up 12% year on year.
Atlassian has generated $766.8 million in free cash flow over the last twelve months, an impressive 22.9% of revenues. This extremely high FCF margin is a result of Atlassian asset lite business model 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 $37.2 billion, more than $1.98 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 were very impressed by Atlassian’s very strong acceleration in customer growth this quarter. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter slightly missed analysts' expectations. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. But investors might have been expecting more and the company is down 10% on the results and currently trades at $134.99 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 9.6x. But looking at the tech landscape today, Atlassian's qualities stand out and we still like it at this price.The Wall St analysts covering the company had a one year price target of $200 per share right before these results, implying that they saw upside in buying Atlassian even in the short term.
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