IT project management software company, Atlassian (NASDAQ:TEAM) beat analysts' expectations in Q2 FY2024, with revenue up 21.5% year on year to $1.06 billion. Guidance for next quarter's revenue was also optimistic at $1.10 billion at the midpoint, 2.8% above analysts' estimates. It made a non-GAAP profit of $0.73 per share, improving from its profit of $0.45 per share in the same quarter last year.
Atlassian (TEAM) Q2 FY2024 Highlights:
- Revenue: $1.06 billion vs analyst estimates of $1.02 billion (3.5% beat)
- EPS (non-GAAP): $0.73 vs analyst estimates of $0.63 (16.4% beat)
- Revenue Guidance for Q3 2024 is $1.10 billion at the midpoint, above analyst estimates of $1.07 billion
- Full year 2024 guidance raised for Cloud and Data Center revenue, also raised for non-GAAP operating margin
- Free Cash Flow of $284.3 million, up 74.1% from the previous quarter
- Gross Margin (GAAP): 81.6%, in line with the same quarter last year
- Market Capitalization: $64.46 billion
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,
Project Management Software
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 strong over the last two years, growing from $688.5 million in Q2 FY2022 to $1.06 billion this quarter.
This quarter, Atlassian's quarterly revenue was once again up a very solid 21.5% year on year. On top of that, its revenue increased $82.34 million quarter on quarter, a very strong improvement from the $38.68 million increase in Q1 2024. This is a sign of re-acceleration of growth and great to see.
Next quarter's guidance suggests that Atlassian is expecting revenue to grow 19.6% year on year to $1.10 billion, slowing down from the 23.6% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 15.5% over the next 12 months before the earnings results announcement.
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 81.6% in Q2.
That means that for every $1 in revenue the company had $0.82 left to spend on developing new products, sales and marketing, and general administrative overhead. Atlassian's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that Atlassian is controlling its costs and not under pressure from its competitors to lower prices.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Atlassian's free cash flow came in at $284.3 million in Q2, up 94.1% year on year.
Atlassian has generated $1.07 billion in free cash flow over the last 12 months, an eye-popping 27.6% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.
Key Takeaways from Atlassian's Q2 Results
It was good to see Atlassian's strong revenue guidance for next quarter, which topped analysts' expectations. Full year guidance was also promising, with Cloud and Data Center revenue outlook raised. Higher growth is not hurting profits, as the outlook for full year non-GAAP operating margin was lifted as well. We were also glad its revenue outperformed Wall Street's estimates. Overall, we think this was a really good quarter that should please shareholders. The stock is up 10.8% after reporting and currently trades at $282.5 per share.
Is Now The Time?
When considering an investment in Atlassian, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
There are several reasons why we think Atlassian is a great business. While we'd expect growth rates to moderate from here, its revenue growth has been solid over the last two years. Additionally, its impressive gross margins indicate excellent business economics, and its bountiful generation of free cash flow empowers it to invest in growth initiatives.
Atlassian's price-to-sales ratio based on the next 12 months of 14.7x indicates that the market is definitely optimistic about its growth prospects. But looking at the tech landscape today, Atlassian's qualities stand out and we still like it at this price.
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