What Happened:
Shares of IT project management software company, Atlassian (NASDAQ:TEAM) fell 17.4% in the morning session after the company reported second-quarter earnings results. Its full-year revenue guidance was below expectations, and its revenue guidance for next year suggests a slowdown in demand. Notably, cloud revenue came in softer than expected due to lower-than-expected migrations from data centers and elongated sales cycles. Lastly, management took a more conservative approach to guidance due to macro concerns and execution risks. Overall, this was a bad quarter for Atlassian.
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What is the market telling us:
Atlassian's shares are very volatile and over the last year have had 13 moves greater than 5%. But moves this big are very rare even for Atlassian and that is indicating to us that this news had a significant impact on the market's perception of the business.
The biggest move we wrote about over the last year was 6 months ago, when the stock dropped 15.4% on the news that the company reported second-quarter earnings results and provided a mixed outlook for the coming quarters. In a letter to shareholders, management expects more unpredictable decisions from customers migrating to the cloud following the server end-of-support in February 2024. It added, "While some of the remaining Server customers will migrate to Cloud, the majority will migrate to Data Center, and also prudently assumes that some Server customers will not migrate in FY24." CFO Joe Binz explained further during the earnings call, "If there was any weakness in our cloud performance versus expectations, it's that paid seat expansion has been lower than we expected, and this quarter, it was slightly lower than we expected, particularly in SMB."
These comments likely spooked Wall Street analysts, with Goldman Sachs analyst Kash Rangan commenting, "As weakness from small and medium-sized business weighed on growth, Altassian's cloud transition might wind up taking longer than expected."
On a more positive note, revenue and EPS exceeded expectations during the quarter. Revenue guidance for the next quarter also 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.
Overall, this was a mixed quarter, with the results likely overshadowed by worries about the slow cloud migration.
Atlassian is down 35.2% since the beginning of the year, and at $146.67 per share it is trading 43% below its 52-week high of $257.43 from January 2024. Investors who bought $1,000 worth of Atlassian's shares 5 years ago would now be looking at an investment worth $1,041.
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