Atlassian (TEAM)

IT project management software company, Atlassian (NASDAQ:TEAM) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 14.1% year on year to $1.36 billion. The company expects next quarter’s revenue to be around $1.35 billion, close to analysts’ estimates. Its non-GAAP profit of $0.97 per share was 4.9% above analysts’ consensus estimates.

Company Overview

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.

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.

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.

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, Atlassian grew its sales at a solid 24% compounded annual growth rate. Its growth surpassed the average software company and shows its offerings resonate with customers, a great starting point for our analysis.

This quarter, Atlassian’s year-on-year revenue growth was 14.1%, and its $1.36 billion of revenue was in line with Wall Street’s estimates. Company management is currently guiding for a 19.7% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 19.3% over the next 12 months, a deceleration versus the last three years. Despite the slowdown, this projection is commendable and implies the market is forecasting success for its products and services.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Atlassian’s billings punched in at $1.53 billion in Q1, and over the last four quarters, its growth was solid as it averaged 14.7% year-on-year increases. This alternate topline metric grew slower than total sales, meaning the company recognizes revenue faster than it collects cash - a headwind for its liquidity that could also signal a slowdown in future revenue growth.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Atlassian is extremely efficient at acquiring new customers, and its CAC payback period checked in at 6.1 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Atlassian more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

Software is eating the world. It’s one of our favorite business models because once you develop the product, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

Atlassian’s gross margin is one of the best in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an elite 82.3% gross margin over the last year. That means Atlassian only paid its providers $17.69 for every $100 in revenue.

Atlassian’s gross profit margin came in at 83.8% this quarter, marking a 1.8 percentage point increase from 82.1% in the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Although Atlassian broke even this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 3.4% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. This happened because the company spent loads of money to capture market share. As seen in its fast revenue growth, the aggressive strategy has paid off so far, and Wall Street’s estimates suggest the party will continue. We tend to agree and believe the business has a good chance of reaching profitability upon scale.

Analyzing the trend in its profitability, Atlassian’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, Atlassian generated a negative 0.9% operating margin.

If you’ve followed StockStory for a while, you know 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 has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging 29.6% over the last year. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Atlassian’s free cash flow clocked in at $638.3 million in Q1, equivalent to a 47% margin. This cash profitability was in line with the comparable period last year and above its one-year average.

Over the next year, analysts’ consensus estimates show they’re expecting Atlassian’s free cash flow margin of 29.6% for the last 12 months to remain the same.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Atlassian is a well-capitalized company with $2.97 billion of cash and $1.23 billion of debt on its balance sheet. This $1.74 billion net cash position is 3.2% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We struggled to find many positives in these results as its revenue guidance was only in line. Overall, this was a softer quarter. The stock traded down 15.7% to $192.95 immediately following the results.

Updated: May 21, 2025 at 10:12 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Atlassian.

Atlassian is a fine business. To kick things off, its revenue growth was solid over the last three years. And while its operating margin hasn't moved over the last year, its efficient sales strategy allows it to target and onboard new users at scale. On top of that, 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 is 9.3x. Looking at the software landscape right now, Atlassian trades at a pretty interesting price. If you trust the business and its direction, this is an ideal time to buy.

Wall Street analysts have a consensus one-year price target of $279.44 on the company (compared to the current share price of $209.15), implying they see 33.6% upside in buying Atlassian in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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