Atlassian Corporation — Form 10-Q Summary
Business context and reporting period
For the three months ended September 30, 2022 (fiscal Q1 2023), Atlassian reported results for its software and cloud services business, including Jira, Confluence, Trello, Jira Service Management, Jira Align and Bitbucket. The comparable period is the three months ended September 30, 2021.
On September 30, 2022, Atlassian completed its redomestication from a UK public company to a Delaware corporation. With this filing, it began reporting under U.S. GAAP rather than IFRS; prior-period results shown here were retrospectively converted, and may not match previously published IFRS figures.
Key financial metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change or context |
|---|---|---|---|
| Total revenue | $807.4 million | $614.0 million | Up 31% |
| Subscription revenue | $651.0 million | $435.3 million | Up 50%; 82% of revenue versus 71% |
| Maintenance revenue | $113.6 million | $130.6 million | Down 13% |
| Gross profit / margin | $668.0 million / 83% | $517.8 million / 84% | Margin down about 1 percentage point |
| Operating income (loss) / margin | ($34.0 million) / (4%) | $56.5 million / 9% | Turned to an operating loss |
| Net income (loss) | ($13.7 million) | ($411.2 million) | Prior-year loss included large note and capped-call derivative charges |
| Diluted net loss per share | ($0.05) | ($1.63) | GAAP |
| Operating cash flow | $92.4 million | $65.0 million | Up $27.4 million |
| Free cash flow | $75.9 million | $58.1 million | Non-GAAP; operating cash flow less capital expenditures |
Operating expenses rose 52% to $702.0 million, led by research and development at $399.0 million, up 47%. Stock-based compensation was $173.6 million, compared with $100.9 million in the prior-year quarter. Cloud revenue increased 49% to $475.0 million; Data Center revenue rose 54% to $171.2 million, while Server revenue fell 18% to $113.8 million.
At September 30, 2022, cash and cash equivalents were $1.469 billion, with $54.5 million of marketable securities. The company had drawn its $1.0 billion term loan; the $500 million revolving facility was available. The term loan matures in October 2025, and Atlassian reported compliance with its covenants. Exchangeable senior notes were fully settled in fiscal 2022.
Material changes and unusual items
- Revenue growth was driven primarily by subscriptions, existing-customer expansion and migration to Cloud and Data Center. More than 90% of quarterly revenue came from customer accounts existing on or before June 30, 2022.
- Higher employee compensation and stock-based compensation, along with increased cloud-hosting fees, contributed to expense growth and the operating loss.
- Other income included a $43.1 million non-cash gain from selling control of Vertical First Trust, associated with the Sydney headquarters project; Atlassian retained a 13% equity-method interest.
- The prior-year quarter included $424.5 million of expense related to the exchangeable notes and capped-call derivatives. This, together with the current-period sale gain, makes the year-over-year net-loss comparison less indicative of underlying operations.
- Strategic-investment losses were $11.8 million, including unrealized losses and impairments. The company also disclosed that the Sydney headquarters lease is expected to commence in FY2027, with initial-term payments of approximately AUD 1.4 billion (about $901 million at September 30, 2022 exchange rates).
Outlook, management commentary and risks
Management provided no numerical revenue or earnings guidance in the supplied filing text. It expects subscription revenue to continue increasing and to remain the primary growth driver, while maintenance revenue is expected to decline as Server customers migrate. Atlassian stopped selling new perpetual Server licenses in February 2021, stopped selling Server upgrades in February 2022 and plans to end Server maintenance and support in February 2024.
Management said paid-user growth from existing customers moderated during the quarter, largely among customers affected by weaker economic conditions; conversion from free products to paid plans also weakened. The company intends to continue investing in research and development, cloud infrastructure and employees, and expects stock-based compensation to increase in FY2023. It believes cash, operating cash generation and borrowing capacity will meet anticipated needs for at least the next 12 months.
Key risks include economic weakness, inflation and interest rates affecting customer expansion and conversion; execution and costs of cloud migration; competition and customer retention; cloud availability and cybersecurity; foreign-exchange and floating-rate debt exposure; and tax uncertainty. The filing warns that required capitalization and amortization of research and development costs under the Tax Cuts and Jobs Act could materially increase future cash taxes if not deferred, modified or repealed. Atlassian reported no material legal proceedings or recorded litigation liabilities and said disclosure controls were effective.
Important facts for investors to verify
- Whether paid-user expansion and conversion from free products stabilize, and whether cloud growth offsets the expected decline in Server maintenance revenue.
- How operating expenses and stock-based compensation evolve relative to revenue, given the shift to an operating loss despite 31% revenue growth.
- The sustainability and quality of cash generation, including working-capital movements and capital spending.
- Debt, interest-rate hedging and covenant capacity, as well as the scale and timing of the future Sydney headquarters lease obligations.
- Comparability of reported results following the IFRS-to-GAAP conversion, and the effect of non-recurring gains, investment marks and prior-period derivative charges.