Business context and reporting period
Atlassian Corporation Plc’s Form 20-F reports the fiscal year ended June 30, 2018, with comparisons to fiscal 2017. The filing is an annual report, not a 2017 Q4 filing. Financial statements are prepared under IFRS as issued by the IASB and presented in U.S. dollars. Atlassian sells team collaboration and work-management software, including Jira, Confluence, Trello, Bitbucket and Jira Service Desk. It reported 125,796 paying customers in more than 180 countries at year-end and generated more than 75% of revenue from subscriptions and maintenance in each of the last three fiscal years.
Key financial metrics
Amounts below are U.S. dollars; figures are for fiscal years ended June 30.
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $874.0 million | $619.9 million | +41% |
| Gross profit / margin | $701.3 million / 80% | $500.8 million / 81% | Margin down 1 percentage point |
| Operating income (loss) | $(53.7) million | $(63.1) million | Loss narrowed |
| Net income (loss) | $(119.3) million | $(42.5) million | Loss widened |
| Operating cash flow | $311.5 million | $199.4 million | +56% |
| Free cash flow (non-IFRS) | $281.2 million | $183.3 million | +$97.9 million |
| Cash and cash equivalents | $1,410.3 million | $244.4 million | +$1,165.9 million |
| Short-term investments | $323.1 million | $305.5 million | +$17.6 million |
| Working capital | $1,359.1 million | $285.6 million | +$1,073.5 million |
Revenue by stream: subscriptions $403.2 million (+67%); maintenance $325.9 million (+23%); perpetual licenses $85.5 million (+15%); and other revenue $59.4 million (+57%). Subscription revenue rose to 46% of total revenue from 39%; maintenance declined to 37% from 43%. Customer growth and expansion within existing accounts drove results; over 90% of FY2018 revenue was attributed to customer accounts already existing by June 30, 2017.
IFRS operating expenses were $755.0 million, or 86% of revenue, versus $563.9 million, or 92%, in FY2017. Research and development was $415.8 million (47% of revenue), including $98.6 million of share-based payment expense. Total share-based payment expense was $162.9 million, up from $137.4 million. Non-IFRS operating income was $166.4 million versus $104.2 million; non-IFRS net income was $118.6 million versus $84.9 million. These measures exclude specified items, including share-based compensation and acquired-intangible amortization, and are not substitutes for IFRS results.
Operating cash flow benefited from non-cash charges and a $104.2 million increase in deferred revenue, reflecting subscription sales and maintenance renewals. Capital expenditures were $30.2 million. The company reported $1.5 billion of cash and short-term investments combined at year-end. Total liabilities were $1.53 billion, including $819.6 million net carrying value of the exchangeable notes and $360.2 million of deferred revenue. The filing states that existing cash and expected operating cash flow should meet anticipated cash needs for at least 12 months.
Material changes versus FY2017
- Revenue increased 41%; subscription revenue was the fastest-growing major stream and an increasing share of the mix.
- Gross margin declined from 81% to 80%, while operating loss narrowed from $63.1 million to $53.7 million as revenue growth outpaced growth in total operating expenses.
- Net loss widened to $119.3 million, driven in part by a $53.5 million income tax expense despite a pretax loss of $65.8 million. The prior year had a $17.1 million tax benefit. Management cited deferred-tax-asset valuation adjustments and other tax differences.
- Cash increased substantially following the 2018 issuance of $1.0 billion principal amount of exchangeable senior notes. Financing cash flow was $906.8 million after $87.7 million spent on capped calls.
- Customer count rose from 89,237 to 125,796; the filing attributes 14,263 of the increase primarily to Bitbucket Cloud pricing changes that brought additional organizations within the company’s customer definition.
Outlook, commentary, risks and unusual items
- Management expects subscription revenue to continue growing faster than perpetual-license revenue as customers adopt cloud services and term-based licenses. It also expects R&D, marketing and sales, and general and administrative expenses to increase in absolute dollars; capital expenditures were expected to rise in FY2019. The company did not provide quantified revenue or earnings guidance and said it did not expect near-term IFRS profitability.
- The $1.0 billion notes mature May 1, 2023 and bear a 0.625% coupon. Their exchange feature is separately accounted for as a derivative; the stated effective interest rate for FY2018 was 4.83%. Noteholders may have cash repurchase or exchange rights under specified conditions. Capped calls are intended to offset certain exchange-related cash payments, subject to a cap and counterparty performance.
- The reported tax expense was unusual relative to the pretax loss. The filing cites U.S. tax reform and reassessment of deferred tax asset realizability; it recorded non-cash charges to tax expense and equity and noted that portions of the tax reform accounting remained under evaluation.
- IFRS 15 was to be adopted in Q1 FY2019 using full retrospective application. The filing’s illustrative restatement increases FY2018 revenue by $7.0 million and reduces net loss by $5.9 million, without cash-flow impact. IFRS 16, effective for Atlassian’s FY2020, was still being evaluated.
- Key business risks include intense competition, dependence on Jira and Confluence (over two-thirds of revenue in each of the prior three fiscal years), customer renewals, cloud execution and transition economics, security and service disruptions, and privacy compliance. The company disclosed prior security breaches that resulted in unauthorized access to certain data.
- Other risks include foreign-exchange exposure, tax uncertainty, acquisition integration, and reliance on third-party hosting and APIs. A 10% U.S. dollar strengthening would reduce the fair value of foreign-currency contracts by $18.8 million, according to the sensitivity analysis.
- Class B shares carry ten votes each; the founders collectively held about 91% of voting power. The company does not anticipate paying dividends. No material legal proceedings were reported.
- After year-end, in July 2018, Atlassian announced a Slack partnership and plans to exit real-time communications; Stride and Hipchat products were to be discontinued.
Most important facts for investors to verify
- Reconcile the filing’s reported Class A shares outstanding: the cover page states 106,199,671 at June 30, 2018, while the financial-statement share-capital table states 105,371,800.
- Review the full note terms, exchange triggers, cash-settlement obligations, capped-call cap and counterparty exposure; distinguish the $1.0 billion principal obligation from its $819.6 million net accounting carrying value.
- Assess the sustainability and quality of cash generation, including the contribution from deferred-revenue growth and non-cash share-based compensation to operating cash flow and non-IFRS free cash flow.
- Examine the FY2018 tax reconciliation, deferred-tax-asset assumptions and remaining tax-reform accounting, given the tax expense recorded on a pretax loss.
- Track cloud subscription growth, gross-margin trends, renewal and expansion rates, and whether rising infrastructure and operating costs support durable profitability.
- Read the complete audited statements and notes for contingencies and subsequent events. Ernst & Young issued unqualified opinions on the IFRS financial statements and internal control over financial reporting.