Atlassian Corporation Plc - Q1 FY2020 Financial Summary
Business Context and Reporting Period
This Form 6-K covers the three and six months ended December 31, 2019. Atlassian is a UK-incorporated foreign private issuer providing collaboration and productivity software (Jira, Confluence, Trello, etc.). The company operates primarily on a subscription and maintenance model, with a significant portion of revenue recognized ratably. The reporting period includes the adoption of IFRS 16 (Leases) effective July 1, 2019, and the acquisition of Code Barrel in October 2019.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 2019 | Six Months Ended Dec 31, 2019 |
|---|---|---|
| Total Revenues | $408.7 million | $772.1 million |
| Gross Profit | $343.0 million (84% margin) | $644.1 million (83% margin) |
| Operating Income | $41.8 million | $37.3 million |
| Net Income | $124.1 million | $193.4 million |
| Diluted EPS | $0.49 | $0.77 |
| Operating Cash Flow | $218.4 million | $294.6 million |
| Free Cash Flow | $202.0 million | $264.4 million |
| Cash & Short-term Investments | $1.94 billion (as of Dec 31, 2019) | N/A |
| Deferred Revenue | $578.2 million (Total) | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 37% year-over-year (YoY) for the quarter and 36% YoY for the six-month period. Subscription revenue grew 50% YoY, driven by existing customer expansion.
- Profitability: The company reported a net income of $124.1 million for the quarter, compared to $45.2 million in the prior year quarter. This significant increase is primarily due to a non-cash gain of $104.2 million from the mark-to-fair-value adjustment of the embedded exchange feature of the 2023 Exchangeable Senior Notes and related capped call transactions.
- Operating Expenses: Operating expenses increased 19% YoY for the quarter, largely due to higher compensation costs (including share-based payments) and increased headcount to support growth.
- Customer Base: The number of customers grew to 164,790 as of December 31, 2019, up from 138,235 a year earlier.
Outlook, Risks, and Unusual Items
- Unusual Items: Net income is heavily influenced by the fair value changes of the Notes and capped call derivatives. Management provides Non-IFRS measures to exclude these items, showing Non-IFRS net income of $93.9 million for the quarter.
- Accounting Changes: Adoption of IFRS 16 resulted in the recognition of right-of-use assets ($237.7 million) and lease obligations ($286.1 million) on the balance sheet. Free cash flow definition was updated to deduct lease payments.
- Liquidity Risk: The conditional exchange feature of the $1 billion Exchangeable Senior Notes was triggered as of December 31, 2019. Holders may exchange notes for cash between January 1 and March 31, 2020, which could impact liquidity. Consequently, the notes are classified as a current liability.
- Acquisitions: Completed the acquisition of Code Barrel for approximately $39.1 million to enhance Jira automation capabilities.
- Risks: Key risks include intense competition (Microsoft, Salesforce, etc.), cybersecurity threats, reliance on third-party cloud infrastructure (AWS), and potential volatility in stock price due to the Notes' exchange feature.
Investor Verification Checklist
- Derivative Impact: Verify the sustainability of earnings by analyzing Non-IFRS net income, as GAAP net income is distorted by the mark-to-market of the Notes and capped calls.
- Liquidity Position: Assess the company's ability to fund potential cash settlements of the Exchangeable Senior Notes if holders exercise their exchange rights in Q2 FY2020.
- Subscription Mix: Confirm the continued shift toward subscription revenue (56% of total) versus perpetual licenses (7%) to validate recurring revenue quality.
- Deferred Revenue: Monitor the $578.2 million deferred revenue balance as a leading indicator of future revenue recognition.
- Share-Based Compensation: Review the $147.7 million share-based payment expense for the six-month period and its impact on future cash burn and dilution.