Atlassian Corporation (Nasdaq: TEAM) — Form 10-Q
Reporting period: Fiscal second quarter and six months ended December 31, 2023; comparisons are with the corresponding 2022 periods unless noted. Atlassian sells collaboration and work-management software, including Jira and Confluence, through cloud, Data Center, and Server offerings.
Financial performance
| Metric | Three months ended Dec. 31, 2023 | Year-over-year change | Six months ended Dec. 31, 2023 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $1.060 billion | +21% | $2.038 billion | +21% |
| Subscription revenue | $932.2 million | +31% | $1.784 billion | +31% |
| Gross margin (GAAP) | 82% | Unchanged | 82% | Unchanged |
| Operating loss (GAAP) | $49.1 million | Loss narrowed from $99.2 million | $67.9 million | Loss narrowed from $133.3 million |
| Net loss (GAAP) | $84.5 million | Loss narrowed from $205.0 million | $116.4 million | Loss narrowed from $218.8 million |
| Free cash flow (non-GAAP) | $284.3 million | Up from $146.5 million | $447.5 million | Up from $222.4 million |
Quarterly GAAP diluted loss per share was $0.33, versus $0.80 a year earlier. For the six-month period, it was $0.45 versus $0.86. Quarterly non-GAAP operating income was $250.6 million and non-GAAP net income was $189.5 million; these measures exclude specified items, notably substantial stock-based compensation, and should not be treated as substitutes for GAAP results.
Revenue mix continued shifting toward subscriptions: quarterly Cloud revenue grew 27% to $653.2 million and Data Center revenue grew 41% to $274.8 million. Server revenue fell 35% to $69.2 million as maintenance revenue declined. Quarterly operating expenses were $914.6 million, including $536.8 million in research and development. Stock-based compensation was $289.8 million for the quarter and $525.4 million for the six months.
Cash, debt and liquidity
- At December 31, cash and cash equivalents were $1.460 billion, marketable securities were $150.8 million, and accounts receivable was $526.4 million. Cash and short-term marketable securities totaled approximately $1.611 billion.
- Six-month operating cash flow was $456.6 million, compared with $243.0 million a year earlier. Capital expenditures were $9.0 million. The company’s stated free cash flow measure is operating cash flow less capital expenditures.
- Cash and cash equivalents decreased $642.2 million in the six months, principally reflecting the Loom acquisition and other investing and financing activity. The Loom acquisition used approximately $844.7 million net of cash acquired.
- Term-loan principal outstanding was $987.5 million; $12.5 million was repaid during the quarter. The $500 million revolving facility was available, and the company reported compliance with its debt covenants. The credit facility matures in October 2025.
- Current assets were $2.272 billion and current liabilities were $2.118 billion at December 31. Management said available cash, operating cash generation, and borrowing capacity should meet anticipated needs for at least the next 12 months.
Material changes and management commentary
- Management attributed revenue growth primarily to demand from existing and new customers and migration to Cloud and Data Center subscriptions. More than 90% of quarterly revenue was attributed to customer accounts existing by September 30, 2023.
- Management said paid-seat expansion among existing customers had moderated since fiscal 2023, which it associated largely with weaker economic conditions. It cited inflation, higher interest rates, and geopolitical uncertainty as potential pressures on customer demand and spending.
- Atlassian acquired Loom on November 30, 2023, for approximately $885.6 million in cash consideration. Loom’s results were not material to the reported periods. Preliminary purchase accounting recorded $544.8 million of goodwill and $272.3 million of acquired intangible assets; valuations remain subject to adjustment.
- Atlassian generally planned to end Server maintenance and support in February 2024, subject to limited exceptions. Management expects Server revenue to contract and maintenance revenue to become immaterial after the end-of-support date; customer migration to Cloud or Data Center is a key execution factor.
- Management expects Cloud investment and hosting costs to increase and stated that the mix shift to Cloud could reduce gross margin. It also said continued R&D and infrastructure investment contributed to GAAP losses. No quantified forward revenue or earnings guidance is provided in the supplied filing text.
- The company repurchased approximately 0.5 million shares for $98.1 million in the quarter and had $682.4 million remaining under its $1.0 billion authorization at December 31.
Risks, contingencies and unusual items
- Tax: Atlassian reported a $44.4 million quarterly income-tax provision despite a $40.1 million pretax loss. It finalized an Australian-U.S. transfer-pricing arrangement covering tax years 2019–2025 and paid approximately $60.5 million in cash taxes during the quarter. The filing also describes full valuation allowances on U.S. federal, U.S. state, and Australian deferred tax assets.
- Litigation: A securities class action was dismissed on January 22, 2024, with plaintiffs allowed until February 12 to amend. Related derivative actions were stayed. The company had recorded no litigation liabilities for the periods presented and said outcomes remain uncertain.
- Cybersecurity and operations: The filing reports that a state threat actor exploited a Confluence Server and Data Center vulnerability in October 2023; Atlassian issued a patch and worked with affected customers. Cloud availability, data security, third-party infrastructure, privacy regulation, and AI-related legal and reputational issues are identified as risks.
- Controls and leadership: The company implemented a new ERP system during the quarter, affecting aspects of the financial close process and related controls. Management nevertheless concluded disclosure controls were effective at December 31. The Chief Revenue Officer stepped down effective December 31, 2023.
- Other exposures: Risks include debt and variable interest rates, foreign-exchange movements, strategic-investment losses, customer retention and renewals, competitive pressure, and the dual-class share structure, which gives Class B holders approximately 87% of voting power.
Investor verification priorities
- Track Cloud growth, paid-seat expansion, renewals, and customer migration as Server support ends; assess whether new subscription growth offsets declining Server maintenance.
- Compare GAAP profitability and cash generation with non-GAAP measures, particularly given $525.4 million of six-month stock-based compensation.
- Monitor post-acquisition Loom integration, final purchase-price allocations, and the effect of acquisition spending on cash and goodwill.
- Reconcile the $60.5 million quarterly Australian transfer-pricing tax payment with the risk-factor discussion that refers to a $117.4 million payment associated with the arrangement.
- Follow developments in the amended securities complaint and derivative litigation, and monitor cybersecurity remediation, ERP implementation, and debt covenant compliance.