Atlassian Corporation (Nasdaq: TEAM) — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2023; comparisons are with the corresponding 2022 periods. The filing was signed May 5, 2023. Atlassian designs and sells team collaboration and work-management software, including Jira, Confluence, Trello, and Bitbucket. Following its September 2022 U.S. domestication, the company reports under U.S. GAAP; prior periods were retrospectively converted from IFRS, which may affect comparability with previously reported results.
Financial performance and position
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $915.5 million, up 24% year over year | $2.596 billion, up 27% |
| GAAP gross margin | 82%, versus 84% | 82%, versus 84% |
| GAAP operating income (loss) | $(161.6) million, versus $32.9 million | $(294.8) million, versus $112.4 million |
| GAAP net income (loss) | $(209.0) million, versus $4.7 million | $(427.8) million, versus $(428.9) million |
| GAAP diluted EPS | $(0.81), versus $0.02 | $(1.67), versus $(1.70) |
| Operating cash flow | $352.4 million, versus $334.7 million | $595.3 million, versus $606.2 million |
| Free cash flow (non-GAAP) | $349.7 million, versus $308.2 million | $572.1 million, versus $560.2 million |
Quarterly subscription revenue was $760.7 million, up 37%; maintenance revenue was $94.2 million, down 22%; and other revenue was $60.5 million, down 7%. By deployment, cloud revenue grew 34% to $534.9 million and Data Center grew 47% to $221.6 million, while Server revenue declined 29% to $94.4 million.
GAAP operating expenses were $908.4 million in the quarter, including $263.4 million of stock-based compensation across expense categories. Atlassian reported non-GAAP operating income of $197.1 million (22% margin) and non-GAAP net income of $138.0 million, or $0.54 per diluted share; these measures exclude specified items, including stock-based compensation and restructuring charges.
At March 31, 2023, cash and cash equivalents were $1.972 billion and marketable securities were $10.0 million. Total debt was approximately $1.0 billion under the term loan facility; $25.0 million was current and $974.6 million non-current. The company also had access to a $500 million revolving credit facility. Current deferred revenue was $1.264 billion; total deferred revenue was $1.398 billion. Stockholders’ equity was $582.3 million.
Material changes versus the prior comparable period
- Revenue growth was led by subscriptions, reflecting customer additions and migrations to Cloud and Data Center. More than 90% of quarterly revenue came from customer accounts existing on or before December 31, 2022.
- Server and maintenance revenue continued to contract as Atlassian no longer sells new perpetual licenses or Server upgrades. It plans to end Server maintenance and support in February 2024.
- Quarterly gross margin fell to 82% from 84%; management attributed expected further pressure to the mix shift toward Cloud and its associated hosting and support costs.
- Operating expenses rose sharply. Quarterly research and development increased 56%, marketing and sales 55%, and general and administrative 44%, with employee compensation and stock-based compensation important contributors.
- GAAP results included $97.8 million of restructuring charges in the quarter, including $61.3 million of lease-consolidation impairment charges and $25.8 million of severance and termination benefits. The company eliminated about 500 roles, approximately 5% of its workforce, and expects the actions to be substantially complete by fiscal year-end.
- Nine-month other income (expense) improved substantially year over year, partly because the prior-year period included losses related to the settled exchangeable notes and capped calls. Fiscal 2023 also included a $45.2 million non-cash gain on the sale of a controlling interest in Vertical First Trust (VFT).
- Cash from operations declined 1.8% for the nine months, while free cash flow increased, primarily because capital expenditures were lower.
Outlook, risks and contingencies
- Outlook: The filing provides no numerical revenue or earnings guidance. Management expects subscription revenue to remain the principal growth driver as customers migrate to Cloud and Data Center; Server and maintenance revenue are expected to decline. It expects gross margin to face pressure from Cloud hosting and customer-support costs.
- Demand and macroeconomic conditions: Management said growth from existing customers moderated amid weaker economic conditions. Inflation, higher interest rates, geopolitical events, competition, customer spending and renewal or expansion patterns may affect results.
- Liquidity: Management believes cash, operating cash generation and available borrowing capacity will meet anticipated cash needs for at least the next 12 months. Quarterly term-loan installments begin October 31, 2023; the credit facility matures in October 2025. Atlassian reported compliance with its debt covenants at quarter-end.
- Commitments: The company entered into $1.9 billion of non-cancelable infrastructure-service commitments over five years. It also disclosed approximately $929.4 million of future payments for its planned Sydney headquarters lease’s 15-year initial term, expected to commence in fiscal 2027.
- Tax uncertainty: The company recorded $117.4 million of gross unrecognized tax benefits for the nine months amid Australian Taxation Office negotiations over Australia-U.S. transfer pricing. It expects negotiations to conclude within 12 months; the outcome could affect taxes and cash flows. Full valuation allowances remain on U.S. and Australian deferred tax assets.
- Legal matters: A securities class action and two related stockholder derivative suits allege, among other things, misleading disclosures concerning the August–November 2022 period. The company intends to defend the cases and had recorded no litigation liabilities. It cautioned that litigation outcomes are uncertain.
- Other notable risks: Cloud migration and execution, security incidents and service interruptions, privacy regulation, foreign-exchange and interest-rate movements, competition (including emerging AI-related products), and the company’s dual-class voting structure. Class B shares carry ten votes each; holders collectively controlled approximately 88% of voting power at March 31, 2023.
Important facts for investors to verify
- Whether subscription growth and customer expansion can persist as management reports moderation in existing-customer growth, and whether Cloud and Data Center migrations offset declining Server and maintenance revenue.
- How recurring stock-based compensation, restructuring costs and Cloud-related operating expenses affect GAAP profitability and margins; assess non-GAAP results alongside GAAP measures.
- Progress and cash impact of the restructuring, office consolidation and potential additional real-estate charges.
- Resolution of the Australian transfer-pricing negotiations and the potential tax and cash consequences of the $117.4 million uncertain-tax-position reserve.
- Use of the $1.0 billion share-repurchase authorization: $35.7 million had been spent through March 31, 2023, with $964.3 million remaining.
- Ability to service the term loan and meet the substantial infrastructure and future Sydney headquarters commitments while maintaining liquidity.
- Developments in the securities and derivative lawsuits; no loss liability had been recorded as of the filing.