Atlassian Corporation (Nasdaq: TEAM) — Form 10-Q
Reporting period: Three months ended September 30, 2023 (fiscal 2024 first quarter); comparisons are with the three months ended September 30, 2022 unless noted. Amounts below are in U.S. dollars.
Business context and results
Atlassian develops team collaboration and work-management software, including Jira, Confluence, and Jira Service Management. It sells mainly through a self-service model and earns recurring subscription and maintenance revenue. The company is transitioning customers from Server products toward Cloud and Data Center offerings.
| Metric | Q1 FY2024 | Prior year | Change |
|---|---|---|---|
| Revenue | $977.8 million | $807.4 million | +21% |
| Subscription revenue | $852.0 million | $651.0 million | +31% |
| Maintenance revenue | $78.6 million | $113.6 million | -31% |
| Gross profit / gross margin | $799.7 million / 81.8% | $668.0 million / 82.7% | Margin down about 0.9 percentage points |
| Operating loss / margin | $18.9 million / 1.9% | $34.0 million / 4.2% | Loss narrowed |
| Net loss / diluted loss per share | $31.9 million / $0.12 | $13.7 million / $0.05 | Loss widened |
| Operating cash flow | $167.0 million | $92.4 million | Increased |
| Free cash flow (non-GAAP) | $163.3 million | $75.9 million | Increased |
Financial position and material changes
- Revenue growth was driven primarily by existing customers, additional subscriptions, and migrations to Cloud and Data Center; more than 90% of quarterly revenue came from customer accounts existing by June 30, 2023.
- Cloud revenue rose 27% to $604.6 million and Data Center revenue rose 42% to $242.9 million. Server revenue declined 31% to $78.8 million. Subscription revenue represented 87% of total revenue, versus 82% a year earlier.
- Cost of revenue grew 28%, faster than revenue, primarily due to employee compensation and third-party hosting costs. Management expects Cloud investment and a mix shift toward Cloud to pressure gross margin.
- GAAP operating expenses increased 17% to $818.6 million, including research and development expense of $481.7 million. Stock-based compensation was $235.6 million, versus $173.6 million in the prior-year quarter.
- Net loss included $20.9 million of income tax expense on a pretax loss of $11.0 million. The filing attributes the tax provision primarily to uncertain-tax-position reserves, foreign earnings and nondeductible stock-based compensation. Other expense also reflected a $6.8 million share of losses from an equity-method investment. The prior-year comparison included a $43.1 million noncash gain from selling control of a subsidiary.
- Cash and cash equivalents were $2.14 billion and marketable securities were $94.3 million at September 30. Current assets were $2.74 billion and current liabilities were $1.91 billion.
- The company had drawn $1.0 billion under its term loan; the $500 million revolving facility was available. The facility matures in October 2025, and quarterly term-loan principal repayments began October 31, 2023. Atlassian reported compliance with its covenants.
- Operating cash flow improved year over year; capital expenditures were $3.7 million, compared with $16.5 million. Financing cash use included $65.9 million of share repurchases. The company repurchased about 349,000 shares for approximately $65.3 million at an average $187.09 per share; $780.5 million remained authorized.
- Remaining performance obligations were approximately $1.7 billion, with about 82% expected to be recognized over the next 12 months. Deferred revenue was $1.50 billion at quarter end.
Outlook, risks and unusual items
- No specific revenue, earnings, or margin guidance for the next quarter or fiscal year is provided in the supplied filing text. Management says subscription revenue is expected to remain the primary growth driver, while Server maintenance revenue is expected to decline. Server maintenance and support are generally scheduled to end in February 2024, subject to limited exceptions.
- Management reported moderation in existing-customer growth and free-to-paid conversion, which it associates with weaker macroeconomic conditions. It also expects Cloud migration, hosting, and customer-support costs to weigh on gross margin.
- Management stated existing cash, operating cash flow, and borrowing capacity should cover anticipated needs for at least 12 months. However, it also agreed in October 2023 to acquire Loom for approximately $975 million, including about $880 million in cash, expected to be funded from existing cash. Closing was expected in fiscal Q3 2024, subject to customary conditions and regulatory approval.
- In October 2023, Atlassian finalized an advance pricing agreement with the Australian Taxation Office and reported a related cash tax payment of approximately $60.5 million. Elsewhere, the risk-factor section refers to a $117.4 million payment related to an agreement with the Australian Tax Office. The filing text does not clearly reconcile these amounts; verify the amount and whether they refer to different periods or obligations.
- In October 2023, Atlassian said a known state threat actor was exploiting a vulnerability in Confluence Server and Data Center; it issued a patch and worked with affected customers to assess unauthorized access.
- A securities class action and related shareholder derivative suits allege misleading disclosures concerning the August–November 2022 period; the company denies wrongdoing. The derivative matters were stayed pending the class-action dismissal process. Atlassian had recorded no litigation liability, and stated outcomes remain uncertain.
- Other prominent risks include macroeconomic weakness, competition, customer renewal and expansion, successful Cloud migrations, cybersecurity and service availability, evolving AI and privacy regulation, foreign-exchange and tax exposure, and debt and interest-rate risks. The dual-class share structure gives Class B holders approximately 87% of voting power.
Key facts for investors to verify
- Whether Cloud growth and customer expansion can offset declining Server maintenance revenue as the February 2024 support deadline approaches.
- The drivers and durability of improving operating cash flow and free cash flow, alongside continued GAAP net losses and substantial stock-based compensation.
- The expected funding, closing conditions, and financial effects of the Loom acquisition and the related use of cash.
- The amount and timing of Australian tax payments: the filing cites both approximately $60.5 million and $117.4 million in different sections without clearly reconciling them.
- The extent of customer impact from the Confluence vulnerability and the status and potential costs of the securities and derivative litigation.
- Debt repayment and covenant capacity, and whether repurchases remain appropriate alongside acquisition and operating cash needs.