Atlassian shares are down 23% from a 52-week high of $258.69 hit in January. (Photography … [+]
Stocks of software vendors Atlasian ( TEAM ) has fallen 17% so far this year, lagging the Nasdaq Composite’s 9.2% gain, on concerns about slowing organic growth in the company’s cloud business, which accounts for about 60% of total revenue.
Investors reacted strongly to Atlassian’s fiscal second quarter (December) earnings report in early February, sending the stock down 14% in a single session. Since the report, the stock has retreated as much as 25%, hitting a low of $189.87 earlier this week.
Expectations were heightened following the FQ2 numbers as Atlassian had a bullish valuation after the stock rallied 56% from a November 2023 low of $165.51 to a new 52-week high of $258.69 hit in late January.
Atlassian actually delivered better-than-expected FQ2 results and raised its cloud revenue growth outlook for FY’24 (June). However, excluding the expected contribution from the recently completed $975 million acquisition of Loom, an asynchronous video messaging tool, Atlassian narrowed its cloud growth range for the fiscal year by reducing the guidance’s top margin.
On an organic basis, Atlassian now sees FY’24 cloud revenue growth of 27% to 29% versus previous forecasts of 25% to 30%. Even with the narrowing, the midpoint of the new range is still up 50 basis points. Including Loom, Atlassian forecasts FY’24 cloud revenue growth of 28.5% to 30.5%.
The company lowered the upper end of its organic cloud growth forecast in part because its server product, which was retired last month, is currently seeing less churn than previously assumed, suggesting a longer period of migration to the cloud (above FY’24). .
Ending support for a server product provides an incentive for server customers to eventually move to a company’s data center or cloud offerings. With the data center unit in FQ2 delivering another outstanding quarter (revenues were up 41% after increases of 42% in FQ1 and 46% in FQ4), it’s clear that many server customers are moving to the data center product first before moving to cloud. Either way, Atlassian will continue to see migrations away from servers, with customers on their eventual journey to the cloud.
The customer base installed in the data center is “significant,” according to the company. Some of Atlassian’s biggest accounts are still in the data center product. The question is not if these accounts will move to the cloud, but when. Customers moving out of the data center drive more than 60% of all cloud migrations at Atlassian. The cloud is where customers really want to be, as it includes AI functionality and Loom’s instantly shareable videos.
In FQ2, Atlassian’s total revenue rose 21% to $1.06 billion, beating the consensus estimate by 3.6%. Subscription revenue of $932.1 million was up 31%, matching the growth rate of FQ1. Operating margin was solid at 24% (above forecasts of 21%), while free cash flow was $284 million (27% margin).
Atlassian has more than 302,000 total customers (including 33,000 added through the Loom acquisition). On an organic basis, the company brought in about 4,000 net new customers in FQ2, compared to an average of about 2,600 net new additions in each of the previous two quarters. Atlassian has 42,864 users (including 326 Loom users) with more than $10,000 in Cloud Annual Return (ARR), up 18% year over year.
The enterprise customer cohort had a strong December quarter, as billings exceeded expectations and Atlassian signed a number of large, multi-year contracts. In addition, the enterprise business saw healthy sales of premium versions. At the lower end, amid a somewhat more stable macro environment, free-to-paid conversions showed stabilization. But somewhat weaker than expected expansion of paid seats in the segment of SMB customers represented a tailwind.
For FQ3 (March), Atlassian’s total revenue outlook of $1.085 billion to $1.105 billion was above consensus of $1.065 billion. Atlassian expects FQ3 cloud revenue growth of 30% to 32%, with data center growth of 35%. In the comparable quarter a year ago, cloud revenue was up 34% and data center revenue was up 47%.
Given the decline in the share price, Atlassian’s stretched valuation has come to the fore a bit. With shares recently trading around $197, the company is valued at 11.9 times the FY’24 consensus of $4.24 billion (representing 20% growth) and 9.9 times the FY’25 consensus of 5 .09 billion USD (growth of 20.1%).