Saturday, September 23, 2023

Atlassian shares collapse after another quarterly loss

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Nasdaq-listed Australian software giant Atlassian has seen its shares fall more than 10% in after-hours trading following the release of its December quarterly results, which posted a loss of $99.2 million.

The loss compares to a rare $23 million gain 12 months earlier. Now in its 21st year of operations, Atlassian has yet to finish another year in the black.

The company exceeded revenue expectations in Q2 FY23 and still grew 27%, year over year, to US$872.7 million. Operating margin was (11)% for the quarter, compared to 3% for Q2 FY22.

Net loss was $205 million for the December quarter, compared to a net loss of $22.3 million for the same quarter 12 months ago.

But it’s clear that layoffs in the tech industry, with tens of thousands of jobs disappearing, are slowing customer growth in the collaboration software business.

Atlassian ended calendar year 2022 with 253,177 active customers, up 4,004 net new customers for the quarter.

Existing customers are expanding their paid seats at a slower pace, and while there is strong growth in free editions of its cloud products, they are not moving to the paid version.

An unpredictable year

Announcing the results, co-founder and co-CEO Scott Farquhar said they are “proud of everything we’ve accomplished in yet another unpredictable year,” with subscription revenue growing 40%.

“2023 will be all about helping our customers navigate these challenging times, cushioning the macro-driven impact on our business and setting Atlassian up for long-term success,” said he.

His co-CEO Mike Cannon-Brookes said they will “continue to play offensively in our big three markets while being pragmatic” amid a series of headwinds.

“Our track record of making smart investment decisions in the service of long-term payouts continues to deliver as we recently surpassed 45,000 Jira Service Management customers, making it one of our fastest growing products,” he said.

As always, the pair included an Australian colloquial in their shareholder letter, saying, “We have positioned ourselves for success in a challenging environment and we are ready to go after it. (As we say in Australia, ‘we’re not here for #@!% spiders.’)”

The company forecasts revenue in the $890-910 million range for Q3, with another loss from the cards — approximately (14%) operating margin on a GAAP basis.

That guidance is below analysts’ forecasts, adding to the pressure on the company’s share price.

Total year-over-year revenue growth is expected to be around 25%, with cloud revenue growing at 35-40%. Operating margin is expected to be approximately (11%) on a GAAP basis.

“We are redeploying our talent and resources to focus more on our biggest growth opportunities: cloud migrations, the IT service management market and serving enterprise customers. Atlassian is well positioned in these areas with significant momentum that can help us navigate the turbulence ahead,” said Cannon-Brookes and Faruqhar in the shareholder letter.

“Throughout our seven years as a public company, you’ve seen us consistently play the long game while being incredibly capital efficient. That is a winning strategy and we are sticking to it.”

Last month, the board approved the repurchase of up to $1 billion of Atlassian’s Class A Common Stock.

The balance sheet ended the quarter at US$1.7 billion in cash and cash equivalents plus short-term investments.

Atlassian’s share price is down about 40% from 12 months ago to close at US$182.41 on Thursday trading, but has recovered to start 2023, up 44%. It’s down 13% after closing to about $170.

Atlassian’s Q2 FY23 earnings. Source: Atlassians

Disappointing results

Stock market analyst Megan Stals said growth in January was driven primarily by signs of declining inflation rather than company fundamentals.

“For Atlassian investors, today’s results will be disappointing, and this could suggest that the recent tech upturn was premature,” she said.

Atlassian tops earnings-per-share estimates, but customer growth continues to fall and the company struggles to convert free users into paying customers. Given the recent layoffs in the tech industry, it’s not surprising that the JIRA product, which primarily helps tech teams collaborate, has struggled.”

Stals said that enterprise software revenues tend to be more robust during economic downturns, but for unprofitable companies that rely on continuous growth, this is often not enough.

“In a short-term negative signal for enterprise technology, Amazon’s cloud arm, AWS, also missed estimates last quarter. Growth in the cloud segment has slowed across the industry and Atlassian has revised its 2023 expectations downward again,” she said.

“The big theme for technology companies this earnings season has been efficiency, and Atlassian is no exception, setting out a plan in its shareholder letter to reduce ‘lower priority efforts’. But it has relatively high R&D expenses, mainly because of salaries. As one of the few tech companies not to have announced any layoffs, it may eventually come under pressure to reduce headcount.”

The Stake analyst said Atlassian’s status as one of Australia’s few tech success stories means it still has a significant impact on the local market and the drop in share price in after-hours trading has boosted sentiment ahead of the ASX quoted technology stocks such as Xero and Appen. .


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