Atlassian's stock drops as layoffs erode cloud-customer 'seats,' but AI could further boost data-center side

By Wallace Witkowski

Data-center sales are 'saving the day,' one analyst says

Atlassian Corp. shares fell Friday after the collaboration- and productivity-software company said it expected business to get worse as companies keep cutting jobs, but some analysts pointed to a rising data-center business as a lifeline.

Atlassian (TEAM) shares dropped as much as 13% to an intraday low of $130.07 and were last down nearly 11%.

Late Thursday, Atlassian had forecast revenue of $900 million to $920 million for the fiscal fourth quarter, while analysts surveyed by FactSet, on average, had estimated $919.4 million, stating that cloud revenue faced "increasing macroeconomic impacts on paid seat expansion from existing customers and new customer conversions, as well as headwinds in areas [where] we have yet to see significant impact," the company said in its letter to shareholders.

A "seat" refers to a paid user of Atlassian software. As companies lay off workers, Atlassian is losing those paid seats. Recently, Atlassian announced it would trim its own workforce by 5%, or 500 jobs

TD Cowen analyst Derrick Wood, who has a market-perform rating and cut his price target to $150 from $175, said that with macroeconomic pressures continuing to mount and management expecting those to worsen in the fourth quarter, visibility into fiscal 2024 is "quite constrained," and that this will be an overhang right up until fourth-quarter results and the 2024 outlook.

Wood said that "layoffs [were] driving seat reductions in some verticals like tech and financial services."

Since the beginning of the year, more than 183,000 tech sector jobs have been cut as budgets get tighter and companies across the board look to increase productivity.

Read: More than 186,000 tech-sector employees have lost their jobs since the start of 2023

Not so surprisingly, International Business Machines Corp. (IBM) is cutting back on hiring, estimating that 8,000 jobs could be eliminated with artificial intelligence. In February, IBM said that AI will likely displace "clerical white-collar work," and in April the company boasted that AI could improve productivity as it paid out up to $260 million in "stranded costs" after laying off thousands of its own workers.

Citi Research analyst Fatima Boolani, with a buy rating on Atlassian, kept her price target at $195 and said the quarter saw "comparable (and unsurprising) headcount-based model headwinds," with cloud performance decelerating for the fourth straight period and data-center sales "saving the day," driving reported subs/total revenues upside.

Morgan Stanley analyst Keith Weiss, with an overweight rating on the stock and a $185 price target, said there were several cloud catalysts on the horizon.

"Given the large proportion of Atlassian's customer base [are] on monthly billing cycles, similar to a consumption model, any pick-up in demand should quickly translate into better revenue growth," Weiss said.

The "most obvious" catalyst is the "end-of-life of server maintenance in February 2024, which management remains committed to (despite chatter in the channel about a push back)," Weiss said.

"Another potential driver of Cloud migrations could be the new GPT-driven Atlassian Intelligence functionality, which is free to customers, but only available in the Cloud," Weiss said. Plus, the company's margins outperformed as Atlassian signaled it was continuing to invest, "and we see room for more upside ahead."

"GPT-driven" refers to AI models like the Microsoft Corp. (MSFT)-backed OpenAI's ChatGPT, Alphabet Inc.'s (GOOGL)(GOOGL) Google generative AI product Bard and Adobe Inc.'s (ADBE) AI product, named Firefly.

The current drop in Atlassian's stock doesn't come close to the stock's worst day ever. In November, Atlassian shares sank as much as 33% after the company's earnings and outlook disappointed as layoffs claimed paid seats.

Atlassian shares are still up about 4% on the year, while the iShares Expanded Tech-Software Sector exchange-traded fund (IGV) has gained more than 14%, the tech-heavy Nasdaq Composite is up nearly 17% and the S&P 500 has advanced 7.5%.

-Wallace Witkowski

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05-05-23 1514ET

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