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Atlassian Earnings: Selloff After Solid Quarter Offers a Buying Opportunity

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We are maintaining our fair value estimate of $215 per share for narrow-moat Atlassian TEAM after the company reported good results for its fiscal first quarter coupled with solid guidance for the second quarter. With shares selling off after hours we see a buying opportunity. Our model changes are minor and we struggle to uncover a supportable rationale for the selloff. Demand trends remain healthy overall and are showing signs of improvement as the company reported better-than-expected revenue and much-better-than-expected profitability. Guidance calls for solid revenue growth and good operating margins. Overall, results support our long-term thesis on a quality growth company.

Total revenue for the quarter grew 21% year over year, to $978 million, compared with the high end of guidance of $970 million. Subscription revenue grew 31% year over year to $852 million, which was in line with our aggressive assumptions. Management said the company continues to gain traction in premium and enterprise accounts. Cloud migrations are on track, per management, but there is a good size pool of customers who still have not migrated, and may not migrate by the end of support deadline in February 2024.

Customer additions have been volatile over the last year even as deal sizes are picking up. Atlassian added several thousand new customers in the quarter overall, and 1,377 customers in the cloud that generate $10,000 or more of annually recurring revenue, or ARR. Top of funnel demand remains positive, so overall demand is not problematic, in our opinion, even as conversions of free users remains depressed against historical norms.

Profitability remains a bright spot for Atlassian, as it has for much of our coverage, which supports our long-term profitability assumptions. Non-GAAP operating margin came in at 23.0%, compared with 18.3% a year ago and guidance of 19.5%. Spending discipline, better revenue, and benefits from lower headcount drove margin strength.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Dan Romanoff

Senior Equity Analyst
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Dan Romanoff, CPA, is a senior equity research analyst on the technology, media, and telecommunications team for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers software.

Before Joining Morningstar in 2019, Romanoff spent 12 years in buy-side equity research covering the technology and telecommunications sectors, most recently at Holland Capital Management. Prior to that, he spent five years in sell-side equity research as an associate analyst at UBS and a senior analyst at Credit Suisse covering various areas within technology, including hardware, software, and semiconductors. Romanoff also has worked as an auditor and in valuation services for major public accounting firms.

Romanoff holds a bachelor’s degree in accountancy and a Master of Business Administration in finance, both from the University of Illinois at Urbana-Champaign. He also holds the Certified Public Accountant and Accredited in Business Valuation designations.

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