Subscriptions Drive Growth for Atlassian Corp.

Image Source: Atlassian.

Team collaboration and productivity software provider Atlassian (TEAM -1.06%) reported its fiscal first-quarter results after the market close on Oct. 27. The company posted strong revenue growth, driven by a surge in subscription and maintenance customers. Atlassian swung to a loss on an IFRS [international financial reporting standards] basis due to higher costs, and it expects losses to continue for the rest of the year. However, the company is free-cash-flow-positive, and expects to generate substantial free cash flow in fiscal 2017. Here's what investors need to know about Atlassian's first-quarter results.

Atlassian: The raw numbers

Data Source: Atlassian Q1 2017 earnings report.

What happened with Atlassian this quarter

An influx of new customers, both organic and from the acquisition of StatusPage, drove revenue higher during the first quarter.

• Atlassian ended the first quarter with 65,673 customers on active subscription or maintenance agreements. The company added 4,723 net new customers during the quarter, or 3,296 net new customers excluding StatusPage.
• The total customer count has increased by 27% since September 2015.
• Subscription revenue jumped 63.9% year over year to $49.9 million.
• Maintenance revenue rose 22.6% year over year to $61.7 million.
• Perpetual license revenue increased 12.9% year over year to $17.5 million.
• Other revenue was up 38.4% to $7.6 million.
• Atlassian ended the quarter with $754.3 million in cash, cash equivalents, and short-term investments.
• The company generated $28.5 million of operating cash flow and $26.1 million of free cash flow during the quarter.

Atlassian provided financial targets for the second quarter and fiscal 2017.

• For the second quarter: Revenue between $142.5 million and $144.5 million, IFRS operating margin of negative 8%, non-IFRS operating margin of 16%, IFRS EPS loss of $0.03, non-IFRS EPS of $0.08.
• For the full year: Revenue between $597 million and $603 million, IFRS operating margin of negative 10%, non-IFRS operating margin of 16%, IFRS EPS loss between $0.17 and $0.18, and non-IFRS EPS between $0.33 and $0.34.
• Full-year free cash flow is expected to be between $155 million and $165 million.

What management had to say

In Atlassian's shareholder letter, management discussed its approach to sales:

Our customers represent diverse industries and geographies as our highly automated sales model allows us to target the Fortune 500,000 -- not just the Fortune 500. A few of our more than 4,700 new customers during the quarter include utility software solutions provider SEDC, luggage manufacturer Samsonite, mobile device manufacturer ZTE, pet insurance administrator Petsure, luxury automotive manufacturer Bentley, asset management firm Russell Investments, organic food delivery firm Green Chef, and the Munich Airport.

Management also highlighted the success of its various products. HipChat, the company's messaging product, generates 1 billion messages every seven weeks. Upon launch in 2010, it took three years to reach the 1 billion-message mark. Confluence, Atlassian's content collaboration product, reached 30,000 customers, while Bitbucket Cloud, a continuous delivery product, now hosts code from 5 million developers.

Looking ahead

With subscription and maintenance revenue growing rapidly, the effect of that revenue being recognized over time is putting pressure on Atlassian's profitability. The company is profitable on a non-IFRS and free cash flow basis, though, something that can't be said for many fast-growing software companies.

Atlassian expects to grow revenue by between 30% and 32% in fiscal 2017, a slowdown compared to the 43% growth the company posted last year. Free cash flow generation remains strong, a fact which will bolster the company's already cash-rich balance sheet. As long as Atlassian can keep gaining new customers, the rapid growth the company demonstrated during the first quarter should continue.