The Tax Bill Hits Atlassian's Bottom Line

Collaboration and productivity software provider Atlassian (TEAM 1.57%) reported its fiscal second-quarter results after the market closed on Thursday. A big charge related to U.S. tax reform knocked down earnings, but revenue growth was impressive, and earnings on an adjusted basis marched higher. Here's what investors need to know about Atlassian's second-quarter report.

Atlassian: The raw numbers

Data source: Atlassian. IFRS = International Financial Reporting Standards.

Atlassian's Stride app. Image source: Atlassian.

What happened with Atlassian this quarter?

• Atlassian ended the quarter with 112,571 customers on active subscriptions or maintenance agreements. The company added 4,285 new customers during the quarter.
• The Atlassian Marketplace now contains more than 3,500 apps that enhance Atlassian products. It has generated more than $350 million in lifetime sales since launching in 2012.
• Subscription revenue was $96.8 million, up 71.8% year over year.
• Maintenance revenue was $80.4 million, up 23.5% year over year.
• Perpetual license revenue was $21.8 million, up 19.5% year over year.
• Other revenue was $14.7 million, up 57.9% year over year.
• Cash, cash equivalents, and short-term investments totaled $678.1 million at the end of the second quarter, up from $613.5 million at the end of the first quarter.
• Atlassian generated $72.3 million of operating cash flow and $67.8 million of free cash flow during the quarter. Free cash flow was up 52% year over year.
• The U.S. tax bill passed late last year led Atlassian to take a $47.3 million charge. The company wrote down its deferred tax assets due to the lower corporate tax rate.

Atlassian provided guidance for the third quarter and for fiscal 2018:

• For the third quarter: Revenue between $217 million and $219 million, up 36.3% year over year; non-IFRS EPS of $0.08, flat compared to the prior-year period; non-IFRS gross margin of 83%; and non-IFRS operating margin of 17%.
• For fiscal 2018: Revenue between $853 million and $857 million, up 37.9%; non-IFRS EPS between $0.47 and $0.48, compared to $0.36 in fiscal 2017; non-IFRS gross margin of 84%; and non-IFRS operating margin of 19%.
• Atlassian expects to generate full-year free cash flow between $260 million and $270 million.

What management had to say

On the earnings call, Atlassian CFO Murray Demo discussed how the U.S. corporate tax rate would affect the company:

First of all, our fiscal year, half the year is at the 35 rate in the U.S., the other half is at 21. So we're not like other calendar companies where they're starting the calendar 2018 where you get a full-year of benefit of the rate. And secondly, we are a U.S and Australian company and so you've got a blend that way. When you kind of put all that together for fiscal '18, sort of the second half of the year for us, we are not seeing a whole lot of benefit. That's going to show up in fiscal '19.

Co-CEO Mike Cannon-Brookes gave an update on Trello, a product Atlassian acquired in 2017:

Look, Trello continues to power along and we're really happy with its progress. As we've said previously, we are not even at the end of year one in terms of an integration program of the business, the team et cetera. And our main goal is maintaining the momentum of the product and business that Trello already is before we look at the opportunities potentially in combining the customer bases and we have a lot of time to go through and continue to do that.

Looking ahead

Atlassian's revenue continues to grow at a brisk pace given how big the company has become. If the growth rate doesn't drop too much, the company will easily cross the $1 billion annual revenue mark in fiscal 2019. Atlassian isn't profitable on an IFRS basis, but its adjusted earnings are rising right along with revenue, and its free cash flow generation is impressive.

Revenue growth will surely slow down as Atlassian grows, and the company's guidance calls for a slight slowdown in the third quarter. The lapping of the Trello acquisition, which closed in February of 2017, is one reason for the slower growth rate. Still, Atlassian has plenty of growth potential as it goes after a massive market for collaboration and productivity software.