Collaboration and productivity software vendor Atlassian (NASDAQ:TEAM) reported its fiscal third-quarter results after the market closed on April 19. The company set a record for quarterly customer growth, driving revenue nearly 40% higher in the process. Here's what investors need to know about Atlassian's third-quarter report.

Atlassian: The raw numbers

Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$223.7 million

$159.9 million

39.9%

IFRS net income

($14.3 million)

($17.5 million)

N/A

Non-IFRS net income

$24.6 million

$18.9 million

30.2%

Non-IFRS earnings per share

$0.10

$0.08

25%

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

The outside of an Atlassian office with a red car driving by and a person walking by.

Image source: Atlassian.

What happened with Atlassian this quarter?

  • Atlassian ended the quarter with 119,158 customers on active subscriptions or maintenance agreements. The company added 6,587 net new customers during the quarter.
  • Subscription revenue was $105.6 million, up 66.7% year over year.
  • Maintenance revenue was $82 million, up 22.2% year over year.
  • Perpetual license revenue was $21.3 million, up 9.1% year over year.
  • Other revenue was $14.9 million, up 49.3% year over year.
  • Cash, cash equivalents, and short-term investments totaled $763.9 million at the end of the third quarter, up from $678.1 million at the end of the second quarter.
  • Atlassian produced $91.7 million of operating cash flow and $86.4 million of free cash flow. Free cash flow was up 26% year over year.
  • Atlassian recently announced the planned opening of a new research and development and customer support center in Bengaluru, India.

Atlassian provided the following guidance for the fourth quarter and for fiscal year 2018:

  • For the fourth quarter: revenue between $232 million and $234 million, up 33.7% year over year at the midpoint; non-GAAP EPS of $0.12, up from $0.09 in the prior-year period; non-IFRS gross margin of 81%; and non-IFRS operating margin of 19%.
  • For fiscal year 2018: revenue between $862 million and $864 million, up 39.2% from 2017; non-GAAP EPS between $0.47 and $0.48, up from $0.36 in 2017; non-IFRS gross margin of 80%; and non-IFRS operating margin of 19%.

Previously, Atlassian had guided for fiscal year 2018 revenue between $853 million and $857 million. Guidance for non-IFRS EPS remained unchanged.

What management had to say

During the company's earnings call, co-CEO Mike Cannon-Brookes gave an update on Trello, a project management application acquired last year:

As we've said a number of times now, our focus to date has been just allowing to continue its impressive momentum and user growth. These user base continues to grow quickly as Trello spreads around the world. So with regard to monetization, we certainly aren't rushing into cross-selling into our existing base. We're looking to do what makes most sense for the businesses.

As of September 2017, Trello had 25 million registered members. The company expects it to generate about $20 million of revenue in fiscal year 2018.

CFO James Beer commented on why the company's fourth-quarter earnings guidance was below analyst expectations:

Well, in terms of the current year, I'd say a couple of things. We did identify some additional opportunities to spend against our various product investment areas. Second thing I'd mention is that, we're particularly pleased with the pace with which we're attracting top talent to both our Bengaluru office across multiple functions and the Mountain View office as well.

Looking ahead

One notable thing about Atlassian is that its sales and marketing spending isn't all that high for a company that sells subscription software. Through the first nine months of fiscal year 2018, about 22% of revenue went toward sales and marketing. That compares to 46% for SaaS giant Salesforce.com in its fiscal year 2018. Atlassian commented in its quarterly letter to shareholders that "word-of-mouth referrals continue to drive more new business for us than any ad campaign or brand initiative." The numbers back that up.

Atlassian still isn't profitable on an IFRS basis, mostly because of heavy R&D spending. But it's clear that the company's products are resonating with its customers, and winning new customers isn't nearly as expensive compared to other SaaS vendors. As Atlassian gets bigger, the bottom line will eventually have its day in the sun.