Atlassian's Price Increases Drive Strong Renewals

Productivity software provider Atlassian (TEAM -1.06%) reported its fiscal second-quarter results after the market closed on Jan. 17. Revenue growth accelerated, and adjusted profits soared. Pricing changes led to some pull-in that may reduce orders in the second half of the year, but the company still expects strong growth in the coming quarters.

Check out the latest Atlassian earnings call transcript.

Atlassian results: The raw numbers

Data source: Atlassian.  

What happened with Atlassian this quarter?

• Atlassian's net income using International Financial Reporting Standards (IFRS) was boosted by a $31.3 million noncash gain related to marking to fair value the exchange feature of the company's exchangeable senior notes and related capped calls. IFRS operating income was a loss of $3.2 million, an improvement from a loss of $13 million in the prior-year period.
• Atlassian ended the quarter with 138,235 customers on active subscription or maintenance agreements. This number was boosted by 1,396 from the acquisition of OpsGenie, which closed on Oct. 1. Excluding OpsGenie, Atlassian added 5,155 net new customers during the second quarter.
• Atlassian announced the acquisition of Butler for Trello, a popular integration for Trello, in December.
• Subscription revenue was $152.5 million, up 56.1% year over year
• Maintenance revenue was $97.2 million, up 20.7% year over year.
• Perpetual license revenue was $25.8 million, up 20.6% year over year.
• Other revenue was $23.5 million, up 57.7% year over year.
• Cash, cash equivalents, and short-term investments totaled $1.6 billion at the end of the second quarter, down from $1.8 billion at the end of the first quarter. The OpsGenie acquisition cost $263.5 million, net of cash acquired.
• Atlassian produced operating cash flow of $130.4 million and free cash flow of $122.6 million during the quarter. Free cash flow was up 81% year over year.

Image source: Atlassian.

Atlassian provided the following guidance:

• Third-quarter revenue is expected between $303 million and $305 million, up 35.9% year over year at the midpoint.
• Third-quarter non-IFRS gross margin is expected to be roughly 86%, and non-IFRS operating margin is expected to be 17%. Non-IFRS earnings per share of $0.18 are expected.
• Full-year revenue is expected between $1.195 billion and $1.199 billion, up from a previous guidance range of $1.175 billion to $1.183 billion.
• Full-year non-IFRS earnings per share between $0.81 and $0.82 are expected, with free cash flow between $370 million and $380 million.

What management had to say

Atlassian CFO James Beer responded to an analyst question about the impact of price increases during the earnings call:

We did see a significant volume of Q2 transactions coming in ahead of the Server price increases taking effect. And this activity came in the form of both early annual renewals and multiyear renewals. So this pull-forward activity, in essence, replaced what would otherwise have occurred in the second half of our current fiscal year or the following two fiscal years as well.

Co-CEO Scott Farquhar discussed the impact of Microsoft's acquisition of GitHub on his company's Bitbucket product. GitHub recently made unlimited private repositories free for all users:

We haven't seen any material change this quarter in the competitive market. We believe what we have said previously, which is that Microsoft's primary goal in acquiring GitHub was to get more of their developers into Azure, and that's what we continue to see to be the Microsoft focus. So there's no real change in the last quarter on that front even with the changes in how they price GitHub.

Looking ahead

Atlassian surpassed $1 billion of revenue for calendar year 2018, and its revenue growth rate continues to hold up despite its size. Profits are soaring as well, although the company is still unprofitable on an IFRS operating basis.

OpsGenie will boost revenue a bit in the coming quarters, and Trello still has a pool of millions of users that aren't yet paying customers. Winning new customers is important for Atlassian, but so is growing relationships with existing customers. Adding products like OpsGenie to its portfolio will help the company do just that.