Atlassian's Adjusted Earnings Soar

Productivity software provider Atlassian (TEAM -0.22%) reported its fiscal third-quarter results after the market closed on April 17. Noncash charges knocked down the bottom line, but earnings grew much faster than revenue on an adjusted basis.

The company did see some customers pulling forward orders due to a pricing change, but Atlassian's guidance calls for a similar growth rate in the fourth quarter.

Atlassian results: The raw numbers

Data source: Atlassian. *Q3 2018 numbers are adjusted to reflect the impact of the full retrospective adoption of IFRS 15.

What happened with Atlassian this quarter?

• Atlassian's net income using International Financial Reporting Standards (IFRS) was hurt by a $172.6 million noncash charge, related to the exchange feature of the company's exchangeable senior notes and the related capped calls. IFRS operating loss was $27.6 million, down from a loss of $10.3 million in the prior-year period.
• Atlassian ended the quarter with 144,038 customers on an active subscription or maintenance agreement. The company added 5,803 net new customers during the quarter.
• Atlassian closed its acquisition of AgileCraft, a provider of enterprise agile planning software, in early April. The deal was valued at $166 million, with Atlassian paying with $154 million in cash and some restricted shares. AgileCraft is being rebranded as Jira Align.
• Subscription revenue was $166.5 million, up 56.6% year over year.
• Maintenance revenue was $98.9 million, up 20.3% year over year.
• Perpetual license revenue was $23.2 million, up 12.5% year over year.
• Other revenue was $20.8 million, up 36.4% year over year.
• Cash, cash equivalents, and short-term investments totaled $1.8 billion at the end of the third quarter, up from $1.6 billion at the end of the second quarter.
• Atlassian produced operating cash flow of $133.3 million and free cash flow of $127.1 million during the quarter. Free cash flow was up 47% year over year.

Image source: Atlassian.

What management had to say

In response to an analyst question during the earnings call about lower-than-expected deferred revenue, Atlassian CFO James Beer explained that price increases pulled forward some demand:

... in Q2 we saw relatively robust deferred revenue, as various customers stepped in front of the price increases that we had announced in the middle part of September last year, and that drove an unusual level of activity in Q2. And so, of course, that activity was drawing from quarters such as Q3, and the fact we think that we will also draw some activity from quarters into the future as well. So, it's very much driven by that moving forward of activity into Q2, driven by customers reacting to price increases that were about to come into play.

In the quarterly letter to shareholders, the company gave an update on its cloud-related business:

Atlassian is a Cloud-first company. More than 100,000 of our customers subscribe to at least one Cloud product. Over 90% of our new customers purchase a Cloud offering. And we have more than 10 million Cloud monthly active users who rely on Atlassian Cloud products to get their work done.

Looking ahead

Atlassian provided the following guidance for the fiscal fourth quarter:

• Revenue between $329 million and $331 million, up 35.4% year over year at the midpoint
• Non-IFRS gross margin of 85%, and non-IFRS operating margin of 13%
• Non-IFRS earnings per share of $0.16, compared to $0.13 in the prior-year period

For the full fiscal year, Atlassian expects:

• Revenue between $1.205 billion and $1.207 billion, up 38% from fiscal 2018 at the midpoint
• Non-IFRS gross margin of 86%, and non-IFRS operating margin of 19.5% to 20%
• Non-IFRS earnings per share of $0.82, compared to $0.49 in fiscal 2018
• Operating cash flow between $425 million and $435 million, and free cash flow between $385 million and $395 million

Atlassian's growth rate is holding up, even as the company is on track to produce well over $1 billion of revenue in the current fiscal year. It's still unprofitable on an IFRS basis, but both adjusted earnings and free cash flow are soaring.