What happened
Shares of workplace-management software company Atlassian (TEAM -0.75%) were up 18.3% in August, according to data provided by S&P Global Market Intelligence. While many software companies have disappointed this earnings season, Atlassian delivered a strong quarter to the market's delight, sending the stock up for the month.
So what
Atlassian reported financial results for the fourth quarter of its fiscal 2022 on Aug. 4. In Q4, the company generated revenue of $760 million, which was up 36% year over year and significantly ahead of its guidance of $725 million at most. This pleasantly surprised investors and sent the stock higher.
Analysts raved about Atlassian's subscription cloud revenue stream. To their point, the company had subscription revenue of $597 million in Q4, more than 78% of total revenue and up 55% year over year. For perspective, only 75% of revenue in the third quarter was subscription revenue. Analysts like subscription revenue because it's predictable.
Analysts like cloud revenue because it has high profit margins. For Atlassian, cloud revenue and subscription revenue largely go hand in hand -- as its customers adopt the cloud, they get on subscription plans. And this is why the company's gross profit margin continued to expand (albeit just slightly) in Q4 on an adjusted basis, reaching 84.8% compared to 84.7% in the same quarter last year.
Atlassian stock was up in August because of these strong numbers. However, early in the month Atlassian stock was up far more. The market pulled back in the second half of August, disproportionately impacting stocks with high valuations like Atlassian.
Atlassian stock is down roughly 50% from its high as of this writing. However, it still trades at a price-to-sales valuation of 21, which is considered expensive and why it couldn't hold on to all of its gains following its upbeat Q4 report.
TEAM PS Ratio data by YCharts
Now what
Looking ahead for Atlassian, it continues to expect high growth and is hiring plenty of people as it expands.
Atlassian expects to generate $795 million to $810 million in the first quarter of its fiscal 2023 (next quarter), which would be up roughly 30% year over year at the midpoint of guidance.
For its employee base, Atlassian hired 2,300 new people in fiscal 2022. For perspective, it has around 8,800 now so this was a substantial one-year increase. However, it's not anywhere close to reaching its upper limit. Right now, Atlassian's management is on a mission to build to 25,000 employees over the next several years.
This is something for investors to be aware of because Atlassian uses stock-based compensation as a tool to attract top talent. Depending on how contracts are structured, this could dilute shareholder value over the long term. But it's not without reason. The company is hiring so it can build toward its goal of $10 billion in annual revenue, compared to just $2.8 billion in fiscal 2022.
