What happened
Shares of enterprise-software company Atlassian (TEAM 0.05%) plunged on Friday morning after it reported financial results for the second quarter of its fiscal 2023. The stock started the day down about 13%. But it's slowly clawing its way back up, only down 7% as of 10:45 a.m. ET.
So what
In Q2, Atlassian generated revenue of nearly $873 million, up almost 27% year over year. That's a significant slowdown from its 31% growth in the previous quarter. And it's also much slower than its 34% growth in fiscal 2022. The market doesn't like slowing growth for growth stocks like Atlassian.
Atlassian was able to add more than 4,000 net new customers during Q2, which is encouraging. However, the company's software is frequently used by tech companies. In general, these companies have slowed hiring or even laid off workers, affecting Atlassian because subscriptions are per seat. And Atlassian is seeing fewer conversions from its free tier to its subscription tier, reflective of belt-tightening in the industry.
This trend was in place in the first quarter, but Atlassian's management said it became more pronounced in Q2.
Now what
Atlassian is guiding for roughly $900 million in revenue next quarter, about 22% year-over-year growth and close to Wall Street's own projections. Therefore, top-line growth is clearly slowing. But this is hardly a dying business -- it's still adding customers and growing revenue.
Also of note, Atlassian is in the process of migrating customers to the cloud, which helps it grow subscription revenue. The company's Q2 subscription revenue was up 40%, which is a strong growth rate. Moreover, this recurring revenue gives management and shareholders clarity regarding the future of this business.
Finally, research and development (R&D) expenses are either good news or bad news, depending on one's perspective. In the first two quarters of fiscal 2023, Atlassian spent 63% of its gross profit on R&D, which largely accounts for its hefty operating loss of $133 million.
On one hand, spending on R&D positions Atlassian to retain and gain market share -- few can match its budget. On the other hand, one has to wonder how much the company will ever be able to pull back in this category, which makes future profitability uncertain, in my opinion.
