What happened
Shares of Atlassian (TEAM -9.34%) tumbled on Friday morning after the Australian work-management software company announced results for its fiscal 2023 third quarter. Management talked about a slowdown in what is arguably the most important part of its business, and that didn't sit well with the market. As of 11:30 a.m. ET, Atlassian stock was down by about 11%.
So what
In the quarter, which ended March 31, Atlassian generated revenue of $915 million. This was a record quarterly high and up nearly 24% year over year. It also surpassed guidance from management and was ahead of Wall Street's expectations.
Atlassian offers free-to-use versions of some of its products, hoping to attract customers who will, in time, upgrade to paid versions. And like many software companies, Atlassian is trying to get its legacy customers to switch to its cloud-based subscription services.
In its letter to shareholders, Atlassian's management said, "The moderating growth rate of cloud revenue continues to be impacted by worsening macroeconomic headwinds on paid seat expansion from existing customers, free-to-paid conversions, and modest seat count reductions in some customers that have announced layoffs."
Atlassian's cloud-based revenue was 58% of total revenue in fiscal Q3. And it was only up 34% year over year, a sharp deceleration from its 41% growth in the previous quarter. Fewer new customers are signing up, fewer free customers are paying up, and fewer paid customers are increasing their spending. All of that is likely weighing heavily on investors' minds, despite the fact that the company beat revenue expectations.
Now what
Management expects further moderation in Atlassian's cloud revenue growth rate in its fiscal fourth quarter. It's guiding for 26% to 28% year-over-year growth for the cloud business. Overall, management expects revenue of $900 million to $920 million, which would basically be flat quarter over quarter.
Atlassian stock is expensive, but investors have been willing to pay a premium for it in the past due to its strong top-line growth. It appears investors are rethinking that now in light of the growth slowdown.
On a more positive note, however, Atlassian's current problems could prove temporary. The company ended its fiscal Q3 with nearly 260,000 customers, which was a net increase of about 6,600 during the quarter. If it's able to retain and gain this many customers during challenging economic conditions, then its growth could reaccelerate when the economic environment for tech companies improves.
