Atlassian Corp Q3 FY2023 earnings

Atlassian closed the March 31, 2023 quarter with revenue of $915.5 million, up 24% from a year earlier, and nine-month revenue of $2.60 billion, up 27.0%. Subscription revenue grew 37% and cloud revenue grew 34% as customers kept migrating to the cloud. Data Center revenue grew 47% on strong renewals, while Server revenue fell 29% and maintenance revenue fell 22%. Deferred revenue of $1.4 billion rose 28.0% on annual cloud subscriptions and multi-year commitments, and remaining performance obligations reached $1.6 billion at quarter end. Customer count finished at 259,775, up from 234,575 a year earlier, a gain of 6,598 net new customers in the quarter.

Profitability is where the quarter turned ugly. Gross profit of $746.8 million rose 19.6%, but gross margin slipped to 81.6% as hosting costs and the mix shift toward cloud weighed on the percentage. Operating income swung to a loss of $161.6 million, leaving operating margin at -17.6%. The quarter absorbed $97.8 million of restructuring charges, mostly $61.3 million of lease consolidation and $25.8 million of severance and other termination benefits, tied to cutting roughly 500 roles, about 5% of the workforce, and consolidating office space. Net loss came to $209.0 million, swinging from a profit a year earlier, and net loss per diluted share was $0.81. Restructuring and income tax charges of $139.5 million added $0.54 to the per-share loss, net of tax effects.

Strip out stock-based compensation, intangible amortization and the restructuring charges, and non-GAAP operating income was $197.1 million on a 22% non-GAAP operating margin, down from 24% a year earlier. Non-GAAP net income was $138.0 million, or $0.54 per diluted share. Cash generation held up. Operating cash flow of $352.4 million rose 5.3% from a year earlier, capital expenditures dropped 89.8% to $2.7 million, and free cash flow was $349.7 million, up 13%, for a free cash flow margin of 38%. The quarter's free cash flow included $5 million of severance payments, with $21 million more expected in the fourth quarter. For the first nine months, operating cash flow of $595.3 million was down 1.8%.

Guidance for the fourth quarter of fiscal 2023 points to a range of $900 million to $920 million, with cloud growth of 26% to 28%. Management expects GAAP gross margin near 81.0% and non-GAAP gross margin near 83.5%, with GAAP operating margin near negative 11.0% and non-GAAP operating margin near 17.0%. Maintenance revenue should decline to about $85 million, and other revenue should be roughly flat against the third quarter. For the full fiscal year 2023, the targets imply total revenue growth of approximately 25% and cloud revenue growth of approximately 37%. Diluted share count is expected to rise less than 2% year over year in the fourth quarter.

Macroeconomic pressure is the dominant risk. Management attributed moderating cloud growth to worsening headwinds on paid seat expansion from existing customers, free-to-paid conversions, and modest seat reductions at customers that announced layoffs, while saying it sees no change in demand or competitive position and no above-average churn. Guidance assumes those macro trends worsen in the fourth quarter. The Server business keeps shrinking, with maintenance and support ending in February 2024, and the company could face added churn or softer upsell to Premium and Enterprise editions in areas that have held up so far. Interest expense of $8.0 million rose 92% on higher rates under the credit facility.

Tax is a second pressure point. The quarter included a $38.8 million reserve for uncertain tax positions tied to transfer pricing talks with the Australian Tax Office, and the nine-month reserve reached $117.4 million. A full valuation allowance stays in place on U.S. federal, U.S. state and Australian deferred tax assets, and the TCJA requirement to capitalize and amortize research and development spending may raise future cash taxes. Cash and cash equivalents plus marketable securities totaled $2.0 billion. On the product side, the company used its Team 23 event to launch Atlassian Intelligence, Confluence whiteboards and databases, Atlassian Analytics and a threat-detection product called Beacon, and the Atlassian Marketplace passed $3 billion in lifetime sales. Headcount ended at 11,067 after 280 net new hires, and the company repurchased 0.2 million Class A shares for $35.7 million during the quarter.