Atlassian (TEAM) shares today rose for the fifth session in a row, but still have plenty of catching up to do. Recently trading at $171.66, the stock is down nearly 28% YTD.
At the new 52-week low of $152.34 reached last week, the shares had fallen 41% from the 52-week high of $258.69 in late January. While investors fret about Atlassian’s cloud growth potential in fiscal ’25 (June), the company is focused on long-term expansion initiatives.
At the Atlassian investor day last month, the management team said it has a line of sight to reaching greater than $10 billion in annual revenue within the next five years. For FY’24, the consensus revenue estimate of $4.36 billion represents growth of 23.3%.
Atlassian expects total revenue over the next three years to grow at a 20%+ CAGR, driven by cross-selling of additional products, continued momentum with enterprise customers, greater wall-to-wall seat expansions, upgrades to higher-value editions and the net tailwinds of data center to cloud migrations. To drive the next leg of growth, Atlassian will prioritize the following strategic initiatives: expanding in the enterprise, service management and AI.
At the investor event, Atlassian management talked about opportunities across three “massive” markets: software development, service management and work management. Atlassian argues that these markets are becoming more interconnected, putting it in a unique position to bring together technical and business teams. Atlassian estimates that its total serviceable addressable market (SAM) is worth $67 billion, growing 13% annually.
In software development, Atlassian puts its SAM at $17 billion, growing 9% annually. The company powers agile collaboration between developers, operations teams and the rest of an organization. It helps teams plan, build and ship software in a timely and efficient manner. With the increasing sprawl of tools across an organization, Atlassian’s open toolchain approach gives customers the flexibility to use best-of-breed products.
The service management SAM is estimated to be $15 billion, growing 13% annually. IT departments are now working closer than ever with software and operations teams to resolve incidents, keep services operational and quickly respond to service requests. In IT service management (ITSM) alone, Atlassian sees a $6 billion opportunity. For use cases beyond IT (in HR, legal and marketing), there’s an additional $9 billion opportunity.
Work management, Atlassian’s largest SAM, is worth about $35 billion, growing 14% annually. As businesses become more complex, the company is seeing a rapid rise in teams across HR, marketing and finance working with their counterparts in development and IT. Organizations want to see a single system of work, while teams want seamless collaboration.
Today, across these three important markets, Atlassian’s three largest products—Jira, Confluence and Jira Service Management—drive 75% of total revenue. Jira is at $1.7 billion in annual revenue, growing faster than the overall business. Confluence is at $1 billion in annual revenue, growing in line with the overall business. Jira Service Management is at approximately $600 million in annual revenue and is the fastest-growing of Atlassian’s at-scale products.
Atlassian argues that much of its opportunity is already in its customer base. While it has more than 300,000 paid customers, it’s still “incredibly early” in its journey with most of these accounts. Atlassian estimates that it has an $18-billion opportunity within its existing customer base alone. When it comes to potential customers, it estimates an additional $5-billion opportunity within nearly 200,000 teams that are using free editions of its cloud products today.
Looking beyond its existing customer base and teams currently on free editions, Atlassian sees a $44-billion opportunity based on 4 million potential customers worldwide. It has identified that approximately half of this total dollar opportunity is available within the 400,000 companies it is currently targeting.
In the meantime, Atlassian shares are in the doldrums, off 13% since the fiscal Q3 (March) earnings report in late April even though the company reported solid results.
In the March quarter, total revenue rose 30% to $1.189 billion, above the consensus of $1.1 billion. Subscription revenue of $1.071 billion rose 41%, accelerating from growth of 31% in FQ2. Cloud revenue of $703 million gained 31%, in line with the guidance range.
Driven by growth in annual and multi-year contracts, deferred revenue of $2.0 billion was up 40%, accelerating from growth of 30% in the previous quarter. Operating margin of 27% easily topped the outlook of 19.5%. EPS of 89 cents beat the consensus by 27 cents.
In FQ3, Atlassian topped $2.8 billion in cloud annual recurring revenue. The net expansion rate in the cloud stands at 120%. In the past three and a half years, the company has made good progress scaling its enterprise business in the cloud, growing the enterprise portion of cloud sales to 30% from 10%. The goal is to increasingly shift this cloud mix toward more lucrative enterprise customers.
For FQ4 (June), Atlassian forecasted total revenue of $1.12 billion to $1.135 billion, coming in above the consensus of $1.11 billion. Cloud revenue is expected to be up 32%, while data center revenue is forecasted to grow 40% to 42%.
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