Billion-Dollar Unicorns: What Will Atlassian Acquire Next?

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About: Atlassian (TEAM)
by: Sramana Mitra
Summary

With the successful integration of the Trello acquisition under its belt, what other acquisitions are on Atlassian's radar?

I'm very impressed with the company's performance, and so is the market.

The stock is trading at $57.09 with a market cap of $13.2 billion. It has been steadily climbing from the 52-week low of $31.2 in April last year.

Collaboration software maker Atlassian (NASDAQ:TEAM) has had an impressive run in the two years that it has been public. It had a successful IPO that valued it at $5.8 billion, and today its value has almost tripled. The company recently reported another strong quarter and is taking strong strides toward annual revenue of $1 billion.

Atlassian's Financials

Atlassian recently reported a strong third quarter that beat analyst estimates. Revenue in Q3 grew 40% to $223.7 million. Net loss narrowed to $14.3 million, or $0.06 per share, from $17.5 million, or $0.08 per share, a year ago. Non-IFRS net income increased to $24.6 million, or $0.10 per share, from $18.9 million, or $0.08 per share, last year. Analysts expected adjusted earnings of $0.08 per share on revenue of $218.8 million.

By segment, revenues from subscription rose 67% to $105.6 million, maintenance grew 22% to $81.9 million, perpetual license increased 9% to $21.3 million, and other revenues 49% grew to $14.9 million.

During the quarter, Atlassian added 6,587 net new customers, taking its total customer count to 119,158. It ended the quarter with cash and short-term investments of $763.9 million.

For the fourth quarter, the company expects revenue to be in the range of $232-234 million. IFRS gross margin is expected to be approximately 81%. IFRS Net loss per diluted share is expected to be approximately ($0.05), and non-IFRS net income per diluted share is expected to be approximately $0.12. While the revenue outlook beat analyst estimate of $232 million, the EPS forecast was below the average estimate of $0.14.

For fiscal year 2018, Atlassian expects annual revenues in the range of $862-864 million. IFRS Gross margin is expected to be approximately 80%. IFRS net loss per diluted share is expected to be in the range of ($0.44)-($0.43). Non-IFRS net income per share is expected to be in the range of $0.47-0.48. Analysts expect earnings of $0.48 per share on revenue of $857.4 million.

During the quarter, the company appointed Dr. Shona Brown to the board of directors. Shona is a former member of the Google (GOOG, GOOGL) executive team. Atlassian also added Sasan Goodarzi to the Board. Sasan is executive VP and general manager of Intuit's (NASDAQ:INTU) Small Business and Self-Employed Group.

The company also announced the opening of an R&D and customer support center in Bengaluru, India.

Atlassian's Competition

Atlassian has several competitors. For its project management, collaboration and developer tools like BitBucket, its competitors include Microsoft (NASDAQ:MSFT), IBM Corp. (NYSE:IBM), and Hewlett Packard Enterprise (NYSE:HPE); while smaller competitors are GitHub that was last valued at $2 billion and Rally Software that was generating $24.5 million a quarter before being acquired by CA Inc. (NASDAQ:CA) for $480 million in 2015.

For its service desk solutions, competitors include primarily public cloud vendors, including ServiceNow (NYSE:NOW), Salesforce.com (NYSE:CRM), and Zendesk (NYSE:ZEN), startup Freshdesk that is yet to go public, and legacy vendors such as BMC Software's Remedy. In point solutions for enterprise collaboration, it faces competition from Microsoft, IBM, Google, and Slack (SLACK).

Questions for the Atlassian Board

Last year, Atlassian acquired cloud-based team collaboration software maker Trello for $425 million. Trello has strengthened the company's capabilities in handling clients across business teams in legal, HR, Finance, marketing and sales. For fiscal 2018, Atlassian expects Trello to add $20 million in revenue. With the successful integration of the Trello acquisition under its belt, what other acquisitions are on the company's radar?

As I have said in a recent post, SaaS companies have an unprecedented opportunity:

SaaS has been the most prolific area of entrepreneurship in recent times. There are numerous SaaS companies out there. Do you have a systematic process to harness this massive body of innovation that could very well be strategically aligned with your product strategy?

I'm very impressed with the company's performance, and so is the market. The stock is trading at $57.09 with a market cap of $13.2 billion. It has been steadily climbing from the 52-week low of $31.2 in April last year.