Atlassian Stocks: Second Quarter Earnings Preview, and Other Considerations (NASDAQ:TEAM)

Second Quarter Earnings – Key Considerations

Software Developer and Collaboration Tools Maker – Atlassian (Nasdaq: Team) plans to report earnings for the second quarter to 23 after market hours on February 2nd. Last quarter’s TEAM earnings announcement read: It was the first time, so some kind of anomaly 20 A quarter that did not meet the expectations of the EPS consensus! Prior to that event, the company consistently outperformed EPS Street estimates by an average of 22%.

Atlassian is currently facing some challenges that are unlikely to go away anytime soon.

During the September quarter, Atlassian management led the second quarter earnings range from $835 million to $855 million. The midpoint of that range sees only 23% growth.Even at the high end of the range, growth was only 24%, which is at least Over the past eight quarters (the sell-side consensus is now $849.45 millionwhich means an annual growth rate of 23.4%).

Performance isn’t great either. On the “non-GAAP” EPS front (on a GAAP EPS basis, Atlassian would be in the red), the consensus estimate is currently looking at the $0.297 figure. Given last year’s particularly difficult second quarter comp ($0.50 EPS), the year-over-year drop (-41%) will be even more pronounced than the first quarter (-22%).

Investors should monitor the additional trajectory of slowing customers on both an annual and quarterly basis. In some contexts, the downward trajectory of annual growth he started more than a year ago, but the consecutive declines started in the 1-22nd quarters before that.

The difficult macroeconomic environment has undoubtedly contributed to budget tightening. TEAM still sees interest and momentum for the free version of the product, but conversions to paid plans dropped even more significantly from last quarter to first quarter last year. If management can gain some insight into the emerging stability in this area, it could help boost sentiment on the stock.

Another major concern concerned the slowing pace of adoption on the client side of TEAMs trying to stay cost-optimized. This meant that Atlassian also had to endure the challenges associated with expanding paid seats for existing clients, and this constraint on existing user growth rates put him at risk across industries and geographies. TEAM’s clients are covered and spread across the board. I think this is unlikely to reverse anytime soon.

The nuances that Atlassian’s clients experience as they migrate from data centers and servers to the cloud are another important monitoring point to watch. So far we’re doing relatively well here and I don’t think there will be too many concerns in Q2, but with the loyalty discount mechanism Atlassian is offering its clients until July 2023 Not everything is always driven by value, and some of the momentum in moving to the cloud is also driven by the enhanced capabilities of Atlassian’s cloud enterprise solutions. There is a possibility. I would like to know if the Atlassian Analytics open beta has acted as a catalyst to further the migration story in Q2.

Although the company pulled across many metrics in the first quarter, it reiterated that cloud migration will grow 10% year-over-year in the near future. For additional context, Atlassian’s overall cloud business growth forecast has been lowered from 50% to 40-45% year-over-year (the pace of growth here has slowed down over the last few quarters). be careful).

Given the associated investments required to support this development, this continued focus towards moving to the cloud will also negatively impact the group’s gross margins of the team. First quarter GAAP GM dropped 160bps to 82.7%. In the second quarter, investors should expect him to drop from 230-300bps to he levels of 80-81%.

In terms of operating margins, we expect headcount growth to slow down, perhaps by the third or fourth quarter, so there will be pressure on that front as well. The company’s full-year operating margin guidance is in the mid-teens, and it was significantly higher at 18.3% in Q1, so obviously there will be some adjustment in Q2, Q3 and Q4. Please be careful.

Operating cash flow generation in the first quarter was pretty dire at just $92 million or less than 10% of revenues, but this is more timing related (bonus payments are typically made in September, Cash tax payments of $17 million in the quarter) should return to triple-digit levels in the second quarter.

at the end

Compared to its Nasdaq peers, TEAM grew in influence over time until it surpassed the 1.2x level in late 2021. This is captured by the rising channel (blue line). In 2022, this narrative changed as investors moved away from his TEAM, even as RS ratios dropped to pre-pandemic ranges. As a rotating play within the Nasdaq, TEAM is currently trading below the midpoint (0.7x) of its lifetime range (despite a roughly 35% rise in the RS ratio from the levels seen in November). ) still has some benefits. .

Looking at TEAM’s standalone weekly chart gives us a sense that investors are positioning for a breakout from a falling wedge pattern, but given how close the price is to TEAM’s upper bound, The risks and rewards at this point are questionable. wedge. Starting in November, he took TEAM’s stock price below $120 in 10 weeks. Momentum investors may be incentivized to pursue TEAM as the gap formed in the daily chart after the Q1-23 results has yet to be closed ($168.49). Needless to say, whether TEAM can build further momentum from there could depend on the outcome of the earnings event in Q2.