CodeBarrel: Code Barrel specializes in creating add-ons for Atlassian products.  We have over 40 years combined experience in working on Atlassian products and Agile software development. We believe that great software is found at the intersection of design and engineering. The company created Automation for Jira, winner of Atlassian Codegeist 2016, which makes it simple to combine triggers, conditions and actions to handle even the most complex scenarios. There is no more need to install many different add-ons, figure out Jira’s API or learn how to write custom scripts.

Tasktop: Tasktop enables Atlassian Jira to remain dedicated to supporting the way Agile Development teams track workflow. Instead of bloating Jira with additional functionality, Tasktop integrates Jira with other best-of-breed specialist tools for planning, building and delivering software. By automatically flowing product-critical information (epics, stories, defects etc.) between roles in the software value stream in real-time, Tasktop enables precise configuration of what flows in and out of Jira, meaning the productivity powers of Jira are felt end-to-end.

TechExcel: DevTest provides total control of every aspect of your testing process from test case creation, planning and execution through defect submission and resolution, DevTest manages the complete quality lifecycle. Implement quality processes earlier in the development lifecycle to manage shorter deadlines, address complex contemporary testing challenges, and Strengthen your deliverable software.  DevTest supports multiple test interface options including a matrix-based test interface specifically designed for game and multi-platform testing. Best of all, DevTest crunches the numbers for you while your team is testing, providing built-in, dynamic test analysis without having to break out the spreadsheets.

Related content: How Atlassian is carrying the developer world

Adaptavist: Adaptavist helps the world’s most complex enterprises optimize their application lifecycle. The company is the provider of Atlassian professional services, managed services, training, and Marketplace apps. Adaptavist offers some of the most popular apps in the Atlassian marketplace, including more than half of the Fortune 500. ScriptRunner for Jira, Test Management for Jira, and Project Configurator are just a few of the road-tested, premium apps offered across the Atlassian stack. A full list of Adaptavist apps is displayed on the Atlassian Marketplace website.

BigPanda: Big Panda has an IT Operations teams that maintain applications and infrastructure that are more complex and fragmented than ever, and change just as frequently. To track everything, the average IT stack now consists of 6-8 monitoring tools. Unfortunately, the alerts generated by these monitoring tools are very noisy and can easily overwhelm your JIRA queue with hundreds or thousands of low level and repetitive issues. That leaves IT Ops teams struggling to detect and resolve critical incidents in a timely manner, resulting in outages, missed SLAs, and angry customers. BigPanda for JIRA and HipChat solves the noisy alert problem by automatically correlating IT alerts and events to provide visibility into what’s really going on at a faster pace.

Black Duck Software: Black Duck collaborated with Atlassian to help companies build software agilely and securely by integrating Black Duck Hub with the processes and tools software development teams already use at every step of the DevOps pipeline. Continuous delivery and open source are changing the face of software development. Teams are building and releasing at a faster pace and are relying on open source to build applications smarter.

DataDog: Datadog extends Atlassian’s tools by connecting them to your critical infrastructure and applications. You can easily overlay code changes in BitBucket on performance metrics in Datadog to more clearly understand the impact of application changes. Or have more informed technical discussions in HipChat or Stride by instantly sending graphs from Datadog. And finally, you can prioritize your next steps using Datadog to create Jira tasks from metric-triggered events.”

Dynatrace: Dynatrace directly connects monitoring data into the Atlassian DevOps tool chain to empower pipeline contributors to make better decisions at the right time based on real time performance and end user data. From Dev to Ops, Dynatrace acts as a quality gate in delivery pipelines (Bamboo, Bitbucket); gives real time performance and user behavior feedback back to epics, stories, change requests and support tickets (JIRA, JIRA Service Desk, Trello); and optimizes triage through ChatOps (HipChat, Stride).

LaunchDarkly: The management platform enables organizations to reduce risk while delivering value. Feature flagging is a best practice in modern application development to separate code deployments from feature releases. LaunchDarkly provides management of the entire feature lifecycle—full visibility of your features, who controls them, who uses them, and who changes them. LaunchDarkly integrates with JIRA providing users visibility of the current state of a feature in the release process alongside your JIRA ticket.

Lucidchart: Harness the power of collaborative visual communication within the Atlassian apps you already use to save time and increase productivity. With Lucidchart, teams can insert diagrams into Confluence, Jira Software, and Hipchat that clarify ideas, information, and processes. In Bitbucket, teams can generate easy-to-reference UML class diagrams from code in their repository. Whether you need to create process flows, ER diagrams, or org charts, it’s easy to work visually in Lucidchart.

InVision: InVision for Jira allows you to bring your design workflow right into Jira to provide every issue instant context with always up-to-date design access. InVision for Confluence allows you to Bring your projects into Confluence, view what you’re building and enhance collaboration team-wide.

PagerDuty: ChatOps extensions with Stride and HipChat bring speed, productivity and efficiency to modern-day DevOps teams managing incidents. Additionally, bi-directional integrations with JIRA Software and Server empower teams to automate the escalation of high-priority JIRA issues for faster resolution, as well as create follow-up work in JIRA to learn and prevent future issues.

Perforce: For teams that use Atlassian’s Jira for issue tracking but need more coverage of their workflow, Helix ALM offers a simple answer. It’s a modular solution — with requirements management, issue management, and test case management capabilities — that integrates with Jira to cover the rest of the product development workflow. With Helix ALM and Jira, you need only two tools, not multiple plugins, to manage and link all the artifacts a product generates.

QA Symphony: The platform provides Agile teams with a suite of software testing tools to Strengthen speed, efficiency, and collaboration throughout the software testing lifecycle. For example, qTest Pluse is a continuous testing solution that is designed for teams practicing DevOps to deliver quality at every step in the process. qTest Scenario for Jira is a free add-on to allow teams to optimize and scale the Test-First approach across the enterprise.

SmartBear: SmartBear provides frictionless tools and integrations, including Atlassian JIRA. With Collaborator, developers directly link code reviews to JIRA tickets. With TestComplete and Ready API, reporting a bug is fast and painless. Open source and commercial tools are available for free trial – start to power continuous testing efforts today.

Splunk: Atlassian and Splunk work closely together to enable joint customers to tackle IT, Security and DevOps challenges through product integrations, including Hipchat, Bamboo, Jira Software and Jira Service Desk.  For example, Dominos, an Atlassian and Splunk joint customer, uses the Splunk App for Jira and Splunk ITSI to track trends across Jira projects and protect the security health of their codebase.

Tricentis: Exploratory Testing for Jira allows teams to plan and timebox sessions, write charters, define objectives, invite team members, and add artifacts directly from a Jira environment. QA, developers, UX specialists, technical writers, product owners, business analysts, etc. can all be invited to participate, and start then testing with a single click. Session owners gain quick overviews of results and progress, while testers get instant access to all the details required for testing.

VictorOps: VictorOps supports Confluence (Runbooks), Jira (Issue Tracking and Status), Jira ServiceDesk (ITSM integration), Hipchat (Collaboration), StatusPage (Incident Status), and Bamboo (Release and Integration Awareness).

XMatters: XMatters accelerates business processes through intelligent communication and smart automation within key DevOps processes, fundamentally altering the way business units work together. The XMatters-Jira Service Desk delivers capabilities which eliminate the need for manual tasks for IT and customer support teams to resolve issues. It is a rapid, automated communication with the correct on-call resources. The integration with Atlassian JIRA service Desk allows IT teams to connect with key support escalations.

Zephyr: Zephyr offers metrics-based visibility via real-time dashboards into the quality and status of software projects. Customers experience improved productivity. Zephyr for Jira provides a full featured and sophisticated test management solution – all inside Jira. Capture for Jira provides visual feedback and testing tool for all teams.

Related content: How does your tooling expand and enhance the Atlassian ecosystem?

Australian software giant Atlassian and Envoy, a startup that provides workplace management services, were at loggerheads on Thursday over a data breach that exposed the data of thousands of Atlassian employees.

As first reported by Cyberscoop, a hacking group known as SiegedSec leaked data on Telegram this week that it claimed to have stolen from Atlassian. This data includes the names, email addresses, work departments and phone numbers of approximately 13,200 Atlassian employees, along with floor plans of Atlassian offices located in San Francisco and Sydney, Australia.

“SiegedSec is here to announce that we have hacked the software company Atlassian,” SiegedSec said in a Telegram message seen by TechCrunch. “This company worth $44 billion has been pwned by the furry hackers uwu.” SiegedSec made headlines last year after it leaked eight gigabytes of data from the state governments of Kentucky and Arkansas, in protest at the states’ efforts to enact abortion bans following the Supreme Court’s decision to overturn Roe v. Wade.

Atlassian was quick to point the finger of blame for the breach at Envoy, which the Sydney-headquartered company uses to organize its office spaces. “On February 15, 2023, we learned that data from Envoy, a third-party app that Atlassian uses to coordinate in-office resources, was compromised and published,” Atlassian spokesperson Megan Sutton said in a statement shared with TechCrunch. “Atlassian product and customer data is not accessible via the Envoy app and therefore not at risk.”

Envoy, however, was just as quick to rebuff Atlassian’s claims. Envoy spokesperson April Marks told TechCrunch that the startup is “not aware of any compromise to our systems,” adding that initial research had shown that “a hacker gained access to an Atlassian employee’s valid credentials to pivot and access the Atlassian employee directory and office floor plans held within Envoy’s app.”

Soon after the startup’s denial, Atlassian changed its stance to align more closely with Envoy. Atlassian’s Sutton told TechCrunch that the company’s internal investigation since revealed that attackers had actually compromised Atlassian data from the Envoy app “using an Atlassian employee’s credentials that had been mistakenly posted in a public repository by the employee.”

“As such, the hacking group had access to data visible via the employee account which included the published office floor plans and public Envoy profiles of other Atlassian employees and contractors,” Sutton added. “The compromised employee’s account was promptly disabled eliminating any further threat to Atlassian’s Envoy data. Atlassian product and customer data is not accessible via the Envoy app and therefore not at risk.”

Envoy initially declined to answer our specific questions, but on Friday, the company’s spokesperson provided an update, ruling out a breach on its end.

“We found evidence in the logs of requests that confirms the hackers obtained valid user credentials from an Atlassian employee account and used that access to download the affected data from Envoy’s app,” said Envoy’s Marks.

While it appears that Envoy was not at fault for the Atlassian data breach, the workplace management startup — which counts a number of big-name customers, including Hulu, Pinterest, Slack and Stripe — is no stranger to security incidents. In 2019, security researchers at IBM uncovered two flaws in Envoy’s visitor management system that could have exposed customer data.

Updated with Envoy comment.

Note: This story and headline have been updated on 2/16/2023 and 2/17/2023 following new information and statements from both Atlassian and Envoy.

Australian software company Atlassian confirmed that employee data has been leaked on the web through an account they use on a third-party application. While independent researchers at cybersecurity firm Check Point have backed up claims that the data does not appear to have come from Atlassian's systems, the makers behind the app say an Atlassian employee's compromised credentials are to blame.

In a statement sent to SC Media, an Atlassian spokesperson said the leak appears to have originated via their acount with Envoy, which makes and sells workplace collaboration software.

“On February 15, 2023 we learned that data from Envoy, a third-party app that Atlassian uses to coordinate in-office resources, was compromised and published. Atlassian product and customer data is not accessible via the Envoy app and therefore not at risk,” the spokesperson told SC Media. “The safety of Atlassians is our priority, and we worked quickly to enhance physical security across our offices globally. We are actively investigating this incident and will continue to provide updates to employees as we learn more.”

After SC Media reached out to Envoy for comment, a spokesperson sent a statement saying the company is not aware of any evidence that their systems were breached, claiming their own research indicates the incident stemmed from a compromise of an Atlassian employee's credentials.

"We’re investigating this right now and are not aware of any compromise to our systems. Our initial research shows that a hacker gained access to an Atlassian employee's valid credentials to pivot and access the Atlassian employee directory and office floor plans held within Envoy’s app," the spokesperson wrote.

In an update Friday, an Envoy representative told SC Media they found log evidence of requests confirming that hackers obtained valid user credentials from an Atlassian employee account and used that access to download the affected data from Envoy’s app. The representative also claimed no other customer data was stolen.

An Atlassian's representative also reached out to confirm that the leak began with compromised credentials.

"We learned the hacking group compromised Atlassian data from the Envoy app using an Atlassian employee’s credentials that had been mistakenly posted in a public repository by the employee. As such, the hacking group had access to data visible via the employee account which included the published office floor plans and public Envoy profiles of other Atlassian employees and contractors," the spokesperson wrote. "The compromised employee’s account was promptly disabled early in the investigation which was proven effective in eliminating any further threat to Atlassian’s Envoy data. Atlassian product and customer data is not accessible via the Envoy app and therefore not at risk."

Earlier this week, a hacking group calling itself “SiegedSec” began posting on Telegram that they had compromised Atlassian's network and leaked employee data in a Valentine’s Day-themed note, claiming to have obtained email addresses, phone numbers, and names of employees as well as “a lot more!”

“SiegedSec is here to announce we have hacked the software company Atlassian,” the hackers wrote, according to a screenshot obtained by SC Media. “This company worth $44 billion has been pwned by the furry hackers uwu…We are leaking thousands of employee records as well as a few building floorplans. These employee records contain email addresses, phone numbers, names and lots more!”

However, independent researchers corroborated some of Atlassian’s claims, including their core contention that the data leaked online does not appear to have been taken directly from Atlassian systems.

Check Point researchers told SC Media the files and blueprints involved are consistent with the type of third-party data that Envoy would have stored and were stamped with Envoy’s logo. Lending further credence to the idea, despite claiming to have hacked directly into Atlassian’s systems, SiegedSec did not leak any other types of data.

The data leaked does not appear to be particularly valuable, and researchers at Check Point said it's not clear whether SiegedSec's motivations are financial, self-promotional or simply to cause chaos.

Atlassian today announced that Jira Product Discovery, its tool for helping engineering and business teams prioritize and collaborate on new product ideas, is now in open beta, with general availability expected in the next three months. The company made the announcement at its Unleashed event in Berlin. Atlassian also announced that it will provide free access to Jira Work Management to all Jira Software customers until March 2024, in addition to a new set of customer-designed templates for using the entire suite of Jira products, which now include Jira Software, Jira Work Management, Jira Product Discovery and Jira Service Management.

Correction: Due to a misunderstanding, we previously said that the product was now generally available. Instead, it is now in open beta.

“Most software teams already have really good and efficient processes in place for building code, the delivery stage and the operation stage of software development. And we can really thank the widespread adoption of Agile and DevOps and, of course, the number one software development tool, Jira Software, for that. But in the discovery phase, it’s a bit of a mess, it’s a lack of structure, it’s not clear what’s going on,” Megan Cook, Atlassian’s head of product for its agile solutions, told me. She noted that figuring out that in many companies, when teams try to decide which new product features to build, the process can often feel like it’s happening in a vacuum or that it’s the loudest voice that gets to decide. Instead, those decisions should be outcome-driven — and that’s where Jira Product Discovery comes in.

Image Credits: Atlassian

Atlassian first announced this new service in 2021. Like Jira Work Management, it was incubated as part of the company’s Point A program, which brings together customers and Atlassian product development teams to better understand and address their needs.

“We found that three-quarters of product managers today they struggled to determine the true value of their product for their customers, and we really wanted to help with that,” said Cook. “They tend to use things like spreadsheets, mental notes, backlog — a lot of them told me about using email, you can imagine how terrible that would be. They’re totally disconnected from where software is planned, tracked and built. And then because it’s spread out like this, there ends up being no single location for this discovery phase.”

Image Credits: Atlassian

The idea here is to help teams capture ideas and feedback, provide them with tools to prioritize these ideas and engage with stakeholders to get these into the development pipeline. There is also a browser extension that makes it easier for users to bring in user feedback from across the web and, unsurprisingly, there is a deep integration with Jira Software to help teams keep their product plans in sync.

In practice, this means users will get tools to vote for ideas, talk about them and rate them according to their risk, impact, effort and other metrics. Jira Product Discovery also features a number of visualizations that can then help teams better understand the trade-offs between the impact of a given choice and the effort it’ll take to build a given feature, for example.

Image Credits: Atlassian

As for the free access to Jira Work Management for the next year, which until the launch of Product Discovery was the newest Jira version in Atlassian’s stable, the company noted that about 43,000 Atlassian customer already use Jira Software and Jira Work Management together.

“We’ve seen a lot of the benefits that having those teams working really well side-by-side can have,” Cook explained. “We know that this is a touch economic climate and it’s great just to be able to provide back and spread those practices to our customers.”

Lastly, the new customer-designed Jira templates may not, at first, sound like a big deal, but they do look like an interesting way for Atlassian to get potential Jira customers to understand the overall value proposition of the entire Jira suite. Some of the companies that have put their names on these are UserTesting, Lumen and Code.org.

Atlassian (NASDAQ:TEAM) is an Australian-founded software company that has a mission to "unleash" the power of teams globally. The company's product Jira was named a leader for agile software development teams by both the State of Agile report (2021) and Gartner in 2022. Its "product-led" growth strategy has been tremendously successful over the years and enabled continued customer growth. In Q2,FY23, Atlassian reported solid financial results as it beat top-line growth estimates. The business did miss on its GAAP earnings estimates, but beat analyst estimates on a non-GAAP basis. In addition, I discovered that despite the company being criticized as "unprofitable", over 50% of its "expenses" are really investments into Research & Development [R&D]. Even more amazingly, when I adjust or "capitalize" these expenses the company's operating margin actually rises to over 10%. In this post I'm going to break down the company's accurate financials as well its valuation and expense profile; let's dive in.

Financial Breakdown

Atlassian reported strong financial results for the second quarter of the fiscal year 2023. Revenue was $873 million which increased by a rapid 27% year over year. This growth rate is slightly slower than the prior quarter's growth rates of between 30% and 36%, which was expected due to the "recessionary" macroeconomic environment which has caused a slowdown in the number of users transitioning from freemium to paid plans. A positive is Q2, FY23 revenue still beat analyst estimates by $27.14 million.

Breaking down revenue by region, Atlassian reported strong revenue growth of 30% across EMEA and Asia Pacific regions. The Americas showed signs of weakness with 23% growth, but this wasn't helped by a strong prior year which made the comparable unfavorable.

Its overall revenue growth was driven by 4.9% year-over-year customer growth to 253,177.

On the below graphic you can see an overview of Atlassian's product line, which includes its flagship Jira for Agile/DevOps, in addition, to an I.T service management tool and work management tools such as Confluence. The company also acquired Trello for team collaboration in 2017 and more recently acquired Chartio now Atlassian analytics for data visualization which I believe is a strong growth market, as organizations visualize their "big data". I have discussed the business model of Atlassian in more detail in my prior post, so you can read more about it there.

Digital Marketing Analysis | Brand Power

The beautiful thing about Atlassian's business model is the company can continue to acquire "free users" during tough economic times and then convert these to paid plans at a later date. A leading indicator of interest in Atlassian's product can be website traffic. Now although the exact google analytics data is unknown I can estimate this using various online tools. In the below chart we can see the company achieved ~14.1 million website visits in November 2022, this was up slightly from the 13 million in October 2022. Thus I am not surprised Atlassian reported a strong quarter (for Q2, FY23 or the Q4 calendar year). However, it should be that since November, website traffic has declined to 13.2 million visits in December and 12.3 million in January 2023. On a percentage basis, this works out as a ~12.9% decline since its peak in November. I expect this is mainly due to the "recessionary" environment which I will discuss in the "Risks" section. However, a positive is the drop in traffic is not substantial, e.g. 30%/40%, which would ring major alarm bells. However, this indicator is still worth watching in the future.

A positive for Atlassian is the company has a strong brand in the world of workplace software. To quantify this I have estimated the percentage of the company's website traffic from sources using an online tool. In this case, we can see over 50% of the company's website traffic is from the "direct" method. This basically means over half of Atlassian users are heading straight to Atlassian.com as opposed to entering via search engines or advertising. This is one indicator the company has a strong brand, which will result in lower customer acquisition costs than its competitors. This can also be seen as a competitive advantage against new startups, which may try to enter the space and have to spend substantial amounts on advertising just to obtain users.

Atlassian also obtains 14.82% of its traffic from referrals and over 32% of its traffic from Search. As a Digital Marketing agency owner, I know SEO (Search Engine Optimization) rankings can be extremely valuable for a business. The reason for this is that if you can rank number one on Google consistently it can again lead to lower acquisition costs and improved marketing. In the tables below, you can see Atlassian ranks number one for over 1.28 million keywords, and its "branded keywords", Jira, Trello, and Confluence are searched heavily. I deem this similar to "direct traffic", which is a positive sign.

The final chart below you can see, Atlassian also has over 21 billion backlinks, which is the number of other websites linking to it. The Google search engine uses this as a primary indicator of where to rank a website. A new startup website, will not have this backing and thus will have to pay more to acquire customers.

Financials Continued

Breaking down revenue by deployment, In Q2, FY23 Atlassian generated 58.7% of its revenue from "Cloud" based deployment. This is up from the 52.9% of revenue generated in Q2,FY22. This is a positive sign as it shows the company's strategy of moving or "migrating" users to the cloud is working. This is great for the customers as it means, they often will receive faster product updates and access to more advanced features. In addition, Atlassian will benefit, as it will then need to provide less manual people-intensive support to legacy companies that use an on-premises server for their deployment. Atlassian has announced plans to stop its support for server products by February 2024, which should provide customers enough time to migrate. Overall this is a positive strategy as it will drive down Atlassian's operating costs and the company can redirect internal resources toward cloud product improvement.

You can see a full breakdown of the positive trends below. Cloud-based deployments have skyrocketed by 41% year over year. While Server revenue has declined by 22% year over year. Without the context I laid out above, an investor may believe this is negative when it's actually a positive trend.

Margins and Expenses

Atlassian reported a super high gross margin of 82%, which declined by 2% year over year. Earnings per share [EPS] was negative $0.80, which missed analyst estimates by negative $0.34. A positive is on a Non-GAAP basis EPS was $0.45, which beat analyst estimates by $0.14.

Atlassian's main profitability challenges came from an eye-watering 47% increase in GAAP operating expenses. This may seem atrocious at first glance, but when I "pop the hood" on the income statement, I see the majority (58%) of its expenses were driven by Research & Development costs, which increased by 48.7% year over year. Overall I don't deem this to be a negative as I believe technology companies must continually invest in their product to stay ahead of competitors. Many studies also indicate that companies that invest in R&D tend to create more shareholder value long term.

The second major expense for Atlassian is Marketing & Sales, which made up 22.8% of operating expenses and increased by 53.8% year over year. It was interesting to see the company accelerate this expense during a tepid macroeconomic environment. I would personally like to see this decline as a portion of operating expenses moving forward at least for the next year. Overall Marketing and Sales expenses aren't "bad" assuming an ROI is obtained, but this is harder during a recessionary environment.

The final expense line item is general and administrative [G&A] expenses which contributed to 19% of total expenses to $156 million, up slightly from 20% in the prior year. As Atlassian operates a software company theoretically the business can execute high operating leverage, which should drive margin increase over time. In Atlassian's Q2,FY23 earnings call, management announced plans to "decelerate" operating expense growth in the second half of 2023, after previously announcing plans to reduce "discretionary" spending and "moderate" headcount growth. I believe this is a positive sign overall for profitability and I will discuss this in more detail in my "valuation and forecasts" section next.

Before diving into that, it should be noted Atlassian has a solid balance sheet with $1.6 billion in cash and cash equivalents, as well as $36 million in marketable securities. Its debt also looks to be manageable with a "term loan" facility equating to $999.5 million, which is "long-term debt" and thus manageable.

Valuation and Forecasts

In order to value Atlassian, I have plugged its latest financial data into my discounted cash flow model, with my forecasts for growth. In this case, I have forecast 25% revenue growth for "next year", which in my model refers to the calendar year 2023. This is in line with management's guidance of 25%, for the fiscal year 2023, which I have expanded to include the calendar year. Breaking this revenue down by type, Cloud revenue is forecasted to grow by between 35% and 40% year over year. With 10 points of this growth being driven by the aforementioned cloud migrations. In years 2 to 5, I have forecast a greater 36% overall revenue growth per year for the entire business. I expect this to be driven by improving economic conditions, which should result in a greater number of customers converting from free to paid plans. In the accurate quarter, Atlassan's management noted it had seen tepid demand among its SMB customers, with fewer moving to paid tiers. I expect this dynamic to Strengthen post-2023. A positive for Atlassian is in the past few quarters, management has reported minimal issues with churn and upsell for its premium and enterprise customers. This makes complete sense as often large organizations can weather an economic storm much better than smaller businesses.

As mentioned prior Atlassian invests a huge amount (~58%) of its expenses into Research & Development. This is cited as an "operating cost", but to Strengthen the accuracy of the model I have "capitalized" this expense, which has boosted net income slightly and adjusted equity figures through "amortization", (annual balance sheet write down). I will not go deep into explaining this process, as it's beyond the scope of this post, but you can read more online. You can see from a screenshot of my model below, I have capitalized R&D expenses over a 3-year period, which has resulted in an adjustment or "boost" in operating income by $638.93 million.

The bottom line is with this accounting adjustment, Atlassian actually posts a positive 10.76% operating margin this year up from negative 10% in the trailing 12 months. Therefore the company can actually be deemed to be "profitable" on an adjusted basis. For "next year" I have estimated this margin to grow slightly more to 12%. I expect this to be driven by the aforementioned plans for the company to reduce its "discretionary" expenses in the second half of 2023. Over the next 8 years, I have been slightly more optimistic and forecast a 26% operating margin. This figure is based on the fact that the average operating margin for a software company is 21.8% (according to industry datasheets). I believe Atlassian is an "above average" company with a strong brand and leadership position (discussed prior), high retention, and a solid list of enterprise customers with plenty of room for upsell and improved cost efficiencies (from moving to a pure cloud model). Thus I have forecast a higher margin than the average for the industry long term.

Given these factors I get a fair value of $176/share, the stock is currently trading at $169.3 per share at the time of writing and thus is ~3.81% undervalued. Due to the quality of the company I deem this to be "fair value".

As an extra data point, Atlassian trades at a price-to-sales ratio = 13.56x, which is 47% cheaper than its 5-year average.

Risks

Lower Conversions/Recession

Analysts management has already started to see signs of lower free-to-paid conversion rates for its customers, with particular weakness in the SMB market. I forecast this trend to continue into 2023 as many economists have forecast a recession for the year. The good news is Atlassian still has a strong brand and can continue to "collect" free users, which will be poised to convert to paid as economic conditions improve.

Final Thoughts

Atlassian is a world-class software company that has continued to produce strong revenue growth despite a tough economic backdrop. Its "unprofitable" nature is not so bad when we see the majority of its expenses are related to R&D investments, which when adjusted boosted profitability to the green. Its stock is trading slightly undervalued intrinsically at the time of writing. This doesn't offer a major "discount" compared to many other technology stocks in the current environment (see my post Google). However, one cannot argue with the quality and potential of this SaaS company to continue to Strengthen its product and expand its margins.

Atlassian Corporation (NASDAQ:TEAM) is a software company that specializes in developing and providing business collaboration and productivity tools. Its products are installed in more than 80% of the Fortune 500, and once new tools like Atlassians are embraced at big firms, its extremely difficult to change direction. This has helped Atlassian grow revenue from $145 million in 2013 to more than $2.7 billion over the last 12 months.

Atlassian is impressive

The company has grown to become a global leader in enterprise software solutions with a product mix that is very sticky. The more touch points across a clients organization a software vendor has, the higher the switching costs, and Atlassian has five main products:

• Jira: a very popular project management tool that helps teams track and organize their work

• Confluence: a collaboration platform for creating and sharing documents, knowledge bases and team wikis

• Trello: a visual tool for organizing and prioritizing tasks and projects

• Bitbucket: a version control system for software development teams

• HipChat: a team communication tool for real-time chat, video conferencing and file sharing

In addition to these, Atlassian also offers a range of integrations and add-ons to help teams customize their workflow and Strengthen their productivity through a diverse marketplace of third-party listed deliverables. The company offers its solutions through both software-as-a-service (SaaS) subscriptions and enterprise license agreements with Jira being its preeminent offering.

Atlassians marketing playbook

Atlassian has built its business in the same way Salesforce (NYSE:CRM) did, using free trials to gain competitive advantages against would-be competition. The real building of the software is no longer the hard part. Being able to get first mover advantage and then stay there is what's difficult. Most SaaS companies start by offering free versions of their software, often limited in features, and require payment to access more. The more with Atlassian's offering is tied to users, data storage and support.

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Atlassians flagship project management tool Jira starts at $0 per user per month for up to 10 users. This rises from $7.75 to $15.25 per user for advanced with unlimited storage and 24/7 premium support. At the highest level, which is what most of those Fortune 500 clients are likely on, the service offers the additional benefits of centralized control, security and support. The point being, any company, big or small can get started and scale as needed.

Atlassians current revenue is pretty stable considering the penetration in major American corporations and those high switching costs, which comes from the time and expense of implementing a new software package while maintaining the existing platform or the indirect costs in learning a new system. No matter how you look at it, Atlassian is here to stay.

Atlassian seems overvalued by Mr. Market

Desipte the steller product offerings and revenue growth, the stock price has become out of balance with its real value. Of course, this could mean that the problem Atlassian solves is really hard or that investors believe that paying 13 times sales today will translate in someone else paying 13 times sales in a few years when annual revenue has doubled.

A major red flag is that while the companys gross margins are above 80%, it still spends an inordinate of money on research and development. Thats typically a sticking point when investing in technology companies. Atlassian may have to continuously spend over 60% of its gross profit on R&D just to keep up with competition as it tries to match growth estimates. By comparison, the SaaS pioneer Salesforce only spends 23% on research and development. This one line item on Atlassians income statement is the reason the company remains unprofitable. In fact, if that number was in line with Salesforces, Atlassian would be able to push nearly $1 billion to Ebitda. Considering its significant growth rate, that could justify a 40 times multiple.

The good news is that 98% of transactions occur on the companys website, placing Sales, General and Administrative (SG&A) costs at just 46% of gross profit. Salesforces SG&A costs eat up 74% of its gross profit. Even though it only generates $340,000 per employee, the company is still keeping the admin costs in check.

For Atlassian, achieving high revenue growth is crucial for justifying its poor management and bloated employee base. In startups, its almost a requirement to hire fast and tack on as many people as possible to solve problems. Now, the company needs to scale back and become more efficient. A 30% top line growth rate alone is no longer enough. As the company expands and the industry becomes more competitive, growth could slow substantially.

What price makes sense?

This is one of those situations where value investors can understand the business, keep tabs on where the price fluctuates and act when it reaches a certain level. I believe that level is much lower based on todays performance indicators.

Even assuming Atlassian can continue to grow at the current rates for the next five years, pushing revenue above $11 billion, the company will still likely be losing money. However, if any quarterly report shows research and development expenses stabilizing or declining, that would be good news for the bottom line.

At this point, I believe a price-sales ratio of around 5 seems more in line with the market. Salesforce is priced at that level and it is the undisputed industry leader. That would place the market capitalization closer to $15 billion today and up to $55 billion in the future as long as Atlassian can continue the strong performance over the next five years.

This article first appeared on GuruFocus.