Why Atlassian Stock Soared 10% on Friday

What happened

Shares of Australian workflow management system provider Atlassian (NASDAQ: TEAM) jumped in Friday trading, closing the day up 9.7% after the company crushed its fiscal second-quarter 2022 earnings report Thursday night.

Ahead of the report, analysts had forecast that Atlassian would earn $0.39 per share on sales of $641.3 million in the period, which ended Dec. 31. In fact, it earned $0.50 per share and did $688.5 million in sales, beating expectations on both the top and bottom lines.

Red arrow zooms higher over numerals 2022.

Image source: Getty Images.

So what

Sales for its fiscal second quarter rocketed upward by 37% year over year, and the subscription portion of Atlassian's revenue did even better -- up 64%. (And because subscription revenue makes up three-quarters of the company's revenue, chances are good that future revenue growth rates will approximate that latter, bigger number).

That's the good news. The bad news is that it turns out Atlassian's $0.50 per share profit was a non-GAAP number. When calculated according to generally accepted accounting principles (GAAP), Atlassian actually lost $0.31 per share for the quarter -- though that was a whole lot better than the $2.49 per share it lost in the prior-year period.

Now what

The other good news, however, was much better. While Atlassian may not have had GAAP net income, it did generate copious free cash flow in the quarter -- $197.5 million, which, when applied to its $688.5 million in revenue, works out to a free cash flow margin of 29%.

Translation: For every dollar of revenue Atlassian took in, it generated $0.29 in real cash profits, which is a very good number, especially given that the top line is still growing nicely. (Management forecasts revenue in the range of $690 million to $705 million in fiscal Q3, for example). If Atlassian can maintain this free cash flow margin, I see every chance that it will blow right past analysts' forecasts for $651 million in free cash flow this year -- and keep its stock moving higher all year long.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns and recommends Atlassian. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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