Shares of enterprise software company Atlassian (TEAM -1.50%) soared on Friday after the Australian outfit reported financial results for its fiscal first quarter of 2025. As of 10:30 a.m. ET, Atlassian stock was up about 15%, but it had been up as much as 22% earlier in the day.
Atlassian's growth is heating up
Atlassian's software remains popular, as evidence by ongoing customer acquisition and spending growth. In its Q1, the company generated revenue of nearly $1.2 billion, which was up 21% from the prior-year period and ahead of expectations. Moreover, its cloud revenue jumped 31% year over year, which is encouraging considering management has worked hard to get customers to adopt the cloud.
The strength of Atlassian's Q1 was further underscored with management's guidance for the year. At the end of its fiscal 2024, management had expected full-year revenue growth of 16% for fiscal 2025, including 23% revenue growth for cloud. But after its Q1 results, it raised overall revenue expectations to 16.5% to 17% growth. And it also now expects 24% cloud revenue growth.
Top-line growth is undeniably an important aspect of investing. And with Atlassian's growth picking back up and ahead of expectations, investors sent the stock flying.
High employee compensation suppresses profitability
From my perspective, one area of concern with Atlassian stock is employee compensation. The company isn't profitable because of high stock-based compensation. Stock-based compensation isn't a cash consideration, so Atlassian is free-cash-flow positive and uses cash flow to repurchase shares -- it just authorized a new $1.5 billion buyback. Share repurchases for Atlassian don't reduce the share count, but rather merely offsets the stock-based compensation.
In Q1, Atlassian's free cash flow fell by 54% year over year due to employee bonuses. Granted, the bonuses are annual, so it shouldn't be a problem next quarter. That said, the company also benefited from strong collections in Q1, which means that cash flow could be challenged in the coming quarter since collections were already high in Q1.
Atlassian justifies its employee compensation because it's aiming to become a much bigger business over the long haul. Therefore, if I were an Atlassian shareholder, I'd watch employee compensation, but I'd still take comfort in knowing that growth is strong right now.
