Billion Dollar Unicorns: Atlassian, A Legitimate One, Delivers A Great IPO

We have seen several Billion Dollar Unicorns burning up cash to acquire new customers and jeopardizing their fundamentals. Collaboration software maker Atlassian is strikingly different in this aspect and when it went public on the NASDAQ under the ticker TEAM, it was lapped up. 

Atalssian’s Industry Position

According to a Gartner report, the Application Development market is projected to be worth $8.7 billion this year. An IDC report estimates the Collaborative Applications market to be worth $13.5 billion and the Project and Portfolio Management market to be worth $3.8 billion in 2015.

Within this high growth enterprise software market, Australia-based Atlassian has made huge inroads. It has been placed as a leader in Gartner’s 2015 Magic Quadrant for Application Development Life Cycle Management along with the likes of Microsoft and IBM. VersionOne and Rally, which was recently acquired by CA Technologies for $480 million, also made it to the Leaders Quadrant.

Atlassian was founded in 2002 by Scott Farquhar and Mike Cannon-Brooks to help software teams work better together. True to its Australian roots, one of its values is “Open company, no bullshit.” And there sure is no bullshit in the way it operates. It has more than 1,400 employees and for two consecutive years has been named the best Australian company to work for.

Its flagship products are project and issue management tool JIRA and content collaboration tool Confluence, which account for almost two-thirds of its revenue. It also sells workplace messaging application HipChat, which it acquired in 2012. It also has a marketplace of over 1,800 add-on tools developed by third party developers on its platform.

Atlassian’s Financials

Atlassian earns revenues through subscriptions, maintenance, and license-based models. In the past three years, more than 75% of its total revenues were recurring from either maintenance fees or subscriptions. Revenues have grown from $148.5 million in 2013 to $215.1 million in 2014 to $319.5 million in 2015. It generated free cash flow of $47.1 million, $65.0 million, and $65.5 million for 2013, 2014, and 2015, respectively. Its global employee base grew from 769 in 2014 to 1,259 in 2015.

Net income grew from $10.8 million in 2013 to $19.0 million in 2014 but fell to $6.8 million this year due to significant investments in research and development and technology infrastructure for its cloud-based offerings, global expansion and development of new products and enhancements of existing products.

In its IPO filing it warns that,

“As a result of these significant investments, as well as share-based payment expense associated with our growth, we may not achieve IFRS net income in future periods.”

Like others in the industry, Atlassian has also seen strong revenue growth. But what sets it apart from other players in the cloud computing industry is its profitability due to a lean sales team. In 2014, it had just seven people in its sales team. It spends just about 21% of revenue on sales and marketing. It, however, has made significant investments of about 36% of its revenues on product development and sales automation. Rather than a huge sales team, it relies on data-driven insights to automate and streamline its approach to customer acquisition. At the end of fiscal 2015, it had over 5 million monthly active users across more than 440,000 organizations and over 48,000 customers. It seeks to convert this large user base into long-term customers and word-of-mouth advocates.

The company has been mostly bootstrapped. In 2010, they sold employee stock to Accel Partners, T. Rowe Price Group, and Dragoneer Investment Capital to raise $210 million overall. The last such sale took place in April 2014 when T. Rowe Price and Dragoneer Investments invested $150 million at a valuation of $3.3 billion. Earlier coverage is available here and here.

Atlassian’s IPO

Atlassian’s IPO was priced at $21 at a valuation of about $4.4 billion. It closed at $27.78, 32% above its issue price, giving it a market capitalization of almost $5.8 billion. It is currently trading around $30 with a market cap of around $6.2 billion.

Atlassian has till now been on an optimal path — a lean sales model, focus on existing customers and product development, profitability and revenues rather than on raising funds at unsustainable valuations. It also has proved itself as a leader in the industry before going public.

Also, notice, the company doesn’t have the bad habit of being addicted to investor cash. The investor money is mostly going into giving liquidity to founders and employees, while the business growth is mostly organically generated from profits.

I love this kind of disciplined company that is squarely focused on fundamentals. Atlassian is likely to continue delivering on fundamentals, and even under public scrutiny, will do well.

This is a legitimate Unicorn with excellent long-term prospects.

More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns. Unicorns will also be discussed with some special guests during our 1M/1M Roundtable programs over the next few weeks. To be a part of the conversation, please register here. The term Unicorn was coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.

This segment is a part in the series : Billion Dollar Unicorns