Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
SaaS stocks had a good run in late 2019. TechCrunch covered their ascent, a recovery from early-year doldrums and a summer slowdown. In 2020 so far, SaaS and cloud stocks have surged to all-time highs. The latest records are only a hair higher than what the same companies saw in July of last year, but they represent a return to form all the same.
Given that public SaaS companies have now managed to crest their prior highs and have been rewarded for doing so with several days of flat trading, you might think that there isn’t much room left for them to rise. Not so, at least according to Atlassian. The well-known software company reported earnings after-hours yesterday and the market quickly pushed its shares up by more than 10%.
Why? It’s worth understanding, because if we know why Atlassian is suddenly worth lots more, we’ll better grok what investors — public and private — are hunting for in SaaS companies and how much more room they may have to rise.
Results
To avoid spoiling our own game, we’ve listed the company’s core results below. Try to spot what you think is the more important result from its fiscal Q2 2020:
- revenue of $408.7 million, up 37% from $299.0 million in the year-ago quarter
- operating income of $41.8 million, up from -$3.2 million in the year-ago period
- net income of $124.1 million, up from $45.2 million in the year-ago quarter
- subscription revenue of $227.8 million, up from $152.5 million, or +50.0%
Hard to pick, right?
In order, 37% growth at its size is impressive. Moving from operating losses to operating profits is huge; so is driving three times as much net income in just a year. And having higher subscription revenue growth than net revenue growth implies improving top line mix, which is never bad.
The results certainly beat expectations, which included revenue of $389 million and far less net income. But what I’d hazard matters most is that Atlassian is managing rapid subscription revenue growth and rising profitability, which implies strong operating leverage. Investors are so enthused about the company that, after its earnings bump, Atlassian is worth about 27 times sales, according to YCharts.
Before its earnings, Atlassian was richly valued, but now it’s nearly stupid-expensive; this shows that investors are still happy to bid SaaS companies up provided that they demonstrate ample future strength. Given that SaaS stocks according to the Bessemer cloud index are trading at an average enterprise value to revenue multiple of 12.3x, it’s a surprising result.
Not all SaaS companies have received the same market boost. Dropbox and Box, former cloud darlings, are flat or down over the last year, for example. But for SaaS companies that can hit both key investor results (quick growth and rising profitability), Atlassian shows that valuations aren’t capped; they can still run higher.
Whether this is indication of too much enthusiasm, or just enough, is up to you. TechCrunch recently spoke to a venture investor who is predicting a slowdown in cloud growth (more on that early next week), so at least some folks emancipate a change in the paradigm. Today, however, investors appear more than bullish.
For startups in SaaS, it’s just more good news.