Photo Credit: mohamed Hassan from Pixabay

Enterprise collaboration solutions provider Atlassian (Nasdaq: TEAM) recently announced its third quarter results that outpaced past market expectations. However, a slightly weaker outlook sent the stock falling 18% in the after-hours trading session.

Atlassian’s Financials

Revenues for the third quarter grew 14% to $1.357 billion, ahead of the market’s forecast of $1.353 billion. Adjusted EPS was up 9% to $0.97 and was ahead of the market’s forecast of $0.90.

By segment, Subscription revenues grew 19% to $1.27 billion. Other revenues came in at $83.8 million compared with $117.7 million a year ago.

Among other metrics, customers with greater than $10,000 in Cloud annualized recurring revenue (Cloud ARR) increased 14% to 50,715.

For the current quarter, Atlassian expects total revenue of $1.349-$1.359 billion compared with the market’s estimates of $1.357 billion.

Atlassian’s AI Focus

Earlier this year, Atlassian released Rovo, the AI-Powered teamwork tool for Jira and Confluence. Recently, it launched Rovo as part of the Premium and Enterprise editions of Jira, Confluence, and Jira Service Management. It will soon include Rovo in the standard edition as well. Atlassian claims to have over 1.5 million monthly active users of AI across its platform.

By including Rovo in all Premium and Enterprise subscriptions of its core apps, it believes it has taken the step needed to win in the AI era. While it may experience shorter term revenue impacts, the company is confident that keeping AI central to its offering will help it deliver on the business model in the longer run. Including Rovo across its portfolio is helping Atlassian drive human AI collaboration at a faster pace.

Rovo already offers advanced enterprise search, contextual chat, and over 20 pre-built AI agents to assist teams with tasks like ticket triage, documentation, and project updates. The recently introduced Rovo Studio allows users to create custom agents using low-code or no-code tools, thus accelerating automation across Atlassian and third-party applications.

Rovo has also led to interesting use cases. Atlassian’s customers are deploying Rovo Agents to automate tens of thousands of workflows across Jira and Confluence. For instance, companies like HarperCollins have reported a fourfold reduction of manual project work through activities like using Rovo agents to draft requirement artifacts and using agents to create tickets from meeting notes.

The advent of AI into enterprise SaaS is raising questions around subscription revenue versus usage-based revenue models. Bottom-up TAM is calculated on the basis of business model and pricing model. It is unclear how usage-based pricing is factored into the TAM calculations Atlassian is putting forward.

Atlassian has pivoted its viewpoint on Rovo pricing as well. Rovo was initially priced at a tier-based pricing ranging from $20-$24 per user per month with the tiers sliding down based on the increasing number of users the client had. Some Rovo Search features were available to non-Atlassian users at no additional cost.

Recently, Rovo’s pricing was changed so that it was baked into Premium and Enterprise cloud subscriptions. Atlassian increased prices for these subscriptions to account for Rovo’s bundling. Some believe that the change in pricing reflects the difficulties organizations are having in justifying return on investment on AI upgrades. Bundling with a subscription may make it easier for Atlassian to get its customers to buy AI features.

Atlassian has continuously built upon its product offerings to grow its TAM to $67 billion across its three key segments of software development, service management, and work management. Analysts believe that by continuing to innovate and by adding AI capabilities to its product offerings, it has the potential to expand its TAM to $142 billion by 2028. By offering a unified platform that connects data, workflows, and teams, Atlassian clearly has the potential to target a bigger market share.

Its stock is trading at $220.88 with a market capitalization of $58 billion. It touched a 3-year high of $326 in February and has recovered from the 52-week low of $135.29 that it was trading at in August last year.

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