SHOP - Is It Time For Investors To Team Up With Atlassian?

• Atlassian shares, like those of many high-growth IT companies, have been cut in half or more since they peaked last October.
• Part of the fall was from excessive valuation, but part of the fall has to do with fear of slowing growth in a recession.
• While it seems likely that the company will grow more slowly in a recession than would otherwise be the case, I think fears have been far overdone.
• Atlassian offers its users a platform, and platform offerings will provide a cushion as IT budget growth contracts.
• Atlassian has an exceptionally profitable business model that affords it lots of flexibility to price aggressively and maintains substantial margins.

Atlassian - its attractively valued for the first time in years

Why write an article about the shares of Atlassian Corporation Plc ( TEAM ) now? I last wrote an article on the company that was published on Seeking Alpha about 2 years ago. The shares are actually higher now than they were back then, but in the interim, they appreciated substantially, before falling precipitously.

There are many commentators on SA who continue to deprecate the company and its valuation. Some of these commentators are fixated on the level of stock-based compensation ("SBU"), ignoring the differences in how that metric is calculated using the IFRS accounting standard as opposed to U.S. GAAP. And while SBC is an interesting metric, with much discussion as to its importance in valuation, the fact is that the more relevant metric, i.e., that of share dilution, is far lower for this company than for some peers.

Atlassian is moving its legal domicile from the UK to the U.S. this year. When it does, it will report SBC in conformity with US GAAP. This will result in the company reporting lower levels of SBC, but the economic realities won't change - just the optics.

Of course, Atlassian does have an elevated level of SBC as reported. And SBC levels have risen as the company has used the current employment climate as an opportunity to acquire talent. In looking at valuation, I trend outstanding share count to best incorporate estimates for potential dilution. Dilution is, in my opinion, the real economic cost of SBC.

I am certainly not going to solve the issues surrounding SBC in this article. It is a debate that has been ongoing since the FASB mandated disclosure of GAAP earnings more than a decade ago. I believe that looking at free cash flow is by far the best representation of the economic position of a company, and eliminating SBC expense as well as depreciation, and many other expenses to report a free cash flow metric is almost universally accepted as the most accepted methodology to calculate free cash flow. Of course, stock-based compensation is an expense, although how much of an expense is quite debatable. Simply put, and to encapsulate my side of the argument - in the case of Atlassian, specifically - if Atlassian hires lots of developers as they are - the company's reported, SBC expense will be elevated. But the other side of that is that revenue growth and operating margins are going to rise more than is built into consensus number. For the most part, hiring developers is profitable for Atlassian to an extent not truly reflected in estimates. But I recognize that others don't hold that view. This article, then, will not be for those readers.

Like almost all IT vendors, the shares of Atlassian have seen woeful performance in recent months. The shares peaked at $483 at the end of October, and have since lost 57% of their value as of Friday morning as I write this. Sadly, at least for this writer and most readers, that kind of performance is fairly representative of many other high growth IT shares. The shares made a recent low of about $177 in mid-May, before bouncing to current levels over the last couple of months. Most recently, the shares were initiated by the analyst at Bernstein with a buy; overall the shares have a positive rating from analysts, but with a substantial minority of analysts at a hold rating, almost all because of valuation. There has been one analyst upgrade in the past month by the analyst at Goldman, Sachs, who also raised the estimates at that time.

This is article is about a recommendation to buy the shares of Atlassian. But as I have written about many other recommendations over the past few months, these shares will not be able to outperform the market during periods of risk-off sentiment, as that through which the market is currently navigating.

I am putting the finishing touches on this article on July 29th in the wake of a rather significant layoff announcement by Shopify Inc. ( SHOP ), coupled with its disappointing earnings report and forecast. The business analogs between Shopify and Atlassian are almost non-existent. But in terms of sentiment, and algorithmic trading, there is a significant link. The fact that e-commerce growth is moderating at this point and returning to trends that were in place before the pandemic will really not be a factor in demand for Atlassian solutions, or for solutions offered by most other IT companies. Even those companies who are Shopify partners really will not see a material change in their demand picture given how small their volumes from Shopify are, compared to the mammoth size of the Shopify GMV.

Of more relevance to me were the extremely strong results that were reported by Amazon AWS (AMZN) and by Google ( GOOG , GOOGL ). AWS and Google both offer significant integrations with many Atlassian products. Of even more relevance were the results of Microsoft (MSFT). At one level, Microsoft is a competitor of Atlassian. But the two companies also offer users tight integrations. At the least, the strong results Microsoft reported suggest that the IT space is hardly the wasteland envisioned by some investors and commentators.

Atlassian is yet another IT vendor whose earnings are scheduled to be released on Aug.4 ^{t h} . I will state at the outset of this article that I have no particular knowledge about what the company might report for the quarter, or more significantly, what kind of guidance the company might provide. It is extremely unlikely that the company won't show a beat for the quarter.

On the other hand, over the years that I have followed this company, Atlassian has often provided conservative guidance, and that has been more true of this particular quarter being forecast, a fiscal Q1, than any other. Much of the time, conservative guidance has led to share price declines; typically, however, those declines have come after periods of significant share price appreciation anticipating a strong quarter and positive guidance. Needless to say, there is no such anticipation this time around. Further, as more of Atlassian's revenues now come from recurring sources, presumably its visibility has improved, and some of the more seasonal swings in the company's revenues will be smoothed going forward.

But again, why write about Atlassian and recommend its shares at this point. Most observers believe a recession is impending, although one SA author contends that the Fed doesn't think that to be the case and is prepared to surprise investors. Of course, that was written before the latest Fed meeting and the subsequent press conference by its chairman. But most metrics do point to a slackening of global economic activity, and it is hard to ignore the flash S&P purchasing managers indices which are showing significant declines for data collected on 7/21.

Atlassian is a company built by software developers for the software space. As the picture to accompany this article I have chosen a photograph of the company's founders, Scott Farquhar and Mike Cannon-Brookes . No doubt the men look like the software developers they have been. Collectively, the founders still own 43% of the shares in the company, and their insider sales have been modest, and are likely to stay that way.

They have built a company with a fairly unique business model with quite high gross margins, higher than average research and development spend, and much lower than average spend on sales and marketing, leading to very strong profitability metrics. It simply doesn't have a traditional field sales force, although it obviously promotes its offerings in various ways. Its products tend to cost less than competitors, because of this unusual cost structure. In a normal economic environment, price advantages are not really a huge consideration in choosing a software vendor. In a recession, where IT budgets are more likely to be constrained, price matters. And in that environment, Atlassian has more advantages than usual, particularly with its accelerated investment in development.

One contributor on SA wrote that his view of Atlassian is negative because it has a focus on sales to the SMB space. That is quite inaccurate. Atlassian has lots of customers - more than 200k at latest count and the customer count has continued to increase at substantial levels - but many of these are particular teams within very large enterprises. Most of Atlassian's revenues come from the Fortune 2000, and not terribly surprisingly, it is the larger customers that have accounted for most of the company's growth in recent years. As it happens, because of the cost of Atlassian products, it is rarely a top 50 vendor within large enterprises, but the product suite is very much enterprise focused.

Atlassian is all about collaboration and IT service management, over simplifying its portfolio. Global economic instability is simply not going to slow down the requirement for collaboration and IT service management. Users, in a constrained budget environment, are going to have to figure out how to do more with less. And that is why I believe that Atlassian's business is less likely than many to experience the headwinds associated with economic turbulence and a constrained IT spending environment.

Digital transformation is a concept that has dropped out of the lexicon of investors in this current environment. But the fact is, digital transformation is one thing businesses can do to grow sales, and to become more competitive and to grow their market share in a recession.

One example that comes to mind is the case of Walmart ( WMT ). I am not suggesting that I am an expert on Walmart and its guide down. And, of course, I don't know much about the company's software investment and deployment. What I can say, however, is that the company's inventory issues might well have been lessened if the company had spent more on predictive analytics to mitigate the problem. If the reasons cited by Walmart for its inventory issues are accurate, then a fully developed digital transformation initiative would likely have prevented the level of inventory mis-match and markdowns.

Any company with digital transformation initiatives is highly likely to use many of Atlassian's solutions. They make digital transformation initiatives more efficient, with reduced time to deployment, and wind up reducing the overall investment required to complete a project with less disruption and fewer resources. The impending recession is not going to change the need for digital transformation and while, of course, I can't say with any certainty that the cadence of such transformations won't be delayed, the evidence thus far is that digital transformation delays haven't happened and seem less likely to happen than other consequences of a recession.

And Atlassian is unusually profitable. Its current free cash flow margin for the first 9 months of this current fiscal year was about 30%. And that number, it should be noted, was constrained as the company has moved from a model in which much of its revenue was based on license sales to a Software as a Service ("SaaS") model which has no deferred revenue component. Further, the discontinuation of Server sales, and Data Center price increases, which had boosted sales and free cash flow in the prior year, were absent as demand drivers in the latest quarter. Presumably, in a recession, companies with strong business models, significant demand tailwinds, and high profit margins are going to be rewarded by investors. And that is why it is timely to consider buying Atlassian shares at this point.

The conventional wisdom, which has been widely dispersed through many channels, is that investors should seek to find defensive investments with low valuations, and most times with lower growth as appropriate to deal with the current bout of economic uncertainty. I think that is a counsel that is focused on avoiding losses but not achieving substantial returns. I think companies in the right space, with the right solution offerings, that are highly profitable and gaining market share are more likely than defensive names to achieve positive alpha in a recovery. And Atlassian fits that category.

Historically, Atlassian shares have never been "cheap" although they have been on sale many times after reporting what was then perceived as disappointing guidance. On a relative basis now, considering both free cash flow margin and estimated 3-year CAGR, they are relatively cheaper than has been the case in several years. At some level, depending on the metrics used to value investments, the shares are still not cheap. The EV/S ratio is more than 13X. But on a Rue of 40 basis, this company's score is above 60, and it is not surprising that even in the current market environment that kind of performance is priced at somewhat of a premium. But that premium is lower now than it has been for many years, and that is what makes it a timely undertaking to consider Atlassian shares at current levels.

Reviewing Atlassian's solution offerings and its changing business model

Atlassian has become a relatively large software company with revenues likely to achieve a $4 billion run rate by the end of the next 12 months. As mentioned, it is basically a company built by software developers for software development teams, although at its scale, it has thousands of customers whose usage transcends its software roots.

One of the primary reasons for the company's success is its founders, Scott Farquhar and Mike Cannon-Brooks, both 42 years old. They have been friends and business partners since they met in college and they founded the company with $10,000 of credit card debt. They are both adjunct professors at the University of New South Wales, and they live next door to each other in two of the most expensive houses in Australia. They continue to be the largest shareholders in Atlassian and each own about 21%+ of the outstanding shares. They are co-CEOs and continue to set the overall direction of the company.

The company's principal products can be readily grouped into 3 major categories. The core offerings of Atlassian have been tools to providing project tracking and communication. These offerings include Jira, Jira Work Management, Jira Service management, Opsgenie, and Align. The company also offers collaboration solutions including Confluence and Trello And it offers some tools that help developers code and release their software.

Jira has been the core offering of Atlassian and it is still one of the most widely deployed tools of all time. It was first introduced 20 years ago, and it facilitates bug tracking and project management. Jira has about 180k customers and it is used globally by millions of developers. While it was developed to support the software development process, it is frequently used by other kinds of teams and there are many adaptations of Jira that have been made by indie developers and are available through the Atlassian marketplace.

Jira has a work management solution that is somewhat similar to the tools offered by Asana ( ASAN ), monday.com ( MNDY ) and Smartsheet ( SMAR ). The company has a significant entry that competes in the IT Service Management space, Jira Service Management. This is a far less costly alternative in the market that has been dominated by ServiceNow ( NOW ) for many years now. The company bought a company called Opsgenie about 4 years ago . Opsgenie is part of an overall service management framework; the tool is used to alert users about incidents and to determine who has been notified and who is working on the problem. It is tightly integrated into a number of other applications, most particularly Slack. It competes with VictorOps, a similar tool owned by Splunk ( SPLK ). Finally, Jira offers a solution it calls Align . Align is really an extension of Jira Work but focused on the whole enterprise rather than just a particular team.

All of these Jira offerings are available on the Jira platform, they have a common UI, and they can be tightly integrated which makes the Jira offering increasingly attractive for the enterprise. Is Jira "better" than its competitors. I think that is essentially an impossible question to answer. It usually depends on the organization, the problems that are being addressed, and the use case involved. It is not infrequent for users to have more than a single tool for their work management needs. I have linked here to one look at alternatives from Gartner .

I think one of the more interesting comparisons is between Jira Service Management and ServiceNow. ServiceNow is by far the leader in the space with an overall market share said to be 25%. According to the analysis linked earlier, the Jira product is far, far less expensive than the ServiceNow offering and essentially offers comparable functionality. In a recession, the kind of pricing differential shown here can make lots of difference.

In the course of writing this article, ServiceNow reported the results of its quarter that ended on 6/30. The company's CEO had previously foreshadowed a weaker outlook in a recent interview, after which the shares fell noticeably. The shares are falling once again, in the wake of the earnings report and forward guidance.

ServiceNow's results for the current quarter were reasonable but management reduced its full year subscription revenue forecast by about 1.6%, or about 3% for the last two quarters of the year. IT Service Management is not really a function that any company can avoid regardless of economic circumstances. On a constant currency basis, NOW's latest forecast calls for constant currency growth of license revenue by about 28%. Interestingly, the company maintained its margin guidance although it continues to hire.

Overall, ServiceNow called out lengthening sales cycles, but also indicated that it was actually have greater success with larger deals in which buyers wanted a platform-based solution. This is, of course, an article regarding Atlassian. But in this case, the commentary from the ServiceNow CEO Bill McDermott applies equally to the outlook for Atlassian, and to what I believe will be the way enterprise software demand plays out during a recession.

Enterprise software is an all-weather industry. Some businesses out there are prioritizing enhanced productivity to lower costs. Others are evolving business models to stimulate growth. All of them know full well that digital technology is the only answer. That's why the demand environment to software is consistent and durable.

Market research from IDC and several prestigious institutions on this call I might add have all affirmed the stability of technology budgets. We also see consolidation of enterprise software as buyers shift further away from experimentation with unsustainable solutions. So when you think about the technology sector they're on niche vendors, legacy leaders and platforms

If Atlassian is anything, it is a platform vendor. The basic reason to consider Atlassian shares at this point, encapsulating many other factors, is that platform vendors will perform relatively better in a recessionary climate than other companies and one's like this one, with a fairly unique business model that allows them to enjoy cost advantages and thus pricing flexibility, will do relatively better still.

As mentioned, the company offers a couple of collaboration tools. Trello is essentially the modern way in which teams keep lists of tasks and updates their completion. It is a very visual set of tools, and there are templates for just about everything imaginable. There are some newer instances of Trello that will resonate with some such as a weekly meeting template and a daily task management template. Trello is often integrated with Jira; obviously Trello competes against the other major collaboration tools on the market such as monday.com and Smartsheet.

The strength of Trello is its use of what are called Kanban boards . Atlassian announced a major set of upgrades for Trello recently and its competitive position seems to be improving relative to the more visible independent companies in this space. The other collaboration tools tend to be more involved and can do more from a project management perspective although they take more effort to deploy and thus might have a higher total cost of ownership. Confluence, the other Atlassian offering in the collaboration arena has been around for a long time. It shouldn't be confused with Confluent ( CFLT ), which is a different company in a different space. Jira and Confluence are often used together. I have linked here to the Atlassian promotional material that emphasizes the difference in terms of functionality between alternatives.

Finally, Atlassian has several relatively well-known development tools such as Bitbucket and Bamboo. Bitbucket has more than a few competitors. Two of these come from companies on which I have written articles, GitLab ( GTLB ) and JFrog. Probably the best known code repository in the market these days is GitHub , which is an offering of Microsoft. Here is a 3rd party review of the offerings which is very positive with regards to Bitbucket.

Bamboo is what is called a continuous integration server. It competes against Jenkins, which is open source, and is by far the most widely used alternative in the space. The review here says that Bamboo is more user-friendly. As is the case for most of Atlassian offerings, the real advantage of Bamboo is its integration with the rest of the Atlassian suite and its professional support.

While I have linked to several 3rd party evaluations above, the real advantage of Atlassian is that it is a platform, with all of its offerings integrated. Many developers find it very useful to have a menu of functionality with consistent UI, for the most part, and as applicable, available from a single vendor with a single support organization. In a recession, with more constrained IT budgets, vendor consolidation has typically become a major theme. Atlassian at this point has a breadth of offering along with cost advantages that are quite likely to appeal to enterprise buyers in a budget constrained environment.

Most recently, Atlassian introduced a product framework called Point A. Point A currently includes 4 products, Atlas which is a teamwork directory, Compass which is a control offering for a distributed architecture, Jira Product Discovery which is designed to prioritize and collaborate new products ideas through Jira, and Beacon which is focused on threat detection and response for the Atlassian cloud. Beacon will probably be the most popular of these new offerings when it is formally released.

How will Atlassian fare during a recession?

The question on the minds of most readers and investors these days is how will a company fare during a recession. It is a reasonable question, but is perhaps not the sole criteria for building a long-term growth investment portfolio. In the current business environment there are many trends, some headwinds, other not so much, that are important in the specifics of an individual quarterly report. That is certainly the case for a company like this.

Recently, Atlassian's co-CEO, Scott Farquhar gave an interview to the "Financial Review," an Australian, business focused newspaper. While I don't want to suggest that there is anything proprietary or unknown in the interview, it is worth reading for those interested in making a commitment in Atlassian shares.

The question was asked as well during the last conference call.

Keith Weiss

And very impressive results. Right now, the investor focus is really on sort of macro and durability of software demand. One of the things, Mike, that you've talked about in the past is Atlassian is kind of built for defense. But when you look at sort of the 3Q results, how much of this was just the demand environment is good, and you guys are executing in a good demand environment. How much of this is Atlassian flexing that we're good at side of the equation to help us kind of understand the operating environment you guys are in?

Scott Farquhar

Keith, it's Scott here. Look, I'm super happy with the results we have. But the way we operate as a company is really making long-term bets and long-term investments. And that's what we see here. And those investments, whether they were in free many years ago or they were in ITSM, who we made those investments or cloud infrastructure and migrating our customers to cloud, all these things are long-term bets that are paying off over time. And so I think regardless of what the demand environment is like we've played that long-term game. So that's one thing to think about. The second aspect about that is that we've seen kind of great demand for our products around the world. I know there's some worries about that but we've seen great demand in all of our geographies. And I think what we're seeing there is we sell into a market that in good times and bad times, requires the products that we sell.

And we've seen that even through sort of the '08, '09 downturn, we've been around long enough to have played through that, and we came out stronger on the other side of that, and we grew through that downturn as well. So it's a combination of those factors. I think people realized sort of pandemic is coming off and there might have been pandemic tailwinds, fueling Atlassian's business that will come off after that. We haven't seen anything to indicate that if anything, the demand for digital transformation is kind of a structural change that's continuing to happen.

While it has been about 5 weeks since the time of the interview and 2 months since the time of the conference call, given the nature of the answer, I doubt that much different would be said by the company's leaders these days. A recession is coming, at least according to most metrics that seem relevant. And a recession does create headwinds in terms of the growth in software demand. But as with most other things, there are shades of grey - whether 50 or more I don't know - but the extreme pessimism about the growth in software demand is most likely overdone, as the results and the guidance provided by companies such as Google and Microsoft might indicate.

Atlassian is going to have to deal with currency headwinds. It will have issues as well with the vagaries of demand caused by the end-of-life of its server products. And it has some Russian exposure that will be a headwind as well. But I think demand growth will be far more resilient than is appreciated by many or is reflected in the company's current valuation.

Atlassian's business model - there are a few moving parts

In my opinion, one of the reasons to buy Atlassian shares now is the strength of its business model. The company is hiring, and hired heavily in fiscal Q3, and will probably continue to do so. The growth in the company employee count was a bit more than 10%, and in absolute numbers was the highest ever. The company has broad ambitions as I have sketched out above, and the hiring is a necessary concomitant of that strategy.

The biggest moving part of the Atlassian model has been the rapid migration of its customers and its revenue stream to the cloud. The company today has two basic offerings; data center and cloud. Both of those grew by 60% last quarter. At this point cloud revenues are 54% of the total. What Atlassian calls data center revenues, which is essentially a customer hosted cloud, grew by 59% last quarter and were 20% of total revenues. Server revenue fell 19% last quarter and is now 18% of the total, while maintenance revenues are also falling. Last year, server revenues enjoyed a one-time surge as customers hastened to acquire additional on-prem licenses before a price increase and an end-of-life cutoff. One of the aspects of the company's performance is that the transition to the cloud has actually created revenue headwinds, which the overall demand picture has overcome.

This transition, along with the company's strategy to add to its staff, led to a noticeable, albeit well telegraphed decline in operating margins last quarter. All of the expense categories on the income statement showed higher levels. Gross margins fell to 86%, essentially because the current gross margin on cloud revenues is lower than the gross margin on server revenues. The company's non-GAAP research and development expense rose by 38% year on year, and is now 33.5% of total revenues, one of the highest ratios to be seen for the category at scale for an enterprise software company. Non-GAAP marketing expense rose by 54% and non-GAAP G&A expense rose by 47% year on year. Despite the significant jump in the expense category, Sales and marketing expense at 16% of revenues is exceptionally low for an enterprise software company.

Atlassian is highly rated on Glassdoor , and 94% of survey respondents recommend working there. The company is totally virtual; many employees never see the company's headquarters in Sydney. The company's web site currently shows more than 500 job openings in various fields, with the greatest number in Engineering (139), Sales (86) and Customer Experience - basically product support (47). That is a huge number of job openings for a company of this size. It is consistent with the company's strategy about using macro uncertainties as an opportunity to recruit talent, and, at least at some level, it suggests that demand signals remain positive.

The company provided what appears to be exceptionally conservative guidance at the time it released earnings. Most often, fiscal Q4 for Atlassian has experienced sequentially greater revenues than Q3. That didn't happen last year, because of the huge revenue spike in Q3 (revenues rose by 14% sequentially in Q3-2021) because of the price increase and end-of-life announcements, and of course, fiscal Q4-2020 was the period of the maximum impact from the economic impacts of the pandemic. But the company is forecasting a rather noticeable decline in sequential revenues this quarter. I often believe that companies such as this, particularly given the current environment predicate their forecast on showing a certain level of year on year revenue growth, and the company's revenue objective translates into 30% year on year growth. No doubt, there will be FX headwinds, and it seems unlikely that the very strong percentage growth performance of the company's offerings in the data center space in Q3 will be able to achieve the same kind of percentage growth that was the case in Q3.

The combination of lower revenues and higher operating expenses on operating margins is a forecast that shows a 900 basis point decline in operating margins for the quarter to be soon reported. Currently, the consensus forecast for FY 2023, has revenue growth of about 26% with EPS falling 10%, which implies a very significant decline in operating margins. The good thing about that is that it sets a relatively low bar for the company, one that would be relatively easy for the company to over-attain. And presumably, it is the consensus that is "baked in" to current valuations.

Basically, the current consensus forecast is for Atlassian to grow its opex by 31% next year. I don't want to suggest that the rapid growth of opex while revenue growth compresses won't happen. And I have presented management commentary about its plans during a recession. But my guess is that the kind of margin compression embodied in the consensus which calls for substantial and sustained opex increases, with falling revenue growth is not terribly likely, and that is a good set-up for positive share price performance.

Wrapping up - taking a look at valuation

One thing about the financial bloodletting in the IT sector is that there is a plethora of opportunities. At one level, picking the right one is a matter of preference in terms of investment styles. I personally believe that when a recovery comes, and it will, percentage returns will favor high growth names. That said, however, I certainly could make a strong investment case for Google, and I own Microsoft and was greatly impressed with its latest quarterly result.

Atlassian currently has an EV/S ratio of more than 13X. That might seem elevated in this market environment and indeed, it is quite a bit greater than average for a 3-year growth cohort in the low 30% range. But the company has an equally elevated free cash flow margin which was no less than 42% last quarter, and it was 30% for the first 9 months of the fiscal year. One reason why the company's cashflow margins have been high is that its non-FRS margins have been elevated as well. And the basic reason for that is that the company has been able to leverage its product strengths such that it hasn't needed the level of sales and marketing spend that is seen in most enterprise software companies.

I have forecast that Atlassian will generate free cash of $975 million in the fiscal year that started on 7/1. That is a free cash flow margin of 26% and would represent a significant compression from the 9-month free cash flow margin. Free cash flow the prior year is probably not representative of any long term trend due to end-of-life purchases of server software.

Atlassian's relative valuation looks much more attractive when considered in this light, although it is still slightly above average for my forecast of the company's 3-year growth cohort. Using my estimates and the Value Investor input of a weighted average cost of capital of 7.2%, the net present value of the shares is $298, or about 54% greater than its current share price. The basic reason for that is the company's strong current cash flows and cash flow margins.

My portfolio strategy is to position commitments into companies that can perform reasonably well during a recession, but will show market share gains, and rapid growth when the economy emerges from a recession. Atlassian has a broad ranging set of products that allows for it to benefit from vendor consolidation. It continues to attract development talent helping to ensure that it offers users the functionality that is most relevant in today's IT environment. In that regard, the background of its founders and their track record over many years should be a great comfort to investors in an uncertain time. The company's differentiated business model allows it far more pricing flexibility than most other competitors in the various spaces in which it competes. And while the transition to cloud, and the end-of-life of the company's various server products has created some optical illusions, the fundamental underlying execution of Atlassian has been consistent or better both recently and over a period of time.

I am not making any kind of a trading call here. Atlassian shares have fallen substantially, like most IT shares so far this year and since their high point. That doesn't mean they can't fall when they announce earnings on August 4th. While the company set the bar quite low when it announced its fiscal Q3 earnings at the end of April, on various occasions the company's guidance has been viewed as disappointing and has resulted in bumpy share price performance. In the current environment, and looking at how shares have performed in the wake of earnings, it probably is prudent to wait until after the dust settles before making a commitment in the shares. But looking at a 1 year time horizon, rather than trying to play quarters, leads me to strongly recommend the shares. I believe that Atlassian will produce a great deal of positive alpha over the coming year.

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