A Tale of Two Earnings Reports: Atlassian (TEAM) and Vestis (VSTS)
As if we needed reminding of just how volatile the current earnings season has been, today provided us with a stark reminder. On the one hand, one of our holdings gained 20% after reporting a stellar quarterly report. However, another holding was down 13% after releasing its quarterly results and guidance.
Let’s start with Atlassian (TEAM), which is Friday’s big winner. The stock shot up strongly at the opening bell in response to Thursday’s release of fiscal Q2 (ended December) results, which featured stunning top- and bottom-line beats, as revenue of $1.3 billion increased 22% from a year ago, while earnings of 96 cents a share exceeded estimates by 27%.
Other highlights of the quarter included what management called “some incredible customer wins,” including a record number of deals greater than $1 million in annual contract value signed, with some of the world’s largest companies “committing to the Atlassian cloud and embracing the Atlassian system of work.”
Today a number of major financial institutions predictably upped their share price targets and outlooks for the company, including BMO Capital Markets, which said it believes Atlassian can sustain 20%+ growth through fiscal 2026. BMO also substantially raised its price target from $292 to $360—a 15% gain from the current price if realized.
Analysts at Canaccord Genuity were even more bullish on TEAM, raising their price target from $285 to $375, which would represent a 20% gain if realized, basing the upgrade on the firm’s strong AI position along with its enterprise opportunity.
In view of the size of the earnings-induced rally, I’m recommending that we go ahead and take an additional quarter profit in TEAM. For our remaining one-quarter position in the stock, I think we should let it ride until the stock completely runs out of steam. SELL A QUARTER
Now for the bad news. Vestis Corp. (VSTS) didn’t fare well in the wake of this morning’s fiscal Q1 (ended December) earnings release. As mentioned above, the stock got hit with a wave of selling pressure after the company reported revenue of $684 million, which was down 5% year-on-year and flat sequentially while being in-line with expectations. Meanwhile, earnings of 14 cents a share beat estimates by two cents.
Likely contributing to the sell-off was the announcement that Executive Vice President and CFO Rick Dillon will be leaving Vestis as part of a transition of the CFO role. Taking his place will be Kelly Janzen, with over 25 years of experience in various financial leadership roles; she has also been working with Vestis as a finance consultant since last October. (Mr. Dillon will remain with the company until February 14 to assist with the transition.)
In reporting Q1 results, management emphasized that it’s seeing improving net volume trends driven by growth in national accounts and lower customer losses. It also saw positive in-year trends for new sales, customer retention and pricing, with its latest operations initiatives driving “favorable” net productivity. Vestis also declared a $0.035 per share quarterly dividend, in-line with the previous one (a 1% yield).
In terms of guidance, the company expects sequential improvement throughout the year as it continues to implement its strategic initiatives and cost cuts. It further expects improving year-over-year growth rates in the second half of the year as it moves past tough comps in the first half.
All in all, Vestis continues to expect fiscal 2025 revenue to be around $2.82 billion (up 1% from a year ago if realized) and full-year adjusted EBITDA to be around $355 million (also up 1%), while Wall Street sees full-year earnings increasing 7%.
For now, I’m not recommending any change in our position and will stay with a Buy rating, as I believe the earnings reaction was overdone. That said, it’s also possible next week will witness some additional spillover weakness in the stock, especially given past extreme share price reactions to the company’s earnings (not unusual for a relatively recent spinoff). I’ll have more to say about Vestis next week once I’ve had a chance to listen to today’s earnings call. BUY
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