Collaboration and productivity software juggernaut Atlassian (NASDAQ: TEAM) has agreed to acquire Loom, an asynchronous video-messaging platform, for $975 million.
Loom is very different from standard video-conferencing software. Loom users record and share video messages where they can share their screen, include interactive elements, and make use of AI-powered features. The product is built for distributed, remote workforces that span multiple time zones. Video meetings can be useful, but scheduling can be a headache when employees are scattered around the world.
Loom has over 25 million users and 200,000 paying customers. While Atlassian is paying a steep price for the async video platform, integrating Loom with Jira, Confluence, and the rest of Atlassian's product suite could pay off handsomely in the long run.
An expensive acquisition that makes sense
Loom's annual revenue is in the tens of millions of dollars, according to ZoomInfo. Atlassian is likely paying dozens of times annual sales. This acquisition wouldn't make sense if the only benefit was a small revenue boost.
There are two main upsides of this deal for Atlassian. First, deeply integrating Loom with existing products will improve those products and make them more useful to customers. Atlassian plans to enable Jira users to create videos for Jira issues, for example. This could help eliminate some back-and-forth by allowing those creating issues to provide a visual demonstration.
Confluence, Atlassian's team-workspace platform, could also benefit from integrating Loom. Sometimes a quick video is a lot more effective than a document for conveying important information. Loom's AI features, which include auto summaries, add additional value to this functionality.
Second, Loom's large user and customer bases present a significant cross-selling opportunity. Any Loom customer that's not an Atlassian customer can be sold on other Atlassian software. The sales pitch will be more effective once Loom's features find their way into Atlassian's product suite.
One downside, at least initially, is that this acquisition will hurt the bottom line through fiscal 2025. Atlassian expects a slightly negative impact on adjusted-operating margin in fiscal 2024, which kicked off on July 1, and in fiscal 2025. Adjusted profit figures usually exclude accounting charges related to acquisitions, so this hit to margins will likely be due to Loom's unprofitability.
Battling a slowdown
Like many enterprise-software companies, Atlassian is feeling some pain from growing caution among its users. While plenty of teams are trying out the free versions of the company's products, the conversion of free users to paid users has slowed as a tough macroeconomic environment drags on. Churn and usage haven't changed much, but existing customers have become more hesitant to expand seats.
By integrating Loom's video features into its products, Atlassian can give its existing customers a reason to expand usage. And some of Loom's features, particularly those powered by AI, will likely be walled off from free users. As it stands today, Loom's AI features are off limits to its own free users, and paid users must pay an additional monthly fee for access. Atlassian could do something similar, potentially inducing some free users to upgrade.
While the Loom acquisition makes sense strategically, it's certainly an expensive proposition. This is a mostly cash acquisition, with Atlassian planning to shell out $880 million in cash along with some equity awards. Atlassian's balance sheet is solid, but it's not bulletproof. At the end of June, the company had about $2.1 billion in cash and nearly $1 billion in debt. This deal will bring its net-cash position close to zero.
While paying nearly $1 billion for a video-recording app with minimal revenue may seem excessive, the deal could be well worth the price if it helps Atlassian break out of its current funk and accelerate its growth.
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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Atlassian. The Motley Fool has a disclosure policy.
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