Atlassian Corporation (TEAM) Earnings Call Transcript & Summary

All right. Thanks, everyone, for joining us. My name is Arjun Bhatia. I'm the research analyst here at William Blair who covers Atlassian. For a complete list of disclosures for potential conflicts of interest, please go to our website at www.williamblair.com. And with that, it's my pleasure to introduce Robert Chatwani, the Chief Marketing Officer of Atlassian. Robert, thanks for joining us.

Thank you, Arjun. Nice to be with you.

Yes. So maybe just to start off, it would be -- it'd probably be helpful for everyone to get some background on yourself, and for those that aren't familiar with Atlassian as well, to give a quick overview of the business and the problem that you're trying to solve for customers.

Absolutely. Thank you. Well, why don't I start with the company, and then I can tell you a little bit about me. For those of you who don't know us, Atlassian is a global software company, and we focus on software to help teams within organizations work better together. And so historically, that's net software teams. And so Atlassian provides products like Jira, which is our flagship product, to help software engineers collaborate and ship great products. And that's really expanded now to all types of teams within companies, especially as more and more teams begin to model their working behavior, like great software teams, working agile, planning, tracking, shipping, work in an iterative fashion. And so for Atlassian, we find that our products are really systems of record where work gets done. And Mike and Scott, our founders, like to say that we're a company built to serve the Fortune 500,000. And so we have 170,000 customers ranging from SpaceX, which put the recent astronauts on space on the Dragon capsule using Atlassian products, all the way down to your local bike shop that might be using a product like Trello that's really simple to use and manage for collaboration. And so I'd like to say, Arjun, like as spreadsheets are to analysts, our products are to knowledge workers. It's where work gets done. And then just about me personally, I'm in to Atlassian for just under 3.5 years. It's been really exciting. It's my first foray into the enterprise software space and sort of the software industry. I come from 17, 18 years in consumer e-commerce. And so the fun part for me is really bringing those best-in-class capabilities, those growth engines that fuel companies like eBay, where I was at, or Amazon and PayPal and Netflix, and then bringing those capabilities into a software company. It's been a lot of fun.

Yes. That's a helpful overview. So maybe to just continue on that last point a little bit, one of the themes that's been playing out in tech and in enterprise software specifically is the consumerization of enterprise software, right? So the products are evolving. They're becoming more user-friendly, but also the purchasing process is really changing, right? It's not a -- it's no longer kind of this centralized decision-making process. But given your background at eBay, and your background on the consumer space, it'd be great to kind of get your thoughts on how Atlassian is driving this theme forward. And from your perspective, what are some things that are -- that Atlassian is doing well? And then what are some of the initiatives that you're undertaking to kind of really improve on this front?

So you're absolutely right. This is something that we should expect to see a lot more of, which is the consumerization of the enterprise, and that can mean a lot of things. But for us, what it means is really continuing this incredible legacy and impact that Atlassian has really had around scale and frictionless sort of experience of making our products easy to try, easy to buy. You never have to speak to anybody if you don't want to, to use our products and get started with them. And Atlassian has this history well before I got here of having this incredible flywheel of strong organic traffic, word of mouth, lots of virality sort of built into the products themselves. And so what's my job? Well, my job and my team's job is to make sure that we maintain that leadership as other companies begin to offer products that are -- SaaS products, in particular, really friction-free to get started with, how do we ensure that as Atlassian, we keep this lean GTM model, this hyper efficiency? And so when I think about, okay, what are we actually doing, I mentioned some of the companies earlier that I've worked at or that I really respect and admire, and it's interesting. Like when I think about the next chapter of Atlassian's growth, I generally look to companies like Netflix or PayPal. Even gaming companies. There's a Finnish gaming company called Supercell. There's a fashion e-commerce company called Stitch Fix. What are the data and analytics capabilities that are driving the growth of these consumer companies? And how do we think about adapting them and customizing them for B2B? And what that means is that this has always been Atlassian's strength, but now we're able to actually get first-party data combined with third-party data to improve personalization, targeting, monetization, getting existing customers may be on our free products to get to the user limits where they would hit a paid user gate and now nudging them up to upward migrate them and do a paid addition. And the power behind all of this really comes from our understanding of data, and that's a lot of what we're working on right now.

Yes. That's very helpful. Yes, the go-to-market motion of Atlassian has been unbelievable, I think, for everyone. It's a very unique model. But let's maybe zoom out and take a look at the market opportunity. I think in the past, Atlassian has talked about kind of 3 broad range of user groups that you go after. Help us just maybe frame the market opportunity, how large it is for Atlassian and how penetrated you are within each of these 3 user groups in these 3 markets today?

Sure. So we play in the teamwork space, in the collaboration space. And the 3 sort of segments that you refer to generally, we look at our, one, the world for software engineers and software developers. This is really the history and heart of Atlassian's business, and I'll talk more about that in a second. The second is IT teams, and in larger enterprises, in particular, software and IT are very different functions. And the third is what we call business teams or work management, the sort of broader space of knowledge workers. When we look at the numbers globally, roughly, there's about 25 million to 28 million software developers. When we think about the teams that work with software engineering directly, technical team members, there's about 100 million of them, data scientists, product managers, designers, folks running experiments. And then when we think about the broad base of knowledge workers, it's roughly 800 million. And so we're looking at sort of this total global market of 1 billion potential end users who can benefit from teamwork and collaboration software. And when I think about how penetrated we are, I would say that we are in very, very early days of the potential that we have with all 3 segments. Now with software developers, 85% of software developers have unaided awareness of Jira. And so there's hardly a software developer in the world who won't know about Jira. That said, we are seeing that segment grow, and that's being really driven by companies who are operating and adopting more software principles across their organization. And so even though we have a great foothold with Jira, what we see is Jira's vector -- sort of growth is expansion with more software developers and then adjacent teams as other teams start to unify their work with that core group, and similar trends in IT and knowledge management for collaboration. And so we have 170,000 customers at Atlassian. Globally, there are 1 million companies with $10 million or more in revenue. We think every one of them can be an Atlassian customer. And so relative to the potential, we're still quite early.

Yes. That's a helpful overview. And we'll come back to the different parts of the TAM and how your products are addressing those opportunities a little bit, but I want to maybe focus on the current environment. Atlassian has always taken a very long-term view of things, right? You're not just planning for the next quarter and the next year, but you're thinking a decade ahead at times. And right now, we're in this global crisis that really no business is immune from. So maybe touch on the near-term impact that you're seeing for Atlassian from the current macro situation. And then when you think out longer term, right, what's your -- what's the game plan to come out stronger on the other side of this?

It's really incredible. I don't think any of us could have predicted where the world is today, just back in January. And I'm really proud. I think I'll answer it in sort of 2 parts, sort of our response to the current state of the world and then as we look forward, sort of the opportunities that we have. We, very quickly, in March, realized that we have an opportunity to really help customers, like many companies, think about how to operate in this environment. And so one of the things that we decided is we're going to focus on what can we do to help our customers rapidly move to a remote work environment. And so we launched within days really atlassian.com/remote. We just created a single portal and entry point into all the things that we can help customers with, ranging from free software for COVID response teams, Trello free for educators, a lot of principles and practices on remote work. So we have a whole body of expertise and knowledge on how to operate remote teams. And then we brought partners into that, so Slack and Zoom and Dropbox to say, here's what we can do together to help customers. And we saw, like, massive spikes in traffic and not just because the customers want to now get on to these products, but they're really engaged in trying to understand, okay, how do we actually take thousands of employees and move to a distributed work environment? And so that's a lot of sort of the near-term impact. And we have so many COVID response teams around the world actually using our products to coordinate and collaborate work, volunteers, the largest Swiss hospital and -- the largest hospital in Switzerland using our Trello to mobilize thousands of volunteers. And those are really inspiring, but that's sort of here and now. I spoke to some colleagues in marketing and some of whom are in China, and I sort of asked them this question, hey, when you look back, right, because certain regions of the world are a little bit ahead of us, what would you have done differently? And unanimously, what they said is we didn't think enough about playing offense when we come out of this. Now they're not fully out of it, but they spent so much time in crisis mode that they didn't think about how do we compete and win on the other side. And so one of the things that we did in March is we very quickly released and launched free versions of Jira Software, Confluence, and Jira Service Desk. It's already on the roadmap, but we pulled all of that in. And we see this as a huge opportunity, one, to gain market share in a really authentic way; second, to build great products and services and engage customers, not just with our products, but with a lot of the thought leadership that you can find on our blog and through our materials. And really think about, okay, how do we serve them now because we know they'll remember us on the other side. And here's the thing, like, what we're seeing is years worth of behavior change of remote work and distributed work compressed into months. And so we're excited because we're part of the solution to help empower and enable how teams work differently. And there's going to be some dramatic changes throughout this year but even going forward in terms of what knowledge work looks like, and we're right at the heart of that.

Yes. Yes. Absolutely. I think the move to freemium is really interesting. I remember you were talking about what it's been -- it's been in the works for a little bit and then it get moved up to the beginning of the year, you said. What can you -- can you share anything about some of the recent kind of developments that you've seen, in particular, your core products in the top of funnel from moving to freemium with Jira, Confluence and Jira Service Desk? Just what are some of the early results and adoption that you've seen in that freemium model?

So it's interesting, I was talking to the teams internally about this, not only do we offer free products, but just to give you a sense of Atlassian's long-term thinking and really driven from Mike and Scott, our founders. We had these conversations, sometimes debates internally, but we made a choice to default customers to free. Now think about that. So you come to the pricing page for one of our products, Jira, Confluence, Jira Service Desk, and it's not that we have a free version available, and we -- sort of a little button, the ratio dial is on the paid version, and he said, I'm going to try the free one. We actually defaulted customers to free, which means you start with free. Now you can choose a pay version if you want, but we're going to start you with free because we're so confident that we don't even want -- we don't want price to be a friction point. We want to get you into the product, get your team using it. We're really confident in the value that it'll create. In the first -- after the first month alone, we saw the numbers were about 125% increase in sign-ups. And so think about it. This is largely incremental net new customers. And if I think about the marketing spend to get that, 0 change. Part of our run rate. I had no incremental marketing spend, yet I got 125% increase in new sign-ups across all 3 of those products. And so what it made me realize and what it really helped us focus on is get the customer relationship to make sure that we gain market share and focus our resources and energy on cultivating that relationship and delivering value to the customer once they're using our product. And this proved to be a really valuable strategy way back in 2008, 2009 before I got to -- well before I got to the company in the last recession where Mike and Scott and Jay and our leadership team said, we want to release the starter version of our products, and that was in a server world. So that's done in a software that you download, $10 a month for up to 10 users. And that decision was huge at the time but had a remarkable impact in sort of the following decade of Atlassian's growth because if I think about where all of that growth came from, a huge part of it was companies and teams that started in a really lightweight small way, and that land and expand strategy really paid off because those teams started to grow within companies and adjacent teams to get the product. Price was not an issue. Utility and value was how we won. And so we see that playing out yet again. It's still early, but that's sort of a page out of the same playbook.

Yes. Especially when you're in such large markets, I think that going after that land grab in that way makes a lot of sense. I want to touch on the last point that you mentioned what you did in 2008, 2009 as a starter version. And I think the freemium question maybe does it a little bit of a disservice to what you've done with the starter products because you have 170,000 customers that are paying you, I think, $10 or more per month and then you have another almost 200,000 starter customers today that are paying you less than that. So they're still Atlassian customers, but they just haven't kind of crossed that threshold. So when you think about getting these customers to expand over time, maybe talk about what that time line and what that process looks like. Is it going to be more seats? Is it going to be cross-selling products? Just walk us through what the next decade of transitioning these customers to paid might look like.

Yes. Well, first of all, I like you're using our language of decades. That's great. I think it's one of the things -- coming from one public company in my prior life to this company, it's actually -- we operate very differently. We do think -- it starts with Mike and Scott, they do think very, very, very long term. You're asking the right question, which is how do we leverage and harness the power of this massive influx of new customers to fuel future revenue, right? And I'll be honest with you. That's the way my brain works, which is, okay, how do we reasonably quickly start to create value and monetize the space. And internally, I get reminded the most important thing is our customer is using the product in finding utility and value because that's the leading indicator of whether or not they're going to pull out a credit card and pay us for it. And so I have to temper sometimes my own excitement to take what is inevitably hundreds of thousands of net new customers on these free versions and sort of say, oh, let's start to monetize. The first question really is, what kind of behavior do we see? Are these teams growing month over month? Is each corresponding cohort demonstrating higher usage behavior? And if so, what's driving that? And if not, how do we ensure that they're getting value from the product? This is like my first -- I remember my first couple of months at Atlassian, I was with Mike and a small team, and I remember in telling you the stories, like, he said early on in Atlassian's history, like, I say, I don't care if a customer doesn't buy the product. But if they didn't choose to buy it, what's more valuable for me is to understand why. Like, what can we do better? Like, what do we need to build in order for this to be compelling enough? And similarly, what we've started to do, and it's still early, is segment our free cohorts and look at team size, look at industry, look at role, what's the expansion rate. But if I think long term, what does all this mean, it basically -- our goal is to get these teams to a threshold of 10 or higher. That's when we start to monetize. So it's free for up to 10 users. And then there's size limits for file sizes. And so the more usage we get, the faster we can get them to that threshold. And then we're making our paid versions really compelling, standard and premium, so that there's features in there that compel them, beyond just user limit gates, compel them to upgrade. Like in Jira, we have advanced roadmaps, we have automation. In Confluence, the ability to invite external teams. So that's the strategy is, first and foremost, create usage, find utility in the product; second, expand these teams to get to that 10 threshold, that 10 user limit threshold. And then third, make our paid products really compelling.

Yes. I think that can be a really powerful flywheel. The -- one of the other kind of recent initiatives, recent -- maybe over the past 5 years is cloud, right? That's been a big focus for you. You've done a lot of -- made a lot of enhancements and improvements in your cloud products. Talk about how that offering has evolved. And from your role, maybe on the go-to-market, right, what are some of the things that cloud -- having customers on cloud as opposed to on-prem, what are some of the things that makes it -- makes your go-to-market motion easier by having them on cloud or improves it? Just maybe talk about that landscape a little bit.

Got it. And so for those who may not -- may be less familiar with our business, we have a long history of being a very successful on-premise data center server-driven company. And we still generate a lot of cash from those customers who look for our on-prem products, but what we tell them is it's our responsibility to build ahead of where many of our customers are. Some of them are very quick to move. Smaller companies, tech companies, those in regulated industries or larger organizations a little bit slower to move. And so first and foremost, our cloud products allow customers to spend less time in infrastructure and deployment and maintenance, and they get to focus on their core mission. Second, for us, the benefit is we have continuous deployment. We can update these products and launch releases on a faster cycle and deliver that value to customers in a cloud world. And then inevitably, the other benefit for our shareholders is our ability to monetize these customers. Our dollars per paid enabled user has an opportunity to expand considerably given the economics of our cloud subscription business. Doing this well means a few things. First, we have to successfully migrate a lot of our existing customers to the cloud. So that's a big focus from a go-to-market perspective is helping support that migration journey. Second is that we want to make sure that the value proposition of security, privacy, uptime, scalability is clear. A lot of times, that's the barrier or a blocker for companies to consider a move. And from a go-to-market perspective, a marketing perspective, communicating that trust that they can have in our products is really important. But one of the benefits that we have is now we have -- in a cloud-first world -- and just to give you a sense, over 90% of our new customers start with us in cloud. So where we have a huge advantage with new customers, a big part of the opportunity in monetization is taking this huge base of on-prem existing customers and getting them over. So just a nuance of those 2 segments. But the benefits are, one, we get end user data now in a cloud-first world when you sign up, an end user signs up. It's not just the billing contact or the technical contact that downloaded the software. So we have that end user contact information. That enables us to understand the behavioral patterns and usage at the user level and therefore, use that information to create a better product, and secondly, build a relationship with that end user so that we can start to target them, personalize their experience, cross-sell them into other Atlassian products. And all of that becomes so much more frictionless in a cloud-based world versus in a server and on-prem world.

Yes. It sounds like it's great for you overall because you have all the customer data now that you can then deleverage in the marketing world.

It is unprecedented. I mean sometimes it sounds like a cliché. But as Amazon has done to power the future of commerce by using that data to deliver a better experience, if you deliver a better experience, you're actually able to unlock more value. It's sort of that virtuous cycle. We -- that's what we're doing. And it's still early in that journey because you're never done. But what we find is that customers actually don't feel like they're being sold to. It's like a service, right? Like, oh, you're attaching documentation from Google Docs into your Jira issues. Hey, we have a product called Confluence that can help you do that much easier. Click here and try it for free in the context of the product. It's like take away all the friction, and all of a sudden, you start to see utility. And if you ask a customer, I don't think they view that as marketing. They're like, oh, Atlassian has sort of got some -- a new feature that they can help me with. That's sort of the secret of how we're operating in a cloud world.

Yes. You're almost preemptively kind of solving the problem for the customer. Let's touch on the product portfolio. We talked about how Jira has this kind of market recognition amongst developers. And your product portfolio has changed over the years organically and inorganically. When you think about the landing point for customers to Atlassian, how are you seeing that shift? For years, I think it's been Jira that's bringing customers in. But are you noticing as your product portfolio evolves that the landing point, the initial draw for customers is also changing to some other products that you're not introducing?

Yes, we think a lot about this, and we think about it in 2 -- a couple of different perspectives. So one is what's the best pain point that we can first solve for customers, where would they find the most effective, like, entry point into the Atlassian portfolio of products. And that we -- time and time again, we see that it's Jira Software or Trello. And that usually depends on what type of team you are, the size of your company, the size of your team. We do really, really well with Jira Software and Trello as sort of our entry points into the portfolio. And so it's like, hey, if that's the best problem that we can solve for you, typically planning, tracking, keeping work organized, then great. We are not going to work against that. It's also the most powerful way for us to land a customer and then cross-sell them and introduce them to other Atlassian products. So that's one way we think about it, like what's the best problem that we can solve. And usually, it's those 2 products, 1 of those 2. Now the other way we think about it is, from an economic perspective, how do we maximize the spend on our marketing dollar or LTV of that customer. And when you look at the combination of products that you come in with, come into and then how you grow and expand, we also tend to see that coming into Jira Software and occasionally to Trello, that, that usually is the best entry point to maximize LTV. And so when we optimize for that customer journey, we look at both what's the pain point that we're going to solve, and secondly, how do we create the most financial value to get the best return. And that's typically the model that we see. Now that could change over time, and it's not to say that we don't land a lot of customers organically for our other products. A great example is Confluence and Jira Service Desk. They get a lot of land activity, but most of that is organic. It's not that we're going out and spending dollars to say, please land with these products. SEO traffic, organic traffic, word of mouth. A great example is we launched something called Confluence templates a few months ago. You can do a quick search and find that. But it's a way for teams to say, hey, I'm look -- I can do a Google search. I'm looking for a marketing plan template. Boom. You'll see Confluence come up there or depending on what your query is, you'll have a whole bunch of other content. We have a free Confluence template. Click to get started, takes you straight into the product, and we've launched dozens of templates. We are finding that that's landing lots of customers, but it's not a proactive part of our strategy.

Got it. Got it. Okay. We have -- I think we have time for 1 more question. Maybe let's close out on a cultural question. Jay has been a kind of a staple Atlassian. He's -- who's been at the company for over a decade now. And I think end of June is his -- he's kind of retiring and leaving the company. What do you and kind of the other leaders at Atlassian have to do to kind of fill that cultural role that Jay is leaving behind? Just walk us through how you think about long-term success and how your culture plays into it and how it's going to change now.

Yes. Well, Arjun, you've known Jay for many years. I'm sure many folks watching have heard Jay speak and know him. And thank you for asking this. Let's just be clear. If I had it my way, Jay wouldn't be going anywhere. He is one of the best leaders that I've ever had the privilege of working for, but he's built an incredible bench. I've been here 3.5 years. I'm sort of the youngest member of his leadership team. Cameron, who's our Chief Revenue Officer; Jose, who runs our field operations team; Brian, who runs our customer success and support team. This is a really, really deep bench, and the first thing we can do is to continue this incredible sort of strategy that Jay has helped pioneer, which is keep our go-to-market lean, think about scale, efficiency, self-serve, no friction, but put all the value ahead of a log in as much as possible. And so simple as that might sound, it actually takes a lot of effort. But job #1 is to continue what Jay has really helped build. And then Jay has told us, like, figure out how to define the next chapter of growth. And he's been here 12 years. We've had an incredible ride and Jay's helped to get the company to these incredible heights. But he is the first one to tell us, like, man, we're just getting started. There's a whole world of opportunity out there, and he wants this team to really go help unlock that. And then even as we think about enterprise growth, right, huge pockets of value for us to go tap. What Jay will tell us is let's do it the Atlassian way, and that's the challenge and opportunity that we have ahead of us. And I'm super excited and privileged to be part of that.

All right. Awesome. Well, it was great to have you. Thank you for being here. It's a pleasure to catch up. And hopefully, we'll see each other in person soon.

All right. I hope to see you in Chicago one day. It's my hometown, and I'm missing my deep dish pizza. So...

Yes. One day.

All right. Thanks, Arjun.

Take care.