Atlassian Corporation (TEAM) Earnings Call Transcript & Summary

Thanks, everyone, for joining us. We're going to -- about to spend some time here with Mike Cannon-Brookes, CEO of Atlassian. My name is Alex Kurtz, senior analyst here in the software equity research team at KeyBanc Capital Markets. Appreciate you joining us for about 25-minute discussion with Mike, go through a bunch of different topics. And Mike, really appreciate you taking some time here in the middle of your day.

No worries. Thanks for having me.

Yes. So let's just dive in here. A lot of discussion at our conference last couple of days about work-from-home, impact to office culture. And just want to understand kind of where you see Atlassian fitting into the broader context of what's happened over the last 6 months and likely extend well into '21.

Sure. I mean look, from a -- first effect of that, I would say, is internally. We've changed how we work, as I think a lot of companies have, and working from different places and all that sort of thing. So we're navigating through that. I think we're doing pretty well. And I think it's a good -- as I said before, it's a good time where culture eats strategy for breakfast because we're all just trying to work out and navigate month-on-month and quarter-on-quarter in different cities, in different geographies, houses all going to get affected, people-wise, economically, et cetera. Our strong culture really comes to the fore in those sort of situations. So I've been really pleasantly surprised at how the teams handled the whole thing so far, and we keep moving forward. On the product side of things, look, I think it's -- in the long term, people are going to need more digital tools. It's going to accelerate the digital transformation, and working from home is going to be more asynchronous work, right? Less in-person meetings and more, "I need to write a document, and we're going to collaborate on that document," or, "We're going to use a trailer board in the background of a Zoom meeting, whatever it is." I think that will really help us in -- over a longer period of time. These aren't things that immediately people go and add twice as many Trello licenses as they had when they're working from home. But as they see it's a tool that uses -- works in that scenario, they're going to use it more, right? Usage will go up.

And when you look at the portfolio, as it stands right now, you have a lot of different products that touch an increasing number of different departments and role types inside of organization. Do you feel like you have what you need right now, especially as far as sort of the opportunity around work-from-home for the next 6 to 9 months?

Look, I think we're in a really good spot. If you look at the broader technology team space, so in terms of software teams, IT teams, operational teams, we're building the only single pane of glass for those teams to really manage their collaborative work, their workflows, especially as they all end up working closer together and look across each other's worlds. That's -- you see that in our focus on Agile and DevOps all the way through to the ITSM areas and all those workflows that belong there. As people work from home more, they need more collaborative tools to handle all of that work, right? There's less whiteboards in offices. There's less meetings where we coordinate how we're going to handle the incident that just cropped up, right? That's going to need the digital tools. That really helps us in those spaces. And from the broader sort of work management for all and Trello and Confluence and all those category of products, for sure, as I said, the more asynchronous work is going to help our tool set.

Something that comes up a lot with investors is what you charge for Jira and Confluence, right, relative to the value that they provide to a lot of different organizations, especially right now as a lot of small, medium, large businesses go through digital transformation, very much relying on Jira to get products out and to get releases out on time. Where do you see the ceiling on pricing for some of these core products? Because there's obviously an opportunity over the longer term just to keep charging more, right, because the criticality to getting a product out ahead of the competitor, all those different things kind of leads back to your platform. So I'd like to hear, like, your thoughts on that.

Look, pricing is always a hard area. But we're very philosophical about it. We always want to provide value first and then charge for that value second. And the bigger that gap is, the better for us in the long-term view. We've had that view for a long time. There are certainly segments of the customer base, where they may get far more value than they are paying, and that's fine because there are a lot of segments that aren't. Don't forget the pricing of a Fortune 500 customer and the pricing of a Fortune 500,000 customer, we sell one application. So we have to make sure that works in Eastern Europe as well as it does in Downtown Manhattan. That, we've gotten quite expert at over time. And there's a lot of other strategies and means of doing that. If you look in the cloud, we both have a series of different products in the family, but also a series of different additions from free to standard to premium to enterprise and then asymmetric products like Access to run across the whole set. So we're very good at understanding our customer base, but we always want to make sure that they get a great ROI on what they do pay for; and secondly, that they get the value first, right, because it makes our whole model move much more quickly. It reduces the friction. If you've already seen the value, you're really willing to pay for it afterwards.

Let's just talk about Access for a second. I know that's something you're particularly interested in. Maybe what -- for investors that are new to the concept of that bundle and that approach to market, maybe take us through a little bit about it and maybe how it reinforces future product development and different go-to-market approaches.

Sure. I mean Access is our product aimed at IT organizations inside our customer base. So not to help them do their IT, for IT groups to manage the Atlassian family in the cloud. The way it does that is it charges per user. So it starts at, I think, $3 a user no matter where those users live or how many products those users have. And it takes all of your IT concerns or the large set of your IT concerns and puts them into Access. So we're talking about everything from a single sign-on, identity management, SCIMs, so user provisioning automatically and to what products and where and how and then through some content security features, audit logging, tracking. There's a lot of things that you can do for IT teams centrally run. That has a twofold advantage. One, it puts it into a central place that IT is comfortable with. Two is, it can then unleash teams in organizations to buy our product families without having to worry about IT because IT has already sanctioned their security controls. So if one team wants to buy a Trello small license for their 5, 10, 20 people, IT says great. And they don't need to budget that team for Trello Enterprise that has all these different bits and pieces, right? So they get more value for a lower price, but IT internally is not a blocker to doing that. If they unleash all of the products, they say, " We've paid for security for everybody. We've paid for content control. So use whatever you want. Put it on your departmental budget." That works really well because it gives us an asymmetric competitive advantage and a pricing advantage in the single product, but it also allows for the friction and growth of our product family across an organization to be a lot faster.

Okay. Well, I want to turn now to the acquisitions and in getting those acquisitions on the cloud platform. So sort of at a high level, what drives the acquisition strategy at Atlassian? AgileCraft, Mindville, Opsgenie some really important ones recently, 15 in total. How do you think about what markets you want to be in? And then what's the type of company that fits best inside of Atlassian?

Sure. I mean the type of company, we always thought acquisitions, culture first. It's very, very hard to make things work just on a pure source code or strategic basis. If the cultures don't match or aren't compatible, they may be the same but they may be incompatible. Secondly, we then look at, obviously, is it better for us to own this or not? What unique advantage do we have in this area? Is it a business model advantage, a distribution advantage? Is it going to increase our value, commensurately more that over long term, that will pay back? So we're very thoughtful about acquisitions and philosophical. I think any large technology company needs to get good at doing that. It's not just signing a contract for a price. It's how that's integrated, how well the people stay and how well it delivers on the goals of the acquisition and being truly intellectually honest about that over time. We've got a really good track record, but you're only as good as your last game. The acquisitions recently, we announced 2 this quarter in Mindville and Halp, quite different. Mindville is from the broader Atlassian economy already. It's a CMDB or asset management add-on for Jira Service Desk, and it was the #1 thing asked for that we couldn't build internally, that we didn't have. And so it's a great -- it's highly compatible. They already build on the Atlassian ecosystem. These are a team of people who have been around for a long time. They know Atlassian really well. It's great talent that we're adding to the team. So we're really happy and they seem really happy too. But obviously, it's very strategic for us to continue to add depth in the ITSM area. And specifically, as the software teams in Agile and DevOps and operations teams and IT teams are all increasingly working together more, things like asset management and configuration management become really important because it's like, where am I deploying this service as a software question is the same thing that someone's filing a service desk ticket against or Opsgenie has an incident against, right? So you can see where those assets in terms of software assets are starting to become incredibly important across the whole set of the technology teams that we deal with.

So you spent a lot of time in the shareholder letter talking about the cloud platform, right? I mean that was obviously a big central theme. How do you think about the cloud platform and getting more users there relative to these -- integrating these acquisitions quickly into cloud? So when you go and make these acquisitions, do you feel like, all right, this has to be something that we can quickly wrap into our cloud offering? Just in general, how do they relate to that?

I mean integration is certainly a criteria. Something like Mindville that's already built on top of the Jira ecosystem, that's a little bit easier, obviously, to do. It's not simple, but it's a little bit easier. We -- look, we have to make our platform able to be used by acquisitions in a relatively rapid rate, so they can adopt it themselves, and we're constantly making it more self-serve. If you think about someone coming in from the outside world and saying, "You've got all these tools available to you," great. We don't need to educate them on how to pick them up or which one to use. We're sort of saying, "Hey, there's like constructions and documentation and like you can do it yourself instead of having to parachute people in." That's a constant work in progress, but we're doing that, I think, better every year. And secondly, there's a strategy to each acquisition that maybe integrate faster, integrate slow, right? You saw us take a slower path on Trello. Now we have access for Trello. Now we have identity engaged in Trello and other things. But Trello in and of itself being such a fantastic product and fantastic business with its own gravity of a really large scale, there's a different order of priorities for each different deals. So there's no one size fits all.

Sure. That makes sense. Just to get into a little bit about the -- moving your installed base to the cloud. A big part of the shareholder letter and the earnings call was really focused around getting the right discounting to incent people to move to the cloud. I guess the first question is, outside of discounting, what are the major reasons a customer wouldn't -- in pricing, what's the major reason that a customer wouldn't want to move to the cloud today?

Look, we want to make sure -- I mean discounting is somewhat important. I mean obviously, there's an economic part of that decision. There's a product part of the decision, which is usually the first criteria, right? So we have to make sure our cloud offerings are just fundamentally better in every regard, right? Eventually for every single customer, right, you start with the bulk and you're moving through different customer sets. And that is something we've been working really hard on in the engineering teams. That's everything from security and scalability to performance, geographic distribution, all sorts of work there as well as just the product features themselves. So the platform really helps there because products naturally work better together. They share a lot of componentry in the cloud. Users can flow back and forth. So we need to talk to the customers very clearly and say, "This is a better place for you to be." Now second, "Let's help you get there," right? When you say, we'll help to get there, firstly, they're busy people. They've got things to do, right? So data migration is a big issue. We've worked really hard on migration tools, for example, over the last 2 years, I guess. And especially in the last 6 months, you've seen the Jira Migration Assistant launch and us improve that continually every quarter. That's a big thing, right, migrating 10 or 20 users across. You can do in one shot. It's not that hard. The adoption is not that complicated. If you're migrating 20,000 users, that's not something that happens in 5 minutes. I mean there's a huge amount of data there. You've got to test it, trial it. So our migration tools are getting more and more sophisticated. You can do a sandbox migration. You can run a trial. You can keep running both instances while that is happening. This is not a freeze the world, everyone go on for 3 days kind of thing. So data migration is certainly a big challenge and one we keep working on and find new customers, new levels of data. You're constantly working out how to make that scalable and performing. And then there's lots of other things. The ecosystem continually improving in the cloud, general internal policies, we usually can't do anything about those, but those are changing over time, right? There's -- that wave is going in the right direction.

Do you feel like maybe investors look at -- we get very focused on pricing, right, because we put that into our model, and we can -- x times y equals z, and it's something that all makes sense, right? But maybe we sell short migration. I mean at bigger companies, cost is important, but it's not always the driving force to a lot of IT decisions, right? There's a lot of other factors that go into it. Security compliance is another big element to it. So where are the migration tools today that a Global 2000 company would be experiencing with Atlassian versus maybe a couple of years ago? Is it a night and day change? Or has it been more gradual?

Oh, no, no, no. I mean like, we improve those every quarter. So we ship updates and migration tools constantly. We've learned a lot about customer migration journeys over the last 2 years, and we've baked as much of that into the tools as possible. So Confluence is our oldest migration assistant. It's really, really quite good today. Jira is newer in terms of Jira Software. Jira Service Desk is in early access at the moment. And so we're continuing to move through helping customers do that themselves. At the same time, those migration tools and frameworks -- and a lot of that is not just technical, right, business documentations, processes. We're helping people manage their world. Think about moving house, right? You've got to pack up your house, you got to put everything in a truck, you got to drive the truck, and then you got to unpack it all and put it back in the right places in the kitchen. But guess what, the kitchen has different cabinetry and covers and things. We're trying to slowly help customers with every stage of that. 2 years ago, you did it all yourself. You did the packing up, you did the unpacking, you drove the truck. We can get to the point of saying, "Hey, we can help you, we'll drive the truck for you. A, we'll unpack stuff, if you give us some hints about where to put things, right? Kitchen on the box, we'll put it in the kitchen in the right places, right? We'll make some sensible choices for you. We help you do that." And customers want to do more than just move their data. They want a clean house at the same time, right? They throw a bunch of stuff away. And so this is all getting moved into either the migration assistant tooling and technologies or into documentation and guides to help customers think through, "Hey, this is a good time to think about what you're using and how your organization maps." And then the third category that's really important is Atlassian's broader economy, so our partners, ecosystem vendors and everybody else, and helping them. So now the migration assistants will move your app data as well as Atlassian data. And that's -- it requires the ecosystem vendors to understand how that's -- then they engage in that process. And secondly, our broader partners, there's a great business opportunity for them in moving these customers. But they've got to use the tools and they use them to a much more fine grain level, right? They've done 20 migration projects, 30 migration projects. It's a good business opportunity for them to walk in, but we also want to make that easy for them to do. So that's baked into the tool. So we're learning a lot over time. I'm pretty happy with where we are. Certainly compared to 2 years ago, it really has not been a change for our customers.

So yes, we'll get to the partner question in a second because I think that's a very interesting topic as you move to the cloud. So as there is more focus on moving customers to the cloud, what does that mean for reliance on partners, right? So does that put them in a different value spot as far as what they can do for a customer versus on-prem? Or has it been roughly the same? Or is this data migration thing, it's just going to be like -- could be like a 3- to 4-year kind of opportunity for a lot of these global partners that you work with?

Look, I think certainly, data migration is a big opportunity. There is a different -- some similar work that they can do in terms of the cloud and on-prem. There are certainly some differences as well that they have to be aware of. There's obvious configuration and management of just large instances and deployments of a set of Atlassian applications that are very similar. And that is mapping, how do I take projects or spaces or boards and map it in the organization? There is a different set of configuration around automation and programmatic capabilities like Forge, that partners can use in different ways in the cloud, so they have to learn some new skills. But in some ways, there's a lot more they can do. And then lastly, there's a different set of integrations. So integrating multiple behind-the-firewall applications on-premise has a certain style of doing it, and integrating with on-premise other best-of-breed SaaS applications, and we're going to have a lot of the integrations with the best-of-breed ones done automatically. But for the 1,000 of the long tail of applications or internal applications that, that customer has or whatever else, there's a lot of work still for partners to do there. So I don't know what the handicap is. 70% of the work is the same, that's a lot of migration projects, and there's 30% that's new, and there's 30% that doesn't exist anymore, something in that realm.

Makes sense. So we're going to finish up with a question around investments across different parts of your portfolio, right? And just sort of a longer-term question, Mike, about kind of beyond the pandemic horizon and kind of into the next 2 to 3 years, you're in work management, DevOps, ITSM, obviously, do a lot for knowledge workers. How do you prioritize where the level of investment is going? And where do you see the biggest opportunity over the next couple of years? Because you -- clearly, through acquisitions and internal development, you've gotten into a lot of different areas. So kind of how do you kind of figure out what should be bubbling up to the top as far as dollars spent?

Sure. I mean it's -- look, it's a constant resource balancing act, right? We want to invest across the portfolio, and then you also want to place some bets, so we're trying to do that. We're constantly making sure that we're investing in new ideas and new products as well as the existing products. And a lot of those new products don't see the light of day. They don't work, so they get killed. But it's still better to do that and kill things before they get out and then only ship out the things that we think are really high quality and will make a difference to the customers. So there is certainly a constant proportion of investment that goes into that. The internal sort of market focuses and everything else is a constantly shifting conversation depending on where we're at, what's happening in those markets, where different things are up to. New acquisitions take more energy in the early years, for sure, as they're getting established and converting the platform and everything else. The platform is, by sure, a large category of investment for 2 reasons. One is, it can be an essential differentiating advantage to us in the cloud for the customers, right? They can get more data shared, they can get a manner of operating that's similar across multiple products. They can move back and forth very easily. There's a lot of advantages to the platform in the cloud sense. And then from an internal perspective, building the platform is more expensive, but has a much higher ROI, right? We can leverage that investment 2, 3, 4 times across multiple products, whereas otherwise, we have to build it in every category largely. So -- but that takes time and building out. That's still our biggest broad priority in terms of R&D is making sure that platform gets smarter, better, more efficient, more scalable, more able to handle like data residency and all the enterprise controls. That's -- it's a big category of investment for us across the family.

Well, appreciate you taking 30 minutes with us, Mike. Thank you very much and busy schedule, so appreciate you blocking this out on your calendar. And if you have any questions, please feel free to reach out. But thanks, Mike. Thanks for spending time with us today.

Have a great rest of the day wherever you are. Thanks, Alex.