Atlassian Corporation (TEAM) Earnings Call Transcript & Summary

Welcome to the Wells Fargo TMT Summit 2020. Your session will start momentarily. Please note this session will be recorded.

Hey, good afternoon. I appreciate everyone sticking with us for what we're actually saving as the best for last here today. We have a very special guest with us tuned all the way in from Australia, Mike Cannon-Brookes, Co-Founder, Co-CEO of Atlassian. Mike, thanks for spending time with us here today. Certainly appreciate it.

Hey, no worries. And thanks for having me.

Yes, of course. We'll start off with some recent news that I think is top of mind for everyone here today, and that's basketball. I live just a couple of minutes from St. Mary's College who built a program recruiting from Australia. We saw one software entrepreneur from the class of 2002 recently take on an NBA team. So what's it going to take to get the Atlassian team more involved there as well?

Sports -- it's a good question. It's my -- for sure, my passion is sports. Look, Australia -- we shoot well above our metrics, let's just say, as a country. So we're certainly looking for -- we just had the first-round draft pick who went to high school just...

I saw that.

Just in Sydney.

Yes.

In green, so like respect to him. Two others that were draft picks played in the NBL instead of going to college. So we're a viable path. Anyone who has high school prospects, send them to Australia for a year, we'll happily watch him. And both got drafted in the first round. So...

It's pretty compelling. Just come to Australia.

Multiple powerhouse down here.

It's pretty compelling. So we'll get back to some other recent topics investors are more interested here in a few maybe, but I want to start with the origin story. I'm sure you've spent a lot of time talking through it in the past. But I'm just curious. Now that the company has evolved and you're pushing on $50 billion in market cap, looking back, what was it that led you and Scott towards Jira and something that sounds so esoteric as bug tracking and agile development. While you're young and in college, did you have -- was that a problem that you saw that needed solved? Did you have a sense that there was just a pronounced shift towards software development happening? Or equal parts, luck and timing there?

Definitely equal parts, luck and timing. Look, I mean it's a little more simple than that. We built the first version of Jira actually to solve our own problems, and we used it to service our own customers. And then as a handful of them asked -- I mean when I say a handful, I literally can probably count them on less than 2 hands at that time for -- to use that, we thought, "Hey, there's a business here to commercialize what we've done." So for sure, it started in bug tracking. It then moved to issue tracking, as we say, which is sort of more generic, not just bugs but features and tasks and improvements and all sorts of other things that need to be tracked in the software process. I think our biggest sort of breakthrough leap, that was all just following customer trends and requests. And you could argue our Atlassian DNA of following customers is a very small one. I always feel like that you can't claim any genius from just following what your customers are asking to do.

True.

The biggest change was probably realizing that software development was changing into agile. Agile was bringing in many more people into software development. So you suddenly had other teams outside, right? If you talk to the early 5 years of Jira, the biggest feedback from customers is my non-software, nontechnical people can participate. This is why I'm buying it. That was a huge, intentional leap for us to try to get many more people. Again, we charge less for a software developer than our competitors at the time. But we believe there were many more people who would use our application, and that turned out to be true. And that's been kind of a core DNA of Atlassian ever since. And now, of course, Jira is used in lots of places where no software people are, and agile is taking over non-software technologies, and work management and collaborative work has all become a really important area for all sorts of corporations. But that was definitely an early trend that came from the software groups, the technology groups.

Yes. I mean you also helped pioneer the inbound adoption model, which I think -- I mean I was a scrapping associate on the IPO, and I can empathize with how many questions you got from software investors who are used to a different way, right? But clearly, that model is being more closely followed. Was that a function of just scrappiness in resources that you had at the time? Or was that also just an awareness that software developers generally are maybe less in tune with sales and more in tune with product?

A combination of need and smarts. Again, our -- we've always been very long-term, sort of pragmatic, first-principle thinkers at Atlassian and built a lot of our strategy on the back of first principles. It was clear that we couldn't hire a lot of salespeople and the enterprise software model was changing. And so we needed to find a business model that would work, right? So that was very clear. That's your first principles. The second was the hunch that the Internet would change distribution. Well, that turned out to be probably better than a hunch, widely true. Once you've done that, then you need to find a model that you say, "Well, if I can have a scale with 2 zeros on it beyond other people, what can I -- how can I change distributions?" If you look at any change in distribution model anywhere in the world, it's usually orders of magnitude more people want to do something and then you automate some sort of process and you kind of keep going. That's no different to how we arrived at our sort of first decade growth sales model, I would say. And in the last decade, it's certainly continued to evolve, right? One of the things we've never done is sort of stood still on our model. We found more applications that work with that model, and we've had to continue to refine and evolve the model, as we now have lots of customers north of $1 million in sales. It's very different, but we still have tens, hundreds of thousands that are very small and use a totally self-service model. And our secret sauce now will be connecting both of those worlds together, right, and having a good shareholder economics and investor economics and ability to invest at each point on that curve.

Yes, yes. And one thing we observed from afar and admire around Atlassian is the engineering culture you've built. I'm wondering just how much harder that is to sustain as you get to bigger and bigger scale. And then in this move towards remote work, is that harder? Or given that you're already globally distributed in some ways, were there already the underpinnings of that where that's been potentially more seamless than it could have been?

Look, I would say both. One of the biggest advantages of Atlassian at the moment is our engineering platform in the cloud. That has come both from our engineering DNA and our family of applications, right? We're not a one-application, one-product company, which means we need to build platforms for ourselves. Those platforms then become self-fulfilling. And you can look at that as strict engineering. The actual technology that underpins our cloud offerings, as you've seen over the last couple of years, continue to evolve. But also our locational DNA, I'm not sure what you call it, right? We've been a distributed company, I would say, for -- since we began. We opened the U.S. office -- first U.S. office in 2005. So 15 years ago, we've had the Pacific Ocean to deal with in our DNA of like meetings that went across the ocean. People had to travel. Like we dealt with that. And so the new moves, the TEAM Anywhere and saying people don't have to come back to an office, we're in a great position to go do that. We don't have to teach people how to use Zoom. We lived on Zoom already. We just lived on Zoom from the office, and now we're evolving to living on it from home. Our engineering culture has been about asynchronous communication, so a lot of documentation, a lot of APIs, a lot of writing things down because we have a family of apps. And because we have engineers all over the world, as we scale that up, there are many, many, many great engineers around the world. And that DNA, I think, is going to work very well for us in the new world. And it's not something we need to relearn. We're just evolving.

You -- at the Investor Day, one of the things that was clear to me was sort of your glow around what you just talked about, the platform investments that have gone into the cloud platform. I think the phrase might have been the envy of SaaS peers. Can you just provide a little bit more context around what you're proud of, how much went into that, and how that can help enable this cloud transition to go off more seamlessly potentially?

Look, what we're trying to do is really hard. And I think we've done a fantastic job so far. We're not done, but like the cloud transition is hard enough to move one's applications into the cloud and run them for customers. I would say we've done that in a proper, proper way across multiple products. We have an amazing platform now that handles all sorts of capabilities, identity, data management, commerce, user flows and management, media assets, large-scale objects, videos and big things like this, so many other different parts of our platform that we've had to build. Our new editor is a great example, right? Confluence has this fantastic editor in the cloud. That editor also exists in Jira, right, in all of the Jira SKUs and variants, and it's built by one editor team. That was a 4-year engineering journey, right, but I think it will set us up very, very powerfully for the future. It comes from having a clear view that the cloud is going to be the future. It comes from having a clear eye view that regulation and compliance, enterprise concerns are going to be things that we need to solve. Therefore, we solve them in the platform. And the more we're not solving them in times 10 applications but solving them in 1 place, the more gravity those applications will have to move closer to the core platform. And that will continue to move forward and then users can trust that at scale. There are very, very few enterprise software companies that have actually done that generally because they're either trillion-dollar, mega companies or they don't have an engineering connection between their products, or they're a one-product company where engineering -- it's all the same, it's all one thing. We're in a very unique place, I believe, being across multiple products. And those scars have come from smarts and from learnings and mistakes and everything else. It's not like we've done it perfectly the whole way along, but I think that puts us in a really good position for the future if you look ahead, right? It's -- are we going to have more or less engineering, compliance, legal concerns going forward? I would argue 5 years from now, we'll have more. And we're still going to need to sell SaaS software, and that's going to be incredibly difficult. So we are really backing on solving that in a scalable fashion with engineering rather than with any other form of solution.

I hadn't appreciated the maturity perspective of comparing it to some of the older, larger incumbents that have tried to make the pivot or just some of the more agile upstarts. So it's an interesting note to make. I'm thinking about the value created from 2 different ways. I think we'll start with customers though because you're rightfully customer-centric focused. You said it at the outset. But in terms of the value this can help unlock for customers, what are the key things that you would highlight to those customers who are thinking about moving towards the cloud given this direction?

Look, there's all of the logical cloud benefits, right? They don't have to manage the application. We can do better at security and performance and scale, your classic kind of AWS concern. I want 3 service tomorrow. I want 3 apps tomorrow. I want it set up right now. Let's go. Let's do it. Like it can all happen very, very quickly. And your ongoing management concerns are we're the people on pagers at night. We're the people making sure the thing runs 24/7, 365 days a year. You don't need to worry about adding scale or service. We just seamlessly do all of that for you. Those are all the obvious cloud concerns. I do think once you start to get to a multiproduct world, once you start to get to a multi-company world, the cloud has advantages that people are only just starting to see, right? Those compliance challenges that we have in the cloud and we're engineering our way through are no different to what a lot of corporations have internally. They've just built them up. But new applications, they need to go through the same internal rigors that we do in scale, right? We do it for 180,000 customers at one time. That's a very different world than them having to do it for themselves. I do think it unlocks a lot of customer benefits. It should ultimately be cheaper for the customer to run as a total cost of ownership basis, and cheaper and faster is a surefire way to do it. The last part from the customers' benefit that they hopefully see and we keep trying to communicate in lots of ways, our speed of innovation. The product quality that they get, the number of features, quality of those features, speed those features get to them, however you want to put quality is going to be a lot faster. And our learning loops, our learning rate in the cloud is just a lot better. I pulled up some stats in the Investor Day, just looking real time.

I remember.

We do -- I don't know, 900 deployments or something during the Investor Day meeting itself and a couple of thousand over the day before that. And that was just unachievable, right? This is in orders of magnitude. This is many, many orders of magnitude different to what it is in the on-premise software world. And that learning rate is incredibly important in business in general. And when we can deliver that value to customers at an increasing rate, that's super beneficial to them.

No. It makes sense. I think the comparison that you made was at the IPO, you clearly pressed pause on everything in the back end of the Investor Day. It was just rapid innovation in real time.

And we can't press pause on anything, right? We'll make deployments on Christmas Day. We'll make deployments on every single day of the year. There is no pause, and we've been very clear in our engineering world. And that's very, very hard, right?

Yes.

It's very easy to pause. It's taken us years to get our cloud DNA to the ability that we cannot pause any application at any time.

Yes. I think it shows the ambition, too. If I ask you the same question, and I said -- describing the cloud benefits for shareholders or for investors, you could answer the same way. I'm hoping you don't. I could see why you would. Are there other aspects that you would highlight for those investors just given the audience here?

Look, I would hope our investors in general agree that having more faster and happier customers is a better place so we can build better products for them. That should be where they start. For sure, customer attraction, adoption and scale -- again, we grow our customers in the cloud a lot faster. It is -- obviously is easier if you've got, I don't know, 8 people using a Confluence instance and you want to invite that ninth person. You don't have to go to IT or anything. They can just sign up. They can go. So the expansion capabilities of a single product are faster. For us, as a family of products, our ability to expand across products is also a lot better in the cloud, right? The ability to just jump from Confluence to Trello and set up a Trello instance. You might have a couple of hundred people on Confluence. You get the first 2, 3, 4 on Trello. As they slowly sort of pour across, we can encourage that in various ways. So from an investor point of view, the customer expansion rate in cloud is better. Again, we shared a bunch of metrics at the Investor Day on that. The long-term customer stickiness rate should also be there, right? I think in terms of the potential of customers to become integrated into our cloud offerings to integrate them with other applications they have as their data flows and everything else move in that direction, I think that's a really good spot for us. Especially being a family of products, one thing people don't think about stickiness is things like security audits, all of the things that our very large cloud customers do, make sure that we check the boxes, right? Once they sign up for access, for example, for user and content security and controls across all of the Atlassian applications, that obviously makes them more likely to choose Trello over a competitor because of access, right? And so there is actually a customer metric there. It's also quicker for us to sign up customers. So just a literal -- be able to -- you can start a new Jira service management instance in the next 3 minutes and play with it, which if -- as soon as you're on-prem, you just can't do. That speed makes a difference in terms of customer adoption as well. And from a shareholder point of view, our ability to know our customers, not just build better products for them but know exactly what they need and when. We shared the example of where we're using AI and smarts and machine learning in terms of product distribution. And that's been very, very successful for us, and we continue to invest in that, right? If we know everything about you as a user, what you have done with us at a generified, anonymized level, we know which product -- you're in IT, we should suggest here a service management for you, where you tend to be doing these activities. Applying AI to those sorts of product distribution problems is a really interesting area again only because we have a deep engineering core and because we have a family of applications. It's that useful for us. If we have one app, it wouldn't matter how deep we were at engineering. If we didn't have a platform, then we can't actually get the distribution. So I think from a shareholder point of view, that's a good thing. I think the last thing from a shareholder point of view that's often not acknowledged is our engineering core. Again, we talked a little bit about legal and compliance and all those other things. That's incredibly difficult to do at scale, right? There are, I don't know, 50 to 100 major countries in the world. They're all going to have some sort of data laws over the next 5 years. Being able to do that and trusting that the company can get there is going to be, I believe, a long advantage for us from a shareholder point of view. It's coming into play now.

That's well stated. In terms of the product set, you think about the world -- or at least the way that it was articulated on the Investor Day was the world of technical and nontechnical teams. And I know there's this inherent DNA that leans towards collaboration, starting points for developers. And so I can see where that world view comes from. So maybe we can just go down those 2 vectors and start with the technical teams. And the vision there -- I think what's new from our perspective is there's been Jira Service Desk. We've seen Mindville and some of these other templates and ITSM capabilities roll into the product set, but you're calling it Jira Service Management now. And so how much of that is conveying the more cohesive vision that you've built around that versus things that are net new that you're bringing to customers that help tackle newer problems? And what is the ultimate vision on the service management side?

Look, I think you have to start at the point of what's happening inside these customers. What's happening inside the customers at the moment is software teams are coming closer to IT and operations teams. And IT and operations teams are starting to look more like software teams. So our goal with Jira Software and Jira Service Management and broadly -- Confluence works across both of them, so does Trello, et cetera, et cetera, so from our entire family, is to be, as we say repeatedly, the single pane of glass that connects software groups, teams, individuals with IT and operations groups, teams and individuals as both of those individualities start to blend and merge. And we live in both camps. We're squarely in both camps. We have huge numbers of customers in both camps. And the customers that realize that's actually just one camp is a huge advantage for us, right? And that's not just in the Jira world, those -- I mentioned things like Confluence and other aspects that work across our set of capabilities. Jira Service Management was a huge launch for us because it's the first time we shipped a deep change management set of capabilities that are based in the modern world of software engineering and IT operations not in the old world of IT management. And there's a big change there. This is about automating the continual sort of deployment processes that IT ops and software teams have to work together on. And so yes, it -- for me, it's one of the best examples of Atlassian DNA working at large. It's very, very customer-driven. Service Desk came from a shipping innovation exercise on top of Jira 5-plus years ago, which turned into a really powerful service desk offering of its own and its own brand and its own customer set. Adding Opsgenie and Mindville through acquisitions plus a whole bunch of internally created things to put all those 4 pieces together in Jira Service Management sort of radically changes that offerings. We've had incredibly good customer feedback of people very excited to, let's say, move off other much more higher-priced, much more antiquated offerings to looking at us as a different vendor now that can solve a larger suite of problems for them. Now for the customers that say that, I'm usually like, yes, of course. Like that's what we did. But some part of that catalyzes some change in thinking, catalyzes some change in position. I think the key point there is the software market TAM, the IT market TAM, whichever way you want to say those 2 worlds, they are continually getting closer and closer together, right? And in the technical team world, we need to be really the bridge and have strength in both sides. You can't be weak on either side of that and really delivering integrated offering for customers that gets them the speed and needs that they have. And then, of course, we bring the Atlassian DNA to that, right? We're a very aggressively priced offering in that world. We're very fast to deploy. We're very modern in the UI and design and everything else sense. We're very developer-friendly even for IT ops that increasingly put their configuration -- everything is in code. So that -- look, we're obviously very bullish about that as an overall area for us and have been for 5 years. But if you've read every shareholder letter for the past 5 years since we went public, you would see a continued evolution of our thinking on the broader IT and IT ops space. And we're long-term thinkers and we just keep moving along as we have.

Yes. No. That's great. On the nontechnical side, you have Trello. Obviously, there's pull from Jira and Confluence in that direction, too, especially as development becomes more strategic and pulls in other functional areas. But you also had things like HipChat and Stripe that you subsequently exited. So what are your just general observations around that market? And is there more you can do on the product side to help address that demographic and reach the broader business user with more? Or is it just this continued evolution of pull from the core technical towards the nontechnical?

Look, I mean we have some very, very large offerings, right? Trello's a very different offering for us. It's just massive of its own scale, and we've been very clear that our #1 goal is to continue to keep Trello scaling as Trello while we are continually bringing it closer to the Atlassian family, as you've seen over time with now access and identity and app switching and everything else is continually getting more and more integrated. We're trying to be very careful and cautious as we do that. But it is, for sure, a large-scale business application used by many tens of millions of people across all sorts of different usages. It's a big Swiss Army knife, which is fine with collaboration applications. Confluence, I would argue just as much of a Swiss Army knife obviously with a very different flavor and huge sort of wall-to-wall penetration across a lot of our customers. The benefit of having that world and continuing to invest and be in that world but also being close to the technology teams is not small, right? We believe our markets are connected at their core in lots of different ways, right? As IT and technology teams become more a share of expertise, a share of wallet, a share of thought leadership about how companies should work in an agile manner, that's a huge advantage to us and customers and the brand that we already have and the position that we already have and in the teams, right? Technical teams use Confluence in nontechnical ways, but that gets Confluence into a corporation that then will use other parts of Confluence continually. And we see the same thing in like Jira Core, for example, as we see in Trello in a broad level. So I think we're in a really good spot trying to connect both of these markets on a continual basis from a customer flow point of view and being patient. And our ability to invest to make both Trello and Confluence and everything else we're working on in the wall-to-wall, all-team arena of collaboration is very important. The last part that I would remind people, we've always said we solve human problems. We are a team company. We don't solve technical problems, right? We solve human problems. Even in the tech teams arena, our DNA is around solving human problems, team collaboration issues just in a technical domain. That DNA is what enables us to compete very, very strongly in all sorts of other human collaboration arenas. That is no different, right?

That's great. We have time for one more, and I'm going to press pause on Atlassian for a moment and move over to just the broader world of investing. You also have a family office. You spend time thinking about the world as an investor in some way, shape or form. You're on the cutting edge of technology in some ways. You're a part of this new generation of software that's taking over all sorts of industries. But it can be software. It can be somewhere else. We know you're passionate about energy and sustainability, too. But what are other areas you see as opportunities for longer-term investment? Some of us kind of get tunneled into the world of software, but I would be curious just on your world view there.

Look, I'm sure I'm the best person to be giving investment advice at a broad level. Look, I can talk to you about our family office DNA if that's helpful.

Yes.

Obviously, we believe in sustainability and long-term thinking in a generalized sense. We also deeply believe in the power of technology to transform industries. Increasingly, that's not the technology industry. That's other areas. So if you look at where we're investing heavily, energy, transportation, agriculture, they seem like, "Wait, you're doing farming? Like weren't you the nerdy guy? Like what's going on there?" No, it's because farming is being transformed by technology very, very fast. And traditional agriculture vendors, whether that be cell-based and plant-based meats and other things on one end or 100% controlled environment where it's all about control systems, right, it's all about controlling light and air and water, humidity and nutrient levels and everything else to produce vegetables or crops at a much more repeatable and rapid scale using technology and AI and robotics and all sorts of things, I think that industries where there's huge disruption is where we look to invest in either people enabling the disruption. There's lots of renewable energy companies. If you're shipping wind turbines, it's a pretty good industry to be in at the moment because there's a lot of people buying them. So as long as you think they're going to keep buying more in the future, that's a pretty good place to start for growth businesses, right?

Yes.

But then any other industries that are being transformed like that, I think there's some really interesting aspects. And that tends to be where we start from our first-principle thinking. And then the other area that's interesting for us is entertainment broadly, right? You mentioned sports and basketball and other things, and sports is one area that we're certainly looking at. And then across to things like what is entertainment. Obviously, you've got Netflix, Disney and other people like that, but there's a real -- people only have 24 hours a day. And if you think about where do I use my time and how is that going to shift, I think that's very disruptive. And obviously, it's a super complicated area of mobile phones and young people and where that is and what is live events, what's streamable. But I think that's a fascinating area that's being disrupted by technology, which is at the core there. And I would -- obviously, large-scale tech companies are a good place to put your money. I wouldn't disagree with that. That's done pretty well over the last 10 years. And I think -- what is that? I think it's like 6 or 7 of the 10 largest companies now and 5 out of 5. I don't think the trend's going to reverse anytime soon. So I'm not going to...

Yes, we're certainly biased. We're certainly biased. Well, look, with that, we're up on time. I promised I'd keep it to 30, and we will hold to that. Mike, we know your time's valuable. We certainly appreciate you spending some of it here and Zoom-ing in from abroad. So thanks for joining.

Thanks, guys. Thanks for having us, and thanks for everyone who's an investor and tuned in and listening and spending your time to listen to us. So we appreciate your time and your investment very much. That's why we're here.

Likewise. Thanks all. Have a good rest of your day.