Atlassian Corporation (TEAM) Earnings Call Transcript & Summary

Hi, everybody. This is Nikolay Beliov from the research team here at Goldman Sachs. Happy to introduce James Beer, the Chief Financial Officer of Atlassian. James, thanks so much for attending our conference, and welcome.

Happy to do it. Hello, everyone.

A quick disclaimer before we start with the Q&A is that Goldman Sachs does not cover Atlassian. It's not a covered company.

James, to kick off the conversation, high-level question, how have customer priorities changed with COVID from your perspective?

Yes. I think that we will continue to see an emphasis on remote work. Obviously, we were all forced into that abruptly, what, almost a year ago now. And I think the teams were required to use the tools that were most necessary and most available immediately. But I think what has accelerated in this past year is this notion of the value of remote work of teams needing to continue to be productive. And I think as time has gone by, it has only served to bolster the importance of what we do. We have always been about having teams be more productive. And I feel as though where the world is going, is very much consistent with the paths that Scott and Mike have been on now for many years. So I don't believe we're going back to the old ways of work. I think there will be a mix of approaches once everyone is vaccinated and some sort of normalcy can return to life. But I don't see there being any change to this trend of really driving productivity of teams with those teams being located in many different places. So I think it speaks nicely to what we do for our customers.

And in that context, how would you characterize the evolution of the demand environment since last March?

I think it has been steadily improving. Obviously, we talked when we announced our Q4 numbers of fiscal '20. So for the April, May, June period of last calendar year, that we did see challenges there in that initial lockdown period. And then since then, I would say there's been a steady improvement. And that really speaks to what I was just referring to in my last answer is that the value of what we do for our customers. So often, we are mission-critical, if you will, to how their workflow is designed and operated. We obviously have a very large number of customers, directionally around 200,000 customers. And so we have customers of every shape or size. And for our SMB customers, I've been pleased by their degree of resiliency in recent times. And so they, just like our larger business customers, have continued to see the value of what we do and gradually build upon what we have historically done for them. And I see that trend continuing.

And what is your perspective on, with the distribution of vaccines accelerating, how that might impact business conditions? How do you...

Well, I think as vaccines are more broadly distributed, they'll certainly bolster business confidence. I think it will bolster individual and team member confidence. But again, I don't see us going back to the traditional 5 days in the office type of approach. And I see what has played out in this last year, really being a catalyst for driving important change in terms of the importance of remote work, of being able to have a platform of products that help facilitate that work wherever it may be. So I think it will be an incremental boost to the business environment overall. But I see the continuing value, in fact, the increasing value of what we do for our customers.

Atlassian as a company, how do you think about pre-COVID versus post-COVID, the split between being in the office and working remotely?

Yes. Well, from a pretty early time, we've taken the stance of our people having the ability to work where it makes the most sense for them to work. That obviously can offer them more flexibility in where they live, the house that they can afford and that sort of thing as well as flexibility in terms of their daily routines. So I think there's real value to that. And at the same time, obviously, it provides us with significantly more flexibility in terms of the geographies from which we tap talent going forward. Now I think you also have to be very thoughtful and intentional about how you design work in that environment. We're very cognizant of the need to build relationships amongst team members who may be in pretty far flung geographies. But remember, Atlassian has really almost always had that challenge as the company has been growing between our heritage in Australia and still a very large part of the business there, but large operations in this country, in India, in other geographies as well. So we've, for many years now, been faced with the reality of team members being located in different parts of the world. And of course, that's helped us understand the needs of our customers and understand how best to build products that are very relevant for this world of remote work that we've been talking about. So we want to be flexible in terms of giving our people the way to design, the way they do their work. So we think that's the best for our people, and it's best for the work outcome as well. And of course, that all ends up flowing through to our customers at the end of the day.

Before we jump into financial questions, wanting to set the stage with a few strategic questions. The first one being, how do you think about the blend between technical versus nontechnical users as part of your strategy?

Yes. Well, we have, for many years now, really been clear on our mission of serving all teams, both technical and generalist. And so nothing has changed there. We have traditionally landed with software developers in those types of teams. Now it's important to note that those types of teams generally made up of technical folks as well as more generalist business folks who are participating in the work of designing, developing and implementing a software product. That, I think, is illustrated by some of the statistics that we noted at the Investor Day in November last year, where I think it always surprises people how many of the users of our more technically oriented products like Jira Software, Jira Service Desk are actually generalists. So 46% for Jira Software identify themselves as generalists and then 48% for Jira Service Desk do the same. So we're already, as a result of our software developer heritage, engaged with people right across the business in a very material way. Now I think it's also important to note how, in the last couple of years or so, we've been particularly also focusing on the IT customer. And that has made a lot of sense for us given the natural adjacency historically between the software development world and the IT world. And I would very much argue that this is only making even more sense now as you see the DevOps trend really bringing together much more closely the builders of the software and the people who traditionally run that software. That border is dissolving and is really now a situation where there's a significant overlap between build and run. And so our focus there on both software developer and IT is naturally helping our product set become accepted across the technical sphere of an organization. And I think that's an important theme and a real differentiator for us in terms of the competitive environment. Now separately, we've also invested significantly in products like Trello in recent years that have given us an ability to land with generalist teams as well. And so that's been another important vector and just really illustrates our commitment to this mission of serving all teams, not just one type of team within a business. And we increasingly look for ways in which we can use this range of products in sensible ways to serve different types of teams right across the organization. So we're pleased with our progress on the technical side. We talked back at Investor Day about how our TAMs have continued to expand very nicely in recent years. When you look at the technical side, we talked about a $13 billion-type TAM figure in our views and then an $11 billion nontechnical TAM. So $24 billion size overall TAM, directionally about 10x where we are in revenue today. And I think we're well positioned to be able to drive value for customers right across that spectrum.

Can you please dig a little bit deeper into the distinction and the strategy between software developers versus the general IT worker? How is it evolving with the cloud? And talk about...

Yes. So as I say, this DevOps notion is very real. That border line is blurring. There's no question about that, and I just see that trend accelerating. I think the cloud just makes that much more logical. The iteration, the pace of new development, the volume of new versions of the software that get issued every day, every week, so different to how software was developed, say, 10, 20 years ago. And so there's very good logic as to why that blurring is occurring, that those teams have to work really hand-in-glove to be effective for operating the software that is so critical for customers. So that's an important theme that is playing out that I believe we are uniquely well-served to be able to address. We very much look at Jira as being the platform that extends across the business, that allows a business to consider its workflow, operate effectively its workflow right across an organization. Others of our competitors focus on particular verticals, if you will, in terms of types of employee, not industries, when I use the word verticals, but types of employees. Our approach is very much to work right across the employee groups at a company. And I think Jira has -- based on what we were just talking about earlier in terms of its utility across the business is really unmatched in terms of being able to serve as multi-disciplined platform for managing workflow.

And how does the recent launch of ITSM fit into this picture?

Yes, I think it's an important element of the story. We've talked about software development. We've talked about the blurring through DevOps with IT. And another key component for our ability to serve the IT marketplace is centered around ITSM. For some years now, we've had Jira Service Desk, a very successful product. We've talked about it over the last few years being our fastest-growing product ever. And what we have done in the last couple of years, in particular, is continue to organically build out those capabilities, but also supplement those capabilities with some key acquisitions. So the configuration management database was an area where customers would routinely say to us, "Look, that's a hole for you. You need to fill that gap in your product portfolio." We did that through an acquisition of a company called Mindville within recent months. And so that's just illustrative of how we have continued to build out the service management capabilities that we can offer our customers. We've recently launched Jira Service Management now. You can think of those as an extension of Jira Service Desk and bringing other capabilities tightly integrated around that core. And it's early days, but we're pleased with the reaction that we're getting from customers around that offering. It's a very large market. I think there's a real opportunity for us to serve, you can think of it as, sort of the middle part of that market perhaps, the smaller enterprises, the medium-sized businesses and so forth. There's really very little competition there in our minds. And a part of what makes Atlassian so attractive generally is the value that we bring to our products in terms of relatively reasonable pricing for the capability that we deliver, the speed at which a customer can get up and running. These are hallmarks that I think will be attractive increasingly in this service management market space. And indeed, of course, the other thing I'd just point out is that, yes, there's an IT service management market, going back to the earlier part of our discussion. There's also a more generalist service management market that's important across different functions of an organization. And so that's something else that we're putting a lot of thought into as well. And again, we feel well positioned to serve those spaces.

Great. Moving on to financial questions. What are the key takeaways in your mind from the December quarter results?

Well, we were certainly pleased with the subscription revenue growth rate. That was very much consistent with the guidance that we offered back at Investor Day about being able to make mid-30s percent growth rates on the subscription revenue line, both this year and next year. So that's an important theme. We were also pleased with the customer -- the new customer count. That was a record for us. And while those new customers don't have a very material impact on the revenue in the quarter in which they arrive, that's obviously a good leading long-term indicator for us because our business model is really all about starting small with a customer and gradually building that relationship over time. So we were pleased to see that customer number. And I think that was a combination both of one of the themes we were talking about earlier in terms of companies, the overall demand environment improving, the resilience that our customers are showing does speak to the importance of what we do for them. And it also spoke to some specific initiatives that we've had underway at the company in areas Trello and others besides that have helped us build the customer count as we define it, and that is directionally $10 a month from a company. So that was important, I would say, in terms of the migration story. Obviously, we've been talking a lot about that within the last few months since we announced the end-of-life plan for server. I think it's early days in terms of migrations, but we're pleased with how that is playing out thus far. The other story, I think, from the quarter is that there is going to be some more variability in our figures in the short run. And that will really be driven by how customers on the server side of our business decide to work. Do they look to get on with migration to the cloud promptly? Or do they take advantage of the way in which we rolled out that end-of-life server? We gave them plenty of time. We committed it to maintenance for 3 years further from this month. And so one of the themes of the last quarter was we did see some of our server customers, behind-the-firewall customers, buying additional licenses. And of course, that flows through straight to revenue as they were thoughtful about the fact that we'd be closing the door on new license sales this month. We'll allow upgrades to current licenses for another year. And then as I say, maintenance for 3 years from this month. So based on how each of those 30,000-server customers decides to act, and obviously, that's going to be very customer specific, we -- I would expect to see some variability in the figures. We actually didn't see any material level of maintenance pull-forward activity. Obviously, in the last 2 or 3 years, as we've raised prices, we've seen customers stepping in front of those price increases. That didn't really play out in Q2. I would expect that sort of activity to play out in Q3 because, as of now, we've, in essence, raised prices on both the server and data center business by -- of the order of 15%. So those are the things that will drive some short-term variability in the number as we progress on this transition to being very much a cloud-first company.