Atlassian Corporation (TEAM) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to Day 2 of the JMP Securities Technology Conference. My name is Joey Marincek and I'm part of the software team here at JMP. We're really excited to have Atlassian present at the conference today. With me is Head of Tech Teams, Noah Wasmer. So I thought we'd group the questions into 2 buckets. First, we'll start with an intro on you, Noah, and talk about the tech team strategy, and then we'll dive into the Cloud in Atlassian. And for any investors with questions, please just submit them in the chat, and I'll incorporate them into the conversation.

So first, let's start with your background. What was your journey to Atlassian? Why leave large enterprise lands?

Great question. Well, thank you again for having us, and we're really excited to talk about Atlassian and some of the great things we're seeing from customers. One of the things about my past, I've really been part of several -- I've been fortunate to be part of several disruptions in tech, right? I saw virtualization early on and just a lot of passion around what could be possible with it, and we've seen that really evolve into the journey to the cloud. I also had this really great opportunity to see early on, I think, like many of us, iPhone, iPad, come into enterprise, right? And so I got the opportunity to look at how do we make those enterprise ready, how do we secure them, how do we help make tools productive for users. I then had the opportunity to go to Apple, and I hope really take some of that technology into the business, which was fun. But what was unique about Atlassian was that, I'm at -- in my heart, I'm a maker, right? I'm somebody that does. I create, right? Whether it's software or whether it's electric cars, I love making. And Jira really is that key solution for me. At the heart of it, what I see is that it is -- in my personal world, it really illuminates the steps to help me change the world, right? And that's what I -- why I wanted to become part of Atlassian. Now in terms of working with enterprise, man, it's really exciting to see how much we get to work with. Every small startup, every large company, every software company, it's just a broad diversity of customers. So it's incredible to see now with just the number of customers, just a broad diversity of what's happening out there and really learning from it.

That's great. And did you move to Australia?

I did. I'm actually coming to you live from just north of Brisbane. And so hopefully, my reception is okay off of -- coming from a field out here in the middle of the bush.

It's perfect. And do you surf at all? Or...

Absolutely. Yes, there's a -- I'm about 10 minutes from the beach. They don't let you in the border unless you can both wrangle a python as well as get out on a good wave.

That's great. Next, how would you characterize business? What would you say? How is business?

Obviously, we're feeling really positive. We've made some pretty big changes recently, everything from really wanting to see our customers how they are evolving into Cloud, they've been ready. They've been asking to do this, and we're seeing that trajectory happen nicely. Secondly, obviously, the -- and recent quote of softwares eating the world is happening, right? I mean, you are seeing it almost everywhere. You talk to new innovative orthodontia companies that are looking at machine learning model to how to change your teeth through new algorithms. You're seeing pizza companies thinking about how do they deliver in a contactless mode, right, where they want to have great systems and processes to make sure you get pizza delivered safe and securely in minutes. So it's just across the board, just a lot of innovation, and I think we see Jira and the Atlassian products really at the heart of that.

That's awesome. One other question we're asking everyone at the conference is about their work from home policy. In August, Atlassian announced that employees can work home permanently even after the pandemic ends. So has your thinking on that topic evolved over the past 6 months? What policies do you still need to decide on?

Yes. It's a great question. One thing unique about Atlassian is we've been -- being an Australian company, been geographically dispersed for a long time, right? We've had a huge team here in Sydney. We have a team as well up in San Francisco, Bangalore. So we've had that, and that's been a natural form of how we worked. But one thing that is unique is now that we're fully remote and every individual is remote, we're really finding new innovative ways that incorporate that into our tech. So I think there's still -- from our standpoint, I think we're still really resolving around how do we have that 4-hour overlap with key sites, right? So I don't know if it's quite work from anywhere, yet. I think it's still more around working where you can have a consistent overlap of the teams that you're coordinating with, because it's still -- human-to-human interaction is still critical to get some of this work done.

Awesome. So I want to touch on Jira. How has Jira changed over the years in terms of product and then maybe in terms of user and customer base? Has it had to evolve in a world where there's more DevOp product options for developers?

Yes. There's a few key things there. Obviously, it has almost a 20-year history here, right, when it really started as a bug-tracking tool, which is, I don't know how many people are familiar with that -- where that name came from. Really, it was to really evolve around that initial pain point of bug tracking that weren't good tools in the market. We made a bunch of decisions early on. One, we saw the agile wave happening, right? And that really started to be a huge opportunity for Atlassian, is to look -- think about how do you move from what we just call waterfall, where you're shipping every year or every few months to how do we look at -- how do you ship every couple of weeks. Now, even at Atlassian, we ship 52 times a day on average in terms of going to production. So that agile wave has been really good for us. But what's really interesting is we're in the early innings here because we see inside of businesses that every team wants to move agile, right? That is not just a technical team or an IT team that wants to be agile, it's your marketing teams, your HR teams, your legal teams. And so that's where one of the things that I think our founders, Mike and Scott did really well is they said, "It matters about the experience for the user." Right? It had to be great intuitive product that you could get in, try and get value out of very, very quickly, and that was key to that philosophy. Now I think the next question you asked really was around what's happening with DevOps. Like, what are we seeing with developers? And one of the things that we're really excited about is, again, how we're seeing more and more types of what we're calling sprawl, right? That -- it used to be when -- I started in software 20 years ago, you'd build a Microsoft executable or a Java bin, you're like you're done. You'd create a Microsoft app. You are like, "Okay, I'm off to the races." Now a small team of 3 or 4 engineers can create all this multitude of micro services, machine learning models, AI models, they have the iOS app and Android app, they have a website, right? And so the amount of technology that are creating because of Cloud, because of the ease of access, is enormous. And we're seeing this in our small customers and large is that they just have more and more and more technology. And that's where we think that our tools are really going to have to be connecting these different frameworks and connecting into these different tools providing insight. So it's, again, a really exciting evolution of where we're going.

That's super helpful. To me, the ecosystem feels like one of Atlassian's most unappreciated asset. So what is the history of the ecosystem in Marketplace?

Yes. That's -- it really ties to the same issue, having a [ mighty pencil that we had to fly coming fiber ] -- but the... [Audio Gap] and I hope I still have connection with you. So let me pause here for one quick second. Are we still good?

We broke up for a second, but I can hear you now.

Okay. Great. One of the things that we're really excited about is the ecosystem brings to us an ability to connect in to all those latest and greatest tools, right? That... [Audio Gap] because there's new security tools coming online, really, that they're saying, "Let's make it part of the developer process," that as they write code, they can say, "Hey, let's test it right away," and they get almost instant feedback. There's new tools that are coming online to do what we call Blue-Green testing, right? So that -- if we can do our job right and create an ecosystem that all of these tools can plug in, that's going to be a huge differentiator, because that gives all of our technical teams and work teams the ability to use the tools that they need and that they want the most, while having a universal way to communicate and collaborate across the business.

And I did want to touch on TAM. So do you think you got room to continue growing with the software teams in your current TAM? And then maybe how has the TAM expanded as you begin to move into ITSM with JSM?

Yes. Obviously, what we're seeing with software continuing to be on the rise, that obviously is a huge driver of our software TAM alone is very, very strong. One of the interesting things that I think we often see is that when we think about the actual user types inside of even a software team, more than 50% of them are not actually developers, right? They are the program managers and product managers, engineering managers, they are designers, right, they are marketing professionals. And so when we think about that software team, it's really not an isolated side of it, right? It's a set of expanded teams that are connecting into that individual -- that into that work group. And so that's where we see -- the software TAM is actually quite large. But then if you take a step forward and say, "Hey, there's going to be these IT teams, and they're evolving, right? There's a huge amount of evolution." I know I think we're going to get into this, where that they are trying to say, "How do a modern software IT team start to relate to the incidence and changes and problems associated to the services that a business is running?" This is where we really see the TAM just really going off the curve, right, starting to get into 50 million, 100 million more users just in that IT case. But ultimately, the long term is where now every team starts to really think about how to communicate and collaborate better with a product like Jira and some of the Atlassian tools.

Yes. You touched on it a bit, but I want to dive just a little bit deeper on that. So why does IT and ITSM make sense for Atlassian as a focus area? I mean it seems a little bit counter to your development strategy and there's a pretty large competitor in the space.

Yes. Obviously, one of the things that we see -- Gartner had a great quote the other day that about 80% of traditional IT processes that they feel are going to be in some form of transition, where they're going to be shifting or modernizing. And where they're going is they are becoming more dev-centric, right? There is this idea of DevOps and SRE, if you're familiar with it, where IT teams are having to become more involved in the developer group, right? If a service is mission-critical, think about it from your perspective, if the banking site goes down, all right, if your transaction isn't able to be done, fractions of those second matter. Fractions -- just those instant moments are -- you're impacting volumes of business with every second. And so the teams have to be well trained and well orchestrated and well integrated in communicating. And that's where we see that we're -- we come from a very unique position where we're close to the developer, we're close to the software teams. We've now got to bring IT along, right? And that's our heritage, and that's where we think the market is going and why we think we have kind of a unique position for this new disruption that's going to occur. So that's obviously key for our strategy. But we also see long term that one of the things that we think about is, how do we do things slightly differently. And obviously, our try versus buy -- try and buy model is really well adopted by almost every customer, right? They want to see it. They want to experience it. They want to evolve it very quickly. That's a key differentiator for us that we think is just core to our success.

I want to move on to competition. As you think about competition overall, who do you worry about? And who do you think maybe gets more competitive or enter the market that's not there today?

It's hopefully very consistent with how we've presented Atlassian over time, which is that we're a very open company. And a lot of people, for example, think Microsoft is a competitor. Yes, we were one of the first to actually partner with them on Surface Duo, where we have a great partnership on GitHub, right, that we've been able to integrate that really, really well inside of Jira. So that dev teams that choose that type of Git repository and we're great with the Jira product line. So that's an example where we really feel like that sometimes that people may view it as competition, but ultimately, we see them as these strong partners. We also pay very, very close attention to the startup community. We have a huge ecosystem that we actually want startups to be working with us and building around us and that's been really exciting. Ultimately, we have some strategies, things like Frigg, that we think make it very tough to compete in some of our spaces just because we want teams to early on try our products and get to use our products. And really become -- hopefully something as part of their -- how their teams work and that they bring more and more of their groups online, and over time that, that is just how they choose to work. So it's something that we're really excited about our strategy.

That's helpful. And how do you think about the overall opportunity and road map interest areas for software and technical teams?

Yes. I think one of the areas -- and I'll -- I touched on this a bit earlier, the innovation cycle is accelerating, right? The idea of something as simple as a micro service, right, that a team can create very, very quickly in the Cloud, scale and adopt this notion of sprawl is really interesting to us and how we're thinking about how do we help teams understand all that's going on. We see an opportunity here. I call it the democratization of engineering information, right, that ask a CIO today, if he said, "Hey, you are a digital organization, right? If I want to know all those services that we're running in the Cloud, how much do they cost? Who's the team that's running them? How often have they been up and online? Have they had any incidents? If something goes wrong, who do I call?" And most of them will chuckle. They will laugh, right? They will say, "Yes, that information is everywhere and nowhere and into people's heads and in an Excel spreadsheetsn." Right? And this is an opportunity to meet them to say, "How do we really democratize that information?" If you were a company that has a digital nervous system, how are you capturing that heartbeat, how do you really have, what I call, a flight deck of that information to know what's going on and that's really where we think the teamwork, the collaboration, the information sharing is just -- we're just so early in the innings on this one, but there's just so much more to go. And with the pace of innovation exploding, we think there's a long future here.

Let's talk about the Cloud. So Atlassian is in the middle of a multiyear Cloud transition, including the announcement of the end-of-life for server products. As a product manager, what can you do and build on Atlassian's cloud platform today that maybe wasn't possible 2 to 3 years ago?

Obviously, we think the future is obviously Cloud. I think our customers see that same thing. And the reason for it is, one, it's, especially in a heightened security world, right, where we've got to be constantly up-to-date, constantly upfront where we have teams monitoring 24/7 globally, responding quick, we think the cloud is the right strategy, right? That it's hard to keep systems current when you're managing it yourself and we really want to focus on that value. As a product manager, what's exciting about it is, we get to build incredibly fast, right? We get to build solutions, test solutions. We can put it out to customers. We can actually do, again, what I was referring to as, Blue-Green testing where you can try something with one customer and see how well they use it and try it with a different customer and see what's more efficient, more effective for the customer, so we can do that in an anonymized way but really get the intel of like what's working best, how does this really help the customer work. So obviously, the exciting thing about this Cloud transition, if you would have asked me 5 years ago, are these large organizations going to move to the cloud, though I'll tell you, yes, but they didn't have a plan, right? Now they will say, "Yes, we'll move to Cloud. Here are the requirements. This is what you -- these are the certifications you need. This is how you need to have resident data," all of that list, and that's what we've been able to build. And so that's why we think that this is going to really start happening in droves. You're obviously seeing it in the market with some of the big cloud providers in their numbers. So it's the right future for us and for the customer.

Yes. And on that point, what are some of the long-term benefits of the cloud migration journey? And maybe why didn't this migration happen earlier for Atlassian as it did for the rest of the software industry?

I think one is that we've been on this for years and years and years, right? This is not a overnight, we're just jumping into the cloud for the first time. We -- this has been the long-term part of Atlassian's strategy. But we also have a great value on our website, which is, "Don't f*** the customer," right? And obviously, I hope your audience doesn't mind that color, but that's part of -- being part of Atlassian. And we want to understand where the customer is and help take them on their journey, right? And that is something that you think about some of the world's largest companies, some of the world's most secure companies have been using our software for more than a decade, right? And we wanted to make sure that we took them on a journey that was right for them and right for their business. And so that's something that we've been very careful to orchestrate. And we -- the general shift that we've seen just initially has been incredibly positive, right? The customers that said, "Yes, yes. We've had a plan. We want to plan. Now we have a clear time line, and we're moving." So I feel good about that. And obviously, what's ultimately important is how we're doing right by our customers, and so far, the indicators are yes.

Love that. It's great. So it does seem like being [ Cloud-first ] is definitely helping drive strong new customer growth with a record customer quarter in Q2. So how much of that is related to free? And then how much of that is related to -- excuse me, managing churn?

I think there's a whole host of factors here, right? Free has obviously been a huge contributor that we're seeing. We've also seen some really interesting things that -- one of the interesting notes about free is that we're actually seeing more free usage happening in large organizations, right, which is -- I think it's a signal that really, ultimately, at the heart of a 500,000-person company, you still have an 8-person team eating a pizza, right? A pizza box team that's getting work done, and they're starting and they're trying and they're using our tools that we've expected, and you're still seeing that organic growth. But again, a lot of just a whole host of new customers coming online. The other thing, obviously, with -- we're all trying to do the analysis on what are the impacts of COVID, but remote work is really showcasing that people are working differently. They are more active. They are more collaborative in some of our tools. And that's just, I think, really, if you're in the tool more often, if you're putting more emphasis on it, that obviously is going to help drive more team usage and at lower churn.

What would you say you've learned so far from the free strategy?

The biggest ones, I would say, are really around what I would call the activity that users are getting in. They are more active, right? And that's really interesting for us to understand is, I think they feel comfort that they're not going to get a bill at the end of the day if they just use this product, and so they start to rely on it and use it as a daily piece. That's one of the most interesting. And two is just, how much demand there is, right? There's just an incredible amount of teams, not just software teams, not just IT teams, but teams across the board that are really looking for a collaboration platform for how we get work done and how we help teams be more powerful. So it's been a huge, exciting learning for us.

And then just maybe on the other side of that coin, right, like what have you learned in the early days of premium enterprise fee strategy?

Yes. I think we're really excited about what we're seeing there. One of the things that it's really showcasing for us is what features are in the highest demand for customers, right? That where -- if we're putting those features out into a higher addition, is the value there? And the answer that we're finding is, yes, and we're learning very quickly about what are the needed areas that we need to continue to improve our products. So it's been a great learning. And obviously, the enterprise readiness has been -- there's been a pent-up demand, right? And so we're excited for that and we're seeing that traction in the market.

It looks like we have time for about one more question, so I'll wrap it with this one. You've worked and led in many different organizations, from large technology to startups, to nonprofits, and one thing we hear all the time is Atlassian's culture is special. It does seem apparent on a service level, but what is unique from the inside-out? And maybe what is different about Mike and Scott's leadership style?

Man, it is a thrill to work. These guys, they are geniuses. They are. And I don't just say that because -- like, I've worked with a lot of smart people, a lot of -- and one of their geniuses is that they can go super high level and very, very detailed at the same time. I'm sure you've heard this a lot about -- a lot of great leaders is that they could talk to the 50 -- they could talk about going to Mars and then the next sentence say, "Why is that pixel off on that page? And like how do you improve that?" I think one of the most unique attributes about them, though, is that they are long haul, right? They are long haul. They think about the long term. They see the decade, right? And when you're a product manager, that's just exciting, right? Is that you're not, "Hey, what do we have to do this quarter and how do we pack something in?" It's really about what is the long-term strategy for the business, for our customers, like, how do we see it really evolving. Just generally, how are we going to unleash teams as we say in our Mission and Vision.

Awesome. Thank you so much for the time today, Noah. Hope you enjoy Australia. And thanks again.

Yes, thank you. Thank you, everybody.