Atlassian Corporation (TEAM) Earnings Call Transcript & Summary

Thank you, everyone, for joining us. We have today Robert Chatwani, who's the CMO at Atlassian. Robert, it's good to see you again, and thanks for taking the time.

Yes. Likewise, Arjun. One of these days, we'll be back together in person, hopefully.

Yes. Let's hope that's relatively soon. Just a quick -- a few quick housekeeping items at the top. My name is Arjun Bhatia. I'm the analyst here at William Blair that covers Atlassian. For a full list of our disclosures and conflicts of interest, you can visit our website at williamblair.com. And with that -- actually, one more thing. For everyone that's listening on the call, if you would like to submit questions, just go ahead and use the Q&A functionality, and I can relay those to Robert as those come in.

So Robert, let's dive in. It's a very, very exciting time at Atlassian. Definitely, a lot of initiatives going on. But just at a higher level, maybe let's just start off with an overview of the business, what Atlassian does for its customers, just for those on the line that may not be familiar with the company, your products and the problem that you're solving for your customers.

Yes, you bet. So we are a software company. Atlassian was started in 2001 back over in Australia in Sydney by Mike Cannon-Brookes and Scott Farquhar, and we've grown quite a bit since then. So we have 6,000 employees. And the mission of the company is to unleash the potential of every team. I like to say that we help companies turn work into teamwork, and we do that through products like Jira Software, Confluence, Trello, sort of have this nice big portfolio of products. And we play in these really big markets with these products, in software development, IT and IT service management and sort of, more broadly, in general, collaboration. And so, I think, over a dozen different products, we get to play across organizations and really help teams work better together and connect across the company. We're up to now over 200,000 customers, I think, over 190 countries globally. And so we scaled quite a bit over the years and still feels like we're just getting started.

Yes. That's a wonderful overview. And just for -- you had joined us last year at the conference as well, but your role as Chief Marketing Officer, maybe just give us a quick overview of what your responsibilities are and where you spend your time on a day-to-day basis at Atlassian.

Sure. So I'm Chief Marketing Officer. So I run all of our marketing functions. And we have a broad definition of marketing in part because of our business model, which we can talk more about. But I oversee brand, communications, product marketing, even data science. We've got engineering and product experimentation all within our organization as it relates to our customer acquisition activities. But if there's one thing I think about morning day and night, it is growth, and in particular, customer acquisition. That's my primary responsibility. And as you can imagine, that touches a lot of different dimensions of the business.

Yes. And that's a great segue because I think customer acquisition has been one of the most exciting parts of the story. You're seeing great -- I mean, Atlassian has always had a great customer acquisition motion. But particularly in recent quarters, I think we've seen a pretty significant uptick in that motion, right? You added 18,000 net new customers last quarter. I think the average over the last 2 years is something like 6,000 to 7,000. So there's a pretty significant inflection. And you -- we've seen that kind of trend over the last couple of quarters. So maybe just give us your perspective on what's driving that and if there's anything that you've changed from a strategic perspective on that customer acquisition, help us understand those dynamics a little bit better.

Yes, you bet. So you mentioned it earlier, right, which is Atlassian has always had this strength in product-led growth and organic growth. But what we've seen in the past sort of 12 to 18 months has been pretty remarkable, and it's sort of a result of things we've done over many years that are starting to really converge. I'd say it's a moment of pride in sort of these long-term investments that we've made. But what are those things? What's been happening? So first, right at the onset of the pandemic and COVID, sort of early part of 2020, we decided to make all of our major products available for free for under 10 users in most -- there's some variance to that, but we widened the funnel. And the idea here is to really reach as many customers in as many parts of the world as possible and do one of the things that I think Atlassian does best, which is remove all of the friction from getting customers to start trying and using our products. That's how much we believe in sort of the value proposition. And since doing that, we've seen sort of a 2x, in some cases, up to 3x growth in our funnel and the number of new customers coming in the front door. So that's one. Second is -- I come from an e-commerce background. And so I think a lot about the engines that power growth in e-commerce companies. I was at eBay, but pick your company of choice, Amazon or whoever it is, the intelligence, the data, the customer acquisition marketing that has powered a lot of those companies, we really brought into Atlassian. And that's sort of a halo effect or on top of that free funnel, it allows us to really invest efficiently in paid marketing to drive growth. And then I think the third thing I would say is we're benefiting from really good products, which has led to historically low churn. Part of that is macroeconomic, but part of it is also just a really strong value proposition. So when you put all of these 3 things together, you get this dynamic of strong volume of customers coming in, customers using the product, staying engaged, upgrading and then staying with us.

Can you -- so we -- I remember last year when we had this conversation, we talked about freemium quite a lot. And one thing that I'm curious about now is you're a little bit further down the road in having freemium, right? It's been -- it's obviously -- you've had it a year longer now. But in terms of conversion rates, right, because the free-to-pay conversion motion is obviously something that's important, and you're still learning that process a little bit. But what can you tell us about how those conversion rates have trended over the past year? And whether you're at a point where you've optimized that motion already or if there's more room for improvement to come further down the road as you just learn the different dynamics that drive customers to switch from free to paid.

So the funnel has grown. We've gotten a lot more customers into the front door and using these products. And what I would say about -- I'll give you a couple of examples in some detail, but all of our conversion rates and upgrade metrics are on track with what we expected and, in some cases, better than expected, but we're really happy with the progress. I think the -- we've shared this with you before, which is at Atlassian, we like to say that we're patient to be greedy. And so we haven't done anything artificial to unnaturally bump those free customers into paid additions. We're being really methodic, thoughtful, and this is something we have a very long-term view on. The most important thing for us is engagement with our free products. Are customers -- does our MAU look healthy, which it does, and are customers coming back? And are they using the products and getting value from them? In many ways, we've got a long history of free at Atlassian with products like Trello and Bitbucket. So we've learned a lot from those businesses that if you deliver value and you deliver great features and customers stay engaged, they will eventually grow, find value and upgrade. And so we've applied that same playbook to the expansion of free. Now we love it when customers upgrade. So what are we seeing there? I would say a few things. One is, can we make that upgrade path delightful? And it sounds a little crazy sometimes, but how do you make pulling out a credit card and paying you a delightful experience? Well, we test a lot. And one of the things that we think about is what are the behavioral signals -- and you can do this in a cloud product, but what are the behavioral signals that tell us this customer is ready to be nudged, right? And then what's the right first action? Not to ask you to upgrade. It might be to show you a video in product of a demo of our paid version to say, "Hey, did you know this is available? Check out this video." We want to be really careful not to be intrusive into their user experience but really think about the right message at the right time. And what we find is those early experiments are really -- they're working, and they're paying off. And so we're happy with that but still very early days in terms of our monetization push.

Perfect. That's very helpful. And patient to be greedy, I love that. I should start using that in my personal life. But -- so you can obviously do these things, right? You can monitor customer behavior. You can monitor usage now because you're in the cloud. You're pushing -- new customers are predominantly in the cloud. You made this announcement late last [ year ] you're going to end of life your server products by February 2024. And so let's just focus on that cloud migration for a second. What drove that decision to sunset your server products? And why was now the right time to do it? And then from a customer perspective, just help us understand some of the dynamics in terms of what are the benefits that customers get from being on the cloud versus being on-prem, especially from the perspective of the customer that now has to migrate from their maintenance contracts to your cloud solutions.

Sure. Yes. Well, for those who may not be familiar, I'll give some context. Last fall, we announced that we plan to end of sale our server products. Existing customers can still continue to use them for 3 years, and that official end-of-sale date was first week of February 2021. Now we have tens of thousands of server customers, and we offered them 2 pathways. One is our cloud products are ready for nearly all customers. And so that migration from an on-premise server product to the cloud is something that we've spent a lot of time on planning for. The second is for those customers who feel like on-premise is really still mission-critical for them, that they want to maintain and control their own software, we have a data center product that's available to them. So this was, in many ways, one of the biggest decisions in Atlassian's history, but at the same time, also one of the most clear and obvious. Depending on what numbers you look at, over 80% of company workloads are expected to be in the cloud by 2025. And so this is part of a broader macro shift across the industry as companies go through digital transformation. That's already happening. We view it as Atlassian's job to build ahead of where customers are. And so when they're ready to move, we're -- we'll be there for them, and this is part of that journey. Now what are the benefits? Some of this may be obvious. But I'll -- they won't surprise you, but I'll state them. One is in cloud, Atlassian manages all of the hosting and all of the operating of our products. Staff effectively eliminates that need for upgrades and customers to have to spend IT admin time and engineering time maintaining those applications. Customers can focus on their core business. Second, this is increasingly important, which is enterprise-grade security and privacy is constantly changing. Those needs are constantly evolving, particularly for regulated industries or markets throughout Europe. And so with Atlassian Cloud, customers effectively get all of that as part of their license. We are continuously pushing out all of those enterprise-grade capabilities without any work to be done by the customer. And then the last thing I would say is just the innovation agenda that we have. We've made a lot of investments in our platform. And the idea of all of that innovation being available to customers real-time is pretty remarkable. The other side of this is really unifying work across the organization. So if you have multiple Atlassian products -- remember, I said we have over a dozen products that we have available. If a marketing team is using a Jira Work Management product and a software development team is using Confluence or Jira Software, all of that work is much more unified with our cloud proposition.

Yes. And I want to talk about the new product innovation a little bit. And maybe we can come back to it in a little bit because I think that's a very underappreciated part of the story and a very exciting part of the story, in my view, at least. But just if we think about the migration a little bit from customers that do decide to go from server to cloud and they say, "Hey, I'm ready to move to cloud. I don't want to do data center right now," what kind of -- how should we think about just the lift in the burden? It's something you obviously planned for, but how tedious of a process is it to actually port your data from your maintenance -- or your on-prem solution to cloud? And what are you doing to kind of help ease that migration as much as possible? Because I think your enterprise customers are obviously thinking about this in terms of maybe a longer-term time horizon. But how do you facilitate that and make that as easy as possible for your customers?

Yes. This is really important, which is with change management, what is Atlassian doing to help customers on this journey? So how you just framed it, I think, is a really good way to think about it. Imagine sort of SMB and then enterprise. For purposes of our description, let's just say, SMB is companies with under 1,000 seats. We segment that even further. But for simplicity's sake, for those SMB customers, we invest a lot in a self-guided migration motion. And then for those enterprise customers, call it, 1,000-plus seats, that is where more hand-holding is required, more human interaction, our solution partners play a big role there. And so we've invested across both of these a ton to make migrations as seamless and as easy as possible. We launched the Atlassian Migrations Program, sort of center, online. It's a gateway into all of our resources here, broke down the migrations process into 6 distinct phases to really give these milestone or, like, progress markers for customers who are actually going through the process. Community health, videos, content, just a ton of resources that are available, particularly for SMB. And then for enterprise, we have cloud migration managers within Atlassian. We have an Atlassian engineering team for -- dedicated to solution partners to help manage this process. And so it is high touch. Some customers are able to migrate within weeks. Other customers take many months. What we found is our cloud is ready for almost all Atlassia customers. Some of the challenge is simply inertia, right, customers getting comfortable with change management. They love, in many cases, their on-premise products, and they are starting to make the leap, but they're starting very small. They'll start with a particular product and take it one step at a time. Regardless of the speed at which they're moving, we're ready for them, and we're trying to make it as simple as possible.

All right. Wonderful. Yes. And I mean that definitely makes sense, right, the larger customers will have more organizational hurdles, I guess, is maybe a way to put it, to jump through to actually make that transition. And I know it's been...