Atlassian Corporation (TEAM) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Derrick Wood, senior research analyst covering software at Cowen. Today, we have Atlassian. Sri Viswanath is with us. And Sri, thank you.

I'm happy to be here. Thanks for having me.

Let's just start with a quick background, and then I'll get into having more of a product discussion, but a quick background on you.

Sure. Yes. So Sri Viswanath, CTO at Atlassian. I manage engineering, security, compliance, IT and partnerships. I've been at Atlassian for about 5.5 years, so I started right at the IPO time frame. And before Atlassian, I've been in large enterprise companies like Sun Microsystems and VMware; and small consumer companies like Ning, which was Marc Andreessen's start-up; and also e-commerce companies like Groupon. So I've been in different kinds of companies, and Atlassian is unique in terms of how we operate and how we run.

Perfect. So let's get into it. On the -- a big focus for you guys right now is the cloud, and you're going through some rearchitecture efforts. Can you just give us a sense of kind of how big that undertaking is and where you are, maybe what inning? Or -- and how much work there is to go to really get over the finish line on a lot of your new cloud initiatives?

Yes. Yes. So absolutely. Let me zoom back and cover our journey. So I started 5.5 years ago. And when I started, we kicked off this massive project to get off of our data centers and move into a public cloud. And we moved to AWS. And we also had the same code base in terms of on-prem and cloud. We forked the organization. We forked the code base. We moved ourselves to become cloud-native on AWS. And we've made it multi-tenanted. And that took us about 2 years to do the surgery, move it over and make sure that all the customers are migrated over. And once we got to the cloud, then we started building out a platform and a number of platform services. And we went to the microservices architecture and built the foundation of what cloud has become today, right, and how it has scaled. And as we launched -- and that project, the first 2 years, was called Vertigo. It was so complex that it was giving dizziness for people, so they called it Vertigo. And since then, what we have done is we have built a number of features in terms of cloud-native cloud features. We have added a number of products on the top, and I'm -- I can talk about how we are formalizing it as part of the Point A initiative, and we can get to that piece. And what we have done is over time, we have added different editions of the cloud products. We have now a free, standard, premium and enterprise. And as we build this out, we -- especially for the enterprise in the last 2 years, my focus has been to build out the enterprise. We launched the enterprise recently, and we end-of-life the on-prem, so it's been a full cycle of starting to build out the platform, to now cloud is better than on-prem for most of our customers. And most of our customers are choosing cloud. There are very few customers who are moving to data center, which is our on-prem scaled offering. So overall, there is momentum on it. We have -- we can accommodate majority of our customers on cloud. And the work is not done. There is a lot of work to be done. So we said, when can we ramp it up? It's like an ongoing journey as you can imagine. The focus has been to build out the marketplace and making sure that we have a pretty robust marketplace driving over 4,000 apps. In cloud, we have over 1,500 apps that are doing really well. The thing that we want to do is to build a modern marketplace that's secure by default. So we have this new framework that we have launched called Forge, which provides the run time for all these apps. So when our developers, third-party developers, build the apps and vendors run these apps, they can run it on Atlassian's platform. And that gives a lot more capabilities on making sure that it runs safely and it's connected to all the things that we do. So we are heavily focused on that. And also, I guess, the other focus, of course, as you can imagine, is helping our customers move to cloud, right, from on-prem. So there's investment in migrations and making sure that, that transition happens smoothly.

Okay. Yes. I want to touch on a couple of those things. So how -- in terms of the marketplace, you had been -- you had built up a marketplace with on-prem products. And so how do you get partners to -- do they have to rewrite? I mean how do you get that to transition to the cloud?

Yes. So we have always had a cloud marketplace. Like even before we started, we had a cloud marketplace. Our Forge is a slightly different model. So they built it on Forge. So the way we are working through is if you look at most of the apps that our customers use, there's a cloud equivalent to that. Many of them have similar capabilities, same capabilities, so the transition is smoother. Some of them have additional capabilities or different capabilities, which is where we help them to migrate cleanly. But there's definitely a focus on making sure that, that transition from on-prem, from server to cloud, is smooth. And that's one of the focus areas that we have.

I guess on that note, aside from the marketplace, going back to your direct customers, what -- how big of an endeavor or maybe a time frame does it take to repurpose off of on-premise to the cloud?

Can you restate the question? Are you asking the time frame of when it moves?

The effort -- no, I mean, just like how long -- if a customer says, okay, I'm going to move or I want to shift off of on-premise to cloud, what's it going to take? How long is it going to take me?

Yes. No, that's a good question. It depends. It depends on the type of customers. Atlassian is unique in terms of we have 2-person start-ups using Atlassian. We have large customers using Atlassian. So I'll give you a couple of examples, customer examples, recent ones that have moved, and you can see the scale at which they're moving. And these large customers work with one of our partners, solution partners, and it may take anywhere between a few months to a year in terms of -- depending on customer speed, on whether they want to move wholesale or whether they want to move project-by-project or space-by-space. So we give that flexibility to the customer to be able to move. One example is Northwestern Mutual. It's a $30 billion revenue company, 6,400 people. They are migrating 6,000 users from DC to Atlassian Cloud using our solution partner, XPM. And the thing is, they have computed that it costs them 25% less running in cloud because they don't have to worry about security, performance, uptime. That's already handled in cloud, right? So that's been the thing. And they are also taking advantage of additional features that's on the cloud, like Automation for Jira and advanced road maps. And that's Northwestern Mutual. And then we also have this European bank, De Volksbank, and that's like the fourth largest bank in Netherlands. And they operate in a highly regulated industry, and they feel Atlassian Cloud gives them -- satisfies all their requirements and gives them abilities to be able to future-proof what they need, and they are working with our solution partner, Quint Technology. And they assessed our products, and they chose our products. And they are moving into this for -- because they feel like they can use Atlassian Cloud and focus on the core banking business, which is what is more critical for them to look. So we have these large customers who are actively migrating. We have lots and lots of small and medium businesses moving, but it's all self-service. They can do it themselves. They don't even have to talk to us or talk to our solution partners. And they can do it quickly at their speed, and we have significantly invested in tools that can help them to go piecemeal or go wholesale as they decide to do.

Okay. That's helpful. One of the questions I get a lot from investors most -- more recently was the -- I mean, you guys saw a big surge in demand for on-premise purchasing, the server purchasing mostly, and ahead of the end-of-life. And just kind of what that means with the readiness for some of these customers to move? And is it they're not ready? Is it that they don't see the products mature enough to do it? I mean what does that tell you when you see that kind of activity?

Yes. Yes. So overall, we are really happy with the cloud growth, right? So we discussed 35% year-over-year growth, and that's not including all the momentum that's building that hopefully will accelerate the cloud side. The time line that we have given is based on our model, and it's a multiyear journey. Like largest customers may start. Like even though they want to start the discussions now in terms of engaging with a partner, they might actually start the migration at some point. So the time line varies, and it's driven off of our customers and less so on we forcing them to move, right? We have this value of "Don't f*** the customer," right, as a company value. So we want to make sure that we tend towards customers and help them -- we provide all the things that they need. Overall, the migrations is tracking well. We have like 2x year-over-year in terms of the momentum that's building, and we are pretty happy with the momentum that's growing. We are focused on long term, right, in terms of how do we make sure that in the long term, it's all successful. So you might see some variability like quarter-over-quarter in terms of the customer number and the migrations that happens. But that's less interesting, at least to me, in terms of how we operate. But are we building towards a long-term sustainable company where we are in the cloud and we do all these features that we can talk about. So that part is important. In the cloud itself, we are focused heavily on innovation. There is a new program that we launched called Point A. And it's not just a program in terms of external program. There's actually a whole program internally in terms of how we operate and how we think about emerging products and how we invest in it and shield that off of all the other noise and making sure that they are built on the platform and they get all the benefits of everything that we have for other products from day 1. So we launched several products, Jira Work Management, Compass and Halp and few others. So the point is, one example, Trello, we have significantly improved the user experience. If you haven't tried Trello recently, you should. There's a number of views that are pretty amazing, and we are getting really good reviews on that. So -- and we continue to improve every single product. So that is ongoing. We also are heavily engaged with our customers. We want to understand, if they are not coming to cloud, we want to know why they are not coming to cloud. So that can help us either build products or making sure that they're happy with data center as we make sure that we are investing in data center. We have a team working on it, and we want to make sure that they can stay happily in data center until they are ready to move. So there are a number of dimensions of this that we are tracking, and we want to make sure that we are thinking long term in the success of getting everybody to cloud.

Yes. And on that last point around data center, I mean, what is the -- clearly, we know end-of-life on server. But what's the commitment to data center and innovation there? And are you ultimately going to want to get people off of that? Or what's the future of data center?

Yes. Yes. Data center is important for a small cohort of customers, right, who are not ready yet for various reasons, regulation and others. We want to make sure that we keep investing in it and make sure that they are happy with it. We want them to migrate to cloud as well, so we'll keep building features on cloud. We won't force them, but we'll keep building on cloud. And investment-wise, there is no change. We'll keep investing in the data center as we have been, and we'll keep improving features for those set of customers.

So another question I get is around the price changes, particularly with your enterprise-level customers as they shift from server to cloud and price points go up a lot. But -- so one, can you talk to the value that the customers are getting and when you look at the TCO, why it's still very attractive for customers? And then two, what -- how do you kind of make sure customers don't -- they got to rearchitect, they're looking at big price changes, but they don't look at alternatives in the market. And I'll leave it there, and then maybe we'll talk a little bit more about competition.

Sure. Yes. So we have a number of editions of our products. We have free, standard, premium and enterprise. So we added a new SKU that's a higher price point, but it also comes with a number of enterprise features that are not available in other editions. And these are features that are expensive in terms of if they were to do it on their own with all the other things available. These are built into our platform, so it's available on all the different products and features that we are building. And we'll keep adding it. And as an example, these are sandboxes where they can test certain things out, issue tracks where we -- they can control what goes out to their customers and users. It's much higher SLAs in terms of getting to 99.95% uptime. It's data locality, if data needs to be stored in certain places. So these are like high-value features and built into our platform as such. We are not seeing any churn. Customers seem to be really happy. We are happy with, I guess, the progress that we are making in the enterprise SKU itself. And if you compare this to other offerings, we still maintain the high value, lower price in terms of the higher-end market because these features are, if you look at competition, you just mentioned competition, they are priced much, much higher in terms of what they get. But we are trying to make sure that we have the same philosophy of how we have done over the years of high value and a low price.

I'm sorry, I missed that. Who mentioned -- used to mention competition?

No, you said we'll talk about competition.