Atlassian Corporation (TEAM) Earnings Call Transcript & Summary

Yes, yes. Off to a quick start there. The question I get like most often from investors on the product strategy is just like what's next? Where does Atlassian go? There's probably no one better equipped to answer that question than you. So I'd love to get your perspective just on kind of product strategy and how the platform evolves from here.

Sure. So key elements of our product strategy have remained fairly consistent. So we've been stable and consistent in terms of how we view the world. And as trends have changed, we've latched under different trends over the years. What I mean by that is, like I said, overall, our strong belief is that we want to be a collaboration platform that enables choice for customers. So we want to meet customers where they are instead of force a particular path on them. And we believe that building a generic collaboration platform will make it easy for us to play in multiple markets and still keep our competitive position. So we will continue to progress in each of our markets. So for instance, you saw with Agile DevOps, we've undertaken the Open DevOps initiative with ITSM, we have continued to build more and more power into JSM and we see amazing customer adoption in the ITSM segment. And with Work Management, we believe that Atlassian's viewpoint of how collaboration should work in distributed teams, we have a remote testing as a company, all 8,000 of our employees are spread all over the world, and we recently said everyone can work from home. We are entirely remote first. So it gives us a point of view for our products also to be able to say, here's how we think collaboration in the new world and the new post-pandemic world should work. So expect to also see more releases from Point A over the coming years with our point of view of how collaboration should really function. And of course, underneath all of these markets, like I said, we will continue to invest in the fundamentals of the business through a central platform. So expect to see that we will do a lot more around enterprise readiness, basic fundamentals around support, storage, continue to improve performance and scale. And the ability for us to do that by investing ones and delivering in multiple markets is a big differentiator for us.

Yes, yes. I want to hit on the business model just a little bit in case we have folks who are tuning in who may be new to the Atlassian story or learning it for the first time. But I do want to focus with you on some of the product stuff. But just from a business model perspective, I mean, look, you guys kind of evangelize the whole product-led growth strategy. You flip the traditional income statement, OpEx lines on its head, right? You spent 40% of your revenue in R&D significantly less than your typical growth company on sales and marketing. So it's a super efficient go-to-market engine. Just maybe talk a little bit about like philosophically how you manage that model, how it's created kind of such a high degree of predictability for you? And kind of what the advantages it accrues to Atlassian from an operational standpoint.

Sure. That's a great question. And it's one that I've built my perspective on over the past 7 years, as I've seen the benefits show up tangibly over time. To start from the basics, fundamental flywheel is pretty simple. It's the land-and-expand model, but with self-serve, right? So the primary difference between what Atlassian's view of the world is and what traditional enterprise companies view the world as is, like you pointed out, a deep investment in R&D, and we believe that products should organically be able to be distributed across customers. So we shoot for a very low CAC number. And basically, the flywheel how it works is we build a variety of products across a variety of use cases, and we organically acquire customers. The more the number of customers, the more we are able to sell more units of products. And we take more and more of that profit invested back into R&D and therefore, we are able to generate even more products on the other side. And flywheel that generates this gets better at scale. So for instance, last quarter, we had an amazing customer acquisition quarter, we had 23,000 new customers. So we have now 23,000 new customers that we can distribute all of our products to. So our multiproduct strategy makes the flywheel even better because we have a variety of more choices for customers to choose from. And creating that outsized R&D investment of the 40% investment that you talked about really helps us build a strong long-term strategy with a central platform such that we are able to launch even more products into the flywheel and therefore, acquire even more customers. Being on the cloud is a fundamental accelerator for our flywheel because the cloud helps us understand customer needs in a deeper and more real-time way. So we're able to see a lot more deeply into how work flows across our customers' businesses. And so we're able to connect that and make the flywheel go even faster that way. So operationally, it means we lay a lot of stress on our R&D development and invest for the long term. So we're really patient about what we are building such that it shows benefits across all of our markets.

Yes. Yes. There's a couple of things you said in there that I want to dig in on and then we'll talk about the cloud transition. But one of them was like the robust customer additions last quarter, right? And I think, obviously, the introduction of free editions is playing a role in that. So maybe just talk about kind of the strategy of free additions, why it's working so well? And then as part of that, like now you have a full ladder of products, right? You have free and standard premium enterprise SKUs, like how do you march customers up that stack?

Yes, that's a great question. So just for context, we now have a full stack of additions on the cloud side. We recently introduced free about a year ago, and we were very careful and measured about how we introduced free to our customers. Introducing free for Jira and Confluence is kind of illustrate of our long term thinking as well. because we launch this despite COVID uncertainties last year because we strongly believe that this is beneficial for customers. So what happens with free is it widens the funnel at the top of the funnel, right? So there are 23,000 customers that we added last quarter, a strong evidence of the free additions being able to attract a lot more customers at the top end. And one thing we have clear evidence for is customers that experience free and then upgrade to standard are a lot stickier. So we want to make sure that we attract as many customers as possible with free, and we are confident that as they convert to standard and then they're able to go up the ladder from standard to premium to enterprise, they are able to hold on to them a lot more. And one thing we've monitored with free specifically for your question is, we've looked at each cohort as we've introduced free, and we are really heartened by improvement across every cohort in terms of minor changes we make, and it helps people get a part more stickier in the Atlassian funnel. The second part of your question, DJ, around the additions, it's helpful to think of this with an anology. Typically, product companies think of additions as a ladder, like you start somebody with free and then take them standard premium enterprise. We think of it more as a ladder net, right? So it's not a straight ladder, but it's more of a net because customers have the ability to choose any addition for any product. Most of our customers use multiple of our products. So they could very well do Jira Software, standard but Confluence premium or Jira Software free but Confluence enterprise. What this does is, it helps us open up the surface area a lot more. So that's really our business advantage. So we're able to attract customers with a big wide funnel, thanks to free and then give them multiple paths for upgrades. So it doesn't look like a linear line, but it expands itself into a big map.

Yes. That's an important distinction. I think a good point to make. Let's talk about the cloud transition. Obviously, I think it's top of mind for investors. So what was behind the decision to kind of end-of-life on-premise products and migrate those to the cloud? And then talk about why that's important, what it's going to enable you to do and how you're managing the transition?

So the cloud transitions and important central transformation for Atlassian, not just in the way we build products, but also for how we ship to customers. We strongly believe that cloud is the future. And so we invest heavily in cloud as well. One of our key values is open company no bulls***, and we believe that that's exactly what we've done with our shift to cloud. Given we strongly believe cloud is the future and we invest the most there, we want customers to have the best experience, which is going to happen in cloud, which is exactly why we made the decision of ending of life of our server products, but we've done this in an extremely customer-friendly way, as is the tradition in Atlassian. So we've built a 3-year ramp for customers to choose, and they have a choice of going to either data center because there are certain use cases where they wish to continue to stay behind the firewall for a period of time or cloud where we made the migration path extremely simple, not just through self-serve tools, but also through our massive channel partner network, which helps our customers migrate. We are early days in that transition. We announced that a couple of quarters ago, but like you see evidence of migration momentum building, we are really pleased with where we are and where we expect it to be at this point.

And then maybe we could talk about kind of the economics of a transition to the cloud as well, right? You've talked about over a multiyear period on some of the incentives weighing that -- an enterprise customer is going to be more valuable to Atlassian on a cloud product than they were on a server-based product. Can you just wrap some numbers around that or help us think about like how that plays out and how it could impact the model over time?

Sure. So the economics in cloud is a lot more attractive to us. And like I described, there's a lot more expansion vectors in cloud. Also, we have data to say that customers are stickier in cloud, and we see more expansion of users, not just through additions and upgrade, but just through cross expansion, we see a lot more of that in cloud. And you also touched upon really the discounts that we're giving and the take rate changes we're making in the ecosystem to adapt to that. Overall, we are confident that cloud in the long run has better -- more attractive economics for us as a company and also for our customers in terms of total cost of ownership. But like I said, mostly, it's early days. So through the first year, we've seen the economic impact play out like that. And for the remaining -- for the coming 2 years, less than the 3-year road map that we've built, we expect to see that customers will continue to migrate at the velocity that's comfortable to them. So we hesitate to really go out and say, here's exactly how it will pan out. A lot of it is dependent on customer behavior.

Yes, yes. Well, I think the good news for you guys is that you're not the first in the public markets to do this transition, like investors now at least are a little bit more familiar with it, they understand the numbers get worse before they get better on the other end. And I don't know if it's Martin or James doing it, but you guys have done a nice job from a financial management and setting expectations accordingly that you're surprised to the upside, and that's a credit to operationally how you're doing as well. Last question for me. We don't get to talk to folks in the product side quite as much. So if you think -- if you were to tell an investor like, hey, this is something that's still underappreciated or misunderstood about the Atlassian story. Like what would be the message that you'd send them with?

I have to say one of the things that I'm most bullish about and most excited about in our business that doesn't get talked about as much is our ecosystem. We believe that it's a strong strategic differentiator for us. But also, I'm really excited about how much innovation it can unleash amongst a partner network. We have over 5,000 marketplace partners, and we are investing just in the tradition of long-term patient investment. We've invested in Forge, which is really difficult engineering wise to pull off for most companies. And that's just can't -- GA and our ability to use our ecosystem to have marketplace partners contribute more and more applications in the Atlassian world, which will further help with digitization of our customers. That's a great example of compounding growth. So that's an area that I'm really excited about, our ability to expand our distribution in the product-led growth model that Atlassian has enjoyed over to our marketplace partners as well.

Yes, very cool and very helpful. Anu, thank you so much for doing this. Martin, thank you for being here. We look forward to keeping tabs on progress.

Thank you so much for having us, DJ. This was wonderful.