Atlassian Corporation (TEAM) Earnings Call Transcript & Summary

Okay. Good morning, good afternoon, everybody, depending on where you're sitting. Keith Bachman again. This is -- we've had a number of back-to-back sessions. So hopefully, everybody got to take a little bit of a very quick break and just wolfed down a sandwich in record time. We're thrilled to have Atlassian here with James and kind of jump through their story and ask some specific questions, as usual. My questions are going to -- James, are written on my right-hand side. So I'd periodically look to my right because I'm just referencing my questions, so I'm not actually had it distracted.

No problem.

But I wanted to ask you a question I've been typically asking a lot of executives that we've been speaking with this morning and again, this afternoon, my time. But if you had to think about over the next 3 years and pick 1 or 2 things that you're most excited about driving incremental dollars of growth, what -- and it's hard for a CFO because you like all of your children equally, no doubt, and there's no disproportionate affection to be cast about. But what really -- what do you think is really exciting as you look at your portfolio, not the business model, but the portfolio that gets you excited over the next 2 years?

Well, Keith, first of all, good to be here. Hello to everyone. I appreciate everyone taking the time today. Well, we very much are excited about fundamentally being in the middle of some very attractive market spaces that are clearly spaces that have material tailwinds associated with them. As the world of work continues to evolve to one emphasizing teams, to one emphasizing multiple locations, our tools facilitate productivity, effective teamwork and so forth. And so fundamentally, what we've been doing for the last 20 years as a company is just absolutely relevant to where the world of work is going. And I'm just delighted by the breadth of the portfolio that we have created. Many companies, obviously, you've seen oftentimes venture-funded and so forth, trying to jump into this space. And I can certainly understand why. But I think we're positioned very nicely with a nice broad range of product offerings. We can do an awful lot for our customers. And of course, yes, we're seeing more and more customers selecting Atlassian. So I think fundamentally, the fact that we're both very well established with technical users, be they software developers, IT employees and so forth but also with the whole broad range of generalist knowledge worker right across the company. And I think that gives us a lot of scope to continue to serve more customers, the customers we have more broadly because what we do just represents such a relevant issue for the future of business.

Yes. Yes. Yes. I mean it seems like Atlassian is one of the best-positioned software companies out there because of that breadth of portfolio. Let's talk about the customer adds. I'm going to drill down on your growth algorithm a little bit. And last quarter, you added 23,000 customers. Now I know that included the Trello single account, let's call it, 6,000 [ some-odd ] numbers. Even if you take that out, it's still pretty darn impressive, very impressive. What do you think -- and it's actually the second straight quarter that you've had incredible customer adds, even if you take out Trello. What's kind of driving that? And I guess, more importantly, against your customer base of, call it, 236 -- 236,000, rather, what's kind of a durable number that we should think about? And again, I appreciate that not all customers are equal. But what's the kind of a durable runway that you think about? Anything that you would characterize why the customer adds have been so strong over the last couple of quarters? Or is it just kind of a COVID catch-up?

Well, the first thing I would say is [ as I've been saying ] for years, and that is that we would expect this number to bounce around somewhat from quarter-to-quarter. So I think that's [indiscernible]. But 2 or 3 of the important drivers here -- let's just actually start with Trello because, as you framed the question there, you rightly noted that we broke out the Trello single-user customers. So these are people who are paying us more than the $10-a-month type threshold that we use to define our customer. We're very happy to have them, of course, because I think a lot of those people will bring in colleagues and form teams and so forth and gradually expand their relationship with us, which is just very symptomatic of our model generally. So great to have those folks. We very much, in our mantra, serve teams, and that's why we break out these single-user folks just to be very transparent with everyone. But beyond that, Trello teams are also an important driver of our increasing customer count. So I don't want people to think that we're just literally putting the whole Trello product to one side, if you will. Trello is an important driver of that customer number. And I think this illustrates the impact that we've been having, as we focused in the last 18, 24 months or so increasingly on monetization of our very large Trello base of users. When we first bought Trello about 5 years or so ago now, we were very clear with the team there that job #1 was to continue to drive users. And they did an exemplary job of that. And they did not focus per our request on monetization per se. And in the last couple of years, we've moderated that dial, if you will, to emphasize not only user growth but monetization as well. So that's been an important aspect of the recent customer accounts, but also the free versions of Jira Software, Jira Service Management and Confluence that we've really rolled out into the market now, first gradually more than a year ago, but then really increasingly in the last year or so. They -- as we've talked about on earnings calls in the past, they've really obviously expanded the size of the top of the funnel, as you would expect. And we have been quite pleased by how some portion of those free users are now saying, "Oh, well, I've enjoyed this experience using the free version of the product. Now it's time for me to utilize some of the capabilities of the standard edition, the paid edition of our product." And so that's been a nice boost to the customer count as well. And then I think, bank to my first answer, just the general trends in business as people have been trying to sort through what are the right tools for this new world of work. Obviously, when we all went into a lockdown now, what, well over a year ago, the first rush was to Zoom. And that happened to be there. Everyone needed to have a way to talk to each other. I would say it was several months after that initial surge, people started to put more attention on, "Okay, we're going to be doing this forever at some level." Depending on the company, depending on the industry, very few companies are going solely back to the office in the future. And so there's been a focus, I'd say, in the last 9 months on really sorting through what are the right tools. And I think that's helped us somewhat as well. Now one thing to remember in our model, new customers that come to us in a particular quarter, they generate relatively little revenue in that quarter. They are very much an investment in our future. We have consistently, over the last 15-plus years [indiscernible] and then grown very consistently as the years have gone by with that same customer. And I see that continuing to play out into the future.

Yes. James, as you think about -- you offered up some incremental opportunities on free when you did the pricing change, right? You kind of opened the aperture, so to speak. And I think Atlassian management talks very well and articulately about the top of the funnel has been expanded, so to speak, and free is nurturing that. Is there a notion about how that kind of runs its course over some period of time and you anniversary that? And so your customer growth may actually slow down at some point? Or it's just, as you say, the opportunity is so big, it's hard to predict, and there's so much potential there?

It's hard to predict. We don't try to give an estimate as to the customer add run rate. Obviously, as you've been framing in your questions, we've been very pleased with the results over the last couple of quarters, in particular. So we'll see, but you can expect us to continue to have this focus on opening up the aperture at the top of the funnel. One real hallmark of this company is the long-term orientation. And I know all companies say they are long-term focused. Atlassian really is long-term focused. We are very happy to have users, companies, I don't call them customers yet, get value from our products for as long as they're needing to do that. And what we do is design our ladder, if you will, of cloud editions to give them opportunities to benefit from more value if they move up to a paid plan. We know that the total pool of companies in the world is very large. I mean 1 statistic that we have thrown out previously is that there are 2 million companies in the world with 10 or more knowledge workers. So it gives you some sense as to where we are on our journey with 236,000, 237,000 type customers as of our last print. Now frankly, I will point out that there are plenty of customers that we have who have less than 10 knowledge workers. So I actually wouldn't want you to think that 2 million is the ceiling, frankly. But it's an illustrative guide from a data point that's readily available through private research.

Yes. Yes. Well, I do agree with you. I think Atlassian is a longer-term focused. And I think it has -- I think investors have been candidly rewarded for that. You've thrown out a target, your management team, 100 million MAU over some period of time, which is a -- as you -- a big goal. How have you thought about best practices on making sure you're converting those free to paid users and kind of nurturing that pipeline? Presumably, there's learnings going on all the time because you have such good data surrounding that journey. But how do you think about best practices? And how that's nurturing that goal to get to 100 million MAU over time when you think about going from the free to, in particular, the paid?

Yes. Well, I think your point there about the importance of data that we have is really important for the future of the business because, obviously, our customers want to get onto the cloud. We want them to get onto the cloud. That's where we've been investing for a number of years in a highly disproportionate manner. But obviously, one of the benefits to our business is we have visibility into every click. We see how the products are being used and so forth, such a different situation to when those products are being used by the customer behind their own firewall. We have some but really very limited visibility into the usage of the products in that type of an environment. And so yes, we are very focused on that topic. More specifically to your question, I'm pleased with how -- and this is pretty typical of how we do business. We started the free launch in a measured [ way ], pretty long. I'm really talking about Jira Software, Jira Service Management and Confluence. You can think of [indiscernible], obviously. And we've broadened out the scope of the offering in terms of who we have offered that to when it comes to visitors to our website. And then we have analyzed very carefully the progress, if you will, of each month's cohort since the launch towards paid plans. And it is that level of progress that's allowed me to say in the past that I'm very confident that the long-term economics of this initiative will be favorable. So -- and of course, as each month's cohort has gone by, we've done different things. We've tried different things. We've improved. I think the experience of the new user who comes into the free funnel we've worked on, how are they exposed to the capabilities of a paid plan. So again, you can take the feedback that we're getting from the users because we see that activity and we constantly work on refining that with an eye, of course, to understanding how they do journey towards a paid plan. But at the same time, thanks to this long-term orientation, we're going to be balanced in terms of making sure that, that free user is getting a very good experience. We're patient. We play the long game, and this is just another example.

Okay. I'm going to come back to the cloud in a second. But before we get there, I want to talk about the growth. I think I asked Mike this on the last call. But of technical versus nontechnical users, in some respects, what's the growth driver? In some respects, the nontechnical users would seem to be a bigger pie than the technical. But by the same token, your price points to the technical folks may be higher than nontechnical. But how should we think about the growth drivers between those 2 pods of the technical versus the nontechnical over the next couple of years?

Well, they both have significant growth opportunities in front of us here. And this is absolutely one of the key things that we debate, we think about in terms of what is the right resource allocation. Now obviously, the heritage of this company is on the technical side. It's a company that was established to help software developers originally. And you've seen us talking in the last, what, 3 years or so about the need to really focus more so on the IT user as well. And I think that's been a very good path for us because in that 3 years, the line between the software developer and the IT user has continued to blur. We see that absolutely being an ongoing trend. And so [indiscernible] strengthened our competitive position there. And we're taking quite distinct and differentiated approach to serving those technical users. Perhaps we talk about that a little later in terms of really having a common platform between the traditional software developer and the IT operator, very much consistent with the notion of DevOps and so forth and including best-of-breed capabilities from non-Atlassian sources, which I think is a very relevant theme for the future. It always has been relevant to the educated software developer-type user. I think that continues to be the case in the future. So we are seeing engineers and software developers becoming increasingly important to their businesses. We hear the phrase about how software is eating the world or what the heck does that buzz phrase really mean? The way I explain that is that I think, increasingly, almost all companies are realizing that to drive their own competitive advantage in their sector, they are looking to use software to offer greater capability to their customers. And those who don't are getting increasingly left behind in almost all industries. And so this is just creating an environment where there's going to be a tailwind of ongoing demand. This is why we see software developers being one of the fastest-growing employee groups in business. So we feel very well positioned there with our range of products and so forth, which we could talk about more. But at the same time, we already know that even our most technical products, let's just take Jira Software for a second, 46% of those cloud JSW users are nontechnical, describe themselves as neither IT nor a software developer. So we absolutely know that we have great relevance outside of the technical arena of an organization. And of course, we've got -- back to my first point about the range of products, we have a variety of products that very much serve that nontechnical type user. When you think of Confluence as a great form sort of longer-form documentation, exchange of knowledge and so forth, collaboration, very much a relevant factor for that market space. And then, of course, Trello is about as easier-to-use products as you'll find out there in the market for helping generalists kind of get their toes into the water of collaboration across their team and so forth. And so part of our challenge, frankly, is -- you know we already spend a lot of money on R&D as a percent of revenue. That's always going to be our orientation. Our challenge is how do we find that right balance between the opportunities that are in front of us across these different -- 3 different market spaces.

Yes. Yes. Okay. Okay. Let's transition, just in the interest of time, on the cloud migrations. And I have a couple of different questions on this. Let's start with -- well, let's start with churn. Have you noticed -- you and I had this discussion? I think it was after the last call or maybe it was 2 calls ago, but a difference in churn rates between SMB and large enterprise. Now you've already clearly articulated that most large enterprises will be back-end weighted in this journey, so in '23 and whatnot. But have you noticed any difference in churn rates between these customer groups that are actually going on their cloud migration? I would think the SMB would be candidly very low because the price points are either saving money or neutral. But I would just want to hear your thoughts on any kind of different churn rates between the customer segments.

Yes. The first thing I'd say is that it kind of supports actually the first answer to your initial question, is that we're seeing better churn rates now than we were before COVID locked us all down in March of last year. So we're pleased by that. We study this information very carefully, as you would expect. And there are some things that are very explicable, if you will. And then the somewhat more general effect of businesses looking for more of these types of tools, sticking with them longer and so forth because they're becoming so much more a natural part of how a company operates is much harder to quantify at the scale of almost, what, closing in on some 250,000 customers now. I mean at that scale, it's hard to figure out exactly what's driving each and every one of them. But what we have got very good data on is those migrating from behind the firewall over to the cloud, they've made a specific decision to do that. They have less churn. Makes a lot of sense. You've gone through a data migration. You're not going to suddenly head off in a different direction. We're similarly seeing the users of our premium cloud editions to be stickier, less churn rates associated with those. Again, someone's made a decision to say, "Oh, I was on the standard plan. I've decided I need A, B and C that's offered to me on these premium editions." That drives a lesser churn rate as well. Then also, I think importantly, to some of our earlier dialogue, those moving off a free to a paid plan are also looking to us to be stickier right now. Again, they've made a specific decision to pay us some money. And that's not to say you can't head back to the free version. Of course, some will do that. But what we've noticed in our data is the opposite, that we're seeing better retention when someone does that. So that's really the dynamic that we've seen. As you say, early days on enterprise cloud in particular. And it's fair to say that when we look at the data behind the firewall, which is where, obviously, the biggest customers have resided historically, then, yes, you see lesser churn up at the bigger companies.

Okay. On the larger enterprise, the value proposition is you're going to pay more to Atlassian, but your TCO will be less when you go to the journey to the cloud, right? Because you don't have to have the systems or -- systems engineers and all that. Is that a tough conversation to have as you're going through this dialogue? Or does the enterprise, it -- they get it? It's pretty easy to see that if I go to Atlassian Cloud, I do need less support in my 4 walls. How is that conversation?

Yes. The first thing I'd say is that the customers want to move to the cloud. That is the direction of -- the strategic direction of the IT department at most companies, not all but the vast majority. And the conversations that we have with our customers continue to be, it's a matter of, if not when -- excuse me, when not it. And so we can talk about the things that we're doing to help our behind-the-firewall customers be able to move over on to the cloud. And so it's obviously -- and we laid out some examples at Investor Day of what would be a typical price point for someone of a larger scale coming over from server to the cloud. And yes, it's a substantial difference. And so we have to have that conversation. I would say we continue to learn and develop how to have that conversation. We've brought into the discussion total cost of ownership calculators to help companies get their heads around it. We've talked about a tool that we're deploying with the help of Forrester to help companies get their head around it. Obviously, no one is going to give us a high five when we come in and say, "Oh, your bill has gone from X to Y, and it's a big delta." So we have to get them focused on the total cost of ownership. And generally, yes, they get it. Remember, we are being quite generous with these loyalty discounts that we've been talking about. So they moderate the impact of still 2 years to go on those. We've already had them in place for a year. So that has helped without question. Oftentimes, that helps the customer with their own departmental budgeting realities because the savings might be in 1 department, and then this incremental cost of software to Atlassian might be in a different department. So there are those sorts of things to work through. I don't want to say it's an easy discussion every time. But we're pleased by how that's going. And I think we're putting the right effort into making sure that we are best able to actually make the argument effectively.

Right. Okay. And 2 more questions related to this. When customers are migrating workloads, are you seeing an uplift? And what I mean by that is not in the price point but in the workloads, they're actually bringing over. In other words, your customers, when they do migrate to the cloud, and we could say DC or server, doesn't matter which, are they bringing only that exact workload? Or are they migrating up at the time that they're doing this?

I would say that what is happening is that they are oftentimes bringing a portion of their current workload over from behind the firewall. And that allows them -- it's a smaller project. It's a smaller data set that has to be migrated over, allows them to build some confidence in their ability to make these migration projects work. Remember, what we do for companies is almost always mission-critical. And so if you are running the IT department or some group within the IT department and your job is to make this migration work, you would better be successful or you're going to have some interesting issues internally. So the current focus is on steadily bringing the current workloads over to our cloud. And our logic, back to our sort of long-term orientation, is that we are confident that once that customer has completed that work, they've got their current workloads all over to the cloud, then we will see nice improvements in terms of our scale of relationship with that company. So that's the orientation that we have.

That makes sense. Test the waters and then build. Now last one for me on the cloud migration is you have loyalty discounts. Those ebb over time or they decrease over time, I should say. I mean that's a pretty meaningful tailwind to your revenue growth over the next couple of years: a, you're incentivizing customers to move more quickly, but those numbers go down. How is that not helping your growth rate, if I look out 1 or 2 years? Now I know this past year, you got people bought ahead on DC and server...

Yes, that's right. Yes.

I understand that. But if I look out 1 or 2 years, those loyalty discounts go down meaningfully. Isn't that a tailwind to growth?

Yes, it is. And that was part of our thinking as we designed that program. So yes is the answer.