Atlassian Corporation (TEAM) Earnings Call Transcript & Summary

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Hey, good afternoon. Thanks, everyone, for joining us and sticking with us, day 1 of the Wells Fargo TMT Summit. I'm Michael Turrin, Software Analyst here at Wells. I have the pleasure of covering Atlassian. Followed the company for a long time, not as long as our next keynote session. This is with the Co-Founder, Co-CEO of Atlassian, Scott Farquhar, not Scott Farcus, Scott Farquhar. Scott founded Atlassian with his [ college friend ] in Australia, Mike Cannon-Brookes, who we were fortunate to host last year. Very much looking forward to the conversation here. I'll start off with questions. If anyone has anything they want me to sprinkle into the conversation, it's [email protected]. I'll do my best to cover those as well. But there's a lot to touch on in 30 minutes, Scott. So first of all, I appreciate you spending time with us here today.

Totally, and I appreciate all the effort and insightful questions that you've asked over the years, Michael. That's made us a better company.

Excellent. That's great. Well, I'll try for a couple here, too. But I want to start off with something that might not be on everyone's radar, but that I've started to gain a fond appreciation for, which is the new HQ that you're working on. I've seen some pictures on the web. If you're in front of a PC, you might want to Google search Atlassian new headquarters. But not every company right now is focused on building a new headquarters. And so what makes that an important element of what you're aiming to build in the company's future?

There's a few things about that. One is that we operate out of Sydney, which is fantastic and great and has a great access to talent, and they stick around for a long time. Kind of our average life span of employees is way longer than say someone in Bay Area, and so there's a whole bunch of benefits to that. But we want to create a tech ecosystem in Sydney, like an epicenter for technology, and not just for us but other companies out there and mostly counterintuitive. But actually one of the biggest reasons people don't move to Sydney is they're worried if they don't like Atlassian, there's not a job #2 for another company. So we're kind of trying to create an ecosystem. And then the environmental aspects of the building, it's actually a timber building, which is unusual. So what we do is effectively a concrete structure every fifth floor, and all the floors between that are actually built out of timber. So it's actually sort of the exact carbon mass there, but it's closer to carbon neutral than any other building, if not carbon positive. And then lastly, the way work has changed is that the way -- we're not all going to go to cubicles and offices anymore. We're going to get together for a very team bonding, team building like breaking breads and so we get an opportunity to reconfigure our offices for those activities. So all 3 of those are pretty exciting.

You've been global from the start or at least 5 regional from the start, and you've had a focus on tech engineering from the get-go, too. So do you feel like maybe you learned lessons about culture and building or having that trust with a remote-based workforce and some others might be learning here along the way, and has that been helpful in just managing through the macro transition that everyone has been faced with over the past couple of years now?

Yes. I think over -- the COVID thing has been great for anyone for a whole bunch of reasons. But for us, it's been less disruptive than most because we've had -- our management team have been basically straddling the Pacific for over a decade now. So our management team meets virtually twice a week on Zoom, and we have done for many, many years before the pandemic. We have offices all around the world and engineering and sales and so on kind of around the world. So this is not new for us. Actually half our employees joined since the pandemic. So we have -- almost half of our employees have never seen the inside of Atlassian office. And we've had to bring them on and kind of teach them Atlassian's culture. And I think that's -- I don't know, I think we've done it for a long time. We've grown steadily over a long period of time. And so it's not like we've doubled or tripled our staff in any one given year. We've kind of grown our staff 30% to 50% over 2 decades. And that is a really good cultural base because the existing employees have a good opportunity to tell people what's important. And if you know any Atlassian, you know that we've got a really strong set of values. We have 5 company values, and they're actually used and talked about on a daily basis inside the organization. And you got any Atlassian ask them to name 5 values, and I'll make a very big bet that they know more and they can give an example about how that happens. And so look, it's something we're really good at. We continue to have ambitious hiring plans like the biggest constraint to our growth has almost always over the 2 decades have been around, have been getting great people inside Atlassian, and that's the same, and we're going to continue to have ambitious hiring plans to deliver on the opportunities we've got.

So what's different about Atlassian versus some of the other companies that we cover is, you were clear from the start when the pandemic hit that you're going to stand off it. And we've heard more companies say, "Gosh, we didn't know how it was going to go. In hindsight, we really should double down," but how would anyone know that? You were clear from the onset that you were doubling down or at least staying on offense, right? That was your message from the shareholder letter when it hit. It was, we trust that this is the right decision. What drove that decision process for you? And I mean, clearly, it's played out well.

We've got a history of doing this. And so we were around in the 2008, 2009 financial crisis, and it actually hit in Australia slightly different timing to the U.S. It took a while for the rest of the world to catch the cold. And so then we introduced what we call starter licenses, which are cheaper versions of our products to capture market share. And so I think the things that we learned from that was, firstly, there's certain talent that only ever comes on to the market in these crisis, right? They're happy where they work. They're like the best of the best, and they don't go around looking for any opportunities if something changes, and we picked up a huge number of employees who are still with us today, 12, 13 years later, that we picked up in the pandemic who stayed with us for that period of time. So for us, it was a bit of a talent war, can we acquire and get new employees in? And now it's market share. It's like, hey, how do we be aggressive on getting our products into the hands of existing and new customers? And obviously, COVID, whole bunch of customers that are turning out for the first time, looking for solutions to their digital problems who otherwise may have used a whiteboard or kind of other -- kind of old school methods of communicating and collaborating and they're now turning up looking for our product. So again, with strong cash balance and strong history of, I guess, making bets and then turning on gave us confidence to make this one.

You and Mike have been Co-CEOs for a long time before it was fashionable. Does that help with some of the decision process and taking a longer-term bet? Or I mean, does that maybe help you got check stay on us? And is there a way that the 2 of you delineate roles, whether it's product based or team or function based?

Our roles have evolved over time. Like it used to be that, Mike took the trash out in our first office and then I took the trash out and we took turns. And so we've kind of done every job in the company over that period of time. And the way it is today, like which is not static is that I run all the go-to-market and G&A functions and Mike runs all the product functions. But Mike and I chat on a daily basis and effective our roles will continue to evolve. What I think has been important is that we've grown, it's not just sort of Mike and Scott, like we're really proud of the talent that we've grown over the years inside Atlassian. And we've had 4, I think, promotions on our exec team recently, and all of them have been internal. And so super excited by us that we're able to bring up, Erika Fisher, our Chief Administrative Officer; and Anu and Joff on the product side and Cameron on the go-to-market side. And I think that's -- that brings me great pride that we can fill those exec roles internally.

Yes, that's great. One of the areas of focus from the investor perspective has been -- well, and from a customer perspective has been around the cloud and the cloud transition. I think from our perspective, relative to what we see from other cloud transitioned, this has been impressive in just the cadence and just the consistency in terms of the results that we see thus far. Can you just talk about what's gone into that? And what's allowed you to kind of power through thus far?

I think Atlassian and our relationship with our investors has always been very transparent about what we -- let's tell you what we're going to do and let's go and do it. And then hopefully, that all works out for the best. And we take a very long-term view of the company, being the founders. And for one of the super voting rights and other things allow us to take a very long-term view of the company. And a lot of this work moving to the cloud was laid down several years ago. And kind of this has been a very long journey. We've had cloud products for well over a decade, and so these are just sort of moving our customers across. And I feel that it's a good sign for the demand for our products. Like our customers want to stick with us, the value proposition of moving to cloud is really strong, like we're actually -- I think some other cloud transitions maybe happened earlier or different times and sort of value prop for customers and moving was maybe a bit more nascent than it is right now for our customers. We've done well on the customers. Like we've made -- we sort of said, "Hey, look, when we move from behind the firewall to cloud, there is a lot more value we provide to you, our customers." And over time, we want to capture that, but we're going to discount our prices back. So it makes it easier for you as a customer to move across without sort of having to find significantly more budget in a time period in which you perhaps were more surprised, like, "Well, hang on, I want to move there. I want that. I'm happy to pay more for it, but let me step into it." And so I think it's being considered over a long period of time is probably what we think about. We're not always perfect. Like there will probably be some stumbles along the way. I can't foresee what they are. I think that largely, it's in our court on execution, the customer demand is there. And as we said, like we still have -- our largest customers are still got a road map ahead of them before they're moving across. And so this is a multiyear journey for us. But happy to answer any more questions. I feel like this is -- for us, it's just execution through another business thing that we've got to do.

Yes. One of the ways that Mike characterized it when we talked to him about this last year was, he said, in some ways, Atlassian has a marketing problem. Like you're adding new features and functionality all the time, but you're not necessarily asking for a different price point. And so customers get like increasingly more, and it becomes kind of hard to ask for more, too. And it sounds like you've taken a transparent approach to having that conversation with customers upfront. How do you effectively communicate that value to the customers and get them comfortable that, yes, prices might go up, but this is the commensurate value that you're capturing?

There's a couple of things about Atlassian's pricing model that haven't changed over the decade and remain true today. One is that our prices are always public and available and the same for each customer. And that's not true of most enterprise SaaS companies. There is a headline list price on the website that there's very little resemblance to what anyone ever pays. And so any price changes or increase is really just coming out at the discount levels they're willing to accept. And so actually, it's almost impossible to work out. Did some live SaaS vendor have a price increase because no one really knows. So transparent pricing has been really important to us. Secondly, we've always wanted to deliver way, way, way more value than we capture in the price. And that allows us instead of having to spend money on expensive salespeople to convince and ring every last dollar out of the transaction, we can take those dollars, [ invest in ] salespeople and put them back into R&D. And research and development allows us to build better products, which then makes the product easier to sell and that's why it goes around and around. So that's the second thing. And the third thing is we've always, I would say, steepened our pricing curve. And so we've made it cheaper at the low end or more free. And at the higher end, we've tried to capture more commensurate value as we add more product features and functionality. Some of that's with additions, say, premium enterprise, where we do segmentation. And some of that is, over time, small incremental price increases over a long period of time. So we've been very successful with all of that. I mean our free versions have significantly increased the top of the funnel. And it's interesting because you think hang on surely everyone knows Atlassian's products, but there's a big difference between getting a new credit card and swiping for $10 a month or $5 a month and free, and that's made a significant difference for us and also particularly in cross-selling. If you've got a product and you want to try second product, the fact that I can just do 1 quick and it's already set up and ready to go rather than having to approve pricing changes or incurring costs and so forth. So that's really opened up the funnel at the low end. And on the high end, enterprise and premium versions in the sort of behind the firewall data center was a way of capturing sort of the high-end market where they have very specific features that maybe aren't mass market features like that people are willing to pay more for.

That's great. I think and one characteristic, I mean you mentioned -- and this has been consistent for Atlassian, but I still think it's somewhat misunderstood is just the prioritization of R&D relative to sales and marketing. It's different than most software business models. I think investors sometimes view that and miss the fact that there are still go-to-market investments that are happening within Atlassian. You've also created a very vibrant partner community that I think extends the reach in a more cooperative way. So can you just help for anyone who still looks at the low sales and marketing line item on Atlassian's financial model. And since you don't have the reach, help unpack what's actually happening there?

Yes. I mean there should be -- the reach should be like how we get to our largest customers. And I was chatting with my head of go-to-market the other day, and it's not 100% like characterization, but he said, look, largely our sales motions is selling customers, a better version of something that it already has. And that's a much different kind of high-touch motion than trying to convince customers to start something that they don't have or try anything -- or switch from a competitor to some. And so that is a much, much higher touch motion. And so our dollars ROI on those go-to-market investments are way higher than our competitors are. And that's great because we get in like largely through teams around an organization that bring us into a company and we spread from there. And so I would say the proof is in the pudding, now how much we spend on sales and marketing, but kind of the outcomes we get and the -- we sign large deals, we sign every -- large deals every year. But still, I think 10 years ago, our top customer was, I think, 0.3 of 1% of our revenue. Like today, I think it may be 0.3 or 0.4, like it's kind of roughly the same amount. Now the company's got a lot bigger, so the absolute check size is larger, but it's not really customer concentration here that we're worried about. We don't bend things to get things through the end of the quarter. We're patient for revenue and -- look, I think sales and marketing over time as we do larger accounts, there is an overhead to do some of that. So we will see some uptick as we do more enterprise deals, but it will still be best-in-class.

Yes. Yes. Makes sense. You participated in 3 very large addressable markets. And it's not that you've had to sort of overstretch to get to any of them. They've all kind of been within the wheelhouse of what we've known Atlassian to sort of provide from the beginning. So I just want to step through your views on each of them a little bit because you've been close to them for a while, and we'll start with agile development. I think we hear a lot of focus in and around DevOps. I think engineers understand it better than investors clearly. But in terms of just that sort of loop that everyone kind of looks at and the tool set that is required for DevOps, can you just speak to where Atlassian fits into that conversation? And how that's basically the cross-section of a lot of what you've been able, I think, from a much earlier -- from a much earlier point in time?

I mean, yes, I'll give the evolution of this. And it started -- DevOps is -- well, development used to be the moment when a developer gets involved to the moment they stop being involved. And what that used to be was managing all your backlogs and say, a product like Jira, so like what work has to get done. And then largely, that work was writing code. And Atlassian had a play in both spaces. We have Bitbucket in the writing code space, and we have Jira that manages all the work. And -- but then today, like that's very, very different, developers are getting involved earlier in the process like working with product managers and designers and testers and everyone involved sort of early on. And then at the other end, it's like, well, actually, we are on call. We actually deploy stuff and run things and we're much involved there. And I no longer write code, I actually assemble and build micro services, and I'm actually involved in making sure that micro services have the right properties, and those properties are now things like security, reliability, availability as opposed to just seeing there's bugs in my code. So that whole thing has changed drastically over the last decade. And Atlassian has never really wanted to get involved in each of the individual little pieces because individually, they change too quickly. Like we have every 5 years, there's a new paradigm in something. And it's sort of a very shaky foundation to build a long-term company on something that changes so quickly. So we get involved in areas that don't change very quickly. I want to be sort of a coordination backbone or a single pane of glass or a central nervous system for how workflows through that entire tool chain. And we play in a few very specific areas where we think they don't change and where it provides effectively APIs that third parties can get involved with. And we want to be the central nervous system, where are these third parties APIs plug into. And Snyk, which is a partnership we did where we did an equity investment in them, but they've been a long partner before that. They're a security company and they do code scanning, and they want to be able to plug into that pipeline that we provide. And because we do that, I guess as something happens and changes in the security companies and changes evolves like we're not involved in that particular space, we're involved in providing, I guess, the platform for them to get involved with their customers. And there's been a lot of DevTools companies gone public recently. I'd have to look at all of them, but almost all of them to my knowledge, are Atlassian partners like deeply integrated with our products and every new startup that starts in our space, the first thing they do is work out how they can integrate into Atlassian. So I feel like our strategy there of being the single pane of glass is working out well.

That's great. The other one that comes up often is ITSM, and investors know that one potentially a bit more because of an established incumbent there, but that established incumbent has a very small sleeve of customers relative to the customer footprint like Atlassian might have. And so can you just kind of help understand the positioning of Jira Service Management? And how that fits in both to the product portfolio and to the ITSM discussion for potential customers?

Yes. So ITSM used to be around effectively development did stuff and they walked down the hallway with the CD and here's my code. They hand it to somewhere in IT and the IT person schedules a weekend, [ like assisted me ] on the weekend, we're going to upgrade it. And if it doesn't work, we'll roll it back. So we've got all these really strong procedures about change management. And then we've got a ticketing system if something goes wrong. And so we managed that effective of what traditional IT of like change management. Now today, that's not how it happens. Like a developer pushes a button, and it goes straight through a pipeline and gets auto deployed. And if it doesn't work, it rolls forward. There's no real rollback aspect around the work. And so this IT and software are just coming together. And that's a bit we made kind of a decade ago that, that was the way things would happen. And so the big reason people turn to IT and same with Atlassian's Jira Service Management in that space is that effectively put those 2 things together, which makes total sense. And we're the only vendor that can put those 2 things together. The 2 other things that people tell us that they're really excited by is: one, the price point and price to value is like significantly different to others in that space. And it's not necessarily the total dollars, it's just the available market. The Fortune 500 could afford multimillion dollar deals and 12-month implementation times and so forth, like -- but if you're a small company or you're a Fortune 500,000, as we like to call them, the cost is a factor. And so we can sell to many, many, many more of these organizations. And then the deployment time, like, effectively, the time to value is there. You don't need third-party consultants. You can -- smart technical person can get up and running like on a Monday morning and then switch everyone across. And so again, that's the reasons why we're winning in the market versus maybe some of the legacy competitors there.

Yes. And then the other big market is the work management space. I think, look, that is in some ways the broadest. I think your positioning is very interesting there because you have a toehold with IT, with developers, with engineering talent, and we're just seeing a lot of cross-currents where, I don't know -- I mean, we hosted Amplitude earlier, and they're talking about just the pool of product management into marketing and other areas of the business. Does that help you in the work management space? Meaning, does the core position that you have with IT and with engineering help extrapolate into the broader business user? Or what is Atlassian's position in this broader work management potential opportunity as well?

There's a couple of ways to think about that, Michael. It's a really good question. And the work management market, as I think anyone following it, doesn't have as neat boundaries as is the other 2 that will be play in, which is really exciting because we've kind of often defined boundaries in markets we played in and avoid them from what they traditionally were. So that's exciting. Now obviously, if you are strong in the IT team, that's going to help you when you go out to other areas of the business. And though IT is prominent in delivering solutions to the business is maybe proportionally less, like it used to be IT delivered 100% of things that the business use, now maybe it produces 70% of the things business you use, like it's still very, very strong. And that would every internal lawyer at a company to like build their own workflow management productivity system at a practical level. No matter how simple they make it, they just necessarily have the skills or the time or the inclination to do that? And so coming through IT and software actually is a real strength of ours. Now we also have other products like say Trello, which sells globally really strongly, and it doesn't get delivered by our IT. That's actually a self-serve product. And so we play in multiple spaces in this market. The strength, I think we have, and particularly over time as we build out our platform is, this work means to move across an organization. And if you've got the marketing team have adopted a product or how things happen in marketing, but I doesn't talk to your engineering team. And so we'll -- engineering finish on the market, okay, well, how do they coordinate the work across these different departments and with Atlassian's products and the platform that we're building out, we have the opportunity to move work around the organization in a way that many of these other kind of point products or ones targeting specific department don't.

Yes, it's super interesting. We're coming up, we have just a couple of minutes left, so I want to go with more of the open-ended questions to finish. And I kind of think a nice place to start this part of the conversation is where you and I were discussing before, the formal conversations here started. And just what you're working on more broadly within Australia, just some of the social mobility, the aspects of helping enable technology outside of Silicon Valley and in other pockets of the world, can you just help us all understand the global reach and what's happening abroad?

Totally. So today, I'm in a hotel conference room, and I'm here effectively the Washington of Australia, which is Canberra, and I was here visiting politicians. And we actually started an industry association called the Tech Council of Australia. And we have 100 members within 3 months. It's been really exciting. But it's been interesting chatting with the politicians here because when I was here over the last decade, people would look at traditional industries like mining and retail and tourism as the creators of jobs. And these people all turn up with long list of asks and industry subsidies that they want or effectively licenses to operate. And as a tech company, we did need that, right? We just stay out of the way. We're totally happy to just continue creating jobs and delivering value to the economy, just stay out of the way. And then politicians really thought tech listing on the slide that kind of geeks and nerds and there's a small minority of people. And in Australia, we worked out 860,000 jobs in technology today, and that's a significant percentage of the working -- it's only 25 million people in Australia. So that's a significant percentage of the working work for us, and it's going to add 250,000 jobs over the next couple of years. And so for us, it was interesting to see that politicians in Australia are finally understanding the technology is like the key to prosperity and wealth and kind of long-term social mobility. We talked about like in ways that they hadn't maybe realized before. And again, it depends where you are in the world, whether that's kind of a common story or not. Obviously, I track Silicon Valley and other areas and there's a lot of tech legislation in the U.S., and the biggest companies in the world in the U.S. on the spot market are all technology. But in Australia, I guess, we like digging shift out of the ground. And so that's kind of been where people's minds have been historically.

That's pretty rewarding stuff. I guess -- so we've talked a lot about the long-term vision, the good things that you have in front of you. In terms of what keeps you up at night or the risk that you're focused on to make sure that you stay the course and the next 3, 5 years are as successful as the past 3 or 5 have been. What are the things that are top of mind for you as a leader of Atlassian?

The thing that keeps up at night, it used to be my really young kids, but they've grown up, so that's really nice.

I can...

For me, it's growing like okay, well, do we have capital tick, can we hire people, yes? Are we -- like do we want to work here? Yes. Like I'm so proud with the top 25 employer in the world, recently, which is a wise mission. You're like, hang on, there's tiny little company from Australia. They were smallest on the list, Asia-Pac like. So it was super proud. So yet we tick all these boxes, and it comes down to just, we don't have as many people in the building that are productive and running as we would like. And so that's the biggest constraint to our growth. It's not market opportunity, it's not execution, it's that. And so you can continue to see us as a company invest in our team and our staff to go after the opportunities we have. On the cloud transition side, I feel like that's on us, like our customers are there. They want it. They want to buy the products we have, that's down to us as a company execution. And so just making sure that we continue to deliver on all the things we need to do and move our customers across, but that's kind of in our court. So I feel really good about that. And then I don't think stop at night, but the things I get excited for the opposite of your question is just the opportunity we have with this platform about how we move across an organization when we have everyone we won an identity system in the cloud, who uses our products and database, it's like, the extra sort of nouns and verbs that I can add into that mix of companies, especially because we provide how work happens. That's pretty broad. I could add a lot of different things into that. And our platform, as we built it out, means that launching new products, which we've launched to quite a few over the last year, like that becomes incremental easier every time we improve our platform. And so that gets really exciting that we can continue to just add value to our customers. And it may not be priced individually maybe all that will change over time, but kind of we can just do way more stuff for our customers over the next decade.

Yes, the world is headed in a favorable direction for Atlassian. We've enjoyed watching. Scott, thanks for the time. We know it's valuable, and thanks, everyone, for tuning in here today. This is great.

Yes. Thanks everyone out there who follows our story. Like it's -- there's a lot of places you could spend your time and a lot of ways in which you could invest your money, and I think you choose to spend that with Atlassian and get to know our story. I just feel really privileged and thankful that you spend your time.

Okay. Thanks, everyone.