Atlassian Corporation (TEAM) Earnings Call Transcript & Summary

Thank you, everyone, for joining us. My name is Keith Weiss. I run the U.S. software research initiative here at Morgan Stanley. And very pleased to have us from Atlassian, COO Anu Bharadwaj. Did I do a good job there?

Yes. Sounds pretty good.

Okay. Before we get started, I do have to read a brief disclosure for important research disclosures and personal holding information. Please look at the Morgan Stanley website at www.morganstanley.com/researchdisclosures. Excellent.

I guess, very pleased to welcome Anu to the Morgan Stanley TMT Conference. So from an investor standpoint, I think a lot of the focus is on Atlassian being a leading, kind of, software development tool set. But the story is much broader than that. And when we listened to Mike and Scott talk about the stories, it's really about enabling teamwork throughout the organization. So [ maybe, Anu ], can you talk to us about that broad vision of Atlassian? What's the, sort of, fundamental technology underpinning? And what's the, sort of, broad use case that you guys see that's going to get you to that goal of 500,000 customers?

Sure. Thank you, Keith. And it's wonderful to see everybody here. It's been my first in real-life conference for a while, and it's so heartwarming to meet people in person. So back to your question of what's Atlassian's vision. At Atlassian, our mission is really to unleash the potential of all teams. So we think about teamwork a lot. What does it take for teams to take? How can they collaborate more productively? How can they achieve results that they have never dreamed of before? And teams come in various different forms. They come in diverse sets of teams, some are technical, some are nontechnical, some are working together to build something, some are working together to really achieve a goal that is not possible to achieve stand-alone. And as we think about the needs of diverse teams, we also realize that we need a diverse set of products to serve these teams. And as a result, we think of our business, really, as operating in 3 distinct markets. So we have an agile and DevOps market that serves software development teams. We have an IT service management market, which serves IT workers and technical teams. And we have the work management market, which really serves knowledge workers. Each of these 3 markets are really held together by a central platform. Across all of our products, we have the Central Atlassian platform, which has a collaboration fabric. As a result, we can really invest in building up the central foundation, which then lifts up each of these 3 product lines and markets. Across each of the 3 markets, there's 45 million software members, 100 million technical team members and over 1 billion knowledge workers. And of course, each of these 3 markets have enjoyed tailwinds in the recent past with digital collaboration, cloud adoption as well as distributed work becoming more and more mainstream. So we're really excited about the heaps of opportunity in each of these 3 markets that's available to us. And as a company, we want to double down and invest in, play offense in all 3.

Got it. So when we're talking about that Central Atlassian platform, the solutions you guys are best known for is Jira, and that's kind of the underlying workflow engine. You have Confluence that brings, sort of, the right data to the equation and the right documentation. Any other kind of core components of that platform that investors are bearing in mind, of like what enables that collaborative teamwork environment?

Sure. Actually, when I joined Atlassian, this was nearly 8 years ago, the first thing that struck me in week 1 was how much Jira was being used by nontechnical teams. I joined thinking, "Oh, Jira is like a bug-tracking tool, project management tool for teams, right?" And well over 50% of our use cases came from nontechnical teams. So that was a clear signal from our customers, from our markets that the broad applicability of our product line was much broader than what we originally thought, which was the software development market. That was really the beginning of the platformization of our product line. So when we think about platformization, the first stage was really -- we took Jira from being a single product to 3 product lines: Jira for Software, Jira for Service Management and what we call Jira for Work Management. And one layer of that centralized platform was the obvious cloud-native infrastructure layer. So as a company, as we navigated our cloud transition, we built up a central layer of cloud-native micro services, on top of which we could host each of our products. So this was not just Jira but also Confluence and Bitbucket and the rest of our products, resulting in one common Atlassian infrastructure platform. But the interesting unique part of the platform, in addition to infrastructure, is what we call the collaboration fabric or the collaboration layer. That contains collaborative components like automation. For instance, one of the key things customers ask us for is, "There's lots of repetitive patterns in our workflows, help us automate these, so we don't have to spend IT team's time doing these manually." So we have core automation components. We have core intelligence, machine learning and smarts components, which can do predictive analytics and help you look at insights across Jira and Confluence. And we have what we call data analytics and extensibility parts of the platform through which you can build cross-product applications and really bring all 3 of the product lines together.

Right. I mean, this is an amazing kind of expansion from, kind of, where we started 20 years ago with just the Jira bug-tracking tool, if you will. I want to start talking -- digging into some of the -- those 3 parts of the equation, in terms of the product markets, on the developer side of the equation. From our perspective, Atlassian goes to market with one of the most complete, kind of, end-to-end DevOps platforms, with initial focus started on like what people think of as like the left-hand side of that infinity cycle with development planning, with Jira, Confluence, Bitbucket. But more and more of an expanding into the right side of the equation on the operations with Jira Service Desk, Opsgenie, Statuspage and the like. Can you talk to us the strategy for Atlassian? Do you want -- is it to consolidate that market to be the entire, kind of, DevOps tool chain? Is it the sort of a confederation of different technologies? Like, how do you guys think about addressing that market opportunity?

Sure. So Keith, before Atlassian, I was at Microsoft for 10 years, building developer tools. So really, all through my career and my life, have built developer tools. And if there's one thing I can say with utmost confidence, it's, developers hate to be forced into using a tool they don't want. So you often hear a lot of resistance from developer teams, when the CIO or the IT team says, "This is your only choice. You're not allowed to use any tool that you want." And we very much believe in Atlassian that every customer should have choice. And as a result, our philosophy is very much being an open DevOps platform and not consolidating everything into an all-in-one tool chain. We've never wanted to do that across the agile/DevOps market. And likewise, don't want to extend that to ITSM either. However, what we do want to do is be a central nervous system across the entire DevOps, that infinity chain you talked about, the central nerve system that is able to integrate all products of choice that development teams use. The DevOps teams use and also provide expansion slots, such that as more and more new workflows evolve, as DevSecOps comes on board, ITOps workflows get adopted by teams, we're able to use the same central nervous system and additively plug in more new products, whether they're Atlassian products themselves, like you said, we've moved more into the right-hand part of the loop, and we offer Opsgenie, Statuspage, Jira Service Management, a lot more deployment and ops tools, or if it's third-party tools, for instance, LaunchDarkly or Snyk, where we partner with other third parties in market. And we allow customers to really plug in products of their choice while enjoying the one, single platform that connects Dev and Ops teams.

Got it. When you think about the competitive environment within, sort of, the DevOps side of the equation, Microsoft, GitLab, on sort of this side of the equation, I would say. Anybody else we should be thinking about in that environment of, that is the real competitors for Atlassian and your vision of being, sort of, the nervous system, if you will?

Right. When we think about competition at Atlassian, again, we tend to think about it in terms of each market because if you look at it, who else is a company that operates across all 3 markets and compete across all 3 markets? There really aren't any. So specifically, I guess, your question is more in the agile/DevOps space, who do you see as competitors? We don't actually see anybody with an open philosophy. A lot of companies talk about wanting to have an open philosophy. But that would involve a deep commitment to making sure that extensibility prevails as a first-party entity and that it's easy to integrate with other tools out there in market. And the temptation to be the all-in-one product is pretty strong. So when we think about who in market is doing exactly what we are, I don't think anybody is. But the players you mentioned are players that operate in that market, albeit with a different approach.

Got it. Got it. Want to switch gears a little bit. Last April, you guys announced Jira Work Management, that's sort of a broader push into the nontechnical teams, marketing, HR and finance. Can you talk to us about how do you get to those customers right? And what is it that you're looking to do for those customers? Within the IT department, it makes sense how you sort of traverse that Infinity loop into that tool chain, a little bit harder with your product-driven motion of -- how do you get into the HR department? How do you get into the finance department?

Sure. So Jira Work Management, like you said, is one of our newer products, and it's still early days with the Jira Work Management, but we've seen strong customer demand for Jira Work Management from nontechnical teams. Classically, we have landed with technical teams and expanded to nontechnical teams. So typically, Jira Software or Jira Service Management or Confluence gets adopted by technical teams and then adjacent products can expand by virtue of the central landing. However, lately, we've seen a lot more of nontechnical teams landing with products like Confluence and Trello, which tend to take a lot more of an easy-to-use, easy-to-land approach to nontechnical teams. With Jira Work Management, it's very much the land expand approach, through which we reach adjacent teams. You already have the Jira License, the Jira Work Management is already available to you. And all of the work that your IT teams and engineering teams they're doing, is accessible by using Jira Work Management. So HR teams and marketing teams don't have to work in the blind and keep asking questions of the engineering team, in terms of status or when is this release coming out to customers? All of that information is automatically available. So landing adjacent teams is easy through expansion.

Got it. Got it. And then the last component of, kind of, that triumph, if you will. The Jira Service Management, I think it's this year or in 2021, you guys made it into the visionary quadrant in pretty fast fashion. I mean, that product has developed itself pretty well. One -- kind of, what's the market opportunity that you guys see for Atlassian? This is a market where the [ ITSM ] market has been dominated by ServiceNow for a really long time. Where does Atlassian see, kind of, the white space, where you guys could come in and make this into a big business?

Sure. With the IT service management market, and I think this is an important point to land with Atlassian, our viewpoint, our approach and strategy is very different to the incumbents in the market. We don't think of ourselves as, "Let's go create this gigantic, monolithic thing that we will then sell to CIOs and push it top down," instead, much like our agile/DevOps open DevOps philosophy. Really, what we want to do is to empower teams to make choices that are best for them. So we see more and more Dev and IT teams' boundaries blurring, with the taking on of DevOps movement becoming more and more mainstream. And as a product, we already have credibility and reference points with development teams. We've built up trust there. So it's really easy to extend the [ upstreams ]. That's why we see a lot of strong customer demand for JSM. We started with 25,000 customers a year ago. We've landed 10,000 customers in Jira Service Management. Now, we are at 35,000. Lots of great marquee customers that are using JSM and expanding fast as well. And fundamentally, our unique value proposition there is that we bring Dev and IT teams together to create a single DevOps platform. As a result, what that means is that it's really easy to adopt in multiple different instances across the whole organization. And then we are able to then go consolidate those instances organically and go wall to wall. So we aren't really in a, kind of, displacement scenario. Instead, we are in an organic growth scenario. So what we have done in JSM is, as soon as we decided we want to double down on the IT market, we created a roadmap, which we have delivered, as per our promises in year 1, both through organic and inorganic means. We've built up a number of feature capabilities in the JSM product and made acquisitions like Opsgenie, Statuspage, [ Health ] , Mindville, ThinkTilt and most recently Percept.ai. So we are really building all of the building blocks that we believe are required in the ITSM market and letting our teams choose the single platform that they can then bring together across their Dev and IT teams.

Right. So it sounds like you had a decent amount of usage with -- in terms of an ITSM use case before you even productized it. You come out with a sort of entry-point ITSM product into that installed base or a purpose-built IT product. And now, you've built on, sort of, all the modules around it and -- in garnering traction. Can you talk to us about -- you mentioned like the 35,000 customers, but in terms of, kind of, relative, kind of, uptake and, sort of, traction on a go-forward basis, how is that solution doing, now that you have that broader ITSM solution? Is the growth dynamic as compelling on a go-forward basis that has been in the past?

JSM in particular?

Yes.

Yes. JSM has definitely been one of our fastest-growing product lines, and both land and expand has worked significantly in favor of JSM, like I explained. We've strengthened the value proposition across both organic and inorganic lines. And also, if you compare us with other players in the market, we're clearly the highest-value, lowest-price offering. We remain that way. And we are the only player that teams trust enough to really connect with their core development and engineering teams. So the traction has been really good. We've done very well in JSM, like the customer numbers I mentioned. And we don't breakout our market revenues. But I have to say, this is our fastest-growing business.

Outstanding. I want to shift gears a little bit, keeping track of time here, to the cloud transition. It's definitely very, kind of, high on investors' radar screens, if you will, in terms of what they're looking at. Can you talk to us, kind of, where do we stand in that cloud transition today? And first, sort of, like access of where we see in -- the cost transition. When we think about the cloud solutions, and we could talk about like Jira or Jira Service Management, are we at feature function parity in, sort of, the cloud solutions to where we were with, sort of, data center or server? Or is that still, kind of, a work-in-progress?

Yes. I love talking about our cloud transition because it's one of the efforts that I personally led. I moved from Sydney to California to build up the team for cloud transition. So the cloud transition has really been a company-wide transformation for us, right? So it has required a DNA change, where we've had to replatform the entire product line. So we built a cloud-native platform from scratch. We took a good 1 year of R&D investment to make sure that we build that strong foundation. And then, we had to retool our GTM teams to train them to sell more SaaS products as against on-prem, plus our channel and enable them to figure out how to adapt their business models to sell more of SaaS products and to offer services to support SaaS products. Overall, we've always said, this is going to be a multiyear journey, and we are really pleased with the progress thus far in this journey. So we -- last year, we announced the [ succession ] of several products. And since then, the migration rates have been really healthy, and we are pleased with both SMB and enterprise customers migrating over. In fact, last year, over 1/3 of our cloud migrations came from data center and not server, where customers had a choice to continue on data center, but they proactively chose cloud because of the innovation that we're delivering on cloud. In terms of feature parity, it's not a great frame to think about one-to-one feature parity because cloud changes the game, in terms of what's available to customers on the other side. So a lot of cloud-exclusive capabilities like automation, analytics, more telemetry, better data, it's all unlocked exclusively on cloud. So as a result, when customers migrate, they're doing so with the incentive of additional capabilities that they can unlock in cloud. But in terms of, "Hey, what does your roadmap look like on the cloud to service all of your customers?" We fundamentally think about our multiyear roadmap, knocking off capabilities in 3 specific, distinct workstreams. One is in terms of scale, on-prem product support, really high scale, that is when we introduce the cloud product, we would only support 1,000 users, for instance. Since then, we've gone from 1,000 to 5,000 to 10,000 to 20,000. This year, we will support 35,000, and we already have launched an early-access program to support 50,000 users, for instance. So scale is going really well, in terms of parity. And then there's the data management and compliance aspects of it, which are very region specific. So we introduced data residency in 4 countries. We just landed Commonwealth Bank as a customer last year because we introduced data residency in Australia, which unlocked them from adopting the cloud, similar work in [ sensor ] and [ Basin ] and EBA in the EMEA regions. So that work continues to progress. We're pretty pleased with how we're knocking off in new acronym every quarter there. And then the last workstream is really around extensibility, where we think about "Hey, for on-prem customers that are coming to the cloud, are they able to use some of those extensibility use cases with marketplace apps that they're used to?" So we've introduced a new extensibility platform called Forge and continue to invest in Connect. And therefore, as a result, our cloud marketplace apps have grown in number and cloud marketplace GMV continues to be very healthy.

Got it. Got it. You mentioned the shift in go-to-market strategy necessary to sell more cloud solutions. Two questions on that. Like on the upfront side of the equation, I think it was almost two years ago, you made some changes, in terms of the free program, and made it a much more expansive free program. And then subsequently, in 2021, we saw a massive year of kind of new customer additions. And I think the two are related. So can you, kind of, talk to us about that opening of the funnel, sort of, that you guys did with the more expansive free program and the, kind of, new levels of, kind of, customer adds, if you will, is that durable, on a go-forward basis? Because it was a real, sort of, [ step-on ] change, if you will, into 2021.

Yes. That's an interesting question. So like I said, with free, we introduced free additions of Jira in Confluence, back in March 2020, I think. And we had a lot building up to that moment, from an R&D side, from operational cost optimization side, all of that. So we've built up to that. And ever since we introduced the free edition, it's really expanded the top of the funnel, almost [ 3x ] sign-ups, and that particular free program, we have continually improved as well. So when we look at cohorts of users entering through the free funnel, we've continually optimized their conversion rate. And that's a big reason for the customer numbers, like you mentioned. But in addition to that, we have a world-class GTM engine that's very efficient at landing customers of all sizes, both small and big, without us having to go talk to them, make cold calls, et cetera. We fundamentally want to protect and enhance that flywheel. So we've made surgical incremental improvements in our GTM model. We have a sales team that focuses primarily on expansion. They're not making cold calls and saying, "Hey, have you heard of this product called Jira?" but really, they're saying, "Your company is using 25 instances of Jira and Confluence. Here is a way that you can actually consolidate it and have better control and administration and easier management of these things." And so those optimizations really help, in terms of expanding and accelerating expansion of our customers. And all of these put together, really helps with customer numbers. But look, end of the day, customers have choice in market, and they continue to choose this, time after time, because we build great software.

So the second part of the question on, kind of, how cloud changes the go-to-market. And you touched on this with the, kind of, expansion standpoint and cross-product marketing. Does the cloud solutions make it easier to do that kind of cross-product marketing and make your customers more aware of the adjacencies? Like we have an ITSM solution, but there's also a CMDB that goes right alongside of it or the selection of products available on the DevOps tool chain. Like, is that a capability that you could, sort of, push harder on, now that it's more of a cloud-focused customer base?

Yes, definitely. So we've certainly seen that in cloud, it's easier to cross-sell across multiple products as well as upsell across editions. So on cloud, we have 4 separate editions that we offer, from free, standard, premium to enterprise, and we have a slew of different products that are available as SaaS products. The nature of cloud environment makes it such that it's really easy for us to inject in-context experience. So when someone's on a ticket, we are able to say, "Hey, here's the knowledge-based article associated with this ticket." And they can easily sign up for Confluence or just sign in to the free instance of Confluence, which makes it a lot more touch points, where we can expose some of these cross-sell kind of scenarios. And with the availability of editions and flexibility, what that really allows us as a company to do is -- most companies think of upsell as a sort of ladder, where you go from free to standard to premium, is climbing a [ run ]. But because we are a multiproduct company with editions that are flexible, we think of ourselves as offering a net, really. So customers can choose to say, "Hey, I'm going to use Jira software standard but pair it with a Confluence enterprise because I want to go wall-to-wall on collaboration." So that just opens up a lot more permutations, in terms of upsell opportunities, for us on the cloud as well.

Got it. Got it. So if we think about, sort of, ARPU expansion on a go-forward basis with our , I would posit that the majority of our ], historically, has been more users, right, and getting sort of teams to expand and going from your developer team to an operations team. Do you think that ARPU expansion, sort of, getting more products per team, more, sort of, a higher level -- does that become a bigger part of the ARPU expansion equation, on a go-forward basis?

We don't really break that out into "Is it adding new users to existing products or adding new products to existing users? How exactly are the ARPU components quantified?" It's definitely a combination of both. And across cloud, it actually offers us a chance to do both components better. So overall, we have opportunities to raise the ceiling on both of those components, compared to on-prem, much more in cloud.

Got it. Got it. Got it. I want to -- running out of time here, but I wanted to touch base on the price increases. It's a question I get a lot from investors, in terms of sort of, what do you -- I think the impact is of any particularly price increase. And I got to admit, like I've lost track. But there's been so many price increases, I can't, kind of, figure out which is anniversarying, which isn't anniversarying. What's the philosophy there? Like Atlassian has been a lower-price vendor over time, there's been a lot of room under the pricing umbrella, but what's been the philosophy behind, sort of, this years of price increases that we've seen over the past couple of years?

Yes, sure. So price increases, they might appear like, "Hey, there are many of them, but our product offering is really complex." But really, we've been very consistent with pricing action across server, data center and cloud because fundamentally, our philosophy has been consistent for 20 years. It's optimizing for high value, for high volume. Because Atlassian serves not just the Fortune 500 customers, like many enterprises, but really, we focus on the Fortune 500,000. So what we want to do is to make sure that our pricing remains highest value at price points that are accessible to the broadest class of customers, which goes back to our intentionality about introducing a number of different editions, starting from free all the way to enterprise, where we can ratchet up prices at different price points according to the value that we deliver. In terms of pull-forward question that you were asking, look, last year was a one-off event because we introduced the server cessation announcement. That would be more of a one-off event as against the overall common philosophy that we will continue to apply.

Got it. And do you think there's still room under that pricing umbrella? There remains a significant gap, in terms of price performance of you versus your competitors and when you think broadly across the product portfolio?

We strongly believe that. If you compare us to anyone else in market, we continue to remain the highest value offering across all 3 of our markets. And like I said at the beginning, we continue to invest and double down in each of those 3 markets. So yes, we definitely have the opportunity to deliver more value and as a consequence, make sure that we continue to offer more options and choices for our customers.

Got it. Outstanding. Unfortunately, we ran to the end of our time horizon. Any last thoughts you want to leave us with, for ending the session?

If I had to leave you with just one thought, in terms of the last year, for Atlassian, cloud transition has been really our central [ stuff ], and that's going really well. It's going to plan. And as I said before, it's a multiyear journey, we're very optimistic about where we are headed, in terms of the cloud migration direction, and it really supports our investment in each of the 3 different markets we play in. And for us, the question really is, there's heaps of opportunity in each of the 3 markets. So how do we continue to double down and play offense in each of those?

Outstanding. Great conversation. Thank you so much for joining us.

Thank you so much. Keith. It's been a pleasure.