Atlassian Corporation (TEAM) Earnings Call Transcript & Summary

All right. Welcome back. Robert and Martin are here from Atlassian, and I think many would agree with my statement that this is probably one of the best built software companies in the planet. It is an incredible force and growth and profitability, and we're all going to start a company we'd probably try to emulate. I think many companies this week that we've had in our conference have said, "Who do you want to be like?" They're like, "Atlassian." So maybe if you want to just kick off and just give us your sense of where you're at in this journey and talk about where we're headed from where you sit in your perspective? And what are the kind of the most exciting underpinnings of the story now that you see?

Well, the mic was there. Well, look, first of all, thank you. Great to be here and share our story. I'm a Chief Marketing Officer, and one of the favorite things I enjoy doing is telling the Atlassian story. Mike and Scott, our founders, started Atlassian exactly 20 years ago. And so we've had 2 decades of incredible growth. And fast forward to today, we play in multiple multibillion dollar markets. Historically, we've always been known for powering collaboration with software engineering and development teams. That has since expanded to helping drive success with the IT teams and IT service management, and more recently business collaboration and business teams. And when we look at the market and the opportunity, you'll see different numbers out there, but there's roughly 25 million, 30 million software developers around the world, 100 million technical team members and close to 1 billion knowledge workers. And so when we look at where we are and what we've done in the past 2 decades, as proud as we are of the progress and impact, honestly, we're just scratching the surface relative to the potential and the growth upside and opportunity we have. As more and more teams inside of organizations start to model the way they work after software teams, it's been a huge accelerant and of course, the digital transformation of large enterprises as well. So I couldn't be more bullish about the future. And to me, every day, it feels like we're just getting started.

This move beyond software developers to the rest of the world is a big move. And it's pretty exciting because many of my teammates, we all sit there and we're still sending e-mails or phone calls or Microsoft Team messages, like it's kind of the joke, right? Like how we -- and this is how companies are running. But like this is -- this opportunity beyond developers is so massive for the broader audience. Can you talk to how you're trying to move to unlock this greater opportunity beyond just software development? And where you're at in this journey and kind of what are the products? What are the -- what's the strategy? Help us understand that move.

Yes. You're absolutely right. Knowledge work is really fragmented. And an average enterprise will have anywhere from 250 to -- large enterprise, 250 to 300 SaaS apps. And the promise of collaboration, which is unified work and teams not working in silos, hasn't really come true. And so we really pride ourselves in this idea that, listen, we -- we're not going to force individuals and teams to work a certain way, the Atlassian way. You have a lot of collaboration products out there that really emphasize moving to one tool to fit everything. One solution, one platform, one suite, it doesn't reflect our reality of what we see. On the other hand, you've got the promise of apps and tools that promise productivity, do more, ship more, ship faster. And that might be true, but that has diminishing marginal returns when teams aren't using a common shared system of work. So our strategy is really differentiated by this idea that teams can work differently but still work together. And so the -- we've made a huge investment in the Atlassian platform, which is say we have over a dozen different products that are built on the platform. You can choose to use products made for software developers, IT team members, marketing, HR, finance team members, but work should flow throughout the organization in a connected way, even if you're using different applications. Now that's easy for us to say with our own products, but we've gone one step beyond that and said, you might be using a competitor's products. At a minimum, we want to be able to integrate to that. So we won't force you or ask you to shift off of one of our competitors' products but integrate it into the Atlassian suite. A great example of this, we launched something called Open DevOps, which is a suite of Jira Software combined with other Atlassian products, but we autoprovisioned our competitors' products. We partner with them. So effectively, a software team will say, "Hey, we want a more integrated DevOps suite of products." Great sign up for Open DevOps. You get Jira Software. You get Bitbucket. Once you're in the product, you can just activate products like GitHub, which is a code repository that competes with Bitbucket. We want to adapt to the way teams work versus forcing them to adapt to a single way of working.

Maybe just one more around this theme. Atlas and Compass, you talked about it at Team '22, and maybe just talk a little bit about the interest level you have seen since talking through this? Maybe explain for those that don't know what it is.

Yes, sure. So 2 products launched on the Atlassian platform. We've made huge platform investments, which is certainly good for customers because they're shared components and ability to unify work when using Atlassian products built on our platform. The other advantage is it really advances our ability to ship faster. We can build and design new products at, I'll call it, lightning speed. Two of those products you mentioned Atlas and Compass are exactly that. I'll start with Atlas. So Atlas is a SaaS application that is really designed to do a few things. Really answer -- help companies answer questions around who's working on what, right? Who is the team working on a particular project? What are the goals for that particular project? And what's the status of that project? All of us here at any given point in time are working across different teams, across different projects, and they are at various stages of completion. Today, most of that information is distributed in Excel spreadsheets, in e-mail, in to-do lists, all kinds of different places, and some companies have systems of record for tracking those goals. Atlas is really designed to be a wall-to-wall type solution for any company to say, "Hey, you may be using disparate applications, but there's a central window into projects and goals status and teams, and you can use that to get an update on anything that's happening throughout your company." And what we find is customers -- it's still very early, customers will look at that and say, "This is the solution, or this is the problem I didn't realize I even had." And to have a single pane of glass to get simple visibility into all of that is really powerful without having to necessarily change the way you work. So that's Atlas. Compass is really designed for digital organizations that deploy services. So if you're Netflix, you might have a service around personalization, right? Netflix probably has tens of thousands of services like that. These are digital capabilities. There's an explosion of these services in every type of company, and it's really hard to have a shared registry and a common understanding of actually, if the service goes down, who's on point? What's the health of that service? What is the integration of that service to other services? Compass is designed to be a digital registry that helps consolidate all of that and give an engineering team full visibility from top to bottom around the status and health of all services.

There are a couple of big questions our clients are asking, and so we'll go through those. The elephant in the room has been the macro. And many companies have said, "Hey, we're not seeing it." Microsoft, obviously, lowered guidance this morning because of FX. The question is kind of what are you guys seeing? And what creates the installation around your model if things got worse?

Happy to take that.

This is Martin, by the way.

I'm Martin. So we have this beautiful linearity throughout our quarter, given the bookings on our board. So we look at bookings on an ongoing basis and we have [Audio Gap] in terms of customer demand. We just came off of a few conferences. We were in front of a lot of our largest customers and partners [Audio Gap] as well. Customers felt very -- and sounded very upbeat. We have a really resilient model. Part of it is our high-value proposition, right? Like offer our products at a very affordable price for customers to get in and get started. At the same time, we are powering these really mission-critical workflows. So I think that -- those 2 factors combined help us be [Audio Gap]

Yes. I'd like to say, we serve the Fortune 500 and the Fortune 500,000. I think that service area gives us a lot of resilience in sort of where the revenue comes from and the types of customers we can reach, a 2-person team to a financial services company like JPMorgan with 250,000 employees. And it's powerful to cover all of that globally. And so a portfolio of products, the global reach and the geographic diversity and the spectrum of the types of customers we were able to tap, I think it really builds in a lot of resilience into the model. As Martin said, we're seeing growth accelerate like [Audio Gap] at or even above in some pockets of our business expectations.

That's great. The other one was just around the COVID potential pull forward as we went early digital, we couldn't really do anything together. Now we're back traveling and we're at this conference. It's great to see everyone in person. But was there a pull forward or not? Do you feel like we're just seeing continued natural demand? How would you characterize that?

There was radical acceleration and customers will tell us, hey -- they saw 2 to 3 years of the journey that they were on get compressed into a matter of months. One of the things we did in the business right at the beginning of the pandemic is to say, "Hey, wait a second, there's a whole world of customers who now need to work in a distributed remote work fashion. What's the most important thing we can do?" And we decided the most important thing we could do is make our products available for free for under 10 users to more customers. We saw it as a huge opportunity to capture market share and frankly, attract companies and customers who weren't working on our products or with collaboration software and at that potential to tap that opportunity. In my view, wildly successful. The monthly active user count and the number of new domains that we were able to track really grew. And we did see -- so when I think of pull forward, I think, hey, this natural progression of collaboration products being used in enterprises, a lot of that just got accelerated. And from a revenue perspective, we -- we're already on this journey of taking a lot of our on-premises customers to the cloud. And with COVID and with the pandemic, we saw an acceleration in a lot of transformation initiatives and uptick in sort of the cloud business as well. Now for better or for worse, when we look at IT budgets, Atlassian, in most companies, represents today a very, very, very small percentage of total IT spend. And so as much as there may have been some pull-forward effect, the upside opportunity that we see to grow within existing accounts is massive.

Maybe there was a pull forward, but you didn't see a dip? You're seeing consistent good demand as you pull forward?

Yes. So I would characterize it as this pull forward of digital transformation, and that digital transformation. [Audio Gap] that's obviously something [Audio Gap] power through [Audio Gap] we can all agree that the importance of software [Audio Gap] as people continue to build software, recently have to [Audio Gap] helps continue to see [Audio Gap] and then at the same time, as Robert mentioned. [Audio Gap]

Yes, that was the next topic we wanted to go through. So where are you at in the journey? Is there a percentage you think we're through? Or you're a baseball fan, what any or -- whatever analogy you want to use, where are we at in your cloud migration?

So, I would say that we've always maintained that this is a 5-year journey. At our most recent Investor Day, we talked about. [Audio Gap] of our server base [Audio Gap] What's interesting is also seeing from a [Audio Gap] you're going to see [Audio Gap]

Why should investors care financially? What is this going to do? What does the cloud give you on pricing and attach rates and everything else that you didn't have before?

So when we look at cohorts of [Audio Gap] economic side [Audio Gap] and for larger customers [Audio Gap]

Sounds pretty good.

Well, here's another advantage, right? Historically, in an on-prem world, we might have a few contacts at a customer, even if there's thousands of users of the billing contact, the technical contact and maybe the admin, and sometimes all 3 are just 1 person. In a cloud-centric world, the telemetry and the instrumentation we have to understand how end users are using our products is incredibly powerful. I always use -- I come from an e-commerce background, an analog of merchandising on [indiscernible]. It's at the user level. I can understand preferences. I can understand search behavior. I can understand potentially the next best product to recommend. Imagine that same competency now in a SaaS business where we have a portfolio of products, and we can understand individual user behavior. And a simple example I use is we have Jira Software, workflow product. Confluence, a workspace and document -- documentation product. If we see someone, an end user, adding Google Docs links into their Jira ticket, that's a signal, an indicator that they may be prime to try a product like Confluence. And you take all the different permutations and our expand opportunity really dramatically improves and the ability to cross-sell products to end users and then to customers, it's just a game changer in cloud relative to on-prem.

Happy to take any questions, if you guys have any. A couple upfront. As he's coming up, James is kind of transitioning out on the CFO role. Can you just give us any update what's -- about the transition, the search?

There are no updates at this time. James, is fortunately. [Audio Gap] He's around till [Audio Gap]

Just a question on the operating margins. You talked about taking operating margins down like mid-teens next year, which is almost 8 to 10 points lower year-over-year, which is even having the top line. Maybe what is driving that? And especially given the kind of you're heading into this macro slowdown, the need to kind of spend so much in OpEx?

Yes, happy to take that. And so this actually gets back to almost Brent's question. Earlier, we at our Investor Day, highlighted that. [Audio Gap] at approximately [Audio Gap] We have tremendous [Audio Gap] what's driving this [Audio Gap] opportunities [Audio Gap] These will drive return [Audio Gap] approximately [Audio Gap] these really attractive opportunities. And also [Audio Gap] we've also been building [Audio Gap]

As one of the go-to-market leaders in the company and running our marketing organization, there is a tremendous window for us to attract talent right now that, frankly, my 5.5 years at Atlassian, it's almost unprecedented. And so the ability to invest and double down on the growth opportunities in front of us, not just on the R&D side, but on the talent acquisition side, we're already starting to see it. And it's, I believe, going to be a huge accelerant for our ability to continue to scale and grow the company long term.

As you expand your products [Audio Gap] at what point do you [Audio Gap] your partners?

Sorry. Can you just repeat the last part? At what point do we start to...

Become a competitor to your partners?

We are quite surgical in how we think about collaboration space and the opportunity for us to launch new products and where we decide to launch those products. There are plenty of white spaces or gaps in the market right now that play to our advantage and don't necessarily compete with partners. But I'll be very open. Like our philosophy is to be the best integration partner for every SaaS company out there. Any SaaS company looking to our collaboration and teamwork, and it may be a little bit counterintuitive. But what we find is customers are attracted to Atlassian because of that. We don't necessarily force the way they have to change the way they work. Agile -- we have a solution called Open DevOps. And it's built on the Jira platform and offers a whole spectrum of competitors auto provisioned for customers. So when a software team introduces Open DevOps to their development organization, you can provision Bitbucket, or you can provision GitLab or GitHub as an alternative. And we found that to be an extraordinarily powerful strategy to help teams, call it, work differently but work together.

And -- but like GitHub or GitLab is designed with that? Or do they [Audio Gap]

No. I mean they've -- we've got, I think, 16 growing to maybe over 20 partners as part of our Open DevOps initiative. And what we find is companies can either choose to say, "Hey, we want to be the one product to rule them all, or we want to bring our products to where incremental new customers are and introduce them to the services that we provide." And we have found it incredibly powerful to offer a strategy for those companies to say, "Hey, if you want incremental growth, use Atlassian as a distribution partner."

And just one more question. Is the buyer of [Audio Gap] DevOps [Audio Gap]

Great question. In most situations, in that example, no, it's the same one. It would be an engineering manager. If it's a large organization, it tends to be someone in the CTO's office. But the power of the Atlassian business model is, we are still very heavily focused on landing with single teams and expanding from there, and that hasn't changed. Now as we get to larger 5,000-, 10,000-seat deals enterprise customers, the conversation is more top down, but the flywheel effect, Open DevOps as an example, still holds true.

You have a lot of products that aren't monetized maybe at the level they could be like Trello. I mean everyone asked like, why aren't they leaning in harder? Is it that you just have such a great revenue engine on the other side, you don't need it? Is it you want to get more mass market usage and then kind of dial the price? Like what -- we get the question a lot...

Yes. Good question. We love the Trello. Millions of customers come into Trello and use the product -- end users use the product, and it's just one of the most efficient acquisition engines we have. However, we are, in fact, monetizing Trello. This past year, 18 months, we've leaned in very aggressively on enterprise Trello. And so we have actually a bold and cheeky and fun, almost consumer-grade ad campaign out in the market, promoting the enterprise features of Trello. And we've just seen tremendously positive response. And it's sort of interesting because we have Trello deployed in enterprise companies, many of them who have been using it either for free or at kind of very low price points, Trello standard or Trello premium, and they don't take advantage of the enterprise-grade features. And a lot of the early wins on Trello Enterprise has really been companies who are already using it, unlocking the value of the enterprise tier. And there's a lot of runway left. So we're excited about the value prop of Trello, the existing footprint we have and the monetization potential for sure.

Martin, any other questions that you're getting that you think need clarification? I think you're pretty clear on the macro, that's not a headwind from what you can see right now?

I think you've done a great job of going through all the questions that are top of mind for investors.

Last question? If not, we'll wrap there. Thank you, gentlemen.

Thank you very much, pleasure.