Atlassian Corporation (TEAM) Earnings Call Transcript & Summary

Thanks, everyone, for joining us. My name is Arjun Bhatia. I'm the analyst here that covers Atlassian. I'm the analyst at William Blair that covers Atlassian. I'm honored to be joined by Cameron Deatsch, who is the Chief Revenue Officer of Atlassian. Cameron, thanks for taking the time being with us.

It's a pleasure. Thank you.

Thank you. So Atlassian, I think most folks in this room are going to be at least somewhat familiar with the story, but maybe give us an overview of the business, the key markets that you play in, the broad vision that you have for the company and the problem that you're ultimately solving for your customers?

Okay. Founded in Australia, like all good tech companies, in 2002. 2 founders, 2 CEOs, still a co-founder CEOs for 20 years. It's -- actually, just celebrated our 20th anniversary. We've been public for 5 years now, going on 6. A little shy of 8,000 employees or so, 220,000 customers worldwide. We provide largely collaboration software. Our focus is on empowering teams all type. We think there's many different types of teams and many different types of teamwork and many different types of solutions to solve different types of teamwork. We largely compete in 3 markets. We look at Agile Software Development and DevOps as a market, helping software development teams to be more productive and work with their business counterparts. We compete in the IT service management market, providing a wonderful IT service management tool that works hand-in-hand with the software development organization. And then lastly, we look to the broader work management for all market category, which is helping teams of all type, whether they are technical or nontechnical track the work, work with other teams, managed dependencies across their organization. Our vision is that every single knowledge worker in the world wakes up in a day and uses one or multiple Atlassian products to manage, track, plan their work, communicate and work with their colleagues and teams.

Awesome. And I think one of the bigger changes since I've been following the story took place a couple of years ago when you guys announced that you would sunset your on-prem server offering and try to migrate those customers, whether it's the data center or to cloud, primarily. What does that shift in strategy? What is that evolution in the business meant for Atlassian? And how do you see that playing out over the next couple of years here as customers migrate?

Yes. So I've been with the company for 10 years, done many, many different roles before taking the CRO job. I actually was the General Manager of our Server and Data Center business, our on-premises business. So those are like my customers that we largely made the strategic decision to accelerate the migration to the cloud. And the best thing we did was, we realized that, hey, it's time to largely give a push, which was to end-of-life server version. Now we still have an on-prem version of our products called Data Center, but it's a more premium version more for the largest customers, but largely gave our customers a big announcement of our cloud is ready for you and it's time for you to make a choice. We give them plenty of time. We give more than 3 years heads up to make this decision, and we also published -- and largely knew most of the reasons why they would move to the cloud on the good side as well as the challenges they might have along the way. Let me try to address that as clearly as possible from all documentation and online public roadmaps, and then we have pricing and packaging exercises through all that. So we did not make that decision lightly nor did we make it with any shortage of detailed research on what this migration path would look like. The good news is, we're -- it started last February of 2021. So we're now 14, 15 months later, and largely, it's -- everything is pursuing exactly how we perceived it would. We are accelerating migrations across the board. Our retention is quite good through all this. We understood this was going to -- when you force a change on our customers, it forces them to potentially look to alternatives. Like that's part of the risk you take in this type of thing, and the reality is, our retention rates continue to maintain very strong. And we have another 2 years before all these customers option out across choosing cloud, choosing Data Center and hopefully, a small fraction going to alternative vendors, but we've been really good at that. That part is when they actually move to the cloud, we know their CSAT is higher, they use the products more and they end up trying more products from us, which is the real reason we're trying to make this all happen and so that they get more value from us when they move to the cloud.

What -- on that point, what is it in the cross-sell, upsell multiproduct adoption motion that is a lot easier for you on cloud versus on-prem? And then maybe talk about some of the recent customers that have actually migrated or that are on cloud, what you see there in terms of multiproduct adoption?

Yes. The fundamental simplification when you're in our cloud products is that imagine you're a Jira Software customer in our cloud. We have 14 different products in the portfolio, but Jira Software, Confluence, Jira Service Management, we have a few bigger ones than others. But once you're in our product, say you wanted to go try Confluence. You want some rich documentation to add to your software development, Agile project management tool. Historically, if you were on-prem, if you're an end user, you probably hate to go call someone in IT who had access to a server to go deploy software tool. That person has convinced to go download the software, get an evaluation license of the software, install it. Then once you get it up and running, integrate it with Jira Software, which is not a hard thing to do, but it's like -- it's probably a 2-day thing, if that IT person is your good buddy or if you have access to a box, in which 15 years ago, it was like a legendary amount of speed into play enterprise software in 2 days. Today, any individual user simply just goes up to the app switcher, hits try Confluence for free. It stands up the Confluence instance for 10 users already integrated in Jira Software, and that person could be written Confluence docks tied to the Jira Software environment in 45 seconds, any end user. So like that type of just simplification like greasing the flywheel of access to our products makes it much, much easier for everyone. My best example is Splunk. It was one of our first large enterprise migrators over the last 9 months ago, and I specifically remember Greg Warner over there, who is kind of like our primary contact doing the migration on the side. We announced a new product from Atlassian. At that time, it's called Team Central. We rebranded to Atlas, and we're just talking to them about it. We really hadn't done a big splash, and he was like, great, I'd love to try it out. We're like, "Yes, go to app switcher and click." And he's like, great, tried beta, and he had it going like as we were talking to him on a Zoom call. And he's like, "Oh, man, cloud is amazing." It's that type of simplicity that the cloud is going to enable for our customers.

And you're seeing that with large customers as well as evidenced by Splunk. It's not just a smaller customer dynamic, it's across the board.

Yes. And like the -- since all this is built on the common Atlassian Cloud platform, largely all the identity, security -- all the checklists that all those IT departments used to have to go through every time they evaluate a new product are already checked because it's part of that common ecosystem within the Atlassian product suite.

One of the other questions I get a lot from investors about the migration is, there's obviously an economic impact to Atlassian, right? You see a price uplift from the on-prem server customer versus what they're paying on cloud. What is a typical kind of uplift that investors should expect? And how do your economics maybe even at a broader level change when customers are in cloud versus on-prem?

Yes. So the stats that we give here is of our cloud growth rate for the next 2 years is north of 50%. Of that 50%, 10% is driven by migrations. The rest is organic expansion, new products coming in, addition upgrades, user expansion, you name it and cross-sell. Specific for customers, the cloud transition, if you have less than 500 users on your server product today, that maintenance line item that you're paying us every year is effectively in line with what a cloud subscription would be. So that really is for the -- that long tail of our smaller, midsized customers, not a big financial difference. The bet is, you can move over, same effective cost, you're going to get a better product experience and our -- obviously, as we'll be able to expand you with more users and more products quickly, that's the driver. On the larger side of the house, it's a -- the step-up can be more significant from a very large company spending a few hundred hold dollars. They end up spending a few million dollars with us, and that's largely due to our historic pricing from Atlassian, where we -- our historic large enterprise per user pricing was in the pennies. When I started at Atlassian 10 years ago, you get an unlimited license of Jira, unlimited users for $8,000. And that, for better or worse, anchored us at a very low price per user and those very big customers over a long period of time allowed us to get saturate those customers. So we have lots of users all over the place, but then it's one of those where we always had to like slowly, you raise that price over time. With this jump to cloud, especially when we end to life server, it's really forcing us to get more to the $5, $6 per user per month type of multiples that we have versus the pennies on the dollar. To help with that transition, one, we give all the customers plenty of time. Like no one's forcing you to do this today. You got a few years. We offer loyalty discounts. So every June, we've been having loyalty discounts that step down, but the sooner you move, the bigger discount you get to move so we help subsidize that transition. And then I have built up a pretty incredible team of individuals who come out there and help you build through the ROI models, the case studies, the customer references, you name it, to help build those business cases internally. It's never a question of are we going to continue to work with Atlassian, this comes down to when are we going to move. And hey, this is not -- wasn't in my budget, help us work through to build this budget inside our organization, and we're pretty good at that.

And it's actually surprising. I've seen some of the pricing charts for on-prem customers. It's like maybe it can be a couple of dollars a user a year in some cases. So the value that now you're capturing on cloud from the -- relative to the value you're delivering increases exponentially. And so when you think about customers moving over to cloud, are they taking into account this total cost of ownership because they do get the on-prem, they get to retire some of their infrastructure. Are they looking at it that way? Do you have to educate them? And is there a kind of a curve that you have to work along to convince them to move to cloud earlier or later in their journey.

Yes. They absolutely look at total cost of ownership. So it's the only way that's just. So going to the cloud, there's core cloud value props, right? You don't have to manage boxes. You got to pay administrator to upgrade things. You have to pay a partner to go run all of that. So there's -- those hard costs that are true for any SaaS provider over an on-prem provider. Then there's the additional benefit. So we shipped a bunch of new functionality last year that's only in the cloud. So we're unlocking more value for you. And the real trick part there is, especially in software development, like how much you're spending on your software development organization? Millions and millions, tens of millions, hundreds of millions, some of these banks, billions of dollars on all their development team. And it's like -- and it's very hard to prove, but it's like if we show all this functionality, we can show you much better entry metrics and insights and automation and capability. Do you believe there's at least some percentage increase in either the quality of what your developers are building, the retention of those developers are using more modern tools or the productivity of the development teams. And like even do a 1% increase in any of those 3 based on what I just showed you, the spreadsheet goes like as an ROI model. And it's always hard because it's like that direct linkage, but as long as it's going to be greater than 0, if you don't believe you're going to be higher quality or more productive by going to our cloud, you shouldn't go to our cloud and shame on us. And that's the conversation that we have to have. The hard costs are easy. Great. You won't paper server anymore, right? Like Bezos makes a few hundred thousand less on running boxes in the cloud, but the real thing is unlocking that additional value with the functionality.

Got it. And then one of the other parts, I think -- switching to product a little bit. One of the other parts of the story that I think has gained a lot of traction over the last couple of years is Jira Service Management. It used to be Jira Service Desk. You added some capabilities, announced a full-on ITSM offering. Maybe talk about some of the progress and some of the innovation that you've introduced with that product in the last 18, 24 months and the kind of traction that you're seeing there from customers?

Great. And all of you got to choose from Shake Shack across the way to come here and talk about IT service management. So thank you. My kids much enjoy talking about milkshake and burgers instead of this. But the IT service management market is -- I could just call our execution here. It's like it's -- hopefully, one day I'll have a Harvard business review case study and how to execute a new product in a mature company in enterprise software. And I say that because we launched Jira Service Desk, call it, 7 years ago. As largely, we had some customer demand. We have this internal innovation thing we do every quarter called ShipIt. And the demand was, hey, people wanted to submit tickets through Jira, requests into teams, but just that interface was way too clunky, way too hard, let's make it lightweight. So we ran a project called Viewport. It was like simplify the entire thing, have this little form you can embed on any web page anywhere and allow people to really easily submit tickets into whatever team was managing here. That was the original incarnation came out of a ship at project at one ShipIt. And then we quickly realized that, hey, as soon as we have that very simple interface to submit tickets, if you add some SLAs, a little bit worth little bit of reporting, you actually have a pretty nice help desk tool. We weren't going to IT search management at the time. We were like, hey, this is actually a customer problem. Customers are asking for us to simplify this. So we built this very simple, lightweight help desk tool, and we call it Jira Service Desk and started selling it. It's like very Atlassian thing. Next, they got some traction. So they got some traction, got some more traction, got money and start going. We changed our pricing model so it was more aligned with help desk tools instead of paying for all users to pay for agents. And then about 3 years ago, 2, 3 years ago, we had matured that offering enough. We had acquired a couple of companies. Opsgenie for incident management. We recently acquired Mindville for asset management, some automation capabilities. We started assembling all these Lego pieces together into a what is a pretty comprehensive enterprise-grade IT service management offering. That's where 2 years ago, we rebranded Jira Service Desk to Jira Service Management, and it's been through the races since then. We have 40,000 customers on Jira Service Management out of our 200,000 total, which is pretty good cross-sell rates. Plenty of good adoption. And the question is, well, why would I choose Jira Service Management over the other handful of vendors in the market and basically comes down to, do you believe that your dev teams and your IT teams are coming closer together? Or are they going to operate as they have historically, where your IT team is in one building, managing software and your dev team is another one writing software. Like is that dynamic going away? We believe so. Well, if so, when should they be running on the same platform managing all the work together. So that's one big. The second is, if you look at most IT service management offerings in the market, a lot of them are largely reinforcing 20-year-old IT processes called ITIL that have been documented like their rigorous process for a reason, but it's one of those well, hey, is there a different approach? Can you take -- there are downsides to that type of structure and scale and it slows things down and do you want your teams to be more responsive to be able to manage and customize their tools themselves. There's waiting 6 months to navigate things. And the last big thing is, which is always an Atlassian is, hey, do you think you're overpaying? Potentially, right? That's -- if not, that's cool, but it's as long as when you go to Atlassian, we're a fraction of the price of those vendors, and we provide significant functionality. We're on all the Forrester Waves and Gartner Magic Quadrant. I'm going to do the checklist with you. If you believe in those 3 things, I think Jira Service Management continues to -- like that's what's driving our growth today.

Is there -- when you think about some of the maybe incumbent vendors that are there, is your growth in Jira Service Management driven by replacement of existing solutions? Or is it a little bit more greenfield where you can take a different approach into getting customers to implement Jira Service Management, like you said through maybe the dev market as opposed to traditional IT department. How do you view that dynamic of this market?

Yes. There's broadly 3 different ways we're doing this. One is, in our long tail of customers, we have a lot of SMB customers that maybe they're just creating IT departments in their businesses, and they were using e-mail and spreadsheets to track request like I don't update my printer and all that stuff. So like as money just finally got mature enough. And for those people, we have -- we offer Jira Service Management for 3 agents for free, so just start using us. And when you get the fourth agent, we'll start making some money, but like that's the long tail seed and that's largely replaced in e-mail spreadsheets. Maybe some other small tool that's not very [ popular ], but they just ran into it. So -- but largely, that's replacing an e-mail. And then there is a subset of called mid-market and enterprise, where they're on legacy vendors who've been around 20, 25 years, haven't had a lot of innovation are being priced out, and those conversations are largely, hey, we're looking to do a new tool, right? And what exactly are you looking to? Do you believe in the dev and IT, and those ones is, we're highly competitive and people choose us. Good part is most of those customers already on Jira Software. We have an established relationship. It's not a new conversation we're happening, it's just the next evolution in our relationship, and hopefully, they can save some money in the process. And then there's many large enterprise organizations who may have committed millions and millions and millions of dollars as a corporate standard in corporate IT to stand up a new IT service management platform. With those organizations, we are, hey, is there a pocket? Is their team, the department or subsidiary. We just did a case study with a company called Belong, which is a telco subsidiary of one of the biggest telcos in Australia, and they largely chose -- they chose Jira Service Management. They had a corporate IT standard for their IT platform, but they went and chose us largely because they wanted to move faster. They had the flexibility and permission to go do that, and it's largely finding those pockets within the organizer's security team or a department. And this something like this is the Atlassian play. We're very good at this. We're patient, and we'll just quickly find more and more use cases, more and more use cases organically and start attracting. And all of a sudden, 5 years now people turn around and realize that, oh, my god, we have half our agents using Atlassian products, let's make a choice. And by that time, we've already organically gotten there.

Yes. Yes. I want to maybe take a broader view on innovation, right? Like Jira Service Management is a clear example of how you've innovated both organically and layered in acquisitions into the mix to build an offering that's competitive. At your Analyst Day, you announced a $10 billion revenue target for the company. When you think about how you get from here to that goal, what role do new products, your point A program, you launched a couple of new solutions, Atlassian Compass as well. what role do those play in that -- in achieving that $10 billion goal versus growing and scaling some of the products that you have that are on the more mature end of the spectrum already?

Yes. That $10 billion target, right? We could get there, let's say, like we compete those 3 markets, as I mentioned, after the big cloud transformation, we could get there just off of agile DevOps. There's enough of software development people in the world. There's enough of that trend where tech and development is becoming more and more important as well as all the people that need to interact with your development teams do that in Jira Software. So it's not just developers, it's everyone around developers, designers, program manager, product managers that kind of. We could get there just on that market category alone. We already spoke to IT service management in that second category. Also another multibillion-dollar market growing quite fast in our business. We've struck a vein there, and so those 2 are going, but ITSM alone is a multibillion-dollar massive market. And then broadly in that third category of work management for all of which there are many players who can talk about our strategy and stuff there, which we're continuing to grow across multiple product lines with Trello, Jira Work Management, Confluence, each one of those, that's definitely a multibillion-dollar opportunity there. So it says, we can get there with any like by purely just focus on Jira Software, but the reality is, those other 2 IT service management market and work management just gets us there faster, right? So that's like already fully dependent on this versus this. It's not that conversation just comes down to speed.

One of the points you mentioned earlier was that you have invested in the cloud platform quite a lot. You've been able to scale the number of users you can support on cloud. Now that a lot of that build-out is done, the infrastructure investments are being made, where are you directing your R&D spend today? I think Mike and Scott had talked about ramping up R&D investment because there are long-term returns to be had there, but where do you direct that strategically to generate the most return for the business?

Yes. And first off, platform investment is never done, right? And everything we invest into our platform, those common capabilities from the infrastructure perspective, the identity and security perspective to automation, to analytics, to our commerce systems, every improvement we make there improves each and every individual product we take to market. So it's one of those like we'll never stop doing that. That's a place where we'll always have continual investment. That said, over the last few years as we basically were eliminating all the objections that on-prem customers had from adopting our cloud platform, it did hoover up a lot of our R&D resource. We just had to do scale and performance and security and all those enterprise checklists. As that's become less of the requirement, I mean we're still investing there significantly. We've been able to invest in those 3 markets, as I just mentioned. Each of those markets, we have competitive differentiation, a set of offerings, clear go-to-market and R&D roadmaps that we want to execute on. The thing I'm also like -- but the best thing to point out here is, for the last -- for a good 3 or 4 years, we really didn't have any new products coming out from Atlassian that weren't acquired. We were really relying on inorganic to add SKUs to our portfolio. And you saw about 1.5 years ago, 2 years, as we continue to grow, but we didn't have to hoover up all of our resources into the platform to make it all enterprise grade. We're able to free up development teams via this point A program to allow us to basically create idea and invest in new ideas, and that's where we've had 4 new offerings come out of that program. We got Confluence. We've got Jira Product Discovery, Jira Work Management, Atlas. It's one of those like -- and we're launching new products in the market, and that's the best. And we have another line of another 3 or 4. It makes my job ridiculously difficult because it's like I have 4 new things we got to market and sell, but that's okay. The -- but that's the biggest thing we see R&D starting.

Good problem to have.

Yes. It's like and it's -- and the reality is, the customer is just -- we are very lucky with the customers we have. Like most customers, even the angriest ones, when I'm like they're getting a customer escalation, great, I have to get on the phone. We get on a Zoom call and they're like wearing Atlassian t-shirt. Like, okay, we're friends. You can yell at me. It's all right, we'll figure it out. But they're the ones that were just like have so much or pent-up demand to go try new stuff from us.

I actually want to maybe switch to your organization now, the go-to-market organization. So how -- when we think about what happens as this cloud migration wraps up in a couple of years as the business is scaled a lot more, how do you think the go-to-market organization changes, if at all, once we're on the other side of cloud once you have more products in market as well to sell to customers?

Yes. So first off, the cloud migration thing does not stop in a couple of years, right? Like data center is still out there as an on-prem offering. And in February 2024, Server goes away, but there's still be plenty of Data Center customers that we will continue to nurture and grow and convince the move to the cloud. So that cloud journey doesn't stop, it continues on for many, many years. As far as go-to-market organization, it's constant evolution. The things I live by is like what I'm proud of is, we run the most efficient go-to-market organization in enterprise software. If you find one that's better, please let me know. We run roughly all go-to-market at 15% of revenue, all sales and marketing expense. What we've done -- historically, that was all marketing and like 10 people that may be responded to an e-mail, the customer called us. That's like it was my first job at Atlassian. And we have increased -- while growing our marketing experience, we have increased the customer-facing functions to keep us closer to customers. So over the last few years, we have enterprise advocates. These are account executives, there's sales reps. We have customer success managers. We have technical account managers. We've invested in our channel. We had solution architects. So like we have way closer to our customers than we've ever been, but we still barely just scratch the surface there. And I've been doing that, we've been able to layer that on while maintaining this efficient go-to-market funding model, and that's the balance that I work in. And the delicate balance as we continue to grow is, great, now we're all the enterprises like a focus on migrations, how do we support these 3 different market approaches from how do we ensure that we continue to invest in our flywheel from growth teams and analytics teams and most importantly, how to get closer to our customers. How do we think about international, how do we think regional and country level go-to-market efforts. All of that can get really expensive if you just dive in really quick unchecked, and that's just not how we operate. We largely invest in new capability or a new muscle. We use usually copious A/B testing or try one market or a different market, prove it out that it drives the incremental return we want, and then we'll scale it from there. We've done that again and again and every one of those functions I just spoke about that we built customer success, enterprise advocates, TAMs, even international marketing, that's exactly how we think about it. And we're like, we could go faster, but it's one of those like not about the speed, it's about growing consistently, efficiently, and that's the model we're building.

I want to touch on macro. I think it's something that's obviously on everyone's mind here. There is increasing uncertainty, I'd say. I'm sure you've gotten this question a lot already today, but I would love to maybe hear what you're seeing in your pipeline in deal velocity and deal size, if anything, whether it's U.S. or international, that's different than what you would expect in this environment?

Yes. Two pieces on this. Completely understand there's things going on macroeconomically. If you looked at our metrics, you would not outside of Russia, which was the Russia, Ukraine, Belarus, the 1% of our customer base, 1% of revenue that effectively has gone away. Outside of that, I would not see there's any other -- when I look at all my metrics from sign-ups all the way to renewals and everything in between, there's no macroeconomic issues, if you just purely looked at the data. Talking to customers, yes, listen, there's always uncertainty out there, but there's been uncertainty for the last 2 years. Like every few months, we have some level of uncertainty. The -- but the things that I say on this is like the regardless of the uncertainty, whether it was COVID or inflation or whatever is going on tech or wars, you name it, like there's 2 things we're certain of that we're tied of. But one thing uncertain of is businesses will continue to invest in technology to improve how they're delivering value to their customers, right? I'm not going to -- like you can call that digital transformation or whatever buzzwords you want, but it's like our people going to continue to invest in tech to streamline their value chain to a customer. And the answer to that is, absolutely, there's no going back, which means there's going to be more developers in the world, had more businesspeople work with developers, that's tied to the core part of our business. So can things slow down, grows a bit like long term, that is going to be a trend that we're writing that we are a core part to. The other thing I am certain of is that the way we all work together has changed forever, right? Whether you have to go back to the office or whether you're going hybrid or whether you're going to be remote forever, it's never going back to the way it was in 2019. All right. And that's going to drive massive new cultural transformation challenges, business challenges, how we work together is going to have to change, which drives a bunch of new opportunities for vendors like ourselves to try and solve these new problems. I'm not saying we have solved them all, but that opportunity to solve those new challenges is something that really excites us. I think we can really take it on. And something we've embraced from day 1, like we said very early on, you never have to go back to the office. Let's figure this thing out. So it's those 2 things that I'm certain of, regardless of what happens in the next 6 months, 12 months. Who knows.

Do you think it -- does it change -- do you change your approach at all whether how you position which of the 3 markets you want to go after more, whether how you position ROI or pricing. Is there anything fundamental in the business that you think you would have to adjust in the next 6, 12 months, perhaps as things change here?

Nothing yet. Like there's new customer acquisition is always #1, then migrations and IT service management. Like I can go right down that list. We do quarterly plan in every case. So every quarter, we can adjust and so on. And the reality is, whatever is working, we throw more capacity at and go to market, things like we have to build things before we market and sell them. So the reality is, I can largely see where R&D is investing and I have a couple 2, 3 quarters to get the go-to-market train going behind it. So -- but no, I don't see any massive shifts in our approach. Actually, as you know, we're investing and we said, "Hey, we're going to invest through all of this because these 3 markets are gigantic and our competitive differentiation in each is pretty unique.

Yes. Absolutely. All right. Well, that is all the time we have. Cameron, thank you very much for joining. Thanks, everyone, for coming, and we do have a breakout session upstairs in Adler for Q&A, if you'd like to join us there.

Yes. Thank you.

Thanks, everyone.