Atlassian Corporation (TEAM) Earnings Call Transcript & Summary

Excellent. Thank you, everyone, My name is Keith Weiss. I run the U.S. software research franchise here at Morgan Stanley. And very pleased to have with us from Atlassian recently announced President and CEO Anutthara Bharadwaj.

Bharadwaj.

Okay. I was close. Not even close.

Nice try, Keith.

Before we get started, for important research disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Excellent. So thank you for joining us again at the Morgan Stanley TMT Conference.

Can you talk to us maybe a little bit about your expanded role at Atlassian. What you're looking to take on? And kind of what are your key priorities now that you have that President role over the next 12, 24 months?

Sure. Thanks for having me here, Keith. It's a pleasure being here with all of you. My new role that I took on recently as President at Atlassian. I keep all of the responsibilities that I had in my previous role as COO, which was roughly about half of the R&D business, around our enterprise business, cloud platform and the data center business. In addition to that, I'm also taking on the responsibility for the other half of the R&D business across our 3 markets, ADO, ITSM and work management and SMB growth and user experience. Our thesis with bringing all of these different functions together, product, design, strategy, business operations under one leader is that it will let us execute with a lot more efficiency and focus on unified priorities. And we can see that straight out of the gate to just within the last few weeks of taking on the role and unifying these teams, we've been able to drive several efficiencies, bring teams together to eliminate overlaps and really focus on accelerating product innovation while also making sure that we are doing this in the best most effective way possible. So really, I see my job as one, clarifying business priorities across the company; two, simplifying user experience; and three, driving holistic business growth across both the SMB and enterprise segments.

Got it. It sounds like there's some relation to sort of that change in kind of how you're viewing sort of like organizing the leadership to the focus on sort of top 3 priorities that we talked about on our last conference call, it seems like there's some relation there.

Yes. So what we have really done is taking a step back. And just as a reminder, we operate across 3 markets in Atlassian, agile DevOps, ITSM and work management. And each of these 3 markets are growing markets showing healthy growth rates despite the current environment. So we are convinced about the longer-term opportunity we have across these 3 businesses. So nothing really changes in terms of our long-term potential of business growth. However, in terms of responding to the current macroeconomic situation, what we did do is we looked across the long-term growth drivers across our markets, and said, "Hey, let's double down on the most lucrative opportunities that will help us drive more revenue across these." And those 3 were really centered around cloud migration, which for us has been a multiyear journey and has been going well. We are situated in a good place right now. In fact, our migrations doubled year-over-year compared to the migrations that we did last year. And the second opportunity is around enterprise adoption. Also, we've sold 2x more to enterprises this year and signed multiyear agreements, which is a solid sign of confidence in -- of enterprise customers across our overall product offerings across our markets. So what we really did with our rebalancing exercise is put more wood behind the arrow across these lucrative opportunities that can drive revenue over the shorter term in addition to loan.

Got it. And I wanted to dive into sort of the investment philosophy that Atlassian is -- seems to be changing a little bit, right? If we go back 2 quarters ago, Scott and Mike had the idea that he listened we want to leverage kind of our strength, leverage our balance sheet and invest throughout sort of the downturn and try to gain a competitive advantage at the expense of sort of near-term operating margins. It seems like that took a step back 2 -- like a quarter ago when there was -- so the targets came down a little bit and you pulled back on sort of the hiring expectations. And then today or last night, you guys announced a restructuring. So it takes -- it looks like you're steering more towards balancing kind of growth and profitability in the near term. Can you talk to us about kind of what's changed over the past 6 months to kind of realign that investment philosophy?

Yes. Yes. Thanks. That's a good question. I was talking to a CEO of a public company recently, and he put it well. He was saying, look, if you have the same set of tactics in running the company in 2023, as you did in 2022, something is wrong. So I'm glad that you're noticing that we are shifting some of our tactics, but our long-term strategy remains very, very focused on investing across our 3 markets where we -- even through the current environment, we see customer demand. We see opportunities for growth, especially coupled with our unique differentiated business model. So what has changed for us really is that we took a look across the company in terms of investments we have made. And shifted the investment mix a little bit more towards shorter and medium term compared to our longer-term mix. However, the investments that we have doubled down are very much in line with our overall long-term strategy. Atlassian is here to be a 100-year company. So our focus has very much been disciplined on staying aligned with what we want to achieve over the longer term. So the 3 areas that we did double down our investment in are very much aligned with what we want to deliver over the longer term. So the 2 ones that I mentioned, cloud migration and enterprise adoption, along with 1 of our 3 markets, ITSM, which has been our fastest-growing market, we've had 45,000 customers in ITSM up from 25,000 at launch and 35,000 last year. So we're seeing substantial opportunity there, especially in the current environment that we are doubling now.

Got it. Excellent. And can you talk to us a little bit about the restructuring that was announced last night. I was a little bit busy. I haven't read the press release yet. So if you could catch me up on that and what do you guys talk to? And where are you looking to sort of take costs out of the equation?

Yes. So the rebalancing exercise that we announced yesterday impacts about 5% of our overall company. This exercise is very much not a cost-savings exercise, right? Because overall, we will continue to expand and grow headcount overall, net-net across the company. This was very much an exercise of us doing -- rebalancing that I talked about in terms of priorities and matching talent, existing talent that we have that we can double down on some of our more near-term opportunities. As we did that talent matching exercise, we've deliberately decided to scale down in some functional areas, which was -- the result of which was the 5% impact.

Got it. It's interesting. There's definitely a cohort of companies that we've talked to. The other one that pops to mind, like Workday had a very similar philosophy. It's not about cost reduction. It's about getting the right set of talent to align to kind of what we're on a go-forward basis. They were talking about incremental investments in like data scientists and people understand large language models. Is there a similar focus in terms of like where are you trying to push towards? What are you trying to gear more towards in terms of your investments?

Yes. So Atlassian's business model is very much focused on the classic land and expand and we are not a traditional enterprise company where we invest heavily in sales and marketing. Therefore, a lot of our rebalancing, realignment exercise will result in focusing more on R&D teams and R&D kind of talent. And inside of R&D talent, for example, one of the trade-offs that we made was we did not need as many talent acquisition people given that our hiring trajectory has changed. So instead, we've rebalanced that effort -- that energy towards hiring more engineers, product managers, designers on the R&D side that can ship customer value more effectively and help us drive business growth through the flywheel.

Got it. That makes a ton of sense. I want to shift gears and talk about sort of the core product strategy at Atlassian and really in the core DevOps business. And I think management has often spoken about sort of open platform versus some of your competitors have more of a closed platform approach. You guys want to be kind of the organizing principle, if you will, and working with whatever tooling that the end customer wants to work with, which other competitors want to do it all. They want to have a fully integrated suite. Can you talk to why that's an important point of differentiation for Atlassian?

Yes, certainly. So before I last in, I was at Microsoft for 10 years building developer tools in Visual Studio. So I spent a lot of my career building products for technical teams. And if there's one thing I can say with certainty, it's that a surefire way to the software developers is to tell them this is the product you will use, and to mandate tool choices on development teams. So at Atlassian, our philosophy, which has been steadfast for the last 20 years of running the business is that we want to optimize for choice. We want to optimize for end users being able to use the products that they want, best-of-breed products that they want. But we want to really be the backbone that connects all of these products. So we have an obsessive focus on integration capabilities on our ability to really connect with other partners in the ecosystem. And this benefits not just end users who really want choice because this is a kind of audience that appreciates early technology, but also the CIOs that are trying to drive standardization and consolidation. They don't want to be seen as the barriers to innovation, but they do want the ability to have administrative control, cost consolidation capabilities, all of that, that the Atlassian platform offers. So really, our open DevOps philosophy has very much been focused on improving the kinds of integrations we can have with best-of-breed tools and our marketplace is evidence that where we have thousands of integrations with second and third parties. Having said all of that, however, the Atlassian platform, which is a strategic differentiator for as in the underlying technical platform across our product also gives us the ability, especially in this current macro environment where CIOs are looking to do more consolidation and drive more cost savings. The ability to use Atlassian products across the entire DevOps tool chain. So our subscriptions like Atlassian Together really help get CIOs the ability to say, "Hey, I want to use the entire Atlassian platform, and it works straight out of the gate."

Right. And the move to the cloud and having the entire sort of portfolio in a cloud-based environment, I would assume that, that helps with the kind of cross-pollination, if you will, the cross marketing into the adjacent tools. So while you don't mandate using the entire suite, now you have better avenues for getting customers to adopt more broadly across the suite.

Exactly, yes. So we have more upsell and cross-sell opportunities in cloud, like you pointed out, because we have a multi-product offering, we often see -- most of our customers really use multiple of our products. So they start with a product, and it's easy in the cloud world to add on more new products and use cases, but also it's easy to climb the ladder of different additions. So we have a complete set of additions in cloud starting from free all the way to standard, premium and enterprise. So we see customers mix and match across Jira and Confluence, for instance, someone wants Jira premium, but Confluence enterprise and the cloud offering really gives us the ability to do that upsell and cross-sell in both directions effectively.

Got it. Martin is going to get mad at me because I'm going to go off the script. But there's a question that -- and a conversation I've been having with a lot of investors around generative AI, right? And the copilot from GitHub has caught a lot of investors' attention and imagination. And the idea is it's going to make developers much more productive. And you hear some big figures out there that are getting validated in the marketplace of improving productivity. And the way the investor mindset works is like, well, developers improve the productivity, you need less developers, Atlassian is a seat-based business, is this going to be bad for Atlassian? So how -- like how do you view that sort of train of thought. Is there any reality in it?

Yes. Thanks for asking that question. I have a product pedigree. I love to talk about this question all day. This is something we think about a lot, given that our investment in data, AI and ML has actually had a track record of many years. So this is not something brand new that we need to think about as some kind of reaction to the current situation. However, the step change in generative AI and NLP specifically does introduce some exciting prospects for us. And the way we think about that at Atlassian very much is in 2 separate parts. One is that to your question of, hey, if developers get all these capabilities. Do we no longer require as many developers? I think we are a fair bit away from saying that generative AI is capable of replacing the entire gamut of developer activities. But even so, really, our products are not focused purely on developers. There may be 30 million developers in the world today, but really about half of our business is focused on nontechnical users that surround these developers and do collaboration and team building. That number is going to continue to grow, irrespective of what happens with the developer population. The second part of it is actually these advances in generative AI are really exciting for developers, which basically means the number of people who can act as developers will explode. So far, we have talked about citizen developers, but their capabilities have been restricted to low-code, no-code capabilities that are available in market today, and that is set to really take a step change, which means the number of people wanting teamwork products like the ones that we build is actually going to increase. So this is a big positive for us.

Right. Yes. I think that's the crux of the equation of that with the capabilities of AI, you really scan the scope of what software can do, you increase the demand for more software. So while each developer becomes more productive, there's probably going to be a lot more developers. And in the Atlassian position seems to be pretty good because you want some sense of control on those developers. You want them all to be in sort of some type of swim lane. And that's fundamentally what like Atlassian brings to the equation, that's the core value proposition of Jira is making sure everyone's swimming in the same direction.

Exactly. Not just Jira, but also the corresponding products around confluence, work management, Trello, all of that really helps teams be more productive, whether they're building software or something else. And therefore, the overall market actually expands for us.

Got it. Got it. Can you talk more specifically about how -- I know that Atlassian has been bringing AI point-forward machine learning functionality into the suite for some time in various areas. When we talk about generative AI, in particular, and some of the GPT models like Codex or whatnot, is there an Atlassian version that's coming out? Is this functionality that we're going to see in the Atlassian portfolio at some point?

Yes, that's a great question. So just in terms of foundationally, what does AIML mean for the Atlassian business? Because we have multiple products and we have an open toolchain philosophy. Today, we are already sitting on a wealth of data from our customers, right? They use this across different parts of the app life cycle management, workflow starting from product discovery, all the way to tracking work, translating that into codes, putting full requests out, operating it with the DevOps workflow and right back to connecting it back with feedback you hear from customers, and therefore, driving incremental change. Given that we have partners as well as first-party products through that whole workflow, we already have what we call people work graph, so to speak, which really connects different kinds of work objects with people who are working on different areas of the overall life cycle, right? And this is a unique [troll] of information that Atlassians has access to, especially in the cloud world, it becomes a lot more easier to bring it together. And that is why we introduced the AVP product, Atlassian visualization platform and analytics last year, where you can create a data lake with data from our products as well as bring in third-party data and you're able to unlock insights and [smart] that you weren't able to before, as a customer, especially in the noncloud world. Putting generate AI on top of that actually unlocks several other exciting possibilities. And without giving away too much of it, we have a user conference coming up in April called Team 23 in Las Vegas, and that should really build on the story that we have started telling over the last couple of years, especially in ITSM, we're really excited about our Percept.ai acquisition, which is an AI agent that can help automate activities as well as come up with smart insights from an existing knowledge base for IT users, but stay tuned for more.

There's a great advertisement coming from a product person. A good segue also into ITSM. One of the areas that you pointed, there's cloud, there's enterprise, but ITSM is the product side of the equation of where you guys are really excited about and putting more wood behind the bat. Can you talk to us about why you think ITSM is such one, a good fit for Atlassian and still such a right market opportunity because there's definitely vendors there. From the high end, you have ServiceNow and you have fresh works coming to the market and HubSpot. Like why is this do a market for like Atlassian, if you will?

Yes, that's a great question. And ITSM is a market that I'm especially excited about, both from a product and a business standpoint. There's a few things that uniquely position Atlassian in this market. One is the whole DevOps wave that has rapidly been adopted by customers of all sizes. We are really the only vendor that is capable of connecting the developer teams and IT teams natively because we have Dev and IT teams already using our product. So JSM is the most natural fit in connecting the Dev and IT teams together to create DevOps workflows and IT Ops workflows. Our time to value is strikingly low because our flywheel model essentially depends on user adoption and user growth happening organically. We've designed the product to be really simple and easy to adopt versus many of the legacy vendors you see that have like years of adoption cycles and expensive service arrangements that are required to get to value. And especially in the current environment, we see a lot more customers asking us for a cost advantage or a time-to-value advantage and we're uniquely positioned there. Our pricing in the ITSM market is also the best in terms of value/price ratio. So it's a pretty disruptive pricing model and our capabilities that over the years, we have now built it up to a point where even industry analysts like Forrester and Gartner recognizes as leaders in that market. So in terms of competition, to your point, we see often JSM coexisting with several other competitors. But given the current situation where customers are trying to consolidate costs and really wanting a quick, agile solution that delivers value to customers, we do see a few replacements as well like PostNord and [ ENGIE ] are 2 customers where we replaced a legacy vendor with JSM, and there are quite big companies. One has about 20,000 employees and other 90,000 employees, which just speaks to the value set that JSM delivers.

Got it. Got it. Another good segue because I want to make sure we touch on all the kind of key focus areas. Let's shift gears a little bit to enterprise. And I'm going to put on my kind of cynical investor sell-side analysts at -- is the focus on enterprise because the SMB market is just really poor right now and like there's more macro sensitive, so that's just kind of where spending is? Or is there a more sort of noncyclical longer-term perspective on why enterprise is attractive for Atlassian to go after right now?

I would say the focus on enterprise is not new for us. I was here last year talking to you about enterprise adoption is going to be exhilarating for Atlassian. And the year before that, also, we were really a lot more focused than enterprise for behind the firewall for our data center product. And having run both of those businesses, I can compare how the situations change, perhaps which can talk to your question about is it something to do with the current environment? We definitely do see a lot more enterprise customers wanting to consolidate on the Atlassian platform. And that is a function of both our maturity overall as a product offering and as a company where we are in terms of being able to offer that like we talked about, our addition set is complete. We've been working on security, scale, trust, data residency, compliance, all of that. So we are really positioned at a place where large enterprise customers can easily adopt a product. And we've been seeing evidence of that. So in fact, we had 2 of the largest enterprise migrations last quarter, an Australia-based bank with 30,000 users and a U.K.-based bank with 25,000 users come into our cloud. So it's very much a pull from enterprise customers that we're seeing as a result of years of investment in our product line.

Got it. Got it. And -- in terms of -- another good segue into the cloud migration. In terms of setting up the cloud migration at the front, at the start, you guys have talked about the smaller customers are going to come over first and then the larger customers are going to be at the back end, and we've always framed it as kind of like a 3-year transition. Are we starting to get to that point where now we're getting to the large enterprise side of the equation?

Yes, yes, definitely. So I personally drove the cloud transition for Atlassian. So I've been fortunate to witness that entire transformation unfold. We had more of the small customers come in. And this year, like I was saying, we have doubled. We have 2x the number of migrations into cloud. And about half of it came from data center last quarter. And data center is really a product line that's focused on serving some of our larger customers, some of our more regulated customers. So we see increased flow from our larger customers wanting to come on to the cloud. And like I mentioned, a lot of it is really a function of the steady progress that we've made over the last 3 years in checking all the requirements that enterprise customers have of us.

Got it. And just a mark-to-market on that. A lot of the commentary from Atlassian around sort of the impact of cloud transition has come in the rubric of like the 10 percentage points added to the overall cloud growth. Is that doubling of the migration still within that framework of the 10%?

Yes. So all of the numbers that I'm talking about in terms of volume of migrations, yes, they're within what we're -- what we have projected overall as cloud migration flows. And -- but I just want to take this time to remind everyone that cloud is a multiyear migration journey for us, like we've always said. And right now, we are in the middle of that journey. And -- if I had to compare where we are versus where we thought we would be, I would say we are exactly where we thought we would be.

Got it. So if I turn this into a little bit more of a macro question, you guys have talked about macro impacts in your business, but it's been more so kind of conversion of a top of funnel into paying customers. It's been more around sort of expansion of seats within existing customers. But the cloud migrations have been on pace. That part is still inflate -- and there's no change to the kind of end of server life next year, and that's all kind of on a go-forward basis?

Yes. Yes.

Got it. Excellent. So maybe just drilling down a little bit further into the cloud transition. And a question that I get from a lot of investors, server maintenance guide changed, right? And people are having a hard time kind of wrapping their head around that. You're expecting to have more maintenance left on the balance sheet or on the income statement when we get to Q4. Why is that not an indication that cloud migration is going slower, right? Like that people are staying on kind of that server maintenance longer.

Yes. That's a good question. So the stack that you are mentioning about the server business is purely a function of churn from server customers being lower than what we expected. So this is basically customers saying, "Hey, we want to stay on server longer. And we would rather stay on server than switch to any other alternative." Right? Because the DC business growth has been healthy. It's actually been pretty solid over the last couple of years and cloud migrations we talked about they at the phase that we expected. But server churn has actually been lower than what we thought. So that really, for us, as a company, what that means is it gives us a longer window, in fact, than we thought of converting even more users from server to cloud or to DC.

Right. So to be clear, these are our customers that you thought might churn off the platform altogether. They are staying on the platform. So the base still remains larger and there's still an expectation that they could come over be cloud customer.

Exactly. Yes.

Got it. And just -- super fast. So I want to end on kind of a high note in terms of the cloud transition, could you remind us, you guys have high expectations of when a customer comes on to the cloud, it's going to be a better customer for Atlassian. We talked a little bit more about sort of the ability to do cross marketing. But what have you been seeing thus far in terms of the base of customers on cloud, do they behave any differently than sort of your on-premise customers? And has -- what does that kind of inform you about kind of the future of Atlassian once that cloud migration is over?

Yes, definitely. So again, 2 parts to the question. One, in terms of just overall user experience. We've been working on a variety of different things in the cloud that were only possible in the cloud and not possible behind the firewall. And when customers initially used to move a few years ago, they would come to us with complaints of what about performance, what about user experience. And over the last year, customers that come in to cloud have actually cited these as advantages, they're really pleased. So in fact, last week, I was talking to a large customer that had come on to cloud. And they were so thrilled that performance was way better, that the user experience is just so much of a refreshed user experience, that it was just simpler to get work done on cloud. So we've really put in a lot of work and that work shows in terms of customer reaction. From a business angle, there is clear evidence that customers in cloud, especially larger customers in cloud, cross-sell faster, expand faster. So they tend to use our products for more use cases, tend to use more of our products and tend to be on the higher priced additions, as well, and like I was talking about, there is a mix and match across multiple products and multiple additions. So there is definitely a larger opportunity for us in the cloud compared to BTF for us to be able to cross-sell and upsell these customers.

Outstanding. Unfortunately, we are about a minute over now. But thank you so much, Anut, for joining us again, another fascinating conversation.

Thank you so much Keith.