Atlassian Corporation ($TEAM)

[Audio Gap] Atlassian from Atlassian with us here today. Martin, as you know, runs IR for Atlassian, and thanks so much for being here with us.

Yes, of course, good to be here. Great.

Yes. Good to be here with you. And so Martin, you're coming off of a tremendous which I would say really surprised a lot of folks. And yes, there were data center pull forwards that you guys spoke about. But regardless, the cloud revenue upside was really strong. And some have asked how you were able to deliver such outperformance. So it'd be great if you could sort of talk about the key drivers of that strength.

Yes. So we had a really great quarter. As Greg mentioned, I think importantly, cloud revenue showed a lot of strength this quarter. The driver of that cloud outperformance was driven by 2 primary factors. One was cross-sell into 2 collection. As well as second factor being seat expansion within core Jira. So those are great things to see, especially, I think, in the face of people having doubts about the durability of seat expansion we actually recently showed a chart about seat expansion at our user or investor forum at our user conference team '26 in Anaheim. We showed kind of that seat expansion or seat growth x migration continues to grow, continues to compound over time. But that really played out in Q3, right? So seeing that seat expansion across both developers as well as knowledge workers drove that outperformance. And then going back to 2-more collection, the other primary driver -- the #1 reason why customers are upgraded to tumor collection where you get the whole Atlassian platform as well as 10x the amount of robo credits with that. So you get a certain amount of ROVA credits with the paid JIRA subscription or any standard subscription. But when you upgrade a to collection, you get 10x the amount of credits, and that's really resonating with customers as they value that predictability as they kind of go forward and see their increase of robo usage.

Okay. That's great. And then any change, Martin, quarter-over-quarter in your SMB business and/or your enterprise business? Or was that just like very steady on both counts.

No, we continue to grow well across both, I would say, we have traditionally known for our flywheel business. We have 350,000 customers, and we have a growing enterprise segment, where our COO, Brian Duffy spoke at our investor forum recently, he continues to execute really well. And I think you see this on the enterprise side play out in RPO growth, growing 37% year-over-year. and we continue to see customers kind of voting for their wallets in this environment, right? They're signing larger dollar contracts they never signing larger duration contracts than ever. And so it's a great thing to see. And I think the value of that Lassan platform, which I mentioned earlier that, that's what customers want to sign up for that strategic partnership with us is an important factor.

All right. Terrific. And then the teamwork Graph, seems to be an underappreciated asset as it relates to Atlassian differentiation. So I think it might be helpful if you could just walk through the key attributes of tumor graft for everyone.

Yes. So our team work graph, as we call it, which is basically underlying knowledge graph, which provides the contextual relationships of who's working on what teams are using, what tools and the relationships between those -- how do these workflows ladder up to the overall company strategy. It's this kind of connection point within the organization that provides that context because in this environment, not all AIs built equally. You need the intelligence, but you need the context to actually deliver good results. And so at our investor forum, we actually showed a side-by-side demo of cloud code, same profit on both sides, 1 connected tumor graph on without same repo that they had access to and the 1 connected tumor graph delivered better, 48% better results at 44% less token usage, which I think resonates especially in this environment where people want to make sure that they're getting good results and, of course, being efficient with their token spend. And so I think that really resonated. That was a big part of our keynote presentation that Mike delivered at the user conference in the morning and that really resonated with customers as well. And as we spoke with our product teams, focused our sales teams after our conference, that's in to really resonate with customers. And so when you think about it, it's -- you don't want to send kind of wind way throughout your organization, searching for things. You want to allow it the guardrails to traverse with the instruction manual to understand how to pull things in a more efficient manner. And so I think that's going to be an important part as we kind of progress on, it's very early with AIS customers understand this. And as they get that additional context, they're going to be able to get better results, get at a better, more efficient rate.

Yes. That's terrific. And I would back up just the -- like that demo because it did really resonate with investors as well. And with me, and I would also say that when I was at Team '26 at your customer conference. So 1 person was telling me that by seeing all of the with teamwork graph, seeing all the relationships, all the connections, et cetera, that it made it easier for practitioners to now be informed and how to build more effective agents. So I thought that was another interesting aspect as well interest. Yes. So let's talk about Rovo. So your AI tech because it now has over 5 million usage is growing rapidly. And what I'm wondering, Martin, is if -- like were there any meaningful functional improvements to ROVA over the last 6 to 12 months that are helping to spark such an uptick in adoption? Or is this just -- there was just a period of time that we had to just kind of weighed through and now you're really kind of seeing the fruits of your labor. So just kind of curious, again, if anything has changed technologically, if you will, more recently.

Yes. I don't think anything has changed technologically. I think it's the progress that we make across kind of all of our 3 priorities and especially in advancing Rovo. When I think about Vivo, very early on when we introduced it several years ago, it was centered around enterprise search. And then, of course, then chat functionality. And now there's more agentic usage. And that, of course, is driving the increased Rovo credit usage. You're seeing Rovo credits consumption grow 20% month-over-month, which is incredibly fast and really good to see. You're also seeing, interestingly, those customers that actively use Rovo versus those that don't actively use it or don't light it up, to grow their ARR at about 2x the rate of those that don't. So that's a good proof point. I think that -- when customers utilize Rovo, they get incremental value that delivers more workflows through the Atlassian platform and that then leads over time to more usage, more users and then more monetization opportunities downline. .

And then getting back to tumor collection, which you mentioned earlier. So are the AI credits for Rovo. Was that the primary driver of tumor collection adoption? Or is it also just the additional products that can be attained at more favorable unit price. .

Yes. I think that premise is -- that lot of permits of this crude bundle is probably a misconception. So a team work collection for everyone. That's a little less than all here. You do get Jira, Confluence, Loom. But really, when we think about it, it's the value of the whole Atlassian platform. I think that's probably the biggest thing when I think about the evolution of our company over the past several years. It's -- we've built a unified platform with a unified data layer, and we talked about the tumor graph underlying that and you get the whole value of the platform with tumor collection. And when we talk to customers, they do call out the increased AI credits as the #1 driver, but they say, okay, what's resonating with me is I understand the value of the whole loan platform, all the automation capability, of course, the tumor graph, which we talked about, the analytics underlying and then kind of a unified AI layer underneath all that. And especially when I add additional users, add additional teams, then I get compounding effects to this because, again, you're adding more enriching the teamwork graph over time as they add more users, more workflows, understanding their tools, their priorities, and that's, I think, what companies understand. And so when they adopt hemo collection, you actually see them expand above and beyond even their initial JIRA footprint. So you tend to see them consolidate from other point solutions. They're adding about 10% more users when they do so. And then when you look at the toll collection kind of behavior, tumor collection customer behavior, those customers are driving 2x more ROV credit consumption than those that are in stand-alone products, and have 2x more active agents, not just bolt agents, but active agents versus those on stand-alone products.

Okay. Yes, that's great. And then Martin, if we take a step back, so it's very clear that many investors continue to worry about AI significantly disrupting Atlassian's business even if it hasn't done so today. But maybe just sort of talk about why you believe Atlassian is a durable growth business.

Yes. I think certainly, Q3 numbers kind of back up a lot of what we certainly have believed. And I think when you think about the complexity of the world and the speed in which AI evolves things. That -- the need for collaboration, coordination raises more than ever, right? Like you need to coordinate more across what are we doing across the organization, especially as the speed and throughput increases and certainly not just coordinating between humans but also coordinating between humans and agents. Are we doing the right things? Are those agents actually delivering what we want them to. If Greg and I are on the same team, we're making sure that as we deploy agents, we're not overlapping having kind of conflicting things that we're working on? Are we actually progressing against our strategic results as a company. And so that coordination aspect becomes more important than ever. I think we see more people needing to be added to the Latin platform to coordinate that then you see things like our innovation of adding or being able to manage and orchestrate agents in GS. That's a prime example. Jira today is already the orchestration workflow platform for work. Right now, I can assign work to my colleagues and team and now I can assign work agents directly in Jira and then the agents can take action directly from there. And again, so managing what are our teams working on managing now what are those agents working on? Are they delivering actual tangible results for us and advancing our strategic priorities as a company because that's actually what matters, right, or not just the volume of work.

Right. Okay. Very helpful. And then back in March, Atlassian, as I think all investors are aware, Atlassian announced a risk of approximately 10% and maybe just sort of talk through the rationale for making this change at this time as well as the magnitude of that change?

Yes. So we took out some action back in March, as Greg mentioned, I think we're still digesting some of that. I think we're very clear that the 2 primary objectives of that were: one, to help us be able to self-fund more quota-carrying enterprise sales reps where we're seeing a lot of traction as well as being able to self-fund key AI talent. Obviously, that's going to be an important part in the years to come. But the other aspect is to accelerate GAAP profitability. We talked about in this past quarter, 1 of our key strategic priorities as a company have been serving enterprises, delivering AI to customers and delivering our system of work, which we call it to our customers. So those are our top 3 priorities. But then we elevated a fourth strategic priority driving durable, profitable growth. So I think that profitability aspect has clearly come into focus. You hear that in our kind of shareholder letter, as we talked about bringing -- elevating this as a key strategic priority. And we do want to accelerate our path to GAAP profitability and then, of course, grow that from there.

And Martin, has there been any discernible impact on growth or pipeline generation since.

No. I mean I think Q3, we obviously executed well. We're tracking well from a Q4 perspective, but nothing to call out. I think we will measure it in terms of making sure that there's no business disruption. But of course, we're still digesting it. As I mentioned earlier, you want to obviously continue to make sure that you're executing well.

Yes. And then perfect. And then you mentioned Brian Duffy, few moments ago, your CRO. So he seems to really be putting his stamp on the go-to-market, including a significant emphasis on driving more enterprise revenue. But how is this going from your perspective?

Yes. I think he's doing incredibly well. He continues to make changes. And I think of that as evolution of the business, right? So we've built an incredible business driven by our product-led growth, kind of flywheel motion. And it's now about how do we supplement that motion with more of a higher touch motion as we call it. How do we serve those customers that need a little more handholding. So we have 350,000 customers already and it's now how do we better serve those enterprises that we are already in that existing customer base. So we've always shared the stat of -- we have 85% of the Fortune 500 as existing customers already, yet they only represent 10% of our overall business. And that, I think, applies not only to the Fortune 500, but the massive enterprise customers within that 350,000 customer base. And so it's how do we continue to better serve them. Brian continues to make changes continues to grow that quota carrying sales group, as I mentioned earlier, and I think we're delivering on what customers want because a lot of this is customer pull. It's not us pushing the Atlassian platform. I think a lot of our customers have said, like, I want more of a strategic relationship with Atlassian. Help me partner with you better. And so I think we're meeting customers where they want.

Great. And then what's your confidence level Martin and continuing to drive strong cloud migrations over the next couple of years, including for large customers that operate in highly regulated environments.

Yes. I think -- so we announced the end of life of our data center or our on-premise platform, which will end of life in March of 2029. But even next to that, I think we feel really good about being able to serve those customers with our cloud platform. We obviously have built an enterprise-grade unified cloud platform, as I mentioned earlier, we feel good that a lot of that is behind us. And so we're now better able to serve these enterprises that are on our data center deployment. There's still some work that we have to do between now and March of 2019, which is great because there's that long runway. And it's about having that open dialogue with customers that may not be able to move now on understanding our road map between now and then so that are we -- can we deliver what do you need between now and then? When we think about migrations, we've obviously had a lot of migration success and we've learned from the end of the life of our server product several years ago. And we continue to see that those migrations tick up in the more recent years. More importantly, you're seeing those data center customers when they migrate to cloud, they're migrating to our cloud premium and cloud enterprise SKUs. So 93% of those data center customers when they migrate they migrate to the higher-level additions. And then actually, what's more important once they land in cloud, we have significantly more products to cross-sell them to. We have higher level additions, which we can kind of upgrade them to over time or upsell them to over time. And then it's significantly easier to add users in the cloud. I don't have to ping my IT admin and say, "Hey, can you add Greg into my instance, I can actually with little friction, click and add Greg immediately bring in more users. And again, you get the benefit of the whole platform, underlying more grass you get this compounding effect. And that's why I think you see such strong user growth continue on the Atlassian platform in spite of, I think, investor concerns -- and we shared more recently at our Investor Forum another cut. Again, we serve all teams on the Atlassian platform. I think sometimes we have this misconception that we're just a developer company. And we showed the active users on our platform are knowledge workers, nondevelopers, non-engineers. And so that's an important aspect that we have the ability to serve increasingly non-technical teams these knowledge workers. So certainly, that have to work in conjunction with those software developers that kind of are our heritage. But increasingly, that's a big part of it. And I feel -- that's why we have a lot of confidence earlier to your question on why do you have so much confidence around durability of things like user growth cross-sells because, first of all, it's really early on, and we feel it's early on in our opportunity. And we're seeing these proof points as we grow into those nontechnical users over time.

Yes, very interesting. And does Brian and Mike and the leadership team overall, I mean, is there a line of sight to some of these bigger customers that are really committed to the Atlassian platform going wall to wall, just to your point on more nontechnical user adoption.

Yes. I think that's been 1 of our big strategic priorities. That's obviously the grand prize in terms of -- oftentimes, we land in an organization with their technically oriented teams, whether it's our software team or their IT team the expansion opportunity then becomes -- how can we serve increasingly the marketing team, the HR team. We see more and more of those teams, I think, added on the Atlassian platform. And that's a big play of ours, right? So we talked about our strategic priorities earlier, and serving enterprises, it's penetrating and reaching more of these knowledge workers.

Absolutely. And then at your Investor Forum about a month ago in conjunction with -- so you said that 3-year, 20% plus revenue CAGR through fiscal '27 no longer a relevant target. You also disclosed subscription ARR for the first time, which encompasses both cloud and data center and also discuss high-level growth expectations for both FY '27 and FY '28. So maybe just kind of refresh everyone on that, if you wouldn't mind.

Yes. So as I mentioned earlier, with the announcement back in September, when we announced the end of life of our data center product, I think that did a couple of things, right? Like that drew a line in the sand for those data center customers of a time line of when they need to migrate over to cloud. And with that, it also introduced ASC 606 of revenue recognition on the data center line because now that kind of useful life of the data center product has shortened or with that definitive end-of-life date. . And with that, that brought forward a lot more upfront term license revenue into 26 is just a mechanical mass of more upfront term license revenue. This is all specific data center again. And therefore, that creates meaningfully tough comp for '27 as well. Again, just math mechanical math. And so we do now expect data center to have negative growth next year. As that business contracts as more customers migrate over to cloud as well. And so that negative data center growth will be a drag on overall revenue growth next year. And so to help bridge investors through that. We thought it was important to introduce subscription ARR for you to understand the health of the overall book of business, right? That normalizes for all the 606 noise. It also helps investors kind of focus less on public the migration economics in terms of like, hey, how much of it on cloud is coming from migrations? How much of the headwind is on data center. Now you get a picture of the full book of business on a normalized ARR basis, and then you can understand the health, overall health of the business better.

And then to be specific about it, so we have 3 quarters of disclosure Three quarters ago, which was your September quarter, the growth on subscription ARR, I believe, was 20%. And then in December, it was 22%, and then this past March was 23%. So we've seen acceleration in the metric. . And then maybe switching gears a bit. So in early May, you guys introduced a Flex program aimed towards large customers. And we had Burt Podbere, Crowdstrike's CFO earlier today, and they -- a lot of people sort of associate them with kind of the genesis of Flex, and we've seen a lot of companies that have adopted and I would say it's been additive every time in terms of what we've seen for the software companies that we track, but to varying degrees. And so I guess as it pertains to Atlassian, like what are your expectations in terms of what Flex will do for you.

Yes. So as Greg mentioned, we introduced Flex. It's very early on. We only have a handful of customers in a beta program that as we kind of work with them through this -- but it's -- basically, think of it as better serving those enterprise customers in the theme of what we discussed earlier of removing friction of how we can better serve and partner with those enterprise customers. And so with a fixed wallet kind of contract or value-based contract, then customers can add on another collection or add on additional products or SKUs over time without the friction of going back to procurement every single time you add a new SKU or add a new department into mix. So I think it's kind of in the theme of meeting customers of where they're at removing friction, helping them adopt more of that Atlassian platform over time. And I think that theme of meeting customers where they're at is applicable, especially AI, so topical right now, and we touched on it very briefly earlier. Tumor collection with the 10x more credits just gives customers so much more predictability. And in this environment, and you hear in the [indiscernible] and especially consumption-based pricing is a question we get quite a lot from investors. Customers value predictability. They want to understand how much am I spending with Atlassian? And Flex gives them that, right, like a fixed wallet contract of understanding how much they're going to spend with Atlassian, and they can adopt over time without having to kind of burst through and be caught off guard.

Right. Okay. Great. And then with that, are there any questions in the room? If you do have a question, please raise your hand. Yes. Great operating business. Congrats on shift. -- stock comp base that .

Yes. I mean -- so I think -- the earliest 1 is probably what Greg mentioned earlier, with the action that we took back in March. Number 1 thing when you address head count. I think that obviously has an impact on stock-based comp early on. But I think the other aspect is growing and maturing as a business as we moderate the pace of SBC. And so we've been, I think, quite open about that as a top priority for next year as we moderate that level of SBC, looking at different things within our overall program over time. And then beyond the media action in March, we have moderated the pace of hiring quite considerably, right? We talked about hiring certainly in kind of enterprise sales and AI. But beyond that, I would expect kind of overall head count growth to be very, very modest overall. And we talked more recently at our Investor Forum about that level of growth in R&D will grow significantly slower than overall top line growth. A big part of that is we went through a heavy investment cycle to build out this platform over the past several years that we talked about. -- had to build that to be able to facilitate the data center to cloud movement, better serve these enterprises in the cloud and, of course, build this unified AI platform. And with that kind of in the rear view and us kind of crested those investments now. we'll moderate the level of R&D investments that will grow and shrink over time as a percentage of revenue. And that structurally should help us as well because in terms of SBC normally R&D is a heavier kind of command on that. Yes.

Do you see a difference in particularly AI or genetic engagement between customers in different regions like West Coast, esters.

Interest haven't drilled down too much, but I think 1 important thing that we tried to look at, of course, is like the more AI native kind of bleeding edge companies. So we try to look at that nonsubjective listen, so we won't talk to our data science and said, here's the Forbes AI 50. How much of -- how many of these are our customers. And over 2/3 of our customers already, which is great to see. But then importantly, the ARR within these AI natives that are the fastest-growing or most innovative companies in the world. They're growing their ARR significantly faster. I think 2x the rate of kind of the overall book of business growing over 100% year-over-year is what that cohort is growing. So that's good to see. And then Greg touched on it earlier, but Rova usage continues to increase. That's probably more broad-based across SMBs and enterprises, it's still very early on. I think people are wanting to identify the platforms that they want to run their genetic workflows on. The platform is so key to this because it offers the security, the governance, that enterprises require to run their agent workflows on. And so I don't think enterprises will have 20 platforms, which they run their workflows on but nor will they have one. And so I think they're working through, okay, which are the problems I want to standardize on the 5 or 6 kind of platforms that we kind of center on our strategic -- with our strategy -- overall AI strategy how do we kind of done that. And I think at last in is really well positioned with the platform that we've built. Other questions?

So 1 thing to ask you, Martin, is that we've seen over the past several years, a series of price increases from Atlassian, in cloud, in data center -- where do we stand today? How do you think about the value that your average customer is receiving at the current price points?

Yes. I think we take a lot of value in being a high-value provider at a more attractive price point, so that we think of it as almost a high volume. Core to our pricing philosophy has always been, let's deliver value to the customer first and foremost. And then we can recuperate value through monetization over time. And so you've seen us price after today is like $8 per user per month that's incredibly affordable. But we've been very systematic with pricing. I think that speaks to the predictability aspect that we spoke about earlier. . And again, we want to deliver that value. That's why we spend so much on R&D because we can deliver incremental value to customers every single year. That affords us the ability to then take pricing over time because we are delivering more and more value to customers every single year. And again, I think that's core to our overall monetization model. And we want to maintain that kind of high value, lower cost profile, especially because that's an enabler of being able to take share from customers or from other providers, I should say. Earlier, we talked about them collection. When they adopt tumor collection, we see a lot of consolidation off of other competing point solutions. That's going to be an important aspect, I think, in the years to come, as you see more and more consolidation. And then especially when you think about the shift overall in the industry. I think that positions us really well as other companies also have to adjust to this landscape. Being a lower cost provider, I think, will put us in a very advantageous position.

All right. Terrific. And then 1 last question that I just wanted to ask you from a product standpoint because we've talked a lot about Jira -- of course, Confluence is a very popular Atlassian product as well. But I'd like to ask about JSM, JIRA Service Management because it just seems to be a freight train, quite honestly, a tremendous momentum in Atlassian. And we hear it very consistently from all of our checks as well when we talk to folks in the field. And so when you look at the runway sort of associated with this product and the opportunity -- how are you thinking about it? What's your confidence level in continued strong growth for JSM. .

Yes. So Durasert or service collection now as we call it, is a north of $1 billion ARR business growing over 30% year-over-year, so doing incredibly well. I think sometimes people ask like, hey, is there an inflection point with your service management? Not really. It's -- I think the compounding effects of all the investment that we've done over the past years really, continue to mature that product better serve enterprises. You're seeing more taking share from, I think, competitors in that space that does well in terms of displacements, competitiveness placements. We continue to add functionality to better serve those enterprises and then reach more non-IT teams, so 60% of the reservice management instances are serving non-IT workflows, which is great to see. And then actually really interesting in terms of genetic invocations, as we call it, 40% of those are within service collection. So I think that speaks to Rovo's ability to be a first line in defense and kind of triage all the inbounds that a legal team is receiving or that HR team is receiving, that's a very applicable kind of agenticworkford that people can deploy early on out the gate.

All right. Fantastic. Well, with that, we're out of time. But thank you, Martin, for a great discussion. .