Atlassian Corporation (TEAM) Earnings Call Transcript & Summary

We are putting a close to day 2 of Citi's TMT Conference today. I'm Fatima Boolani. I jointly head up our software equity research team here. And I'm very happy to end the day with James Chuong, CFO of Atlassian. Thank you so much for being here and joining me.

Yes. Thanks for having me, Fatima.

Excellent. Well, before we get into kind of the meat and potatoes of our discussion, 5.5 months in the seat, almost 6. Biggest surprises, James, in the last 5 months as CFO of Atlassian.

Yes, 5.5 months, so I must have all the answers at this point. But in terms of the biggest surprises, honestly, I would say that a lot of it is more about reinforcing the thesis as I came into Atlassian. When we really thought about the opportunity that AI presents, I think there was a lot of questions, a lot of noise in the market about whether that was going to be a headwind or a tailwind for Atlassian. And I think we've proven over the last couple of quarters and really even before that as well, right, with our strategy that AI is going to be a tailwind for Atlassian as customers look to really drive more and more value out of AI, understanding that Atlassian delivers an incredible graph, our Teamwork Graph, that's what's really going to be powering AI across the enterprise. And I'm excited to get into that today. But again, I would say not a lot of major surprises, but pleasantly surprised at the reaction that we're seeing right now over the last couple of quarters...

And the other question I did want to ask you is areas that you feel you've been able to influence the most change. I know you talked a lot about, hey, there is a little bit of an evolution. Is this just tweaking the machinery of metrics, guidance philosophy and things of that nature. But any areas that you feel you've influenced the kind of change that's worthwhile getting some light on with investors?

Yes. Like we said, the strategy largely hasn't changed, right? When we talk about the strategic priorities at the company, it starts with AI, system of work, enterprise. And I think one of the areas that Mike and I added was around driving durable, profitable growth. And so all of that is continuing to work together and come together over the last couple of quarters here. So I think that's one of the areas I would highlight.

Good segue into the next question I wanted to ask you, a year in review, you just ended fiscal '26. reported results about 6 weeks ago. Just 2 to 3 most important highlights that are worthwhile for folks to kind of refresh on.

Yes. Q4 is actually a great place to start with that, right? We posted $1.8 billion in revenue growth, 28% year-over-year. We posted ARR growth of 23% year-over-year with RPO growing 44% year-on-year. So again, this -- we got a question around what changed overnight, what changed in the quarter. And the reality is it was really a lot of consistent innovation and execution across our product teams, our engineering teams, our go-to-market teams to really deliver and drive those types of results. And 2 of the areas that really outperformed our expectations was stand-alone seat growth in our core products like Jira, Confluence and JSM. We saw revenue reaccelerate in our service collection in the quarter as well. So a lot of opportunities still ahead of us here. And so in terms of highlights, I shared a couple of these stats earlier here. But in terms of AI being a driver for us, the growth that we continue to see across our teamwork collection, one of the things that has made Atlassian incredibly special over the last 2-plus decades is we put the customer first. We want to make sure that we're driving value, number one. And we're seeing that. Teamwork collection is the best way for customers to buy AI with us. We have 10x credits, Rovo credits as part of that. And we want to remove that friction, that ability for customers to adopt and use AI with more and more depth -- and we're beginning to see that. 80% of the Fortune 500 use Rovo right now. And as we continue to focus on the depth side of it, we're also seeing Rovo-assisted actions increase 50% quarter-over-quarter. That's really important because it's not just a simple AI search, it's not simple AI chat, users asking Rovo to take action. That's how you begin to unlock the power of AI across teams and across...

James, I want to focus the conversation on the cloud ARR and the cloud revenue. There's been a pretty visible acceleration in your cloud growth as one of the things that we've seen in the last 4 quarters, cloud growth going -- cloud revenue growth growing from 26% to 31% in the fourth quarter. Can you unpack for us some of the factors that we should expect to be repeatable and durable in terms of growth drivers for fiscal '27? And then conversely, factors and inputs that will lap out or aren't necessarily going to be a durable inputs to fiscal '27 cloud revenue growth?

Yes. So really pleased with the momentum that we continue to see on the cloud side of the world. And some of our biggest drivers remains expansion as well as that cross-sell motion that we talked about, right? So I know there was some concern about cannibalization as it relates to our collection business. But as we saw in the last couple of quarters, the outperformance was driven by stand-alone seat growth that we saw in our applications as well as continued growth in teamwork collection. Teamwork collection is still relatively early. We only introduced that over the last year. So I believe that's going to continue to compound. If you look at also the data center side, right, as we continue to migrate customers over to the cloud, that continues to be a multiyear expansion pipeline. When we look at cohorts of customers that have since moved from data center to cloud, 3 years on, they've spent 1.75x on average more than before. So that makes sense because you've got a whole suite of applications and collections that's available in the cloud. You've got Rovo, you've got AI, you've got the teamwork graph a ton of opportunity to drive more value as customers continue to migrate to the...

You brought this up 2 times now, and I think it's really worth expanding and expounding on this notion, seat growth. I think there's been a pervasive fear or there had been anyway, pervasive fear in the investor community around there is a seat-based monetization orientation to the business. The frontier labs and a lot of the innovation out of the labs had been perceived or misperceived in cannibalizing your opportunity by way of, hey, you're not going to need to hire as many developers or software engineers. In retrospect, that has not turned out to be true. But I want to ask you, what are your current observations in your conversations with customers and customer behavior around just headcount growth, technical headcount growth, just so we can put that matter to bed. Why or why not should we see continued growth in software developer headcount and engineering headcount?

Yes. So I think as you see the intelligence in the models continue to grow and make progress and compound over time and also seeing how competitive it's becoming from a pricing perspective, that's going to benefit the market, right? There's more value being driven to the market, to our customers, that's going to benefit Atlassian as well. And in terms of the seat-based growth, what that really means is the cost of coding, cost of building is coming down. And so we're seeing more innovation in our customers. We're seeing more software being built. We're seeing more seats being added and that's true across developers as well as nondevelopers. I think one of the things that is most underappreciated about Atlassian is how diversified the set of business is. I came into Atlassian sort of thinking that it was a tool-based company simply for software engineers called Jira. And the reality is 65% of Jira users are knowledge workers, non-software engineers, Confluence is even higher, closer to 70%. And JSM service collection, north of 70%. So incredibly diversified base of business. And I think as customers really think about how they're going to get value out of AI, it's one thing to have a point solution product that is going to drive individual productivity. How do you actually get value and productivity across team? Well, that's exactly where Atlassian is, right? We've spent 20-plus years helping teams collaborate, orchestrate, and that's becoming more important now, not just with people, but through people and agents together. And so as customers realize that they're adopting more of our teamwork collection, they want to be able to go wall-to-wall with Atlassian to be able to unlock the value of the teamwork graph because the more teams and more individuals that they can get onto the Atlassian platform, the more context that they're creating, right? The workflows that are being built across Jira Service Collection and all the context that's being captured in Confluence that are attached to those workflows, that's really creating the intelligence and IP within the enterprise that they can begin to unlock.

Historically, our frame of reference in terms of product exposure, what tool-based, right? So Jira and Confluence, JSM and then kind of everything else. So Jira Work, the artist formerly known as Jira Work. I know there has been a pretty meaningful reconstitution of a lot of those capabilities, especially from the standpoint of looking at your portfolio in the cloud. And that has manifested in the effort to build collections, right? So teamwork and service. Can you give us a little bit of a refresher on how many collections you have today? What type of KPIs and metrics can you share around levels of penetration with teamwork, maybe the type of ACV or ASP uplift you can realize when a singular Jira user goes on to add Confluence, goes on to add other capabilities.

So broadly, we have 5 collections across the company, Teamwork Collection, Service Collection, Software Collection, Product Collection as well. And so if you think about the collection space, it's really about jobs to be done across different parts of the organization. Jira is our largest business. It's a $2.5 billion ARR business with roughly 150,000 customers today. You've got our service collection business, which just crossed $1 billion in ARR, growing north of 30% year-over-year. And so that's one of our largest and fastest-growing enterprise wedges today across the Atlassian platform. In Confluence, we really talk about Confluence, but that's a $1.5 billion business with 100,000 customers. So when I think about the footprint of 150,000 customers in Jira and 65,000 customers in service collection. There's a massive opportunity to cross-sell. And we're still so early stages on the enterprise side of the world. When you think about our customer base right now, our $3 million ARR cohort is growing 50% year-over-year, about 164 customers, right? Our $5 million ARR cohort, that's growing 70% year-over-year. That's roughly 69 customers. Think about that against a base, $6.6 billion in ARR. There's a ton of headroom to continue to grow on that enterprise side of the world and the cross-sell and expansion opportunity.

One of the other meaningful efforts beyond the reconstitution and the packaging has been around the go-to-market motion. Historically, we've all been familiar with Jira kind of selling itself. It was a product-led motion, right? But there has been a graduation into this more classic enterprise-focused sales approach. You've had a new CRO, I think, who's now been in the seat years. -- and so what have been some of the most dramatic outputs from the changes that have been instituted in the go-to-market process and institution? And where should we continue to see that envelope move? And where should that show the most yield?

Yes. I think -- so Brian, who joined about 1.5 years ago, Brian Duffy, our CRO, he brings 18 years of experience from SAP. And Atlassian being -- the heritage was product-led growth, right, the product selling itself. And so there was a ton of opportunity to continue to evolve and mature that go-to-market enterprise motion. We're already beginning to -- it wasn't that long ago, really 2, 3 years that we only had about 115 reps selling, right? And we're continuing to grow that towards 400. And even then, I think that's well behind the demand that we're seeing in the market right now. So you're seeing that in terms of the capacity that we're building out to be able to deliver against that demand across our customer base. You're also seeing the evolution across our partner programs as well to make sure that we're moving from what historically had been more volume discount tiers into a much more strategically aligned approach with the Atlassian priorities, which is to drive cloud adoption and over time, more and more drive AI adoption.

Part and parcel to the relationship that you've had with partners, historically, that's involved the data center business and the migration thereof, right? As we enter 2028, as we enter 2029, those are the stated milestone years you've put on the board where there's going to be end of support, end of life. So just by extension of that, how does that change some of your relationships in the partner community for whom the migration business is inevitably going to dry up, right? And how should investors generally think about and partners' ability to recapture and actually expand the value on the back of those migrations to build more enduring cloud practices.

Yes. I think this really speaks to the evolution of that partner program. They're an incredibly important part of our ecosystem here. As customers, especially the ones that remain on data center, they're some of our largest, most committed customers, but they also have some of the largest customizations across the platform as well. So it's going to take deep partnership with our solutions partners, with GSIs globally to make sure that we help our customers change management as they migrate over to the cloud. So that's really one aspect of it, and they remain incredibly important part of our ecosystem. The other piece is the marketplace, right? Many of these customers on the data center side rely on the marketplace vendors, the third-party parts of our ecosystem that drive tremendous value for both Atlassian as well as our customers. And so making sure that we move and incentivize these marketplace providers, not just to build on the legacy Connect system, but on our next-generation Forge platform. And so that our data center customers are able to take advantage of those capabilities as they move to the cloud. So whether it's the marketplace, whether it's the solutions providers, they're an incredible part -- an important part of our ecosystem. That's an area that we...

James, as you migrate sort of this last cohort of data center customers over by your commentary, they're more complex by nature and by design. That's why they live in data center right now, and they didn't move in the prior migration iteration going from server. How should we think about the handholding process from you? And then relatedly, what their wallet potential looks like in the cloud? And how that could that be expressed from a net retention rate perspective potential?

Yes. It's a great question. For our data center customers, they really do know that cloud is ultimately the destination, right? Today, they have a limited set of products and capabilities when it's on data center. They've built robust incredible capabilities around that, but they know that cloud is ultimately the destination. That's where you can unlock all of our different applications. You can unlock our collections, can unlock AI, Rovo and Teamwork Graph. None of that's available on our data center right now. So as customers continue to move towards the cloud, we want to make sure that we partner deeply with them over these next couple of years. And once they get to the cloud, I shared a little bit earlier, 3 years on, they're increasing their spend by 1.75x. That's on average. But if you look at even our NRR on the cloud revenue side, I think that's indicative, right? It's north of 120% year-over-year growth right now on cloud NRR. And that's indicative, I think, of the opportunity that we have in I mentioned marketplace a little bit earlier. We're continuing to incentivize marketplace providers moving to the Forge and building on that platform by making sure that we've got some very attractive rates across that. Again, I think that will be, over time, tailwinds for the business.

On the AI monetization side, and we talked about this a little bit earlier, but I think it's worthwhile getting into a little bit more nuanced conversation about -- I generally feel that there is some misunderstanding or some noise around what your opportunity set looks like and your relevance looks like in an AI-first world, right? We talked a little bit about Rovo, but maybe you'll take me there. But how do you -- how does Atlassian intend to monetize AI over time? And what products will be the financial manifestation of that success that you're actually seeing in AI such that you are an AI winner?

The #1 way that our customers want to buy AI today from Atlassian and deploy AI is through our collection, teamwork collection. And that's very intentional. As we bring together Teamwork Collection, which is Confluent, Loom and Jira, we also provide 10x more Rovo credits. And if you look in the market today, whether it's our stand-alone apps or in our collection, the amount of credits that we allocate out is fairly generous. And that is to reduce the friction as it relates to adoption and usage across our customer base. This really gets back to, number one, keeping the customer first; number two, driving value and ultimately making sure that we're being really thoughtful about the pricing advantage that we occupy today to be able to take share in this. If you look at Jira today, it's roughly $7 per month. That will be some of the best B2B enterprise value in the market today. So that gives us a lot of opportunity from a headroom perspective. if you put yourself in the customer's shoes, they have to think about the cost of seats and they're having to think about the cost of tokens and deploy. But over time, more and more, they're going to have to think about that holistically. When you think about the pricing advantage that Atlassian has bringing together the seats, the AI agentic value that we're going to bring today, we're already starting to see that, and our customers are reacting, and you're seeing that in our results.