Atlassian Corporation (NASDAQ:TEAM) The JMP Securities Technology Conference 2023 March 6, 2023 2:00 PM ET

Company Participants

Martin Lam - Head, Investor Relations

Conference Call Participants

Pat Walravens - JMP Securities

Pat Walravens

Awesome. Look so we're just delighted to have Atlassian with us today. And sitting on my right is Martin who is the Head of IR and Martin has been there since 2015. And before that he was at Salesforce for three years. And so we're going to go through the house business and a macro and why I think it's getting worse and all that we'll get all of that. But -- as looking over your bio reminding me as like I said he joined before the IPO, right?

Martin Lam

Yeah.

Pat Walravens

And you've been through four CFOs.

Martin Lam

I guess so.

Question-and-Answer Session

Q - Pat Walravens

So just remind us, so what were you talking about seven or eight years ago, what was this company when you joined? Salesforce was this right incredible thing and you got recruited away. What was Atlassian like?

Martin Lam

It was a far different place. I think I was employee around 48,000…

Pat Walravens

Really, wow.

Martin Lam

…over 10,000 employees. So I've seen a lot of change. I've seen a lot of growth. What's been exciting is that the culture hasn't changed. I think that's what's kept me there. The people continue to be good people, people that you want to work with. And ultimately the company is focused on the long-term. I think that really resonates with me. And the way Mike and Scott run the company is always guided by the long-term.

Pat Walravens

Yeah. I tell us a little bit of -- a little bit more about what it was like in 2015.

Martin Lam

We were in a dumpy little office in Harrison Street and 7th down. It was a warehouse. It's a lot different, obviously, in terms of -- we were just getting started in terms of our…

Pat Walravens

It was Jay?

Martin Lam

Jay Simons.

Pat Walravens

Jay was basically running the US right? He was -- I saw…?

Martin Lam

I saw him two weeks ago as well.

Pat Walravens

And the founders were -- I mean in Australia most of the time how often were they here?

Martin Lam

About once a quarter.

Pat Walravens

And how much now?

Martin Lam

In COVID world a little less, obviously, the past several years. I was actually just in Australia last week meeting with Scott.

Pat Walravens

So when you do earnings where do you do it from?

Martin Lam

We do it remotely. Everyone is in their own home.

Pat Walravens

And are you guys -- by the way do you know what's happening today at the Salesforce Tower?

Martin Lam

I don't know.

Pat Walravens

Today, thanks to their new CEO, Brian thousands of Salesforce employees are supposed to be back in the office today, thousands, four days a week supposedly. So we'll see how many actually show up. But where are you guys on this whole…

Martin Lam

We've kind of taken the exact opposite approach in sense that two months into COVID, we really leaned hard into remote first practices, which means we give employees the option of where they want to work. Whether it's in the office, outside the office, whatever is their first choice. We've always been like this in the sense that we've been a distributed company from day one as Pat was talking about with Mike and Scott based in Australia, about one-third of the company has always been in Australia. So we've always had one foot in the Bay Area here and one foot out in that sense. And we've always operated with a distributed mindset. So it hasn't been a huge change for us probably relative to other companies.

Pat Walravens

Okay. So we're going to do this a little differently. We're going to do your eight years quickly by CFO. How long did you overlap with Eric? Not only at all right? We won't do that one. So then Murray came off your Board. Murray is one of the greatest CFO is intent. I mean he's incredible, right? And so in those three years 2015 to 2018, what was Murray trying to accomplish?

Martin Lam

Murray helps us take public. That was, obviously, his biggest remit. I think he came off the Board. He was Audit Committee Chair. He had been previously the CFO at Adobe. So he came with great experience and I think he helped develop the muscle to help us become a public company.

Pat Walravens

Yeah. And then James came in, in 2018 another sort of world-class CFO.

Martin Lam

James came, he was previously CFO at McKesson, Symantec before that, CFO at American Airlines. So he came from a much bigger scale than we were. So he really helped scale Atlassian to the place that we've got to today, which is 10,000 strong obviously on the path to $4 billion in revenue. And really, helped us scale and again think about how do we appropriately scale and place capital allocation accordingly about some different products.

Pat Walravens

So, let's just do one, but like what's one of the biggest things you learned from him as he's going through that process of scaling?

Martin Lam

I think, James brought a level of humility. I think what he brought in terms of how do we place our bets accordingly across the different market opportunities? And how do you engage with the founders at that level? Because I think the founders obviously have their opinions on, on how to run the business but I think the founders have always shown this intellectual curiosity and willingness to learn. And I think that holds true today in the sense that as we think about the different opportunities –

Pat Walravens

We're not done today yet. So, how did you decide where to place the bets give us an example?

Martin Lam

A lot of it is just on where are we best strategically positioned. And where do we see the biggest opportunity. Again, back to this concept of, we run the company for the long term, where are the largest opportunities in front of us.

Pat Walravens

Yeah. But on to know, what data do you use to decide? Well, give us an example what was an example you decided was a big opportunity during that period?

Martin Lam

I think, our ride in DevOps continues to be guided by that, right? Like you've seen the influence of software continue to grow. You've seen the growth of developers over time. And then what you've also seen is the sphere of influence that developers have within businesses, continue to grow. So how do they interact with the business in terms of how do we bring products to market how do you integrate it with your existing technology stack. So that has continued to grow. And I think we continue to invest appropriately there as we've seen that evolve.

Another area is in ITSM. We've seen the blurring of lines between IT and development. We recognize that trend quite early on. And so we said, we would double down on that market. That's been another area where we've really placed our bets accordingly and evolved that ITSM offering. And today, that's going to be a sizable business. That continues to be an area we have pretty significant momentum.

Pat Walravens

Yeah. And when you guys exited HipChat was that – in this – what year was that?

Martin Lam

That was back in 2019.

Pat Walravens

Okay. Yeah. So that was in the James Beer period. So that's another example, right? How did you decide that okay we're not – because we're pretty passionate about HipChat at the beginning, right? So, how did you get to the point where you're like okay we're not going to be Slack, right?

Martin Lam

Yeah. So for everyone's background, we previously had a chat offering called HipChat which competed directly with Slack and Microsoft teams. And then several years ago, we made the decision to – in insight the pragmatic decision to exit that market, because it didn't make sense to run through it. Given our opportunity in DevOps, our opportunity in ITSM and other areas of work management, the investment it would have required to continue to just play in that market. The returns weren't nearly as attractive as we saw in those other market opportunities. So, we made the decision to exit and partnered with Slack. We sold the IP of HipChat to Slack. And in it I think that was the right decision.

Pat Walravens

Okay. And so now in September 22 CFO number four, right? So – what does Joe bring? What's his –

Martin Lam

So Joe came from Microsoft, where he's operated at even larger scale. And I think what he's seen as in his ride at Microsoft over a 20-year period is how finance can play a role in helping the business make decisions. And so just getting, better reporting, better understanding of cost to serve for every level of – or every dollar of investment that we're placing, what's the corresponding ROI. And so getting sharper on that will allow us to make better business decisions and help guide us to achieve our long-term goals.

Pat Walravens

Okay. So people get really mad at me if I don't talk about the macro in-house business. So let me start with my standard health business, what would you say?

Martin Lam

I think we continue to be challenged in the short-term by macro impacts in two specific areas. It's around new customer conversion from free instances of our products to paid offerings of our product, and then with seat expansion within existing customers. That's the more impactful area on revenue. So those two areas we continue to see challenges from the macro and those continue to grow and impact. And then we continue to be vigilant around other areas.

There are other growth drivers that we have like cloud migrations, upsell, cross-sell. We continue to do well there and track along with our expectations and see solid growth but we’re vigilant that those areas could become impacted. What hasn't changed is again that long-term outlook.

I think if anything we have been almost more bullish about the long-term opportunities. And this environment I think it helps us in this perverse way in that we are this high-value lower-cost offering. I think we have opportunity to play offense and you're seeing us invest more in this environment to get after those large long-term opportunities.

Pat Walravens

Your guidance assumed that things – I don't want to use – get the words wrong, but I assumed it was that things were going to get worse, right? So tell us what the right words were for that? And then what did you base that on?

Martin Lam

Yes. So those two areas that I previously called out in new customer conversion from free to paid, that's the rate that people upgrade from free to paid as well as that seat expansion within existing customers. We've seen macro impact those progressively worse. From Q2 was much more pronounced relative to Q1. So we now have a clear trend line. And so we're assuming in our guidance that things will continue to get worse. And then those areas that we haven't seen any macro impacts like migration, upsell, cross-sell, dollar-based churn. Those things were allowing for those areas to be impacted at the bottom end of our range.

Pat Walravens

So one of the pieces of evidence you used to support your conclusion that things are going to get worse as the trend line from Q1 to Q2. What else did you look at?

Martin Lam

So another thing that we've seen is December tends to seasonally be a slower period. And so we saw that become much more pronounced in December, particularly we announced amongst SMBs. We saw that business was much more pronounced in that area. And then typically when you see business bounce back in January, after that seasonally slow December period, this year it didn't bounce back to the same level at which we would have expected it to. So again, we continue to see that same trend line. And I think it's just more data points around this. And so assuming that this continues to be greater impact from the macro.

Pat Walravens

Yes. This is the first – is this the first time in your eight years that you've seen sort of this dynamic in the macro for Atlassian?

Martin Lam

The early COVID period was a little bit different, of course and that was quite short-lived. But yes I think – Atlassian though, however was born in 2002, so born in the tech bust as well as gone through 2008, 2009. So we've seen different cycles as a company and I think we've taken some of those learnings.

Pat Walravens

Do you think the sort of product-led growth philosophy at Atlassian then makes you more susceptible to when things slow down?

Martin Lam

So the area that we've seen the impact on seat expansion, we let that motion happen organically. So these are existing customers adding seats, going from 100 users to 200 users to 500 users. So we don't look to actually unnaturally influence that seat expansion.

We have a little more influence around other areas like upsell and cross-sell and of course migration where we're looking to hold the hands of those customers that need more handholding. But in terms of pure seat expansion that is an organic motion and we're not going to look to unnaturally influence that. So, in that sense, yes, we are more susceptible in that area.

Again we've seen much more pronounced impact amongst SMBs who oftentimes choose monthly billing. We give the customers option to be build monthly or annually in the cloud. And as those SMBs slow the rate of user growth, you're seeing that impact revenue much quicker because of the monthly dynamic. At the same time, when things get better, you tend to see SMBs be the early indicator and come back quite a bit faster in that regard.

Pat Walravens

Yes okay. So, last one on this sort of big picture topic. So, when you're looking at your factors to drive your okay things are getting worse and you sort of break that into different markets, is it just SMB and non-SMB, or are there more licensed?

Martin Lam

We've tried to slice this a couple of different ways. So, we've looked at it by geo, by vertical and industry, as well as even by product. And when we look at the trends of actuals versus our forecast the results are incredibly parallel to each other. So, it's very consistent across geos industry even by product where you're not seeing any one area and outperform another and there's a trend across--

Pat Walravens

Really. Is that surprising because like everyone thinks like there's more layouts in tech and travel on the other hand is cranking, right? So, does it surprise you that there's not more differentiation between the different verticals?

Martin Lam

No, in the sense that when you have 250,000 customers, you have very broad customer base in terms of customer diversity. We, of course, see the same headlines that you see in terms of the layoffs in tech. I think that speaks to how diversified our customer base is.

And I think it also speaks to the mission-critical nature of our products in the sense that you were not seeing contraction within the customer base. We're still seeing absolute seat growth. It's just at a much more moderated pace than we've historically seen.

Pat Walravens

Okay. One more for me and then we'll open up to questions. The -- so, I was just looking at your cloud growth and you basically had -- here's my little chart, right -- four were up and now four down, right? So, just walk us through what was going on? What led to the acceleration and what's driving the deceleration?

Martin Lam

Well, again, where we've seen the greatest impact over the past two quarters now is on that seat expansion. That's much more pronounced in our cloud business. As the cloud customer base is much more skewed towards SMBs. That's really changing over time as our largest customers who today are on our on-premises offering so on server and data center.

As they migrate over to cloud that's beginning to change more and more. But as I kind of pointed out earlier migrations that continues to tick along that. We haven't seen any macro impact there. So, it's on that pure organic seat expansion that's really impacted the past two quarters.

Pat Walravens

Yes. what's the definition of SMB for you?

Martin Lam

It's generally less than 1,000.

Pat Walravens

Under 1000 employees. Okay. All right. I think -- hopefully people agree that I've beaten the macro thing to death. Any questions from our audience?

Unidentified Analyst

[indiscernible]

Martin Lam

Yes. So, the question is around the time it takes to go through a migration. And so we've always known that this migration to cloud is going to be a multiyear journey. We announced the end of life of our server product line around fall 2020. That will go end of life February of 2024. So server will go away. We still have that data center cohort of customers that we continue to migrate over to cloud. And that's actually seen an uptick in the number of seats continuing to migrate to cloud. So, this past quarter, 50% of the seats are coming from data center today, which is up from about one-third of the year prior. And that's really encouraging because, we're not really pushing on that data center customer base, right? They're just kind of naturally, organically moving over to the cloud as they see the maturation of the cloud platform.

So that helps validate a lot of the investments that we're making. And to your point, that is what we're doing. We're investing more in migration, because there is a lift involved to get these larger customers over to the cloud, and we're driving a greater level of investment there, to try to speed along that process. With every migration, we learned a bit more. So this past quarter, we went through two of our largest migrations to date.

And as you go through those, you take those learnings, you apply them to things like migration tooling. How do you help the customers to come in the future years, get to cloud easier? And again, there's normally three buckets, where we see customers when they look at cloud and why can't they get to cloud yet?

One is on the scale side. So a couple of years ago, we could only accommodate up to 5,000 users in the cloud. Now, it's 35,000 users, and soon it will be 50,000 users. So, we continue to go up the scalability side of things on the data and compliance side of things. Every quarter, we joke we have to check off a new three, four-letter acronym. And I think, we're making really good progress there. And then the third bucket is on the extensibility side. So, for some of these larger customers, they oftentimes will be running several different apps, which they may have purchased in the marketplace or that they've custom built on their own, that will never see the light of day in the marketplace. And those customers facilitating that move to the cloud, is important to be able to have that same functionality in the cloud.

Pat Walravens

The first one was scale. So, why? Why was the limit 5,000? And then, what was the second 15 and going to 30?

Martin Lam

So today, it's 35,000.

Pat Walravens

Today, it's 35,000. And you said, it's going to go to what?

Martin Lam

50,000.

Pat Walravens

Where are these pretty hard number ceilings coming from?

Martin Lam

I view them less as ceilings. It depends on the complexity of a customer really kind of...

Pat Walravens

Why isn't it just elastic?

Martin Lam

That's the goal. We of course want no user limit to ever be an area, whereas customers move over because....

Pat Walravens

But why is it not elastic today?

Martin Lam

A lot of it previously was our old cloud infrastructure. And part of that was several years ago, we've replatformed our cloud infrastructure from our own self-managed data centers to AWS instance to a multi-tenant environment. And so, that allows us to progress and raise up the scalability limits.

Pat Walravens

I got it, as one more time. But the whole point of AWS is that, you went to your on you just keep going. So, why is there a limit at 35,000?

Martin Lam

A lot of it is due to the customer complexity, right? If you have a much more complex environment that you're running with a lot of these apps and a lot of different customizations that you've built over the years. As you move it over to cloud, you want that to be a good experience for them. We could lift it above 35,000 users today, but you want to make sure, it's a good seamless experience with those customers.

Pat Walravens

Yes, you guys are drawing that line.

Martin Lam

That's right. That's right.

Pat Walravens

So, it could -- so it could be 40,000…

Martin Lam

A much less complex environment, it wouldn't be an issue for you, but we want to make sure it's a good experience, when we move those customers over.

Pat Walravens

Yes. So, I remember when you used to go to the Atlassian user conferences, they were so great, because like the energy was really good. And you would walk around and you would meet a vendor and you'd be like, okay, what do you guys do? And they'd be like oh we make it, so that when you're in or whatever pick a product, you can change the color, so you could put your background in here and you could -- it has like -- well, that's nuts. How can that be a separate company, right? That's totally something that Atlassian should be doing the cells, right? And that would go ask Mike, and it'd be like, how could this be goes, oh, yes, we leave those gaps, right? We've built this massive, because that effectively has become our Salesforce. So we leave those gaps and they, yes, another. At Salesforce, they would have offered that functionality, right? And we built this incredible ecosystem that is effectively our outsourced sales effort as a result, right? But now the issue is translating that to the cloud, and it's harder, right? So this has been a multi-year journey. How is that process of getting the ecosystem…?

Martin Lam

That's the challenge of getting every customer over to the cloud. And so part of that is helping build the platform in which these third-party developers can build that equivalency in the cloud.

So we introduced what we call the Forge platform several years ago, that allows us to, or allow third-party developers to build on top of our infrastructure, and so third-party developers focus solely on the innovation side of things and we'll take care of the infrastructure side. From a customer perspective, that's also more attractive, because then as the customer is doing their diligence on Atlassian cloud, they check the box and are comfortable with our cloud, they don't have to go through the list of four or five other third-party vendors and say, hey, where are they hosting my data?

Pat Walravens

Right. Right. So how far away through?

Martin Lam

I think it should be a multi-year journey, yes.

Pat Walravens

Halfway?

Martin Lam

We haven't put a number around it.

Pat Walravens

Yes. All right. More questions from our audience?

Unidentified Analyst

[indiscernible]

Martin Lam

Yes. So our server customers in particular have been anchored at an incredibly low price point. And oftentimes when they move over to cloud, there is a step-up to cloud. So I think we've been cognizant to not move cloud pricing too much as we progress through this journey. Over the past couple of years, we have taken about five points price on our cloud products so relatively modest. But I think we don't want to create a moving target for customers, because that is ultimately the goal.

Pat Walravens

This is an incredibly low price point, really?

Martin Lam

Even our cloud offerings today, they're generally priced $5 to $7 per user per month. It's incredible value especially when you compare it to other software vendors out there. I would argue, we're always going to be the high-value, high-volume provider and that's kind of core to our philosophy. So that will never change.

And if you think about it, our model is really predicated on price not being a barrier to add additional users. So when you add additional users on your team, you don't never want price to be a barrier for that motion.

Pat Walravens

Yes. All right. So, Martin, you had these conversations all day long. So what would you say are the one or two things that investors are not really getting about Atlassian today? You really like the one or two sort of understandings on the story today, what are they?

Martin Lam

So, I think, the biggest one is probably, we are unlike a lot of other companies continuing to invest through this period, right? I earlier spoke about the fact that, we're guided by the long-term. We continue to have incredible conviction around those longer-term opportunities across all three of the markets, as well as certain strategic initiatives, like serving enterprise customers in a better way, like migrating these customers over to the cloud. And so we're trying to drive a level of investment to facilitate some of those motions faster, as well as play offense, right? We want to take share from competitors in this environment. So we'll continue to invest.

At the same time we want to balance that level of investments with responsiveness to the macro. So that's the balancing act that we're going through. And so it's about trying to balance, while investing in the opportunities in front of us.

Pat Walravens

Anything investors don't get that?

Martin Lam

I think investors generally are supportive of the longer-term opportunity and our desire to, but of course in this environment people want as much more on profitability.

Pat Walravens

They really do, yes. They really do. Well, thanks so much for coming and chatting us. We really appreciate it.

Martin Lam

Of course. Absolutely. Thanks, Pat.