Atlassian Corp (TEAM) 2020 Q1 法說會逐字稿

Good afternoon.

Thank you for joining Atlassian's earnings conference call for the first quarter of fiscal 2020.

As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Atlassian's website following this call.

I will now hand the call over to Martin Lam, Atlassian's Senior Manager of Investor Relations.

Good afternoon and welcome to Atlassian's First Quarter Fiscal 2020 Earnings Conference Call.

On the call today, we have Atlassian's Co-Founders and Co-CEOs, Scott Farquhar and Mike Cannon-Brookes; our Chief Financial Officer, James Beer; and our President, Jay Simons.

Earlier today, we issued a press release and a shareholder letter with our financial results and commentary for our first quarter of fiscal 2020.

These items were also posted on the Investor Relations section of Atlassian's website at investors.atlassian.com.

On our IR website, there is also an accompanying presentation and data sheet available.

We'll make some brief opening remarks then spend the rest of the call on Q&A.

Statements made on this call include forward-looking statements.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events.

Forward-looking statements represent our management's beliefs and assumptions only as of the date such statements are made.

Further information on these and other factors that could affect the company's financial results is included in filings we make with the Securities and Exchange Commission from time to time, including the section titled Risk Factors in our most recent form 20-F and quarterly report on Form 6-K.

In addition, today's call, we will discuss non-IFRS financial measures.

These non-IFRS financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with IFRS.

There are a number of limitations related to the use of these non-IFRS financial measures versus their nearest IFRS equivalents and they may be different from non-IFRS and non-GAAP measures used by other companies.

A reconciliation between IFRS and non-IFRS financial measures is available in our earnings release, our shareholder letter and in our updated investor data sheet on our IR website.

I will now turn the call over to Scott for opening remarks before we move to Q&A.

Thanks, everyone, for joining today.

We're out of the blocks in good form in fiscal 2020.

This quarter, we grew revenue by 36% year-over-year and generated more than $62.4 million of free cash flow.

We also added over 7,000 net new customers during the quarter and now have more than 159,000 customers in total.

This quarter, we introduced 2 important new editions of our cloud offerings, free and premium.

Our disruptive business model continues to win new customers, both large and small, and these new editions offer them more choice and capabilities.

We wanted to be easier and less costly for teams to get started in the cloud and grow with us as their needs change and become more complex.

Premium illustrates the increased sophistication of our enterprise cloud offerings, providing large companies the flexibility and the tools they need.

We are also excited to have acquired Code Barrel, the creator of Automation for Jira.

As a platform for managing work and workflows, Jira is in a unique position to help automate manual steps in the workflow to help people and teams advance work more efficiently.

Automation is an increasing priority for our customers because it helps them move faster and collaborate more effectively.

Automation for Jira is already used by thousands of teams and is another important step as we continue to enhance our cloud products.

We've provided more detail on these announcements along with many other updates in our shareholder letter that we issued earlier today.

And with that, I'll pass the call over to the operator for Q&A.

(Operator Instructions) Your first question comes from the line of Heather Bellini with Goldman Sachs.

I wanted to ask a little bit just because there's been some concern over the past few days about -- if you've started to see any change in the customer buying patterns, right?

I mean I know you guys don't have a direct sales force.

But I know James has obviously seen different cycles from time to time, being at different companies.

But any sense that there's been any change in the demand environment?

And then I had a follow-up question, just if you could share with us anything about any potential impact you saw from the price changes, if there's a way to help think about the impact on the quarter, whether we should be thinking about it more similar to kind of the fiscal year '18 price increase where the timing was more similar.

Or is it potentially more like last years in terms of the behavior in deferred revenue?

Heather, let me start off with our answers.

First of all, I wouldn't say we've seen any material change in customer buying patterns.

We've been pleased by the results.

The overall strength, right across the product sets and our different deployment options.

So nothing material in that regard.

Reaction to price increase, Jay, if you want to start off with that one, and then I can come back on some of the timing items.

I think similar to how we've reported in the past, it was in line with expectations.

So -- and I think customers -- and part of that is just around the planning that we do that goes into the increases that we do communicate to customers and the way we communicate those price increases to customers.

So I think we're pleased with how it's been adopted.

Yes.

And in terms of the timing, we announced our price increases at the start of this past September.

And so a couple of weeks earlier than was the case a year ago.

And so more in line with the timing of fiscal '18.

And so for that reason, we expected that there would be some additional customer activity in Q1 as there was in Q1 of fiscal '18.

And that there would be potentially some of that bleeding over into Q2 as well, again as there was in fiscal '18.

Your next question comes from the line of Gregg Moskowitz from Mizuho.

I found it interesting, just in follow-up to Heather's question, that your EMEA revenue growth actually reaccelerated this quarter just given again some of the macro and other concerns that we've all heard about.

Is there anything that you would call out with respect to your strong execution in EMEA?

Thank you, Gregg, for the question.

Recall that over half of our partners are based in EMEA.

We have over 500 partners around the world, and they have tended to be quite active helping their customers, our customers, step in front of the price increases.

We saw this in the last couple of years.

And while that activity generally impacts our deferred revenue balances, there are, I think as we've discussed in the past, a couple of revenue drivers there as well.

And so that is a part of what's driving those strong results both in EMEA and in APAC as well.

Okay.

That's really helpful, James.

And then just as a follow-up, I realize that we're only 1 quarter, of course, into fiscal '20.

But just relative to your prior guidance for the cloud mix shift to cause a 100 basis point revenue growth headwind for the year, have you seen anything at this point that perhaps might tilt you into one direction or another?

Or do you still see how that's probably the right landing spot for the cloud impact this year?

Yes.

And I would continue to say that, that 1-point headwind to revenue growth year-over-year is what we're expecting.

Recall that there were 3 elements to that when we talked about it 90 days ago.

The first, the launch of free editions of Jira Software and Confluence.

The second thought that we would offer free trials of our cloud product to the user of that same product behind the firewall and then the mix shift that you're referring to in the question.

And one of the other things to recall is that we just rolled out the free versions of Jira Software and Confluence just quite recently.

And so continue to be of the view that, that 100 basis point headwind is the right way to think about those 3 issues combined.

Your next question comes from the line of Keith Weiss from Morgan Stanley.

Very nice quarter.

Two questions.

One on sort of the new customer adds.

You guys have been adding customers at a really nice clip.

Saw a really good growth in that net new customer add this quarter, like 20% on a year-on-year basis.

Anything in particular driving that kind of stronger new customer adds in Q1?

And anything in that, that wouldn't be repeatable for the rest of the year, number one.

And number two, another acquisition, sort of going deeper into sort of the opportunity around Jira and some of that core IT.

We haven't heard as much about this stuff outside of the IT department.

Can you give us an update on kind of how we're thinking about the opportunity for Jira outside of the IT department?

And is the focus still there in the same way it had been historically in terms of expanding the use cases outside of those core IT use cases?

Keith, Jay here.

I'll take the first part and then hand it off to Mike on the second one.

In terms of customer growth, really contribution across the board from all the major products that are -- contribute to new customer adds.

As we talked about last quarter, there's one component in there related to the monetization improvements that we introduced at Trello around board limits for team usage.

And there is some nascent pent-up demand within the existing customer base that's contributing to the number, not in a materially outsized proportion, but it is in there.

And that's maybe one component as we roll through a year of those monetization improvements in the base that will moderate a little bit.

And just one thing to add onto that briefly, we continue to see more than 90% of those new customers going straight to our cloud services.

Mike?

Yes.

Keith, my -- look, we obviously continue to remain bullish and focused on the opportunities both inside and outside the IT and software department.

You referenced the acquisition of Code Barrel.

Obviously, automation is an area that we already have quite a variety of offerings in -- now in Trello, in Opsgenie, and we had some automation features in Jira Service Desk.

This really lets us expand that automation offering across the whole Jira platform.

So when you talk about non-IT teams, where does that mainly exist?

Obviously, Jira Core just for business workflow and process management at all sorts of levels.

This automation fits directly inside of that sweet spot for companies that are modeling all sorts of processes on top of Jira already.

This just gives them extra superpowers.

And then within Service Desk, it's also incredibly important because Service Desk, while it continues to land very strongly in IT, does expand very well outside of IT to all sorts of other flow-based teams within an organization, be it in legal or finance or HR, workplace management, any of these sorts of things.

That automation obviously works very well in those areas as well.

Obviously, in this case, automation doesn't affect Trello or Confluence or anything else we sell outside of -- to business teams.

But from an automation point of view, yes, very, very strong for the whole Jira platform, both inside and outside IT.

And obviously, for us, the core of that business is a bunch of really kick-ass people that came from Atlassian to start with.

So we know the people really well, and I think it's going to work really well.

Makes us very happy.

Your next question comes from the line of Arjun Bhatia from William Blair.

Maybe I just wanted to follow up on the acquisition that you were just talking about.

Just to try to get a better understanding of how you might integrate this into Jira and how you might monetize it.

I think it's -- I think I read that it's largely sold through the marketplace today.

But can you maybe just walk us through how the monetization model might work?

Is this something that you plan to introduce on the premium products only?

Or is this going to be widely available across all Jira tiers?

Arjun, Scott here.

We've had some success.

We've acquired Butler and did something similar where we had a lot of success at packaging part of it in our premium, allowing part of it in our sort of standard offering for customers to get a taste of it.

And in this bigger acquisition, I think we'll also have some existing customers particularly around the existing customers in terms of transition period.

So there's a lot of things to consider there.

But we do think it will help bolster our premium offering over time, and this is something our customers are really interested in.

Great.

And then maybe on the freemium products that you launched, the freemium for -- or the free tiers of Jira and Confluence, can you just give us a sense of what you're seeing from customers in the initial phases of its launch?

I know it's still early, but are you seeing a big uptick of new customers coming in into that free tier?

And maybe on the other side, what are you seeing from existing customers that used to be paying but might have moved down to the free tier?

Yes.

Like well -- if I think about our disruptive model over the years, like we've always tried to make sure our products are accessible for every size company.

The start-ups that's coming out of university, people just starting with 2- or 3-person organization, all the way up to people that use our things with 30,000, 50,000 people and expand that gamut.

And we've always had a pricing to appeal to that.

If I would go back to 20 years when we started, only the Fortune 500 could afford software, and we pioneered the model to make software affordable to companies of all sizes.

And if you go over down with free and premium, it's continued to improve that in the cloud.

And on the premium side, it's making sure our largest customers have the features that they need to continue their expansion in the cloud or to move their on-premises deployments to the cloud.

And on the free side of things, it's around to make sure again that those companies who normally charge a couple of dollars a month, that the barrier of the credit card, if we can remove that, we believe there will be a large increase in the funnel there.

Now on the free, I think it has to do -- the question was how much it's opened the funnel.

Not in a position to talk through that at the moment.

And so apart from saying that we are pleased by the results internally of how that is going and -- but it's still early days, and we don't want to look at some of those things in cohorts over a long period of time to make sure that it really uplifts.

But irrespective of, I guess, the short-term benefit, the long-term benefit is ensuring that every single company of every size can use Atlassian products.

And just to emphasize what I was mentioning earlier about that effect of free being embedded within that 1-point headwind to our revenue growth rate in FY '20.

Your next question comes from the line of Michael Turits with Raymond James.

This is actually Robert Majek on for Michael.

Sounds like Opsgenie is doing really well as part of the Atlassian family.

Can you just give us some more color there, the changes you made that led to an accelerated growth rate?

And maybe more broadly, if you can just talk more about the long-term opportunity for that asset?

Michael, it's Scott here again.

With regard to the Opsgenie acquisition, we just actually had a party in our office to celebrate 1 year of closing last night.

So it's great, it seems that was like only yesterday.

The acquisition is doing really well inside Atlassian.

And the deal with the space, the incident management companies around the world are struggling to how do they release software at a faster pace, how do they keep up with their competitors.

And you're seeing the whole movement around things like DevOps, and being part of that is making sure that when incidents happen as they naturally do, that people are going to respond quickly and have the right people available.

And that's what Opsgenie does.

Now Opsgenie, we're pleased with some of the integration that we've done on the product side, the identity side, on the user space side that I was hoping we have a lot of opportunity there to put those products together particularly with our large existing base.

We have seen a doubling of the rate of paid seats since we acquired the company.

I think we've put it on our shareholder letter, and that's been great, and we still think we have a long way to go in terms of introducing our existing customers to the Opsgenie product.

Your next question comes from the line of Alex Kurtz with KeyBanc Capital Markets.

I just want to follow up on that thread.

Just in your shareholder letter, talking about the free tier, doubling the pace of growth for Opsgenie from a user perspective.

When you see that kind of result, is that how you might think about future M&A that you can really accelerate a product in market where maybe as a stand-alone entity, a company just can't get to that kind of growth rate, that might change how you think about future M&A?

Or do you think that was really specific to the markets that Opsgenie serves?

So I guess the question is, when you see that impact, do you think you guys might want to be a little bit more aggressive on it -- in M&A?

I'll take that.

It's Scott here.

And Mike might want to add something at the end.

When we think about M&A, we think a couple things.

Firstly, it's got to be a great culture fit for the company.

That's first and foremost.

It's very hard to change culture.

Second, it has to be a mission fit.

So there's no point acquiring companies that don't work with our mission, which is unleash the potential of every team.

And third, is a business model fit.

It's more difficult, though not impossible, to change a company's business model.

Take it from a low volume/high price to high volume/low price, for example, is a difficult thing.

And then after that, we consider technical and other things.

And so if we do find companies that align with our mission, with our culture and with our business model, we will consider them.

And we do believe that our base of 159,000 customers and millions of teams around the world is something where they're interested in other products that we can bring to market for them, both acquisitions and new products that we'll develop organically.

So we think the opportunity is really large, we're not about kind of acquiring stuff for revenue's sake.

There's a lot of things that we could -- just random things introduced into our customer base that may bring short-term revenue but don't bring us closer to our mission, and we want to be very disciplined about not going after those types of opportunities.

Yes.

I would just add one small thing.

Obviously, we -- you've seen us make a series of changes in Opsgenie, and it's -- obviously, we're generally pleased about how it's going.

I do believe companies have a DNA.

We obviously have a long-term philosophy, a DNA of having a long-term philosophy and making changes at our patience over the long term.

As Scott mentioned, 159,000 customers, we have a massive distribution engine for software.

But you still have to have fantastic applications with really great feature sets.

Opsgenie has the best features in the market.

And we have an ability to put a disruptive price against it to really make a huge dent.

I think that fits our DNA in a really, really good way.

So part of the reason we've been so excited about the team since they've come on board, and we're starting to see some pretty great results.

Taking our model up against big enterprise software is something that we're very familiar at doing, have almost 20 years now of history of success of doing so and intend to continue that.

Your next question comes from the line of Derrick Wood with Cowen and Company.

Nice job on the quarter.

I wanted to touch on what you're seeing in terms of rate of activity from customers moving from server to either data center or cloud.

And I guess on cloud specifically, now that you've got Cloud Premium out, I know it's still very early.

But I mean as you look over the next 12 to 24 months, do you see migration being more gradual as enterprises slowly get more comfortable?

Or do you see perhaps more of a hockey shape just with more acceptance to cloud and the advancements you're making with your premium SKU?

Derrick, Jay here.

We talked a little bit about this on the last call.

I mean we're seeing increasing interest in cloud generally but also in cloud from our server customer base.

And so part of what we've invested, we made big investments in migration tooling just to make that process simple.

We've made some pricing calibration adjustments to make it easier for customers to move.

And then we're working a lot more closely with customers to make sure that the planning of that move and the implementation of that move is smooth.

I think in -- just in terms of the demand environment, it's increasing at a steady clip.

And I think what we've signaled last quarter is just the investments that we've made over the past year and just the readiness to make sure that when customers do want to move because it is both -- in some cases, it's a replatforming, it's saying I'm going to take an instance that I have 3 or 4 or 5 years of history with, and I want to move that smoothly to -- from infrastructure that I'm hosting and managing to infrastructure that I no longer have to manage because Atlassian can do a better job of it for me.

And then data center is a little bit of a different, not even a migration pattern.

It's basically an upsell from a standard version of server on-prem to a high-availability instance of the on-prem infrastructure.

And that's still a motion that really, really large customers are choosing, which is fine because we're celebrating the customers' choice to either remain on-prem or go to cloud if they want to.

And just a couple of things to emphasize what Jay was saying there.

We're obviously very pleased with the rate of growth of our subscription business, which encapsulates both our cloud and data center business.

So that grew 50% in Q1.

And then you mentioned the potential effect of Cloud Premium.

As I've said in the past, I wouldn't expect Cloud Premium offerings for JSW and Confluence to drive a material revenue effect in FY '20.

I think we see the benefits of that downstream.

Your next question comes from the line of Nikolay Beliov with Bank of America.

Just to follow up on the last question, you've put in place channel incentives, product incentives, pricing incentives to steer the server customer base to the cloud version.

Do you envision this being, I don't know, like 2-, 3-year process or 5-, 6-year kind of like transition of that installed base and the $400 million worth of maintenance to cloud?

I mean the transition will happen over years.

It will be gradual.

Okay.

And James, question for you.

You raised the revenue guidance for the year in line with the Q1 beat.

I'm just wondering what kind of puts and takes you're considering for the rest of the year as you provided the updated guidance for the year?

Yes.

Well, versus the midpoint of our original guide 90 days ago, we've obviously raised beyond the Q1 beat quite substantially.

And this reflects our ongoing confidence, as I've said right at the outset of the call, across the products and across the deployment options.

So really, that's the logic behind the moves that we've made today on the guide.

Your next question comes from the line of Gray Powell from Deutsche Bank.

So yes.

So on an absolute dollar basis, you added more revenue to the subscription line than any prior quarter ever.

I know you're not going to give exact numbers.

But maybe like broadly speaking, how much of that is being driven by just normal demand versus customers shifting from server to cloud?

Well, I would say that the gradual server-to-cloud transition is building momentum.

But what I really would say, and when you think about that subscription growth rate, it just represents the underlying strength of both the cloud business and the data center business.

So we're pleased by how both of those business lines are growing very substantially.

Your next question comes from the line of Brent Thill with Jefferies.

This is Luv Sodha on for Brent Thill.

Congrats again on a strong quarter.

I had a couple questions.

One was given the impressive subscription year-over-year growth rate of 50% this quarter, I know last quarter, you guys mentioned that you would hit -- grow over 40% year-over-year for subscription.

So is there any update to that?

And then the second question was really that this is the first time you guys have done price increases on the data center product.

So has there been any initial reaction to that and -- from customers, if you have seen that?

Yes.

So let me take the first part of that.

So in terms of the subscription business, we guided at the outset of the year that we thought we could beat 40% growth year-over-year.

Obviously, the Q1 result is a very nice down payment, if you will, on achieving that objective.

So nothing to update around that at this time.

And in terms of the price increase activity around data center customers, Jay, would you want to take that one?

Yes.

No.

It -- they had a fine reaction.

I mean the price increase in data center was super nominal.

As you mentioned, it was the first adjustment we made to data center pricing since introducing it 4 years ago.

Your next question comes from the line of Jack Andrews with Needham.

I was wondering if you could speak about the broader demand trends and competitive landscape as it relates to Trello.

It seems like in this broader collaboration space, more companies are increasing some focus and investments there.

So I was just wondering, are you seeing any sort of inflection in the demand for more general collaboration tools?

Look, I mean I would say more general collaboration tools continue to be something as -- that grows as business evolves, right?

Our people are getting more comfortable with using these types of tools.

You have obviously people joining the workforce who are incredibly comfortable with mobile-based collaboration apps and things like that.

But nothing unusual in the last quarter over a general shift towards collaborative tools both in -- as we would say, in specific domains.

So I would argue that Jira, Confluence, other tools we have, are actually modern collaboration tools that have all the modern collaboration features from our Teamwork Platform that focus on specific domains whether it be project management, workflow management or document collaboration, but nothing particularly changing over than a general movement in our direction which is obviously where we intend to be.

(Operator Instructions) Your next question comes from the line of Rishi Jaluria with D.A. Davidson.

Two here, first on Trello, I mean now up to 50 million users.

Can you maybe help us understand if you've seen particular traction in specific industries, lines of business within organizations, specific geographies?

And alongside that, on the monetization side, I know you introduced board limits relatively recently and that seems to be helping.

But maybe help us understand what the path to monetization for Trello looks like going forward?

And then on the automation for Jira and the acquisition there, maybe just help us understand the technology a little better.

Is this similar to the Butler acquisition for Trello?

Or is this more robust, maybe even slightly similar to an RPA offering?

Rishi, I'll certainly take the first half there.

I guess I could take the second half too.

Look, on Trello, we continue to be extremely positive.

As we said in the shareholder letter, we passed 50 million registered users this quarter, which is again a huge jump on last year and continues to power along really nicely.

So as we say pretty much every quarter to you guys, the first goal is to continue Trello growing the way it's growing, and I think we're sort of ticking that box and continue to travel well there.

Those users are all across the globe.

It's a very global phenomenon.

It's an application that works as well in Android in Brazil as it does in iOS in America or on a desktop in Australia.

So as in terms of a global application, it is very, very large, and I think we're showing in the numbers that we can continue to grow it very strongly.

We are, as you mentioned, starting to monetize it more in the last sort of 6 to 12 months, seeing good traction happening there.

Just in terms of managing how, we separate between the free and paid offerings.

You mentioned board limits, a few other small tweaks and changes we've made to monetization and pricing.

I would just say again that comes from a sort of long-term patient philosophy as a company and our DNA of having -- being very, very expert at how we optimize pricing for different customer groups and customer segments and make sure that, that drives, firstly, growth, and then second, value to Atlassian after we deliver value to our customers.

And Trello is no different there.

The only difference, which I already pointed out, is we're still not actively cross-flowing users to other Atlassian properties yet.

It's on the list.

We'll get there.

But we're not actively looking at it today.

The other 2 priorities are taking more of that in the short term.

I guess I can take the Automation for Jira.

Look, technologically, I'm not sure at what depth you want an answer to that question.

It's similar to Butler in some ways in terms of how, I guess, it works as an automation, obviously, built completely differently inside of the Jira stack, it's a very different world.

It's -- for the basics of things like RPA, for sure, you could use it to automate some of this, but it's not -- I wouldn't say it's a competitor to RPA tools in that way.

It's more about automating, I guess, repetitive -- or tasks that you don't necessarily need to do.

So I've given the example of -- our legal team uses Service Desk very heavily to manage incoming contracts and move them around.

They can look for missing fields, missing data, other things they would need and bounce it straight automatically back to the user to get more information or to move it to the next stage in the workflow without one of our very expert lawyers with their legal degrees having to spend time moving tickets around, which they shouldn't have to do, right?

They want to focus on high-value work that leverages their skills, and automation just lets us take that to millions and millions of Jira users around the world.

So I think we're incredibly positive about the impact it can have.

Your next question comes from the line of George Iwanyc with Oppenheimer.

So just another one on Code Barrel from an expense perspective.

Is the acquisition pulling forward some expenses?

And is that kind of embedded with maintaining the operating margin guidance?

Yes.

That's -- George, we've embedded all of that within the guidance.

That's right.

Yes.

Are you accelerating investment in other areas internally as well?

Well, I wouldn't point to any particular acceleration driven by the acquisition per se.

Obviously, we're very pleased to be adding the Code Barrel team.

And as I say, we've catered to each of the effects there within the guide that we've issued.

Okay.

And just broadly speaking.

On the IT side, has the competitive dynamics changed at all with the ramp of Jira Service Desk and Opsgenie and all the other efforts that you're doing focused right there?

Yes.

Scott here.

The competitive dynamics, I don't think they've changed significantly over the last couple quarters.

We feel increasingly confident about our position in IT.

As we sort of mentioned before, IT and software are becoming increasingly closer together, and that's an area that we have a real strong market position given that we have a large number of software developers and tools and products to help them be productive.

And as those teams work closer together, they're looking to have one stack to pull those things together.

So from that, we feel, I guess, increasingly confident at our position in the market.

But if we're looking at other people out there, I don't think there's any major change in the competitive dynamics.

(Operator Instructions) There are no further questions at this time.

I will turn the call back over to the presenters.

Thanks, everyone, for joining the call today.

From Mike and Scott down in Sydney, James and Jay up in San Francisco, we appreciate your time very much and look forward to keeping you updated on our progress as we travel into the future.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.