Atlassian Corporation (NASDAQ:TEAM) Q3 2024 Earnings Call Transcript

Atlassian Corporation (NASDAQ:TEAM) Q3 2024 Earnings Call Transcript April 25, 2024

Atlassian Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon and thank you for joining Atlassian’s Earnings Conference Call for the Third Quarter of Fiscal Year 2024. As a reminder, this conference call is being recorded and will be available for replay on the investor relations section of Atlassian’s website following this call. I will now hand the call over to Martin Lam, Atlassian’s Head of Investor Relations.

Martin Lam : Welcome to Atlassian’s Third Quarter of Fiscal Year 2024 Earnings Call. Thank you for joining us today. Joining me on the call today, we have Atlassian’s co-Founders and co-CEOs, Scott Farquhar; and Mike Cannon-Brookes, and Chief Financial Officer, Joe Binz. Earlier today, we published a shareholder letter and press release with our financial results and commentary for our third quarter of fiscal year 2024. Shareholder letter is available on Atlassian’s Work Life blog and the investor relations section of our website, where you will also find other earnings-related materials, including the earnings press release and supplemental investor data sheet. As always, our shareholder letter contains management’s insight and commentary for the quarter.

So during the call today, we’ll have brief opening remarks and then focus our time on Q&A. This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and assumptions. Any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. 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 and we undertake no obligations to update or revise such statements should they change or cease to be current.

Further information on these and other factors that could affect our business performance and 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 recently filed annual and quarterly reports. During today’s call, we will also discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and are not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. The reconciliation between GAAP and non-GAAP financial measures is available in our shareholder letter, earnings release and investor data sheet on the investor relations section of our website. We’d like to allow as many of you to participate in Q&A as possible.

Out of respect for others on the call, we’ll take one question at a time. With that, I’ll turn the call over to Scott for opening remarks.

Scott Farquhar: Thank you for joining us today. As you’ve already read in our shareholder letter, Q3 was truly a milestone quarter for Atlassian. Today, Atlassian is a cloud-majority company. We have over 300,000 customers using our cloud products and have seen a three-time increase in paid seats in the cloud since we announced the winding-down support for Server 3.5 years ago. And while this is just one significant moment among many across our multi-year cloud journey, we are thrilled with what we’ve achieved to-date. We migrated more paid seats to cloud than we initially projected, and our churn has been consistently lower than expected from our Server base. This speaks volumes about the mission critical role our products play, the value they deliver, and our customers’ desire to realize the innovation in our cloud products.

We now have an even larger opportunity in cloud than originally believed. You’ll see us continue to execute it against our roadmap and do with more innovation to pave the path for these data-centric customers to move to cloud [technical difficulty] drive durable future growths. We’re also announcing that I’ll be stepping down as co-CEO of Atlassian on the 31st of August this year. It’s been a difficult decision, but after 23 years, it’s time to pursue some other passions I have, particularly philanthropy, investing, and to help grow and build the global technology industry.

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Mike Cannon-Brookes: Thanks, Scott. Yes, milestone quarter for a number of reasons. Now there will be plenty of time for celebrations and farewells as this is not Scott’s last earnings call but I do want to touch on his news briefly. As you all know, Scott and I have known each other for nearly three decades and have experienced every major life milestone together. This company simply would not be Atlassian without Scott. And I’m truly thankful to have had him by my side every day for the last 23 years. In this next chapter, I am sure we will remain great mates and trusted partners, and I’m glad that I can support him through this both personally and professionally as I continue to lead Atlassian forward as CEO. Atlassian has always been my Number One professional priority and focus.

Scott and I have both won every hat over the last two decades, so I’m confident in taking over full responsibility of the company. I’m incredibly excited about the massive opportunities that we have in front of us across our three markets in work management, software development and service management. We also have huge opportunities ahead of us in both the enterprise transition and AI, where our unique team data and insights allow us to offer unique capabilities and unleash our customers’ potential. As we continue to attack our opportunities, I want to reiterate the commitments that we’ve made to continue to grow over the long term, while returning to our historical margin levels. We have a thoughtful plan in place to continue to drive durable revenue growth, and we feel really good about our agile-approach to appraise behind key strategic areas like enterprise NII, while driving leverage as we scale, and we couldn’t be more excited about the future.

With that, I’ll pass the call to the operator for Q&A.

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Q&A Session

Operator: We will now begin the Question-and-answer session. [Operator Instructions]. Your first question comes from Ryan MacWilliams from Barclays.

Ryan MacWilliams : Hi, thanks for taking the question. Just like to hear about the overall macro trends at this point. for developer hiring. Like, have you noticed any trends around the green shoots of growth for IT budgets or powering developers? And then separately, just one quick housekeeping item for Joe. What was the loan contribution to cloud revenue growth in the third quarter? And maybe how you’re thinking about its contribution to the fourth quarter? Thank you.

Joe Binz: Yes. Thanks, Ryan. I’ll start. From a macro perspective, macro trends were very much in-line with what we saw in Q2 and in-line with our expectations. Enterprise was healthy across both cloud and data center and that drove the record billings, strong growth in annual multiyear agreements. Strong migration and good momentum in sales of premium and enterprise additions of our products that you see rolling through our revenue results. The macro impact on SMB, on the other hand, continued to be challenging, although also in-line with expectations. And that macro headwind in SMB lands primarily in cloud, given SMB makes up a significant part of that business. And within cloud, it lands primarily in paid seat expansion. So stepping back more broadly within cloud, the trends in Q3 were very consistent with Q2, as well as our expectations coming into the quarter.

And then paid seat expansion rates remained well below prior year levels, but the decelerating trend quarter-to-quarter did continue to moderate from Q2. So that is a positive sign. All of the other growth drivers migrations, cross-sell, upsell, new customers, monthly active usage, churn, et cetera. Those were all in-line with our expectations and stable overall. And then in terms of Loom, basically, from a quarter perspective, we are not going to provide specifics on Loom’s revenue or growth rate. We were pleased with the growth we’re seeing and excited by the customer reaction to the recent AI innovations we’ve been introducing into Loom’s product line. In terms of performance in the quarter, Loom revenue in Q3 was squarely in-line with our expectations.

And in terms of our fiscal year guidance, in terms of our overall revenue and operating margin guidance for the year, we continue to expect Loom to have about 1.5 points of impact on FY ’24 cloud revenue growth for the year and for Loom to be slightly dilutive to FY ’24 and FY ’25 operating margins.

Operator: The next question comes from Fred Havemeyer from Macquarie. Please go ahead.

Fred Havemeyer: Thank you very much. Scott we know you are not leaving immediately, but certainly will be quite missed on these calls. I wanted to ask with respect to those — the super migration at this point, it is very encouraging to hear that churn was looking much lower than expected and primarily the customers have transitioned on to data center. But are there any customers that are left over at this point in time that might make a future transition after limping along for some period of time here?

Joe Binz: Hi Fred, this is Joe. It is difficult to know exactly how many server customers remain running unsupported at this point. We believe it is a small number and certainly smaller than we thought it would be entering the quarter. We are not assuming any material contribution to either data center or cloud revenue growth from this cohort of customers moving forward in the guidance. And operationally, our focus now is squarely on enabling our data center customers to move to the cloud.

Fred Havemeyer: Thank you.

Operator: The next question comes from Keith Weiss from Morgan Stanley. Please go ahead, Keith.

Sanjit Singh: Yeah, this is Sanjit Singh on for Keith. Thank you for taking the questions. I actually want to ask a question about customer call out that you had in the shareholder letter. You guys mentioned that FanDuel was able to cut tickets that require human interventions by 85%, which is a pretty fantastic result for Fanduel. In terms of that customer, are you pricing that FanDuel contract on a seat basis? And how would you think about when they achieve those types of efficiency gains? How do you think about the revenue opportunity with some of the efficiency gains you’re seeing with the Atlassian products.

Scott Farquhar: Yes. That’s a great question, Sanjit and I think one on people’s minds is AI increasingly helps produce these incredible ROI experiences that we are seeing across our customer base. And at the moment, we have historically priced our — almost all of our products on some sort of seat basis with some usage basis that has happened in certain areas of the product such as BitBucket pipelines that we’ve charged for units to build and stuff like that. We are experimenting going forward with more usage-based [product] (ph) seats. So it’s — I don’t want to get into — one specific customer, but we think that there is a world in the future where we do have some sort of usage back pricing around these interactions with the – and the ROI that we getting from customers. And so we’ll see more experimentation with that going forward, but but that’s something we’re experimenting [with] (ph).

Sanjit Singh : Appreciate for that. Thank you.

Operator: Your next question comes from Gregg Moskowitz from Mizuho Securities. Please go ahead.

Gregg Moskowitz: Hi, thank you very much for taking my question. And Scott, all the best in your future endeavors even though I know, as Mike said you’ll be with us for a little while longer, fortunately. So my question is, obviously, this is a significant upside quarter. Having said that, I think the big question is one of sustainability. The cloud revenue in the quarter will be in-line with guidance with all of the upside coming from data center and marketplace and marketplace itself is tied to the data center as well. But we’re never going to have another quarter of server migrations. And clearly, there was also a decent amount of pull forward given the recent data center price increase. And so as we look ahead into next year and beyond, the question is can Atlassian, in fact continue to show good growth. Thank you.

Joe Binz: Yes. Great question, Gregg. Thanks for asking. Let me try and share a little bit of perspective on that without giving specific numbers for FY ’25. At the highest level, the long-term revenue growth of the company is really driven by the opportunities we have in our three large high-growth markets that Mike touched on at the top of the call. And secular trends around things like digital transformation and software is a critical factor to the success of every company. From there — there are several growth drivers across cloud and data center. In terms of cloud, he given the size of the data center installed base, we do continue to expect migrations to be a key driver of cloud revenue growth over several years, although we do expect that impact to wane gradually over time.

Now to drive migrations, we’re delivering a cloud platform that provides the best customer experience and value with analytics and automation and AI, as well as better TCO for the customer. And those factors will only improve and grow stronger over time. As part of that, we’re investing in new and highly valuable product innovation as well, and much of that is only currently available on premium enterprise additions of our products, our cloud products. And we are working to unblock and help customers migrate and deploy on our cloud and making good progress on scalability and certifications and app integration and extensibility, all of which are very relevant to our largest customers in data centers. So we have a lot of confidence in the migration space.

From there — as you know, there are multiple growth drivers in the cloud we’ve discussed in the past, things like paid seat expansion within our existing customer base, our opportunity to cross-sell additional products to our over 300,000 customers upselling to premium and enterprise additions of our products. And then with a smaller impact today but growing over time are other drivers like new customer adds and new high-growth products like Compass, Jira, Product Discovery, and Loom. And of course, pricing is the final lever in the cloud model. In terms of data center, we expect organic expansion and pricing to be durable, long-term drivers given the high renewal rates on data center agreements and the enterprise nature of that customer base.

And with AI, we are well-positioned with the unique data graphs around high-value workloads, and there is a lot of opportunity in that space as well. And we are off to a solid start with Atlassian intelligence with more AI innovation on the way. And then finally, add on significant opportunity we have for further penetration enterprise, where we’ve had great signal and momentum over the last year. And overall, all up, we feel confident in our ability to invest behind and deliver healthy revenue growth over a multi-year period as a result of that.

Mike Cannon-Brookes: Hi, Gregg, I just wanted to chime in at a high level. I think Joe has given a very fantastic and comprehensive answer there. I think we should remember that any upside in data center is long-term upside for the cloud in terms of the destination for those customers over the long arc of time. I think, our end of server journey, as you mentioned, from a migration point of view, overall it’s been a huge success, right? Over the last four years, we beat our original expectations for the number of paid seats that we migrate to cloud, we ended with less churn overall than we thought we would have over that three year or four year period. We’ve tripled the number of paid seats in cloud during that period since we — since we announced the end of service for [3.5] (ph) years ago.

I think the way I would zoom out and see that is, that is an example of Atlassian executing against the long-term goal, as a team and as a company, and we can do hard things. We say this all the time internally. Data center customers moving to hybrid deployments, which is generally the way they go-through in the middle and then to cloud. It’s a different journey, right. These are our largest and most complex customers. They have different requirements, different things, but we will get them there. We will execute against that mission over the next few years in the same way that we executed against the last mission, I have confidence in Atlassian to do that. And if you want a singular statistic of how that is going, again the data center to cloud migrations over the first three quarters of this year were up 90% — 90, on the first three quarters of last year, on a year-on-year basis.

So we are already migrating data center customers to the cloud. So that overperformance is a long-term good sign for us.

Gregg Moskowitz: That’s extremely helpful. Thank you both.

Operator: Your next question comes from Michael Turrin from Wells Fargo Securities. Please go ahead.

Michael Turrin: Hi, great. Thanks. Appreciate you taking the question. Results were quite strong in a still tough environment. I think, the stock is initially reacting more to the surprise news from Scott. So maybe you can both Scott and Mike, give us a peek behind the scenes around how you have historically divided the CEO role? And Mike would be helpful to hear more around is becoming sole CEO at all changes the role or key points of focus on your end from a product or a strategic perspective. I think just any detail there is useful. Thanks very much.

Scott Farquhar: Thanks, Scott here. I’ll the first thing. Look, Mike and I have worked together for 23 years. We used to take terms, taking the bins out in our first office. So we’ve kind of done every job equally over that period of time. Mike is run go-to-market for well over half that time I’ve run actual little less than that. I’ve run engineering, Mike runs engineering products. So we’ve kind of done everything together over that period of time. And I think that’s relatively unique actually, I mean — ourselves unique actually kind of shared and [divvied] (ph) those responsibilities and change them over time. I think, it is also extremely unique there. And so I don’t think there’s anything that Mike hasn’t done before that he will be picking up and — in the philosophy is around how we run finances and how we think about the growth of business and investments like we’ve spent a lot of time together over the years, doing and though — Joe and finance reported in to me for the last half a dozen years or so.

Mike and I spent a lot of time together looking at where we want to grow the business and what our investment profile is so Mike, do you want to add anything?

Mike Cannon-Brookes: Yes. Thanks, Scott. Thanks, Michael. Look other than Scott being clearly cite better than I was taking the bins out, we’ll work on that going forward. But I want to say from a long-term point of view, I’d echo Scout last point right? Our philosophies as a company, our values, our mission to unleash the potential of every team and the culture. This has been a constant of the company for the last 23 years, and it is going to continue to be a constant going forward. We hope for a very long time. We are a very long-term thinking company, we have certain ways of being that we don’t expect to change nor do I think Scott would want them to change or no do I think that should change. Now we live in a highly changing environment.

So we can’t say nothing is going to change. What we can say is in the short to medium-term, sort of the closer focus, we are very clear on our strategies and our execution. As Scott mentioned, we have the most experienced executive team we’ve ever had. I’m super lucky to get to work alongside them all every single day, even executing through this mini project, if you like. From a strategy point of view, look we’re very clear. We’ve been clear with our investors, our shareholders, our customers, what our focuses are in terms of the opportunities we have in the enterprise and with migrations. In terms of the ITSM and ESM market and continue to invest strongly there and seeing strong results. And then in the AI era, we have some fantastic opportunities.

So those are the current priorities as we said. That doesn’t change from yesterday to today, and we’ll keep you updated as we move forward.

Michael Turrin: Maybe Scott can take the bins out one last time. Thanks guys.

Operator: Your next question comes from Alex Zukin from Wolfe Research. Please go ahead.

Alex Zukin: Hi, guys. Thanks for taking my question. Maybe mine is tied to the data center to cloud journey that you’ve seen both over the first three quarters of this year, in the context of some customers kind of signing more longer-term deals and in the construct of kind of this notion that the end of server life unblocks the company’s ability to focus on a lot more things. What does that mean for data center to cloud migration trends in terms of both from a financial perspective, maybe next quarter and next year that 10 points compare to what you maybe previously thought? And then just beyond, if you look at the activity of where those customers are migrating in terms of a tier basis and what that’s doing to ARR or ACV growth.