Atlassian Corporation Plc (NASDAQ:TEAM) Q2 2024 Earnings Call Transcript

Atlassian Corporation Plc (NASDAQ:TEAM) Q2 2024 Earnings Call Transcript February 1, 2024

Atlassian Corporation Plc beats earnings expectations. Reported EPS is $0.73, expectations were $0.62. Atlassian Corporation Plc 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 Second 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 second 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; Chief Financial Officer, Joe Binz. Earlier today, we published a shareholder letter and press release with our financial results and commentary for our second quarter of fiscal year 2024. The 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 datasheet. As always, our shareholder letter contains management’s insights 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. If 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 have. 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 obligation 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 include 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. A 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, Q2 was full of significant milestones for Atlassian. When we first went public eight years ago, we had just over $100 million in quarterly revenue and supported 54,000 customers. Fast forward to today, and we just posted our first $1 billion revenue quarter, Jira Software crossed $1 billion in Cloud ARR, and we surpassed 300,000 customers. These accomplishments are a true testament to our amazing team, our diverse and passionate customer base, and the high-value mission-critical products we deliver. Mike and I are extremely proud and thankful for every single Atlassian who’s helped to get us here. In Q2, our R&D engine continued to deliver incredible innovation across our cloud platforms.

We rolled out Compass, Virtual Agent capabilities in Jira Service Management, and our first wave of Atlassian Intelligence capabilities into general availability. We also welcomed Loom to the Atlassian family and have been thrilled to see the team deliver on their ambitious AI vision with many new features, including an enhanced editing experience that makes updating a video as easy as editing a text document. Customers see the value we’re delivering in the cloud and are turning to us for strategic guidance on how we can unleash the potential for their teams. We’re excited about the momentum we’re seeing across the business and remain laser-focused on executing against our key strategic priorities, cloud migration, serving the enterprise, ITSM, and now AI, and we’re in a great position to get after them with massive market opportunities, strong customer commitments to the Atlassian platform, our unique ability to combine over 20 years of insights with the immense power of AI, and most importantly, a world-class team.

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 Keith Weiss from Morgan Stanley. Please go ahead.

Keith Weiss: Excellent. Thank you guys for taking the question and congratulations on a lot of milestones this quarter and in what looks like a solid quarter. In the shareholder letter, you talked about even absent Loom, still expecting an acceleration in the cloud business into the second half. It sounds like you saw some signs of stabilization in the quarter, but I was hoping you could drill in a little bit further on what gives you guys the confidence to look for that, to expect that acceleration into the back half of the year in what still seems to be a uneven microenvironment? Thank you.

Joe Binz: Yeah, thanks, Keith. This is Joe. Let me start with the cloud revenue results in Q2. They were up 27.5%. Loom contributed about a point of growth, so our results ex-Loom landed in the middle of our guidance range for the quarter. There were a few cross currents in that performance, so let me walk through them in terms of consumer — customer segment and growth driver trends to try and help, and then I’ll transition into your question on the confidence around H2. From a customer segment perspective, we had very strong sales execution in the quarter, which drove healthy performance in our enterprise customer segment. This resulted in better-than-expected billings on an annual and large multi-year deals, a significant portion of which landed on the balance sheet and unearned revenue.

This also drove healthy upsell to premium versions of our products. Results conversely in SMB were slightly lower than we expected and that was driven by paid seat expansion and a mix shift from monthly to annual subscriptions, which, as you know, signal stronger customer’s commitment, but also carrier’s lower pricing. And as you know, dynamics in the SMB business, good or bad, are largely realized in the quarter given the linearity in that part of the business. In terms of the trends on our key growth drivers in the quarter, migrations from server and data center exceeded our expectations, and that’s driven by the significant investment and execution focus we put there. In terms of paid seat expansion, while the overall rate of paid seat expansion remained lower than the prior year, the pace of deceleration or slope of that trend continued to moderate from Q1, and within that trend, as mentioned earlier, enterprise was better-than-expected and SMB was slightly worse.

We also saw the rate at which consumer — customers convert from free to paid at the top of our funnel stabilized relative to Q1 and that’s another positive leading indicator. And then finally, other cloud growth drivers like cross-sell and customer retention, churn, and monthly active usage continued to be very healthy and performed in line with our expectations. And beyond that, we didn’t really see anything noteworthy in terms of linearity in the quarter or across products, regions, or verticals. They were largely in line with our expectations. In terms of the confidence around the H2 guide, the midpoint of our H2 cloud guidance range ex-Loom does assume slightly accelerating growth rates. The factors that give me confidence are the recognition of those strong Q2 billings on annual and large multi-year agreements rolling off the balance sheet, the increasing momentum on cloud migrations as we focus on unblocking more customers for moving to the cloud and continuing to bring new innovation and value to our cloud offering, the benefit of price increases that are laddering into the model and the momentum we’re seeing in enterprise driving healthy upsell to premium and enterprise versions of our products.

I talked about the slope of the trend line on paid seat expansion rates and that continues to moderate quarter-over-quarter. And I also mentioned, the leading indicator around free to paid conversions at the top of the funnel. So those are the types of things that give me confidence in the ability to deliver accelerating cloud revenue growth in the second half of the year. And I hope that helps.

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

Michael Turrin: Thanks. Appreciate you taking the question. For Scott or Mike, there has been plenty of build-up and probably too much focus from us on the server end-of-life. For investors asking us what’s next, the letter does a good job in framing some of that out, but maybe you can share your vision around what the cloud migration opens up for Atlassian from here? And then, Joe, just as a follow-on the 10 points of migration tailwind that cloud line has been, how should we think about that post-server end-of-life? Will that at all lessen or does it simply shift more towards data centers? Any puts and takes there for us to consider useful. Thank you, all.

Scott Farquhar: Michael, thanks for the question. Scott here. Firstly, for those of you new to the Atlassian story, just a reminder, we said historically that about 10 points of our cloud growth has come from migrations, and for those who are really new to Atlassian story, this coming quarter in the next few weeks, we will have our end of server support will be happening, which has been a three-plus year journey with our customers. And so the three points I want to make in answer to your question, Michael. Firstly is that, migrations will continue for multiple years. And we said historically that’s about half our migrations to the cloud come from our data center customers. In this last quarter, even with a lot of server customers migrating with the end of support, 60% of our migrations in last quarter came from data center customers.

So with that, we expect to see migrations continue for a long time to come. And we’ve also made huge R&D investments in order to continue our customers moving to the cloud and you continue to see us doing that. We’ve launched Data Residency in Canada. This last quarter, we also did Bring-Your-Own-Key for Jira software. We continue to remove blockers for our cloud customers and that continues to open up the aperture of migrations. The second point I’d like to make is that cloud continues to be the gateway for the experience, and customers once they get to the cloud are really getting the best we can offer and you’ll see us continue to deliver innovation in cloud. So whether that’s Compass, which has continued to grow, Jira-Product-Discovery, which we talked about and popping 4,000 paying customers, also Loom in our ecosystem, and all the AI functionality that we have already developed and continue to develop are only available in cloud.

And so with that, our customers get a better experience, but we also have an incredible opportunity to sell customers more products and more functionality that really makes a difference to them. And lastly, enterprise. The third thing is enterprise, which is through these migrations and having these discussions with customers around migrating to cloud, we’ve really deepened our relationships with our best customers whether they are North American financial services customers or German auto manufacturers, these discussions have led to us being seen more-and-more as strategic partner for them and I want to do more with us, and you saw that, we talked about Mercedes Benz in our letter, the Mercedes Benz migrated 30,000 seats from data center to cloud, and — Jira and Confluence, and as part of that they were so excited by the usage of our ITSM solution in that process, so they then have adopted that and started using it with their customers.

And so, we are becoming more and more a strategic partner for these large enterprises. Joe, do you want to talk about some of the puts and takes?