Look, we're just delighted to have Atlassian with us today, and sitting to my right is Martin, who is the head of IR, and Martin has been there since 2015.
That's right.
Before that he was at Salesforce for three years. We're gonna go through the house business and the macro and why I think it's getting worse and all that. We'll get to all that, right? As I was looking over your bio and it was kind of reminding me, I was like, "Oh my God, he joined before the IPO.
Yeah.
Right?
Yeah.
You've been through four CFOs.
I guess now that you point it out.
You've been through four CFOs. This cracks me up. Okay, just remind us, what did, what were we talking about? 2015, eight years ago, right?
Yeah.
Seven or eight years ago.
Yeah.
What was this company like when you joined?
It was.
Salesforce was, you know.
Right
... this, right, incredible thing, and you got recruited away. What was Atlassian like?
It was a far different place. I think I was around employee 1,000.
Oh, really? Wow.
Today we have over 10,000 employees, so it's... 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.
Yeah
... that the people continue to be good people that you want to work with. Ultimately, the company's focused on the long term. I think that really resonates with me. The way Mike and Scott run the company is always guided by the long term.
All right. Tell us a little bit more about what it was like in 2015.
We were in a dumpy little office in Harrison Street in down. It was a warehouse. It's a lot different obviously in terms of we were just getting started in terms of our opportunity.
Wait, was it Jay?
Jay Simons was the previous-
Jay was basically running the U.S., right?
Yeah, that's right.
He was and I saw him at the Warriors game the other night.
I know.
I saw him across the way.
I saw him, what was it, two weeks ago as well.
Did you? Yeah. The founders were, I mean, in Australia most of the time.
Yeah.
How often were they here?
About once a quarter.
About, yeah.
Yeah.
How much now?
In COVID world, a little less, obviously the past several years. I was actually just in Australia last week.
Yeah.
I was meeting with Scott.
When you do earnings, where do you do it from?
We do it remotely.
You do?
Everyone's in their own home.
Yeah.
Yeah. Yeah.
Are you guys, by the way, do you know what's happening today at the Salesforce Tower?
Don't know. Tell me.
Today, thanks to their new CEO, Brian.
Yeah
thousands of Salesforce employees are supposed to be back in the office today. Thousands. Four days a week, supposedly.
Okay. Yeah.
We'll see how many actually show up.
Yeah.
where are you guys on this whole...?
We're, we've-
Yeah
... kind of taken the exact opposite approach...
Yeah
... in the 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 a third of the company has always been in Australia.
Mm-hmm.
We've always had kind of 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.
Yeah
... probably relative to other companies.
We're gonna do this a little differently. We're gonna do your eight years quickly by CFO. How long did you overlap with Eric?
Not very long.
Not long at all, right?
Yeah. That was pretty short.
We won't even do that one. Murray came off your board.
Murray came off the board.
Murray's one of the greatest CFOs in tech.
Yeah, that's right.
I mean, he's incredible, right? In those three years, 2015 to 2018, what was Murray trying to accomplish? What were the big goals?
Murray helped take us public.
Yeah.
That was obviously his.
Yeah
... his biggest remit as he came off the board. He was audit committee chair. He had been previously the CFO at Adobe. He came with great experience, and I think he helped develop the muscle to help us become a public company.
Yeah.
Yeah.
Then James came in in 2018.
And then James-
Another sort of world-class tech CFO guy.
Yeah. James came. He was previously CFO at McKesson, Symantec before that, CFO at American Airlines. He came from a much bigger scale than we were.
Yeah.
He really helped scale Atlassian to the place that we 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 then place capital allocation accordingly.
Yeah
... across our different products.
Like, 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?
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 how to run the business. 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, how do we.
No, we're not doing today yet.
Ah.
How did you decide where to place the bets? Give us an example.
A lot of it is just on where are we best strategically positioned.
Yeah
where do we see the biggest opportunity. Again, back to this concept of we run the company for the long term.
Yeah.
Where are the largest opportunities in front of us?
Yeah, how do you know? What data do you use to decide? Well, give us an example. What was an example of something you decided was a big opportunity?
Uh-
... during that period?
I think our ride in DevOps continues to be-
Yeah
... guided by that, right? Like, you've seen the influence of software continue to grow. You've seen the growth of developers over time. What you've also seen is this sphere of influence that developers have within businesses continue to grow. 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? That has continued to grow, and I think we've continued 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 recognized 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.
Today, that's grown to be a sizable business. That continues to be an area we have pretty significant momentum.
Yeah. When you guys exited HipChat, what year was that?
That was back in 2019.
Okay.
Yeah.
That was in the James Beer period.
Yeah.
That's another example, right?
Yeah.
How did you decide that, okay, 'Cause the founders were pretty passionate about HipChat?
Yeah
... at the beginning, right? How did you get to the point where you're like, "Okay, we're not gonna beat Slack," right?
For everyone's background, we previously had a chat offering called HipChat, which competed directly with Slack and Microsoft Teams. Several years ago, we made the decision to in hindsight, 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've required to continue to just play in that market the returns weren't as nearly as attractive as we saw in those other market opportunities. We made the decision to exit and partnered with Slack. We sold the IP of HipChat to Slack. In hindsight, I think that was the right decision.
Okay. Now in September 2022, CFO number four.
Yeah.
Right? What does Joe bring? What's his-
Joe-
Yeah
Joe came from Microsoft, where he's operated at an even larger scale.
Yeah.
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. 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? Getting sharper on that will allow us to make better business decisions and help guide us to achieve our long-term goals.
Okay. People get really mad at me if I don't talk about the macro and health business. Let me start.
Yeah
... with my standard health business, what would you say?
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. Those two areas we continue to see challenges from the macro, and those continue to grow and impact. 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.
Mm.
What hasn't changed is, again, that long-term outlook. I think if anything, we've have been almost more bullish about the long-term opportunities. This environment, I think, helps us in this perverse way in that we are this high-value, lower-cost offering. I think we have opportunity to play offense. You're seeing us invest more in this environment to get after those large, long-term opportunities.
Your guidance assumed that things were... I don't wanna use the, get the words wrong.
Sure.
You assumed it was, that things were gonna get worse, right?
Yeah. That's right.
Tell us what the right words were for that, and then what did you base that on?
Yeah.
Yeah.
Yeah. 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.
Mm.
We're assuming in our guidance that things will continue to get worse. Then those areas that we haven't seen any macro impacts, like migration, upsell, cross-sell, dollar-based churn, those things we're allowing for those areas to be impacted at the bottom end of our range.
One of the pieces of evidence you used to support your conclusion that things were going to get worse is the trend line from Q1 to Q2.
Mm-hmm.
What else did you look at?
What... 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 amounts amongst SMBs. We saw the business was much more pronounced in that area. 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. Again, we've continued to see that same trend line, and I think it's just more data points around this.
Yeah.
Assuming that this continues to be a greater impact from the macro.
Yeah. Is this the first time in your eight years that you've seen sort of this dynamic in the macro for Atlassian?
The early COVID period was a little bit different, of course.
Mm-hmm.
That was quite short-lived. Yes. I think Atlassian, though, however, was born in 2002, so born in the, in the tech bust, as well as gone through 2008, 2009. We've seen different cycles as a company, and I think we've taken some of those learnings.
Do you think the sort of product-led growth philosophy at Atlassian then makes you more susceptible to when things slow down?
The area that we've seen the impact on seat expansion, we let that motion happen organically.
Yeah.
These are existing customers adding seats, going from 100 users to 200 users to 500 users. We don't look to actually unnaturally influence that seat expansion.
Yeah.
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 hand-holding. In terms of pure seat expansion, that is an organic motion, and we're not gonna look to unnaturally influence that.
Yeah.
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 billed monthly or annually in the cloud. As those SMBs slow their rate of user growth, you're seeing that impact revenue much quicker because of the monthly dynamic.
Mm-hmm.
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.
Okay, last one on this sort of big picture topic. 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 not SMB, or are there more-?
Yeah.
... slices?
we've tried to slice this a couple different ways.
Okay.
We've looked at it by geo, by vertical and industry, as well as even by product. When we look at the trends of actuals versus our forecast.
Mm-hmm
... the results are incredibly parallel to each other, so.
Really?
it's very consistent across, geos, industry, even by product, where you're not seeing any one area, outperform another.
Really?
a clear trend across all of them.
Does that surprise you? Cause, like, everyone thinks, like, there's more layoffs in tech, and travel, on the other hand, is cranking, right? Does it surprise you that there's not more differentiation between the different verticals?
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.
Yeah.
I think that speaks to how diversified our customer base is. I think it also speaks to the mission-critical nature of our products in the sense that we're 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.
Okay, one more from me, and then we'll open up to questions. I was just looking at your cloud growth, and you basically had... Here's my little chart, right? four up and now four down, right? Just walk us through what was, what was going on, what led to the acceleration, and what's driving the deceleration?
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.
Mm.
That's slowly 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.
Okay.
As I kinda pointed out earlier, migrations, that continues to tick along. That we haven't seen any macro impact there. It's on that pure organic seat expansion that's really impacted the past two quarters.
Yeah. What's the definition of SMB for you?
It's generally less than 1,000.
Under 1,000 employees.
Yeah.
Okay. All right, I think I've... I hopefully people agree that I've beaten the macro thing to death. Any questions from our audience?
How long does it take you to migrate through the different segments? You know, are there some ways in which you can speed that up as well?
The question is around the time it takes to go through a migration. We've always known that this migration to cloud is gonna be a multi-year journey. We announced the end of life of our Server product line around fall of 2020. That will go end of life February of 2024. Server will go away. We still have that Data Center cohort of customers that we continue to migrate over to cloud. That's actually seen an uptick in the number of seats continuing to migrate to cloud. This past quarter, 50% of the seats are coming from Data Center today, which is up from about a third the year prior. That's really encouraging 'cause we're not really pushing on that Data Center customer base, right?
They're just kinda naturally, organically moving over to the cloud as they see the maturation of the cloud platform. 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 learn a bit more. This past quarter, we went through two of our largest migrations to date. 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?
Again, there's normally three buckets where we see customers when they look at cloud, and, hey, why can't they get to cloud yet? One of them is on the scale side. A couple years ago, we could only accommodate up to 5,000 users in the cloud. Now it's 35,000 users, and soon it'll be 50,000 users. 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. Then in the third bucket is on the extensibility side.
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. Those customers facilitating that move to the cloud is important to be able to have that same functionality in the cloud.
The first one was scale. Why? Why was the limit 5,000? What was the second 15 and going to 30?
Today it's 35,000 users that we accommodate.
Today it's 35. You said it's gonna go to what?
To 50,000 is the.
Where are these pretty hard number ceilings coming from?
I view them less as ceilings. It depends on the complexity of a customer.
Yeah.
Before you kind of.
Why isn't it just elastic?
That's the goal. We of course want no user limit to ever be.
Yeah
... a barrier as customers move over. 'Cause we're. In the.
Don't get too technical on us, but why is it not elastic today?
A lot of it previously was our old cloud infrastructure, part of that was several years ago, we re-platformed our cloud infrastructure from our own self-managed data centers to AWS instance, to a multi-tenant environment. That allows us to progress and raise up the scalability limits.
I gotta ask one more time. The whole point of AWS is that you-
Yeah
... once you're on, you just keep going. Why is there a limit at 35,000?
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-
Yeah
... 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, you wanna make sure it's a good, seamless experience for those customers.
Yeah. You guys are drawing that line.
That's right.
Right.
That's right.
Okay. It could be, so it could be 40, it could be 30.
If you have a much less complex environment, it wouldn't be an issue for you. We wanna make sure it's a good experience when we move those customers over.
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?" They'd be like, "Oh, we make it so that when you're in, you know, Jira," or whatever, pick a product, "you can change the colors, you can put your background in here, and you can..." I was like, "Well, that's nuts. How can that be a separate company?" Right? That's totally something that Atlassian should be doing themselves, right? I'd go ask Mike, and I'd be like, "How can this be?" He goes, "Oh yeah, we leave those gaps." Right?
Sure.
That effectively has become our sales force. We leave those gaps, yes, at another at Salesforce, they would've offered that functionality, right? We built this incredible ecosystem that is effectively our outsourced sales effort as a result.
Yeah.
Right?
Yeah.
Now the issue is translating that to the cloud, and it's harder, right? This has been a multi-year journey. How's that process of getting the ecosystem to the cloud going?
That's part of the challenge.
Yeah
... of getting every customer over to the cloud. Part of that is helping build the platform in which these third-party developers can build that equivalency in the cloud. We introduced the, what we call the Forge platform several years ago. That allows us to, or allows third-party developers to build on top of our infrastructure. We say, "Okay, third-party developers, focus solely on the innovation side of things, and we'll take care of the infrastructure side.
Mm-hmm.
From a customer perspective, that's also more attractive because then as a customer's 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.
Yeah
... third-party vendors and say, "Hey, where are they hosting my data?
Right. You know, how far of the way through that transition are you?
I think it continues to be a multi-year journey.
Yeah.
Yeah.
Halfway?
We haven't put a number around it.
Yeah. All right, more questions from our audience?
How has the migration to the cloud affected your
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. I think we've been cognizant to not move cloud pricing too much as we progress through this journey. Over the past couple years, we have taken about 5 points of price on our cloud products, relatively modest, I think we don't wanna create a moving target for customers because that is ultimately the goal.
This is an incredibly low price point. Really?
Even our cloud offerings today.
Yeah
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 gonna be the high-value, high-volume provider, and that's kind of core to our philosophy. That will never change. If you think about it, our model is really predicated on price not being a barrier to add additional users. When you add additional users on your team, you don't, never want price to be a barrier for that motion.
All right. Martin, you have these conversations all day long. What would you say are the one or two things that investors are not really getting about Atlassian today?
Uh-
That you really, like the one or two sort of misunderstandings on the story today. What are they?
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. We're trying to drive a little level of investment to facilitate some of those motions faster, as well as play offense, right? We, we want to take share from competitors in this environment, so we'll continue to invest. At the same time, we wanna balance that level of investment with responsiveness to the macro.
Mm-hmm.
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.
you think investors don't get that?
I think investors generally are supportive of the longer term opportunity and our desire to invest. Of course, in this environment, people want focus much more on profitability.
They really do.
Yeah.
Yeah, they really do. Well, thanks so much for coming and chatting with us today.
Yeah, of course.
We really appreciate it.
Happy to be here.
It's great to see you.
Thanks, Pat.