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Atlassian (NASDAQ: TEAM)
Q1 2025 Earnings Call
Oct 31, 2024, 5:00 p.m. ET
Key Information and Updates
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon, and thank you for joining Atlassian’s earnings conference call for the first quarter of fiscal year 2025. This call is being recorded and will be available for replay on the investor relations section of Atlassian’s website. Now, I will hand the call over to Martin Lam, Atlassian’s head of investor relations.
Martin Lam — Head of Investor Relations
Welcome to Atlassian’s first quarter fiscal year 2025 earnings call. We appreciate your attendance today. Joining me are Atlassian’s CEO and co-founder Mike Cannon-Brookes and CFO Joe Binz. Earlier, we released our shareholder letter and press release detailing our financial results for the first quarter of fiscal year 2025.
The shareholder letter is accessible on Atlassian’s Work Life blog and in the investor relations section of our website. As customary, the letter includes management’s insights and commentary for the quarter. We’ll start with brief opening remarks, followed by a Q&A session. Please note, this call contains forward-looking statements.
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Forward-looking statements involve risks and uncertainties that could impact our results. If any risks materialize or assumptions prove incorrect, actual results may vary significantly. Stakeholders should not rely solely on these forward-looking statements. They reflect our management’s beliefs and assumptions only as of their date, and we do not commit to updating them.
Additional information regarding potential performance-affecting factors can be found in our filings with the Securities and Exchange Commission, particularly in the Risk Factors section of our recent annual and quarterly reports. Today’s discussion will reference non-GAAP financial measures, which should not be viewed as alternatives to GAAP metrics. Reconciliation between these measures is available in our shareholder letter and performance documentation on the investor relations website.
We want to maximize participation in the Q&A portion, so we’ll take one question at a time. Now, I’ll hand the call over to Mike for his opening remarks.
Michael Cannon — Co-Founder and Co-Chief Executive Officer
Thank you for joining us today. As stated in our shareholder letter, FY ’25 has started positively, fueled by our recent Team ’24 Europe event in Barcelona. It was inspiring to see how companies like Vodafone, Lloyds Banking Group, and Mercedes-Benz are enhancing team productivity using our products. The feedback from our customers and partners motivates us as we innovate continuously.
In recent months, I’ve spoken with numerous CIOs and CEOs of major clients about their challenges. It’s clear that technology plays a crucial role in organizational success. Atlassian’s platform, which integrates software, IT, and business teams, positions us well to eliminate barriers between those teams through our System of Work. Interested in our System of Work? We’re always updating our offerings at Atlassian. Check out the Loom I posted on our IR site to learn more and share your thoughts.
Artificial Intelligence (AI) will significantly shape work processes. Leveraging our R&D and 20 years of operational data, we have a strong foundation in this AI-driven landscape. We’re not merely promoting AI; we’re implementing it. Our latest AI product, Rovo, is now available to customers just five months after its announcement at Team ’24 Las Vegas.
Rovo provides valuable insights through our Teamwork Graph, helping customers harness their organizational knowledge effectively. We’ve also integrated AI across our cloud platform, particularly in the premium and enterprise versions of our products. This has led to increased adoption among customers opting for higher-value editions and migrations to the cloud. To build on our success, we’ve recently launched Jira Product Discovery Premium, Compass Premium, and Guard Premium, which enhance our latest cloud services.
In light of our focus on enterprise offerings, we’ve introduced Atlassian Focus, a new product aimed at our enterprise strategy and planning needs. Through this ongoing product development, we are helping our largest clients realize significant value from the Atlassian cloud platform. These customers increasingly recognize that the best Atlassian experience is in the cloud, expressing eagerness to shift towards our cloud solutions. We are making essential progress against our strategic priorities of serving enterprise needs, advancing AI innovation, and empowering teams.
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Atlassian’s Quarterly Update: Embracing AI and Cloud Growth Opportunities
Atlassian’s latest quarterly update highlights the substantial benefits from their AI initiatives and cloud migration strategy. Customers are finding value, allowing the company to pursue new opportunities.
AI Strategy Proves Beneficial
Michael Cannon — Co-Founder and Co-CEO
In a recent Q&A, Michael Cannon addressed concerns regarding AI’s impact on jobs in development and service roles. He outlined Atlassian’s two-pronged AI approach, which includes:
- Atlassian Intelligence integrated across existing cloud products, enhancing user functionality.
- Rovo, a new product designed for the AI era, now generally available with ongoing improvements each quarter.
He reported impressive results from customers using Atlassian Intelligence and those in the Rovo early access program. These users have experienced significant time savings and increased business velocity, leading to higher returns on investment. Usage of Atlassian Intelligence surged over tenfold since the year began, driving further product adoption.
A noteworthy example involves a leading investment management firm that recently decided to migrate from their data center to the cloud over three years, primarily motivated by Atlassian’s AI capabilities and analytics.
Cannon emphasized that AI serves as a tool to enhance human creativity, suggesting it will empower businesses rather than reduce job opportunities. As companies learn to leverage these tools, excitement and customer adoption have remained high.
Stable Environment Supports Growth
Joe Binz — Chief Financial Officer
Moving on to the market conditions, the company showcased a solid performance attributable to a stable macroeconomic environment. Joe Binz explained that trends from Q4 carried forward into Q1, with notable signs of stability among small and medium-sized business (SMB) customers.
Paid seat expansion remained stable compared to Q4, which is encouraging. Additionally, Atlassian experienced growth in annual and multi-year deals, migration activities, and upgrades to premium enterprise editions, all benefiting from favorable market conditions.
Binz highlighted effective sales execution as a crucial factor in this quarter’s results, which continued to contribute positively amidst a fluctuating macroeconomic landscape.
Looking Ahead: Opportunities for Atlassian
Cannon reflected on the ongoing macroeconomic challenges but maintained that growth opportunities lie within Atlassian’s control. The company’s focus on customer engagement and strategic messaging is resonating well, particularly their “System of Work” philosophy that aligns closely with clients’ needs.
Furthermore, the consolidation onto the Atlassian platform is a growing trend, suggesting a promising path for continued expansion. The leadership team remains confident that, despite short-term economic conditions, their long-term prospects are strong as they forge ahead with innovative strategies and customer collaborations.
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Atlassian Reports Strong Revenue Growth Fueled by AI and Product Innovation
Recent momentum in AI capabilities and product enhancements drives impressive results for Atlassian.
Atlassian continues to expand its reach among major corporations, successfully facilitating the integration of its technology teams with business units. As the demand for knowledge workers rises within these large organizations, the company’s System of Work strategy is proving effective in driving paid seat expansion and comprehensive adoption. Key products such as Atlassian Intelligence, Rovo, and Jira Service Management are generating significant interest, underpinning the company’s growth trajectory.
Recent product launches, including Jira Product Discovery, Compass, and Rovo, are receiving promising feedback and early traction. Loom, another of their products, is also enjoying robust customer adoption. Atlassian’s ongoing commitment to learning and improvement is evident each quarter, further fueling their positive outlook despite global challenges.
Operator
Your next question comes from Adam Tindle from Raymond James. Please go ahead.
Adam Tindle — Analyst
Thanks. I want to circle back to the topic of AI. Mike, could you explain why you chose to emphasize AI with Rovo instead of integrating it solely within your existing products? Additionally, how did you approach pricing for Rovo, given its higher price point compared to your core offerings?
Michael Cannon — Co-Founder and Co-CEO
Thanks, Adam. We view our strategy as two-pronged. The core products, Confluence and Jira, which have been around for over 20 years, are still growing successfully. By integrating AI, we enhance these existing products with functionalities like text generation and smarter searching. This integration is in addition to, not instead of, our commitment to maintaining and expanding Atlassian Intelligence capabilities.
The monetization of these advanced features isn’t about creating a separate add-on; rather, it’s about enriching the core capabilities of our products. Usage of these features has dramatically increased, and customers report significant efficiency gains, enhancing their long-term subscriptions. Rovo, however, is a distinct offering designed for the AI era, leveraging the Teamwork Graph we’ve developed over the past few years.
Rovo enables our customers to use chat and engage with knowledge across multiple platforms like Google Docs and Slack in a powerful way we couldn’t have achieved prior. It introduces features like virtual teammates, which enhance team efficiency.
As for pricing, it’s important to continually adapt based on market feedback, as Rovo targets both small-to-medium businesses and enterprise clients. The early customer response indicates strong demand, and while we will remain pragmatic in pricing, we are optimistic about the growth potential.
Joe Binz — Chief Financial Officer
Rovo’s revenue will be included in our cloud segment when we report our financials. Our focus is on deploying and maximizing product engagement, with monetization expected to follow our success in those areas. Currently, our guidance for FY ’25 reflects cautious optimism for Rovo’s revenue, allowing for gradual growth.
Operator
Your next question comes from Alex Zukin from Wolfe Research. Please go ahead.
Alex Zukin — Analyst
Thanks for taking my question. It seems you’ve achieved your largest cloud revenue beat since providing guidance. Can you detail what factors contributed to this outperformance? Was it due to previous conservative guidance, or did you see unexpected growth in areas like expansions or cross-sells? Also, with your recent CRO hire, what opportunities do you see for advancing the sales strategy?
Joe Binz — Chief Financial Officer
Thank you for your question, Alex. The recent performance largely stems from strong expansion and cross-sell opportunities that exceeded our initial expectations. Our new CRO, Brian Duffy, brings fresh perspectives that can enhance our go-to-market strategy yet further. We’re excited about the possibilities moving forward.
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Atlassian Reports Strong Cloud Growth Amid Transformational Changes
Cloud Revenue Growth Exceeds Expectations
In a recent financial update, revenue from Atlassian’s cloud segment revealed impressive growth, rising 31% year-over-year. This aligns with the company’s fourth quarter performance and surpasses its initial forecast of 27% growth. Key factors contributing to this success include an unexpected increase in paid seat expansion and successful migrations.
These positive results are a blend of broader economic trends and effective sales execution on Atlassian’s part. Other growth avenues, such as additional product sales and improved customer retention rates, have either met or slightly exceeded initial expectations. Overall, the cloud business shows signs of robust health and adaptability.
A New Executive Joins Atlassian
Co-Founder and Co-CEO Michael Cannon expressed enthusiasm about the addition of Brian to the executive team. Cannon described the lengthy and thorough search process that led to this decision. He acknowledged that understanding Atlassian’s complex business model will be crucial for Brian, emphasizing the dual nature of their sales approach: a self-service model for small to medium businesses (SMBs) and a personalized strategy for enterprise clients.
Atlassian is making strides with over 524 customers exceeding $1 million in revenue, marking a significant and growing segment of their business. The leadership team views this as part of a broader transformation strategy aimed at expanding enterprise opportunities.
AI Innovations and Competitive Edge
In response to analyst Michael Turrin’s questions, Cannon shared insights into the company’s AI initiatives, particularly the Rovo product. He highlighted that Atlassian’s position in research and development (R&D) is strong, which has allowed Rovo to evolve into a product that delivers real value. Cannon noted the company’s significant historical investments in building a robust cloud platform and advanced technical systems, positioning them as leaders in the software market.
One key differentiator for Atlassian is their use of well-organized data and a powerful search engine capability that enhances the effectiveness of AI applications. Cannon emphasized the company’s commitment to maintaining this competitive edge through sustained investment in R&D, ensuring that Atlassian’s offerings remain robust amidst evolving market conditions.
Exploring Pricing Strategies
When asked about Atlassian’s pricing strategy, particularly the shift towards consumption-based pricing, Cannon acknowledged the complexity and variability of this approach. He expressed strong interest in this new pricing model and its potential impacts, recognizing that these innovative strategies are still at an early stage. Further insights into the scalability of consumption pricing and how it will be reflected in financial guidance were also sought from CFO Joe, indicating the company’s forward-thinking approach to adapting pricing strategies in line with market trends.
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Atlassian’s Evolving Pricing Strategy and Innovations: A Closer Look
Consumption-Based Pricing: An Overview
Atlassian has been incorporating consumption-based pricing across various products for some time. For instance, Bitbucket pipelines rely on CPU usage, which can vary significantly based on the number of builds, rather than the number of developers. Additionally, storage solutions and other services allow for fluctuating pricing models.
Historically, the focus of this pricing strategy has been on preventing overages, particularly among the top 3% to 5% of users who utilize excessive storage or similar resources. This approach ensures that margins remain stable. As a result, Atlassian maintains this defensive pricing philosophy across its multiple consumption-based strategies.
Customer-Driven Pricing Philosophy
Atlassian seeks to develop pricing models that are customer-centric. The focus is on logical scalability and minimizing friction for users, ensuring they receive clear value returns for their consumption. Upcoming innovations, particularly around AI and virtual service agents, may present new opportunities for consumption-based pricing adjustments. Atlassian assures stakeholders that pricing decisions are made thoughtfully, with an ongoing commitment to evaluate their effectiveness.
Long-Term Planning and Pricing Flexibility
Joe Binz, Chief Financial Officer, expressed that consumption pricing currently represents only a small part of Atlassian’s guidance. The company is adopting a conservative stance as it evaluates how this pricing model scales in the long term. Currently, their financial modeling emphasizes seat-based pricing, but they remain open to making adjustments based on customer value and delivery methods.
Investments in Research and Development
Gregg Moskowitz from Mizuho noted that Atlassian typically spends about 35% of its revenues on R&D, significantly more than its competitors. He acknowledged the remarkable innovations the company has introduced recently and inquired about any structural changes within the engineering teams to support this surge in product development.
Innovation as a Key Focus
Michael Cannon, Co-Founder and Co-CEO, attributed the spike in innovation to a consistent emphasis on optimizing productivity within their engineering and product management teams. While the approach to developing technology remains unchanged, significant investments in building a robust cloud platform have improved Atlassian’s ability to create mature products more quickly than in the past. This platform-assisted acceleration allows time and resources to focus on delivering unique product value.
The Transition to Advanced Enterprise Capabilities
As Atlassian’s cloud platform matures, the company is moving towards offering more advanced enterprise features, including data residency in various countries. This pivot enhances the company’s capacity to deliver effective products while maintaining a strategic focus on growth and innovation in the long run. Cannon underlined their commitment to nurture new ideas into viable businesses through patient and thoughtful development processes.
Competitive Dynamics and Future Opportunities
Keith Bachman from BMO Capital Markets addressed Atlassian’s JSM, mentioning they now serve over 55,000 customers. He sought insight into how win rates and competitive dynamics have evolved, particularly in the context of AI’s impact on JSM. With competitors like ServiceNow introducing aggressive pricing strategies, understanding these shifts is vital for Atlassian moving forward.
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Atlassian’s Strategic Push in Service Management and Cloud Adoption
Impressive Growth in Jira Service Management
Michael Cannon — Co-Founder and Co-Chief Executive Officer
Thank you for your questions, Keith. Let’s discuss the Jira Service Management (JSM) opportunity. We are witnessing significant growth in this sector, as you pointed out.
We now have 55,000 customers, a clear sign that our expansion is on track. This success stems from several key factors. Our product stands out because it provides exceptional value compared to many legacy vendors. The price-to-value ratio we offer gives us a competitive edge, thanks to years of research and development on our cloud platform.
Jira Service Management continues to perform strongly, especially in the DevOps arena. Teams that connect their IT and operations benefit greatly from our tools, including integrated Opsgenie features for incident management and alerts. By combining JSM and Compass, we offer a powerful solution that sets us apart in the industry.
We’re also moving towards broader employee service management applications, with HR, marketing, and finance teams increasingly adopting JSM. It’s an exciting time to launch a service desk, configured quickly and efficiently. Our automation capabilities significantly boost the return on investment for our customers.
The addition of AI enhances our offerings further. We recently introduced several AIOps innovations that streamline alert processing, helping agents sort through information effectively. Our virtual service agents outperform competitors by resolving more tickets and supporting agents’ productivity.
Our leadership in AI and service management continues to draw recognition from analysts like Forrester, solidifying our strong position in this market. We won’t be slowing down anytime soon.
Strong Outlook for the Future
There’s been some curiosity surrounding our recent investor day. The persistent growth in our business remains promising, and we feel well-positioned for competition as we look ahead.
We are in the process of developing a cutting-edge configuration management database that is graph-based rather than relational. This will be highly useful for various workflows within organizations. Exciting opportunities are available beyond just DevOps.
Operator
Your next question comes from Ryan MacWilliams from Barclays. Please proceed.
Ryan MacWilliams — Analyst
Thanks for taking my question. Regarding larger data center customers planning cloud migrations to access Atlassian’s AI features, do you think their timing will align with contract renewals, or could they transition earlier through hybrid deployments?
Michael Cannon — Co-Founder and Co-Chief Executive Officer
Ryan, that’s a great question. It’s a bit of both. Large customers often consider hybrid transitions around contract renewals. However, as we roll out more innovations in the cloud, some may opt for early renewals to take advantage of new capabilities.
Typically, larger customers will first shift to a hybrid state if they have multiple data center instances. For example, organizations with 50 to 100 instances may migrate some while archiving others, while others still need to maintain compliance regulations.
It presents a significant project for these global organizations. The migration process evolves with each customer’s unique needs. I’ve recently spoken with several large banks and telecom companies that each have different geographic requirements.
Our priority is to demonstrate long-term value from the cloud platform. That’s how we help them understand its benefits, and we are positioning ourselves to support their migration needs. Some clients may experience slowdowns due to internal factors, but we remain patient, playing the long game with them.
In the last quarter, we’ve slightly exceeded our expectations, though we lagged behind the previous quarter’s performance. This is part of the multiyear migration journey. Most CIOs I communicate with recognize a transition to cloud is inevitable. They appreciate the innovations we’re providing and foresee significant benefits from the cloud environment.
One financial services customer recently signed a substantial three-year deal largely due to our analytics and AI capabilities. Their migration journey is just beginning, and we’re excited to guide them through it.
Joe Binz — Chief Financial Officer
To add, Ryan, we are optimistic about the contribution from data center migrations, projecting a mid- to high single-digit boost to cloud revenue growth over the next three years. This confidence is factored into our financial model.
Operator
Your next question comes from Brent Thill from Jefferies. Please go ahead.
Brent Thill — Analyst
Thanks. Joe, you mentioned in your letter potential negative macroeconomic factors affecting your growth projections…
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Strategic Caution Amidst Cloud Growth: Insights from Atlassian’s CFO
Assessing Demand Stability: The Need for Conservatism
In today’s climate, it’s essential to consider various factors influencing market trends. During a recent discussion, the demand for cloud services was noted to be stable, although some executives, like Andy Jassy from Amazon, reported improvements. Companies like AWS and Google are experiencing faster growth in their enterprise cloud sectors. Yet, one might wonder why Atlassian is taking a more conservative stance despite these encouraging signs.
Joe Binz Speaks on Strategic Guidance
Joe Binz, Atlassian’s Chief Financial Officer, addressed these questions, emphasizing a cautious approach to their financial forecasts. He explained that the company’s guidance reflects a shift to a more conservative and risk-adjusted strategy. This decision stems from two main factors: the unpredictable macroeconomic environment and potential execution risks tied to changes in their enterprise sales strategy.
Binz pointed out that Q1 is traditionally the weakest for bookings annually, advising caution against making assumptions based solely on this quarter’s performance. He further highlighted ongoing macro uncertainties, including the upcoming U.S. elections and global military tensions, which have led to a more tempered outlook for IT spending. While welcoming new executive Brian to the team brings optimism, the transition process requires time and effort.
Understanding Deal Flow and Timing
Next, Jason Celino, an analyst from KeyBanc, inquired about the impressive cloud results and whether certain deals had been hurried or postponed. Binz clarified that while deal timing was a factor previously, it did not apply in Q1 as they observed consistent deal flow. Importantly, the nature of these deals is changing. The team is now working on larger, more intricate projects which necessitate longer sales cycles.
Atlassian prioritizes a patient approach to pricing and contract negotiations, which means they avoid pressures to close deals prematurely. Looking ahead, they’re integrating this focus into their future prospects.
Long-Term Vision Amidst Complexity
Co-Founder and Co-CEO Michael Cannon added that despite the complex macro landscape, he remains optimistic about the company’s prospects. He noted that fostering long-term relationships with clients is vital. Many companies recognize Atlassian as a strategic partner, which positions Atlassian favorably for future growth.
Cannon emphasized their commitment to Research & Development and maintaining a long-term perspective while navigating the current environment. This approach is essential, as they strive to keep fostering productive relationships with their clients.
Closing Remarks and Future Considerations
As the call drew to a close, Cannon expressed gratitude for the engagement and interaction from analysts and investors. He mentioned a new Loom video added to the investors’ section, inviting feedback for continuous improvement.
In essence, while the cloud landscape appears to be improving, Atlassian is opting for a rational and measured approach. The ongoing focus on maintaining strategic partnerships and cautiously navigating uncertainties remains central to their long-term strategy.
Call Participants:
Martin Lam — Head of Investor Relations
Michael Cannon — Co-Founder and Co-Chief Executive Officer
Kash Rangan — Analyst
Mike Cannon-Brookes — Co-Founder and Co-Chief Executive Officer
Keith Weiss — Analyst
Joe Binz — Chief Financial Officer
Adam Tindle — Analyst
Alex Zukin — Analyst
Michael Turrin — Analyst
Fatima Boolani — Analyst
Gregg Moskowitz — Analyst
Keith Bachman — Analyst
Ryan MacWilliams — Analyst
Brent Thill — Analyst
Jason Celino — Analyst
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