Atlassian Corporation Plc (NASDAQ:TEAM) Q1 2024 Earnings Call Transcript

Atlassian Corporation Plc (NASDAQ:TEAM) Q1 2024 Earnings Call Transcript November 2, 2023

Atlassian Corporation Plc beats earnings expectations. Reported EPS is $0.65, expectations were $0.53.

Operator: Good afternoon and thank you for joining Atlassian’s Earnings Conference Call for the First 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 first 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; our Chief Revenue Officer, Cameron Deatsch; and Chief Financial Officer, Joe Binz. Earlier today, we published a shareholder letter and press release with our financial results and commentary for our first quarter 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 data sheet. As always, our shareholder letter contains management’s insights and commentary for the quarter.

So during the call today, we will 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 make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management’s belief 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 today, 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. 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 would 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 will 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, we’ve been busy. We kicked off FY ’24 by executing well and playing the fence. We continue to push hard on our biggest bets, cloud, enterprise, and ITSM, and those bets continue to pay off. We’re also shipping ever more new products and innovation to our customers. This quarter, we launched Compass into general availability. This is on the heels of launching Jira Product Discovery last quarter, which is off to a fantastic start with several thousand customers already. I was just at a high-velocity IP service management event here in Sydney when we announced the general availability of virtual agents in Jira service management and debuted a host of additional AI capabilities.

We heard from some of our credible customers who shared how they migrated their legacy ICSM solutions to Jira Service Management and are now delivering exceptional service experiences faster than ever. Through our cloud platform, thousands of customers through our early access program, are already realizing value from the AI capability to be introduced across their cloud products powered by our last-gen intelligence. The early feedback has been terrific and we’re incredibly excited by the opportunities that AI presents us. Along with the organic innovation happening here at Atlassian, we also announced our acquisitions of AirTrack and Loom. AirTrack builds on our previous investments in IT service management, and will enable enterprises to better account for and trust all their critical assets within their organizations.

Loom, which has a passionate customer base of 200,000, will bring the power of asynchronous video messaging to the Atlassian platform. We firmly believe distributed work is here to stay, and Loom will allow teams across the globe, or even in the same building, to collaborate seamlessly and deeply human ways. People are increasingly turning to video as a way to collaborate and consume information. And we’re incredibly excited about the opportunities that video can be applied across our platform. Our customers are looking to Atlassian to provide them solutions in the collaboration space and Loom gives us an incredible opportunity to further unleash the potential of their teams. We’re also playing offense on talent. Atlassian is the cornerstone of our success and we’re focused on adding and retaining amazing talent across the company, including great senior leaders.

We recently welcomed Zeynep Ozdemir as our Chief Marketing Officer and Vikram Rao as our Chief Trust Officer. And we promoted Kevin Egan to Chief sales officer, all of whom bring great experience to our leadership team. I also want to acknowledge Cameron, as this will be his last earnings call with us. Mike and I are incredibly grateful for his 11-years of dedication, impact, and most of all, friendship. 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. Please go ahead.

Ryan MacWilliams: Appreciate you guys taking the question. I’d love to just double click on the timing of remaining migrations. I think at this point, there might be a little more server revenue, so on the model than investors expected. So any expectation for like when those remaining migrations will move over and the composition of those remaining customers, like are they more likely to go to data center or cloud from here? Thank you.

Cameron Deatsch: This is Cameron. I’ll take the first here and then I’ll have Joe follow-up. So as many of you know, we have the server end of life coming up the next few months, mid-February. We will cease all support for server customers after that date. And over the last few years, we’ve been actively, aggressively going up to all of our customers across server and data center attempting to get them to the cloud. And this has been very positive for us. It’s gone very in line with our plans over these few years. But obviously there are many customers out there that will wait till the last moment before they make this decision. And we see that today in our enterprise pipeline, we have healthy pipeline with enterprise migrations going up over the next few months.

As far as what I want to make sure that is very clear here is post February, we still will have many migrations. So many customers between now and February will be going from server to either data center or preferably cloud. But for those customers that choose data center, we will continue to be migrating those data center customers to the cloud in the coming years. So the short answer there is, yes, we do expect to see a flurry of activity over the next few months with that big compelling event in February, but migrations will continue post the February date. Joe, you have anything to add?

Joe Binz: Yes. Thanks, Cameron. Ryan, really no change from what we discussed last quarter in terms of the server and the support dynamics that are baked into our guidance. As Cameron mentioned, we end support for server products in 2024. There may be significant quarter-to-quarter variability, as Cameron mentioned, based on when and how those server customers ultimately choose to migrate. We continue to assume the percentage split on migrated seats between data center and cloud will be relatively consistent with historical trends up to that end of support moment. And then with end of support, we continue to expect most of those remaining server seats that migrate, will migrate to data center and we continue to hold prudent assumptions to account for customers who will choose not to migrate in FY ’24, and that’s also factored into our guidance. I hope that helps.

Operator: Your next question comes from Karl Keirstead from UBS. Please go ahead.

Karl Keirstead: Just ask about your observations about the macro. I think every investor on the line is seeing some challenges across the space with, I’d say, a bit of a skew towards some pressure in the SMB space. Could you talk about the trends you’re seeing, SMB versus enterprise? And then perhaps elaborate on the seat growth comment you made in the prepared remarks.

Joe Binz: Yes. Great question, Carl. Thanks for asking. You recall by the end of Q4, we were seeing signs of improvement and stabilization in SMB and a very healthy enterprise environment. Those trends continued into Q1 and played out largely as we expected during the quarter. Now keep in mind, Q1 is typically not a big quarter for us when it comes to large enterprise deals, and we have significant revenue mix from SMB. Now having said that, there’s really nothing unusual or noteworthy to call out in the relative Q1 performance between those two customer segments. In relation to the cloud aspect of Q1, the trends we saw in Q4 continued into Q1, and those were also largely consistent with what we expected. The cloud business does continue to be impacted by pressure on paid seat expansion and free-to-paid conversion at the top of the funnel.

Although we continue to see some signs of stabilization as the rate of deceleration in those areas continue to moderate slightly. The other parts of our cloud business migrations, upsell to higher-priced versions, cross-sell, customer churn, those all continue to be very healthy and perform in line with our expectations. And then from a linearity perspective, linearity in the quarter is what you’d expect to see, and the trends and impacts were fairly consistent across products, regions and verticals. I hope that color helps.

Scott Farquhar: Also just to add on there at the risk of three people answering one question. One of the tailwinds we’ve seen is consolidation. We are actually seeing that across the market, more and more of the conversations I’m having with customers large and small them trying to simplify the number of tools that they are using out there. And because Atlassian is so mission-critical, we are one of the vendors that they turn to, to consolidate on. A good example of that was Domino’s, pizza that runs 4000 stores across sort of Asia Pac and across the world actually. And they consolidated 6 tools down to 1 Jira Service Management installation, and we’re seeing that more and more across the customer conversations.

Operator: Your next question comes from Brent Thill from Jefferies. Please go ahead.

Brent Thill: Thanks, Joe. Just on Karl’s question on the overall macro. In terms of linearity, was there anything different that you saw throughout the quarter? Or was that also pretty consistent to your comments about what you’ve seen in the last quarters, a few quarters between SMB and enterprise? And also, if you could just add on many of you’re kind of asking about close to $1 billion for Loom. Kind of what was the magic sauce, if you will, that drove that type of price point in the desire to complete that transaction?

Joe Binz: Thanks, Brent. I’ll address the first part of your question regarding linearity in the quarter, and then Mike will pick it up on the Loom question. Linearity in the quarter was exactly what you’d expect to see. So there was nothing unusual or strange about Q1 from a linearity perspective overall. Mike?

Mike Cannon-Brookes: Sure. Joe, I can handle that. Hi, everyone. Look, from a financial point of view, we think Loom is a great acquisition for Atlassian. The strategic rationale always comes first for us in this particular case. It is a product that’s leaning into a lot of trends that we think are working really well from the point of view, firstly, distributed work and the increasing desire for asynchronous collaboration across lots of different businesses. Secondly, just the shift in the way that people are sharing and consuming video in the enterprise, specifically at the younger generation, become more a part of the workforce. And certainly, AI is changing the way that video can be created and consumed in really interesting ways that I think it will make it more a part of the formats that we all collaborate on and work over time.