‘A very boring software company’ – Atlassian | Summer Series

Bryce: [00:00:15] Welcome to another episode of the Equity Mates summer series, proudly brought to you by Superhero. Over 12 episodes where deep diving into some of the most exciting, interesting and well-known companies from both here in Australia and over in the US, in some instances will be hearing directly from the CEOs to give you firsthand insight into their companies. My name is Bryce and as always, I'm joined by my equity buddy Ren. How are you going? 

Alec: [00:00:38] I'm good. Bryce. I think you made a mistake in the intro, though. Oh, what did I say? Well, you said were diving into the most exciting companies, and the New York Times actually called this company quote "a very boring software company." So I think we need a change in intro. 

Bryce: [00:00:57] well, I'll go back and have a look at it. But I think this is a rather interesting software company, albeit boring. 

Alec: [00:01:06] Something can be interesting and boring. It can be exciting.

Bryce: [00:01:09] And yes, true, true, true, true, true. But we're here to talk about a home grown hero. Yeah, and that is Atlassian listed over in the US. The ticker is TEAM. You can grab it or have a look at it on the superhero platform. So I thank you to Superhero for sponsoring the summer series. Superhero allows you to buy Aussie and US shares and ETFs with no monthly account fees, and you can now own Qantas points with superhero. So Atlassian Corporation, we're going to have a look in this episode at what it does. We're going to have a look at at the industry, its financials, future prospects and a few fun facts. And speaking of fun facts. A reminder that you can win a thousand dollars in a superhero wallet by just telling us your favourite fact from this episode in the comment section over on our Instagram page. For this particular episode, so check out the Atlassian post over on Instagram Live. Your fun fact and will announce a lucky winner at the end of this week on our stories, all thanks to superhero.

Alec: [00:02:19] Yeah, and there is a lot of interesting stats and facts in this company's journey and where it is today, because Atlassian, despite what the New York Times said, is just a phenomenal story. And as Australians, we should be so proud of this company. It is world class. 

Bryce: [00:02:39] It is. It's a shame it's not listed here in Australia.

Alec: [00:02:42] think the more we know the reason $112 billion market cap than it enjoys, may not. It may not enjoy it if it was in Australia. Absolutely. But let's start there because people, you know, we think about Atlassian being a big Australian company made good in the world stage. It is a big software company. Full stop. It's one of the top 20 software companies in the world in terms of market cap, in terms of size. Yeah, it's a giant. 

Bryce: [00:03:09] It is an absolute giant and it's got a pretty fascinating founding story. Pretty interesting one that kicked off you. I'm sure you would have heard about the founders, Mike Cannon-Brookes and Scott Farquhar. Mike is on an absolute property tear at the moment. 

Alec: [00:03:28] All of the Southern Highlands 

Bryce: [00:03:30] buying all of the southern highlands. I think he owns the $100 million property down in Elanora or something like that down in Sydney Harbour. But anyway, they met at university. You NSW. I'm pretty sure it was, and Mike sent an email to his class. I think it was a computer class at the time, asking who wanted to start a business, and only one person replied, Yeah. And that was Scott. Yeah. I love that. Yeah. Who wants to start a business? 

Alec: [00:03:57] And to be clear, this wasn't Mike's first business. Mike and another classmate started a business. So back in the day, your late, early, early internet and you had bookmarks on your home computer and then you got to work and you'd have a different computer at work. The very first business was a bookmark business where you could like you could like, access your bookmarks from whatever computer you were on. And anyway, a competitor over in the states writes like a stupid amount of money, and they were like, We're going to get blown out of the water here. So Mike went over and sold it. Yeah. Then Mike was keen to do another business. He was still at uni. Scott had done the corporate thing. I think you were to IBM. He'd say, Yes, I hated them all. And so Mike sent an email to the class and said, Who wants to start a business? Scott being dissatisfied with the corporate world from the few tries it had said, I'm Kane. And they started a business and what a business that was. Yeah, what were they doing? 

Bryce: [00:05:00] So they were supporting. Well, it was support it support, I guess, for a Swedish software company.

Alec: [00:05:09] Did they have the Swedish software? Did the Swedish software company know that they were giving doing that? 

Bryce: [00:05:13] No, that's. Part about it, they they essentially set up a company that supplied support for this company overseas without, I guess not the permission or the knowledge of this or the engagement from this Swedish software company, so that up at all hours of the morning because of the time difference. And yeah, a lot of a

Alec: [00:05:35] lot of hassle. Yeah. And they wrote all this documentation, put it on the web, put made a website and then, you know, if people were searching like support, they would come across their website first. But apparently, the documentation they wrote was so good that people only ever contacted them with really hard problems that they couldn't solve. So not the best idea, but I think they quickly realised that the scalable business is in selling software, not in selling support for existing software. Yeah. And these guys, you know, they were both incredibly good coders, I guess, and they'd built a bunch of products for themselves internally that really started the Atlassian software suite. I think it was the first acronym of their product was asked. It was like Atlassian software support or Arcanum what it was. But yeah, they eventually that formed the, I guess, the backbone of what became the first product, which was JIRA. 

Bryce: [00:06:31] A few things to say about Jira, but we'll wait for that. 

Alec: [00:06:34] Okay, or you can say, I'm now.

Bryce: [00:06:36] No, let's wait till we talk about their product suite. 

Alec: [00:06:38] Now there's a couple of things that I think are pretty interesting from the founding days. They had a share, so they own 50 percent of the company and in their shareholders agreement, they needed a way to, I guess, settle disputes. Yeah, because if you both are 50 percent who has the deciding vote, do you know what their final decision making? I guess point was,

Bryce: [00:07:03] yes, is a paper, 

Alec: [00:07:06] which is 

Bryce: [00:07:06] just crazy if you think about it. But I love look, if you've got to respect the game, I guess, and that's the way they did it and it was whoever won it, that was the way they were going to go. 

Alec: [00:07:15] Yeah, yeah, yeah. That I think is really gives, I guess, the vibe of of what they were in the early days, just just figuring it out. Yeah. 

Bryce: [00:07:23] So the business IPO in December of 2015 on the Nasdaq, with a market cap of four point four billion and Ren, as you said, it was to the fanfare of the New York New York Times calling them a very boring software company. However, since then, they've just continued to grow compound. It's just been a fascinating story to watch. Market cap today of about 112 billion. If you'd been able to invest pre IPO or even IPO 

Alec: [00:07:53] even two years after the IPO, you 

Bryce: [00:07:56] would be you'd be doing very

Alec: [00:07:58] well. Yeah. Atlassian is often it's somewhat misunderstood or poorly understood as a business in terms of like the products and services that it offers. So I think the best way to conceptualise it is it is the picks and shovels to teams and in particular software development teams. But teams, more generally, when 

Bryce: [00:08:20] that ticker is tame, 

Alec: [00:08:21] yeah. Yeah, they they're all of their business philosophies are around like, how do we make teams work and stuff like that? But really, where it started was with software developers and Atlassian was, they wanted to make software platforms. I wanted to make tools that allowed software developers to work better, to work more effectively. And there's a number of little aspects that I want to get into about that because there's some cool stuff that a number of they've like changed the number of different models. But that in itself is the business building those platforms, building those tools because teamwork is complicated and teamwork in big businesses is particularly complicated. So the average large enterprise uses 288 software as a service applications, which increased 30 per cent from last year. And companies of all sizes just drown in the amount of communications and project management. And, you know, all these different platforms that exist. It is. It's a bit of a mess out there. And so Atlassian is just trying to, I guess, simplify that. 

Bryce: [00:09:31] That's their mission. That's their mission. 

Alec: [00:09:32] Yeah. Now you have some thoughts on JIRA. 

Bryce: [00:09:36] And now should we use that as a segue to talk about some of their core services that they have built to help with this? So JIRA is a project management tool where you know you use it to plan and then track how your you're going with large scale projects that confluence, which allows teams to create and share documents and data. 

Alec: [00:10:00] It's like a Google Docs vibe. Yeah, yeah, yeah, Trello. 

Bryce: [00:10:03] Um, it's a, you know, it's a way to track who's working on what process flow and how far along certain tasks are. And there's. Bucket helps teams to create and share coding work, and then there's the JIRA Service Desk, which is a self-service portal that allows teams to quickly respond to issues that have come through from customers, which is obviously very important customer service. Now, look, there's no doubt Ren that these are all incredibly successful services. They're incredibly successful software as a service that they've built. However, I was when I was in corporate, I didn't work in software, but a lot of these platforms they tried to implement and they all do still have a pretty sort of soft, wary focus. If that makes you like a 

Alec: [00:10:54] developer, a 

Bryce: [00:10:54] developer focus. Yeah. And so it's hard to it's not hard, but it was more challenging to implement the use of these in non software related projects and that sort of thing. But we eventually got there. But that's sort of my gripe, and I know that Atlassian a changing it significantly to make it more adaptable to non sort of developer use. 

Alec: [00:11:15] So I think this is a good point to talk about how Atlassian grow because it's a model that they really pioneered and they pioneered really as a matter of circumstance, like they were forced to pioneer it. But a number of companies have followed suit. So Slack was sort of, I guess, lionised or like people were so glowing about it because of their bottom up approach where they would find a way for it, like they would encourage just teams within a business to download Slack and start using it, eventually spread like a wave throughout the entire business because it was just so much better than email. But it was a bottom up sales approach rather than a top down Slack's head of sales meeting with a business's chief information officer or a chief technology officer and trying to sell enterprise software. That was how software was sold. That was how IBM and Oracle and Microsoft sold software into big enterprises. It was top-down and Slack, you know, was celebrated because they they were bottom up. But alas, Ian were the guys that pioneered this approach, and they had this motto that software should be bought, not sold, which I love. They in terms of all of their peers, they have the lowest percentage of revenue spent on sales just because just because they don't think it should. But it also stems from the fact that Mike and Scott were based in Australia so far away from a lot of their customers in the states. People had to go to their website and download it, and Mike and Scott couldn't be in there, you know, selling in person. That's why the developer focus is so strong, and that has been a real driver of their growth because similar to Slack, it was bottom up. A team would start using it and it would spread because it was so good for Atlassian. Developers would start using it because it was optimised for developers. It was best in class for software developers, but software developers are so integral to businesses these days, and they're so integral to cross-functional projects that all of these different teams would have to start working with developers, you know, marketing, legal, accounting or all of the different business units. And what they saw was developers would start using it and then the use of the software would spread throughout organisations. And you know, you were probably one of those tentacles at Woollies as a non software developer. And that approach of bottom up get into a business, let it spread organically is the sales playbook that Slack followed and so many other businesses are now trying to follow it. Yeah, it's pretty 

Bryce: [00:13:56] powerful when that happens, really, because, you know, it's being bought on utility rather than sold it down your throat because it's the next best thing. Yeah. Mm hmm. So Ren, you mentioned they don't spend a lot of money on on the sales side, but they do spend a fair bit in that mergers and acquisitions space. Having invested over a billion dollars over the last sort of 10, 20 years or so, 10 years in the past 

Alec: [00:14:19] decade, they've spent over a billion dollars. Yeah

Bryce: [00:14:22] So we don't need to go through all of the acquisitions, but they've made some pretty significant significant ones. Trello was one in 2017 help, which is a tool that generates help desk tickets from slack conversations. 

Alec: [00:14:37] I think I think the so you mentioned the five big business units above JIRA, Jurors Service Desk Confluence, Trello, Bitbucket, Trello and Bitbucket both acquired in the last ten years. Yeah, so Atlassian is a company that's not scared to acquire and grow and grow by acquisition of. What they have done really well is integrate these businesses into their offering, and it's been a real, you know, one plus one equals three approach. Whereas a lot of a lot of companies that have this many acquisitions, you say, maybe not that you say maybe diminishing returns, but. Pretty impressive M&A activity over the past decade. One thing that I think we should highlight, which again, I think shows something about the attitude of Al-Jazeera in the way that they're willing to take risks and then walk away from things that aren't working is the workplace chat. So in 2012, they acquired HipChat. In 2015, they acquired whole both Wallwork companies. And they then rolled them into a product called Stryde that they launched in 2017. And this was slack. This was them going head to head with Slack. So Slack was founded in 2009, and Atlassian obviously decided they were going to go head to head. 2017 they launched Stryde, and it is their Slack competitor product. Two years later, up. So after acquiring these two companies, rolling them into a new standalone business unit competing for two years in 2019, they recognised the writing on the wall that Slack was winning. Yeah. And so what did they do? They shut the business, sold stride to Slack in return, took some equity in Slack and then partnered with Slack and integrated Slack into all of Atlassian services. Great play. So rather than saying we've got our own work chat product, we're not going to partner with Slack, we're going to compete. They said, Suck it. Our customers prefer Slack. Shut it down. Let's integrate Slack into our platform so our customers can use the workshop product they want with the platform that they want. 

Bryce: [00:16:53] Yeah, pretty impressive. Yeah. Well, Ren before we jump into competitive advantages, is there anything else that is interesting about Atlassian? 

Alec: [00:17:03] I think a few starts to just rattle off. So Mike Cannon-Brookes and Scott Farquhar are Australia's first tech billionaires. Yes. So I remember forget the mine is the first tech billionaires. 83 per cent of Fortune 500 companies use Atlassian products. Pretty impressive 10 million monthly active users on a losing cloud. We'll talk about cloud in a sec, but their big, hairy, audacious goal, and that's how they phrase it is 100 million cloud users. They have two hundred thousand customers, over 190 countries. They're truly global business. Yeah, I think that sort of gives us scale and use how big they are and how integrated they are in some of the biggest companies in the world. Yeah. 

Bryce: [00:17:45] All right. Well, let's have a quick chat about the competitive advantages, but before we do, we'll just take a break to hear from our sponsors. So when looking at these companies Ren, it's always important to think about the advantages, the competitive advantages that they have over some of their peers, and it's pretty impressive because there are two clear competitive advantages for Atlassian, and the first is their moat. Yeah. Given that they are creating software as a service for the workforce for huge organisations, 83 per cent of the Fortune 500 changing for these companies between platforms and services would be a nightmare. 

Alec: [00:18:26] Yeah. So this is a this is known as switching costs, and once they're integrated in an organisation, the cost of retraining the entire workforce, migrating data, you know, the risk of losing information or data, or losing productivity productivity because of a worse platform or platform the team is less familiar with. Yeah, there's a big switching costs that comes. So that's that's the first moat. The second one, I think we can call a network effect, but I think this is where we should really bring in Atlassian Marketplace because Atlassian have built this great platform, but now they're allowing other developers to build on top of it. And basically, if you or I want to create a product for software developers or for teams to use, we can create it and sell it through Atlassian Marketplace and Atlassian. Users can buy it and then integrate it into the platform and use it themselves. And so it creates this virtual cycle where elastin is the platform where all these other developers are building products and then all the all of these customers that want to use those products have to access it through Atlassian through a Larsons platform. So as they keep growing their customer base, more and more developers are incentivised to build things for the Malaysian marketplace. And then as more developers build things for the Atlassian marketplace, more and more customers are incentive to use it because the platform has more and more utility. So it's this virtuous cycle that becomes very hard to break. The customers and developers become very sticky because if you and I wanted to start a rival software developer workforce management platform, we all of a sudden don't have all these third party developers building additional functionality on our platform for us. 

Bryce: [00:20:24] Yeah, it's pretty amazing. So industry, there's some pretty big competitors out there like they're competing against the likes of Microsoft to have their suite of products for, you know, working teams and with actually have Teams, literally there's GitLab. IBM playing service now is massive, scrumwise and GitHub. 

Alec: [00:20:47] Yeah, Salesforce, Salesforce. Yeah, I think there are so many alternatives out there, so many big software platform alternatives. So do you think Colossians profitable? I think it is it's not easy. Surprisingly enough, it's not it hasn't been profitable for years. I think it was profitable and then from like F16 onwards, not profitable. Wow. Yeah. But if you look at it on, if you look at a number of those companies that you just mentioned, the Microsoft, the sales force, the Oracle's service now. And you compare Atlassian to them on a enterprise value to revenue ratios, you so almost price to sales similar vibes. But enterprise value to revenue elasticity is expensive 40 times compared to Microsoft, 12 times compared to Salesforce, 10 times compared to Oracle. Seven times. Wow. So I think that's, you know, we've just spent 20 minutes speaking glowingly about Atlassian, but we're not breaking new news here. Yeah, the market realises how powerful Atlassian is, and a lot of that's priced. It's priced 

Bryce: [00:21:53] in. Yeah. Well, let's look at some of the financials Ren. So $112 billion market cap The share price in 2016 was twenty 749. And at the time of recording on the 11th of November, it is about 440 $444. Amazing growth, 74 per cent compound annual growth rate for its share price, and it's also been pumping out some pretty good revenue numbers. In FY 2016, it did just shy of half a billion and in FY21, it's now doing 2.1 billion. So that's compound annual growth of 36 percent over the last sort of five years or so. 

Alec: [00:22:34] Yeah. So as I mentioned before, they're not profitable. They lost almost 700 million dollars in FY 21. And those numbers have been expanding since FY16. So you know why? I think part of it is this migration to cloud, which we can talk about. I guess also they're just investing heavily. Yeah. Platform acquisitions, a bunch of other stuff they're growing, I think, is the long and the short of it. They do have about a billion dollars cash on their balance sheet, so they've got a fair bit there. But I think the important thing to note is while they're not profitable, they they do have they do generate serious free cash flow. Yeah. So F16, they generated about ninety five million f, they generated about half a billion. So 51 percent combat annual growth rate for those five years. So free cash flow, you know, that is cash that the business can use to grow, like invest internally or acquire or. That's true on their balance sheet so that free cash flow growth is impressive. 

Bryce: [00:23:35] So Ren, we've mentioned the cloud a few times. So let's let's move to that and have a look at what is what the future holds for Atlassian. We've seen over the last few years that they've been shutting down their server based products and focussing on cloud and the sort of data centre additions of those, and it's a pretty interesting move. 

Alec: [00:23:54] Yeah. So what do we mean by that? Back in the day, if I was a lesbian and I wanted to to sell my my software to someone, I would ever need to send someone out to go and install it onto a company's servers. Or the company would have to download and install it on the servers themselves. But that business model is outdated now. Everything is cloud based, it can just be downloaded, or it can even just be accessed through the cloud. That is a loss have made the decision that they're pivoting. They basically I was reading something. They forked their code and they just said, we're only going cloud now. So they have stopped selling server products. And I think in 2024, they're just cutting completely. So there's a few years of people like legacy to move them over. But then 2024, it's done. Get out, you're out. You're either on, you've moved over and your host is hosting a data centre posted on the cloud or you don't exist in now books anymore. Yeah. 

Bryce: [00:24:53] Nice. 

Alec: [00:24:54] So I mean, that's a big move for a business to disrupt their customers like that? Absolutely. If you're looking at what the next few years of Elysian is going to be, it's going to be that it's going to be telling the market how they're going with that customer journey and moving customers over and what their customer churn rate looks like and all of that stuff. 

Bryce: [00:25:13] Yeah, and it's a big opportunity as well. They think that it's a what, $24 billion opportunity.

Alec: [00:25:18] Yeah, that's generally how big the market is. Yeah, yeah. I think it's important to know their cloud offering is more expensive than the server offering for most customers, so it is going to be a lot of effort to transition them

Bryce: [00:25:34] most more expensive than server. I mean, yeah, more expensive than server, but I wonder how how expensive it is relative to competitors. 

Alec: [00:25:42] Yeah, that's a good question. 

Bryce: [00:25:43] And also, you'd probably copy it if it means getting kicked off and having to start again, integrating a new competitor off like nightmare, you're likely to copy it. Yeah, I would imagine. I think so, and I think Atlassian probably know that. Yeah. 

Alec: [00:25:57] So. We mentioned their big, hairy, audacious goal before, yeah, they've got 10 million cloud users, they want to get that to 100 million monthly active users. 

Bryce: [00:26:08] Did they say by when? 

Alec: [00:26:10] No, I don't think so. Maybe. But knowing what I read. Revenue of 2.1 billion, they want to get to five billion in revenue.

Bryce: [00:26:19] So they want to ten times their uses, but double their revenue. Yeah, it doesn't make sense. 

Alec: [00:26:25] You'd have to ask them.

Bryce: [00:26:26] Maybe that's why they're unprofitable. And so one other thing Ren just to close out is their spend on R&D. We know that, you know, a lot of managers look at what companies spend on their R&D and Atlassian spend thirty five percent of their revenue on Ren, which is 

Alec: [00:26:45] Hey, yeah. And they have a chart in their investor day. They do investor day six pages, you know? You know, he made that 

Bryce: [00:26:54] famous Investor Day six pages.

Alec: [00:26:56] Forty six pages.

Bryce: [00:26:58] Oh, it's six pages only. 

Alec: [00:27:00] Like, yeah, they've got like they've got I think they got six six pages

Bryce: [00:27:04] Ring a bell, but not remind me.

Alec: [00:27:06] Amazon. Amazon. Bezos. Bezos had a rule that if you wanted to have a meeting, you had to write a six page document. Yeah, yeah. And everyone would get into the meeting and read it, and then they would have a conversation. Yeah, yeah. So Atlassian, the investor day, they had a bunch of six pages. So one on strategy, one on what? At Cloud, one on whatever and they're one on R&D was fascinating because they compare how much they spend as a percentage of revenue on R&D compared to a lot of their competitors. And it's meaningfully more similar to what we were saying earlier about how little they spend on sales compared to their competitors. But I think what's really interesting is how they try and encourage, I guess, innovation internally. So they have this new product framework and they do, you know, the standard things that Big Tech companies do, you know, hackathons and all of that stuff, but they're explicitly looking for $100 million businesses. That's what they're telling their customers. And for memory, one of their big products came out of this like internal new products framework process.

Bryce: [00:28:19] Do they give their stuff equity in it?

Alec: [00:28:21] Oh yeah, yeah. Imagine if you built a hundred dollar business divisions and I think, you know, if there was any major software business, you'd be happy to build it for. It's probably Atlassian like they are universally known as like one of the best places to work. Yeah, yeah. If I've been to their Sydney office, have you? It is so 

Bryce: [00:28:43] well. Are they also building a five half a billion dollar like ultra green sustainable tech hub here in Sydney? Yeah, I think so. Yeah, it's meant to be nuts. As we said at the start. Amazing story home-grown heroes here in from Australia listed over on the Nasdaq. But you do love to say it. There's a great podcast to listen to to get more insight into the founding story. It's called Acquire. Is it the quiet or is the how it's the how I built this one? Yeah, with our Guy Raz, how I built this? Yeah, go and listen to that. It's it's really interesting. You get some further insight, but that does bring us to the end of our episode. Thank you to Super Hero for sponsoring our summer series superhero. Allow you to buy Aussie and US shares and ETFs with no monthly account fees, and you can now own Qantas points with superhero. So visit Superhero Hero A Slash Qantas to learn more eligibility criteria, terms and conditions and fees and charges apply. Head to our Instagram for your chance to win $1000 in the superhero wallet as well. Plenty of fun facts in this episode, so pull pull a few out and leave them in the comments for the Atlassian post and stick around because we're staying overseas. Next episode we've got a CEO of a really interesting company and that is the Australian CEO of Peloton. 

Alec: [00:30:04] Yeah, John was, yes, unprofitable US tech, more

Bryce: [00:30:08] unprofitable U.S. tech.

Alec: [00:30:10] That's one of the most fascinating companies. 

Bryce: [00:30:12] Absolutely. And I'm looking forward to it because Ren will only be pitching the CEO on trying to get a peloton 

Alec: [00:30:19] in his bedroom. We found out another media company was sent a free Peloton, and I am ronorable awaiting someone. So thus this begins the campaign. 

Bryce: [00:30:30] So stay tuned on that front, but thanks for joining us. It's been an absolute pleasure. Hope you got something out of that and we'll pick it up next week.