Atlassian Corporation Plc
Fourth Quarter Fiscal Year 2018 Earnings Conference Call
July 26, 2018
Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2018 Earnings Conference Call, July 26, 2018
C O R P O R A T E P A R T I C I P A N T S
Ian Lee, Head of Investor Relations
Scott Farquhar, Co-Founder and Chief Executive Officer
Mike Cannon-Brookes, Co-Founder and Chief Executive Officer
James Beer, Chief Financial Officer
Jay Simons, President
C O N F E R E N C E C A L L P A R T I C I P A N T S
Matt Broome, Cowen & Company
Richard Davis, Canaccord Genuity
Rob Oliver, Baird
Heather Bellini, Goldman Sachs
Nikolay Beliov, Bank of America
Sanjit Singh, Morgan Stanley
Bhavan Suri, William Blair & Company
John DiFucci, Jefferies
Michael Turits, Raymond James
Keith Bachman, Bank of Montreal
Rishi Jaluria, D.A. Davidson
Jonathan Kees, Summit Insights Group
Patrick Walravens, JMP Group
P R E S E N T A T I O N
Operator:
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2018 Earnings Conference Call, July 26, 2018
Good afternoon, ladies and gentlemen. Thank you for joining Atlassian’s Earnings Conference Call for the fourth quarter of Fiscal 2018. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Atlassian’s website following this call.
I will now hand the call over to Ian Lee, Atlassian’s Head of Investor Relations.
Ian Lee:
Good afternoon and welcome to Atlassian’s Fourth Quarter Fiscal 2018 Earnings Conference Call. On the call today we have Atlassian’s Co-Founders and CEOs, Scott Farquhar and Mike Cannon-Brookes, our Chief Financial Officer James Beer, and our President Jay Simons.
Earlier today, we issued a press release and a shareholder letter with our financial results and commentary for our fourth quarter and full year of Fiscal Year 2018. These items are also posted on the Investor Relations section of Atlassian’s website at investors.atlassian.com. On our IR website, there is also an accompanying presentation and data sheet available.
We’ll make some brief opening remarks and then spend the rest of the call on Q&A.
Statements made on this call include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management’s beliefs and assumptions only as of the date such statements are made.
Further information on these and other factors that could affect the Company’s financial results is included in filings we make with the Securities and Exchange Commission from time to time, including the section entitled Risk Factors in our most recent Forms 20-F and 6-K.
In addition, during today’s call we will discuss non-IFRS financial measures. These non-IFRS financial measures are in addition to and not as a substitute for or superior to measures of financial performance prepared in accordance with IFRS. There are a number of limitations related to the use of these non-IFRS financial measures versus their nearest IFRS equivalents, and they may be different from non-IFRS measures used by other companies. A reconciliation between IFRS and non-IFRS financial measures is available in our earnings release, our shareholder letter and in our updated Investor Data Sheet on our IR website.
One final note on our new revenue recognition reporting standard IFRS 15. The Q4 2018 and Fiscal Year 2018 results we’ve provided today are based on the revenue recognition standard IAS 18. The financial targets we provided today for Q1 2019 and Fiscal Year 2019 are based on the new revenue recognition standard IFRS 15, which is equivalent to the revenue recognition standard ASC 606 which many of you are familiar with. For comparability, we have provided recast historical financial statements under the new standard IFRS 15 for full year Fiscal 2017 and the full year and quarters of Fiscal 2018 on our Investor Relations website.
I will now turn the call over to Mike for his brief opening remarks before we move to Q&A.
Mike Cannon-Brookes:
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2018 Earnings Conference Call, July 26, 2018
Good afternoon. Thanks everyone for joining today. Fiscal 2018 was another year of significant growth for Atlassian, both financially and organizationally, as we continued our mission to unleash the potential of every team.
The fourth quarter of Fiscal 2018 capped off the year with strong customer additions, revenue growth and free cash flow expansion. We added more than 6,600 net new customers, expanded revenue by 40% year-over-year, and generated more than $64 million of free cash flow. We ended the year with more than 125,000 customers, grew revenue by 41% year-over-year to $874 million, and delivered approximately $281 million worth of free cash flow, which equates to a free cash flow margin of 32%.
We passed several milestones during Fiscal 2018: the migration of all instances for Jira and Confluence users to our new AWS based infrastructure; passing 100,000 cloud customers; the one-year anniversary of the Trello acquisition; the launch of our new brand identity; $500 million in lifetime Atlassian marketplace sales, and 2,500 employees worldwide, including those in our new Bengaluru office.
Today, as we look forward to Fiscal 2019, we shared two updates to our strategy and product family in our shareholder letter. First, we will be doubling down on supporting the needs of IT teams across companies of all sizes, what we call the Fortune 500,000. Serving IT departments is an adjacent market we’ve been serving for years, yet we’ve barely scratched the surface of this significant opportunity. This year, you’ll see us placing more emphasis on the IT market through our R&D investments, partnerships and marketing.
Second, we announced that we’ve formed a strategic partnership with Slack. Atlassian currently has two offerings in the real-time communications market, Stride and HipChat. As we completed our strategic planning coming in Fiscal 2019, we concluded that although this market remains large, the additional investment required to compete effectively is unlikely to generate returns that are comparable to those of our other products and the opportunities around us.
We’ll be exiting our direct participation in the communications space with this partnership. Slack has acquired the intellectual property for Stride and HipChat Cloud, both of which we will discontinue. We’ll also discontinue HipChat server and data center and we’ll be working with Slack to provide a migration path for all our customers across the four products.
Going forward, we’ll be deepening the existing product integrations between Atlassian and Slack as well as building new ones. We’ll also be working together on marketing, sales and channel enablement activities.
As part of our partnership, we have made an equity investment in Slack to reinforce the long-term nature and significance of this relationship.
We’ll be sharing more information on this and many more highlights at our Summit event in Barcelona from September 3rd to 5th. Scott and I look forward to talking with all our customers and partners in Spain.
With that, I will pass the call back to the Operator for Q&A.
Operator:
Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two.
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2018 Earnings Conference Call, July 26, 2018
The first question comes from Gregg Moskowitz with Cowen & Company. Please go ahead.
Matt Broome:
Thanks. This is Matt Broome on for Gregg. Congrats on a very good quarter and the announcement of a very interesting partnership with Slack. I’ve got two questions there. Firstly, do you think that the revenue synergies can be meaningful going forward? Secondly, you mentioned that you expect to partner with Slack around marketing, sales and channel enablement. What does that mean for the model and will that entail changes to your go-to-market structure?
Mike Cannon-Brookes:
I can take the first one, Matt. I’m not expecting that as we said on the last call that Stride would have been material to our FY19 revenues, and so we’re not making any comments specifically today about the opportunities in terms of working with Slack around go-to-market opportunities. Safe to say, they’re embedded within the guide that we’ve issued for Fiscal ’19.
Jay Simons:
This is Jay. On the go-to-market question, no material changes at all to the model or the way that we approach going to market with Slack. We already share many, many joint customers that are using the existing integrations between the two products. I think as we mentioned in the shareholder letter, we’re excited. Both companies are excited about improving those integrations and building more integrations between the two products, and actually both companies have similar go-to-market models already so we think that for the most part we’ll do what we’ve been doing.
Matt Broome:
Okay, thanks. Just one last one. Are you able to give any color on the terms of the equity investment?
Mike Cannon-Brookes:
No, Matt. We’re not disclosing that. It’s a relatively modest investment but we’re not going beyond that.
Matt Broome:
Okay. Thanks very much.
Operator:
The next question comes from Richard Davis with Canaccord. Please go ahead.
Richard Davis:
Thanks very much. One question. We had some other excitement—by the way, good job on making the move. Anyways, we had some excitement with GitHub, right? There’s some interesting things going on there, particularly in terms of your business. Kind of, you guys had put some press releases out, but can you talk to us about kind of how you see early days? What you think is happening longer-term? What do you think is happening? Then I guess as the ancillary question, I asked some of my developer friends,
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2018 Earnings Conference Call, July 26, 2018
they’re all jazzed up about some business called GitLab which is guess is similar to that, but do you have any point of view on those guys? Thanks.
Scott Farquhar:
Thanks, Richard. Scott here in Sydney.
Hey there. Obviously we followed Microsoft acquiring GitHub. We believe that Microsoft acquired GitHub largely for GitHub’s strength in the Open Source community and the business rationale there is to get the Open Source developers to buy Azure. We don’t believe they bought GitHub to compete with Atlassian or to compete with our enterprise hosting solutions with GitHub and the developers. We’ve always had to invest in R&D and we’ve always invested well with R&D and with low price products, and that’s true (inaudible) all of our products, so we don’t expect that to change.
Bitbucket itself has thousands of customers, tens of thousands of customers including 60 of the Fortune 100, and across both Bitbucket and Jira software, across our cloud and server environments we touch more than 30 million user accounts.
So, where we believe we’re placed well competitive versus GitHub and GitLab, and nothing really changes there with the acquisition by Microsoft.
Richard Davis:
Super. Thanks very much.
Operator:
The next question comes from Rob Oliver with Baird. Please go ahead.
Rob Oliver:
Hi guys. Thanks for taking my question. Just wanted to drill down a little bit on the commentary around that increasing emphasis on the IT market in 2019. It does seem like a logical adjacency and clearly you guys have a really good sense for how your customers are already using those products, so I wanted to get a sense, maybe if you can give us a little bit more color as to what some of those areas might be, where you feel like there might be a need, and then how you would think about that relative to internal development R&D or perhaps acquisition. Thank you guys.
Scott Farquhar:
Thanks for the question. It’s Scott here again. The IT market is really appealing for us. It is a very logical adjacency for us. As we think about what we’ve done historically, it’s not just your Service Desk that serves IT. Confluence is used very heavily in IT departments. IT departments build a lot of software. Jira Software gets used there. As IT departments build and run software, they use Status Page to communicate with their customers, uptime and reliability, and so we already do a lot of things for IT today.
What we’re finding is we’re getting increasingly pulled by IT departments to do more for them. There’s a few reasons for that. One is that they’re, like many of our customers, are attracted by our relatively low pricing and our great feature parity and the features we provide. Two, as IT departments build more software and software becomes a more important part of what IT teams do, our natural strengths play very well into that.
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2018 Earnings Conference Call, July 26, 2018
You’ll see us invest more in the R&D side of things in our marketing and go-to-market, and across product development and what we bring to market. I think you’ll expect to see a lot from us across a range of our products.
Rob Oliver:
Thank you, guys.
Operator:
The next question comes from Heather Bellini with Goldman Sachs. Please go ahead.
Heather Bellini:
Great. Thank you so much. I had two questions. I wanted to start out with you gave really impressive gross profit growth forecast for next year, or I guess for the current fiscal year, so I wanted to touch on base with you. Can you talk to us a little bit about how you’re getting that growth margin benefit as you’re shifting more to the cloud? Are there some aspects of the economics that we should be keeping in mind? Is there anything you’re talking about in terms of how we should be thinking about that trending over the course of the next few years?
Then the other question would be just with Slack taking the communication assets that you mentioned, just wondering how do you think about what the next leg of growth is if we look out a couple of years down the road for Atlassian? What do you see as kind of taking the reins from obviously what’s a great business with Confluence and Core Jira? Thank you.
James Beer:
Hey Heather, it’s James. Let me start off with addressing the gross profit question there. We in Q4 drove a non-IFRS gross margin of 85%, so this was as we expected higher than the sequential figure. Q3, recall was back at 83%, and that’s because in Q3 we were still going through the process of accelerated depreciation against the internal data center assets that have now been replaced now that we have converted our cloud hosting over to AWS. We did expect that Q4 would drive a higher gross margin, and indeed, it did.
Coming off that, we’re expecting FY19 to drive 85% to 86% in gross margin terms, so it’s really more of a continuation of the full-year effect, if you will, of getting past that accelerated depreciation that particularly hit some of the quarters of last fiscal year.
Stepping back from that, I think you’re right. As we continue to move more of our mix to the cloud, we have said in the past and I would confirm that we would expect that there will be something of a gradual, a very gradual decline in gross margin as cloud becomes a bigger proportion of the overall Atlassian revenue mix.
Mike Cannon-Brookes:
Heather, it’s Mike here. I can take the second half of your question, or your second question. I think in terms of the next leg of growth, you only need to look around the business to see that that’s sort of already happening, right? We have a plethora of opportunities around the business and the broad collaboration space, in the software teams and in the IT team spaces, and you’ve seen us make a series
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2018 Earnings Conference Call, July 26, 2018
of moves over the last few years in the marketplace, in Trello, and more recently, Atlassian Access, so we have great confidence in the opportunities we have around us and continue to make I think very pragmatic and fiscally responsible decisions to chase those markets that we’re going after.
Heather Bellini:
Thank you very much.
Operator:
The next question comes from Nikolay Beliov with Bank of America. Please go ahead.
Nikolay Beliov:
Hi. Thanks for taking my questions. I wanted to go back to the change in strategy, refocusing on the IT market. Just wanted to get some color on the focus going forward on the non-IT space. Do you guys feel like you need a LAN project like Jira to kind of gain more traction? Are you pulling back in that (inaudible), the non-IT areas and really just like doubling down on IT going forward?
Mike Cannon-Brookes:
Hi Nikolay, it’s Mike. I can take that. I’m not sure I quite understand the question. We’re going to be increasing our focus on IT, for sure, as we’ve explained in the shareholder letter. At the same time, we do believe the other areas we’re in we’ll continue to invest. Trello is clearly a LAN product in the all-team collaboration area with tens of millions of users and continuing to grow really strongly. We feel very excited about the prospects there as it gets closer and closer to the Atlassian family.
Confluence obviously does very well across all sorts of all-team collaboration, and that’s before you get to Jira Core and Jira Service Desk, enabling workflow activities in a business as well as obviously service- driven teams of all kinds in Jira Service Desk. Definitely not an area that we’re pulling away from in any major way. We’ll continue to invest there.
Nikolay Beliov:
Got it. That was helpful. Thank you. James, a question for you. Billings really accelerated this quarter from 34% in Q3 to 41% this quarter. Maybe you can just go through the puts and takes here. Will billing in Fiscal Year ’19 follow a more normalized trajectory versus Fiscal Year ’18?
James Beer:
Hey, Nikolay. We were pleased with the Q4 billings result. Particularly we benefited from strong growth around our data center business, around the cloud side, particularly on the annual subscriptions to the cloud, but also a strong quarter on the server side with good upgrades and maintenance renewal performance as well. It was a really nice mix across the board.
In Fiscal ’19, obviously in ’18 we discussed on our last call a certain amount of pull forward related activity that benefited the first half of Fiscal ’18, and made things more challenging in Q3, and that that pull forward was driven by the price increase activity that we rolled out, particularly on the server side of the business back in October of last year.
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2018 Earnings Conference Call, July 26, 2018
Nothing to specifically lay out in terms of price initiatives for Fiscal ’19, but safe to say that there is some presumption of pricing activity embedded within our guide. We’ll obviously tell you more when we’re ready to discuss the specifics there, and it will really be the resulting customer behavior that will drive the billings profile that we would expect quarter-to-quarter as a result in Fiscal ’19.
I would just further observe, of course, that the specifics of any price increases are very important here in terms of the timing within a quarter that we would announce such an increase and the amount of advance warning that would go along between the announcement date and the effective date for any price increase.
Those will be the things that I would expect to drive the billings profile quarter-to-quarter somewhat in Fiscal ’19 and we’ll keep you up to date on all of the specifics there as the year proceeds.
Nikolay Beliov:
Thanks so much.
Operator:
The next question comes from Sanjit Singh with Morgan Stanley. Please go ahead.
Sanjit Singh:
Thank you for taking the questions. I wanted to revisit guidance and make sure I understand some of the dynamics here. You guys came in above certainly what we were expecting, I think what the rest of us were expecting. To be clear, that doesn’t include HipChat or Stride. Can you give us a sense of what the contributions from HipChat and Stride was in Fiscal Year ’18?
James Beer:
Let me take that, Sanjit. Perhaps I can just frame it more in terms of Fiscal ’19 in that the announcement that we’ve made today around the communication space just provide a very small headwind to what otherwise would be in our plan for Fiscal ’19, so just in the order of a million dollars or so in revenue.
Sanjit Singh:
Understood. I appreciate that. Then I guess from a resource allocation standpoint, you guys raised a billion dollars. There won’t have to be any more efforts to support HipChat or Stride. In terms of those extra resources, how are you guys thinking about deploying those resources? Does that involve more new product innovation or M&A, or is it just more resources in the existing portfolio?
Mike Cannon-Brookes:
Yes, look—it’s Mike again. We’ve always maintained that we continue to demonstrate philosophically strong fiscal and operational discipline and are pragmatic about where we put our resources, which is exactly why you see this decision. We believe there are many, many opportunities around the business that we are investing in, and as a result it’s about choosing the best of those opportunities to put the resources that we have. We have an absolutely world-class R&D and engineering team. We’re continuing to grow it really strongly, including, as you see, the new office in Bengaluru. We’ll continue the same way that we’ve been going for 17, 18 years now in terms of investing continually, as we would say
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2018 Earnings Conference Call, July 26, 2018
incrementally in the existing products that we have, and also building out the new products that we continue to introduce to the market.
Sanjit Singh:
Understood. Thank you.
Operator:
The next question comes from Bhavan Suri with William Blair. Please go ahead.
Bhavan Suri:
Hey guys, thanks for taking my question. Nice job on that reacceleration there. I guess I just wanted to first start off strategically. When you think about communication, you think about collaboration, when you think about documents, you’ve got Confluence, you’ve got Jira and you’ve got Jira Service Desk for sort of workflow. Obviously underlying all that is communication, but I just wanted to understand a little more the thought process. You guys obviously invested in Stride post HipChat, and also to say, “Okay, we might feed that to Slack, or at least partner with Slack.” Do you feel like that convergence of communications collaborations is something that could be sought through partnership, or do you feel like maybe communications is a little more commoditized? Just sort of the thought process you guys went through with this strategic view of sort of saying, “We’re not going to do—we’re not going to own the communications piece of Stride,” and potentially partner with that. Just sort of how you guys view that integrated environment. To me, obviously, it feels like it should be totally integrated. I’d love to get your thoughts on that.
Mike Cannon-Brookes:
Sure, mate. As I said, it’s all about pragmatic decision making and operational discipline for us. As we went into our FY19 planning, we concluded that the communications space remains very large but that the level of investment required to compete wasn’t likely to generate the same returns as all of the other opportunities that we have around the business, and so it’s about choosing where we’re going to invest.
At the same time, we believe we can effectively benefit from the market through this long-term partnership rather than through direct product investment. We also think that net-net that’s the best thing for the customers in the long term across the products that we’re going to build and the products that will be served through the partnership and by continuing to build deeper and deeper integrations between Slack and the Atlassian family of products. That’s the way we believe will be the best for the future of the business.
Bhavan Suri:
Got it. I’ll just turn quickly to Jira Service Desk. I guess just as you look at that business, I’d love to understand sort of sort of where you’re seeing growth, and is Jira Service Desk serving as sort of a landing point for new customers that may not be subscribed to other products? Is it starting to be sort of a standalone initial sale? Sort of would love to get some color of say growth to existing versus new. Thank you.
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2018 Earnings Conference Call, July 26, 2018
Scott Farquhar:
It’s Scott here. Jira Service Desk, as we’ve said before many times, it’s one of our fastest growing products in the Atlassian suite. It does serve a couple of different audiences. It serves some customers that want to service their customers externally, so some of our customers use it for external Help Desk, but many of them use it internally as both sort of an IT Help Desk, and also we’re seeing increasingly for people to use it for other workflow applications inside the business. Not just typical IT Help Desk but HR teams provide service to their customers; the Legal team provides service to their customers. We see those use cases as well.
Originally, we sold very heavily into our existing base, as you can imagine. We have a very large customer base and so that’s the place we start with. We are seeing that more sell beyond the customer base, and as we turn our hands more to IT we will be looking to land more customers outside of our existing customer base with not only Jira Service Desk but all the other products I mentioned earlier that serve our IT customers.
Bhavan Suri:
Got it, got it. That’s helpful. Thank you, guys. Congrats.
Operator:
The next question comes from John DiFucci with Jefferies. Please go ahead.
John DiFucci:
Thank you. I have two questions about the Slack partnership. When I think of Atlassian, customer satisfaction or customer delight, it’s always been an important tenet in the business of Atlassian. The good news is Slack has a similar approach regarding its customers, but how involved are you going to be in this transition of customers of four products to Slack products? I guess, I don’t know, maybe—it seems important to me.
Mike Cannon-Brookes:
Sure, John. It’s Mike here. Yeah, I mean look, customer satisfaction is incredibly important to both companies. We’ve already spent a lot of time working with them on how we’re going to manage that and our teams will continue to work on it going forward. It’s obviously of critical importance that customers are able to continue their communications infrastructure being up and running and at that same time migrate their data, migrate their history, their files that they’ve shared, etc. across if they choose to migrate services. That’s something we’ll be working together with them on and obviously owning the customer experience, if you like, on both ends of that transition enables us to do a really good job, I believe, for the customers going forward.
John DiFucci:
Okay. Thanks, Mike. That’s good to hear. Then James, I think this one’s for you. You said you’re only going to see a million dollars or so of headwind in revenue in your guide based on this, but you’re discontinuing four products. I guess I mean you’re obviously not going to give us details of this but can you tell us is there a revenue share or something? Because in understanding—those products have more than a million dollars in revenue, obviously, right? So, something more, if you can give us.
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2018 Earnings Conference Call, July 26, 2018
James Beer:
What I’d add, John, is really further to what Mike was saying, we’re going to be very involved in the process of migrating our customers, the ones that wish to move over to Slack. That process will drive some revenue for us and that will tend to offset some of the revenue that we would otherwise have been expecting to drive out of products like Stride. So the net effect is that small million-dollar type headwind in Fiscal ’19 versus what we would otherwise have planned.
John DiFucci:
Okay. That’s more helpful. Thank you, and nice job, guys.
Operator:
The next question comes from Michael Turits with Raymond James. Please go ahead.
Michael Turits:
Hey guys, I wanted to come back regarding the IT investment strategy and I think double down. I think Rob and Nikolay asked these questions, but can you try to be more specific on what you’ll be doing in terms of that incremental IT investment around product and around go-to-market? Also, I guess this was Nikolay’s but are we clear that there’s no change even in the near term, but it seems like a prioritization of IT versus non-IT strategy?
Scott Farquhar:
Michael, it’s Scott here. I’d love to give you all the nitty gritty detail of what we’re going to do but we don’t sort of pre-announce product changes and other things before we get them in the hands of customers, and so I can’t get into the exact details apart from just saying as a broad company level initiative where we working to focus is IT, and again, largely because our customer base are asking us for that. If you think about the changes in IT, the space, there’s a lot more around agile workflows and IT being much more responsive. Then, a lot of the IT departments are also having service-driven enterprises, both services as in providing services internally but they’re also looking to run services in the cloud and so a lot of those practices that IT are adopting really come out of the software world, and a lot of things that we have a long history of providing product in. There’s obviously extensions as we work with our customers on the gaps that we have in our product portfolio today.
I can’t go into it in great detail apart from this is a company level initiative that you will see go-to-market, you will see pricing and packaging, you will see products that we bring to market over the coming years.
Michael Turits:
Right. The other part of my question was just to make it clear is this or is this definitely not a prioritization in the near term of IT versus non-IT? Because, obviously, the outside of IT part, teams of all sorts have been a big part of the company mission.
Scott Farquhar:
Michael, one of the reasons we’ve made the strategic partnership with Slack announced between us today is that just the all the areas of the business are having such opportunity that we need to—we’ve got plenty of places to invest, and we have investments across non-IT, which Mike talked about earlier, and
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2018 Earnings Conference Call, July 26, 2018
we have investments in IT. Obviously as a result of increased focus there, we’ll be spending more of our focus on IT than we had historically, so you’ll see more of it going forward.
Michael Turits:
Thank you.
Operator:
The next question comes from Keith Bachman with BMO Capital Markets. Please go ahead.
Once again, that’s Keith Bachman with BMO Capital Markets. Your line is open.
Keith Bachman:
Thank you. I wanted to broaden out a question that was asked earlier. I understand why you’d migrate the properties that you have to Slack. It’s still not clear to me once those are migrated, what are you getting from the partnership? In other words, what is Slack going to give you? Is it a revenue share? You’re already doing some marketing with them around some of your other properties, so once the transition is completed, what is the nature of the partnership with Slack?
Scott Farquhar:
Sure, Keith. Look, we’re not disclosing the individual details of the partnership at a financial level obviously, other than the high level that we’ve talked about, the payment flows in the investment. I do think we are getting a lot from a closer collaboration with them. We’re a collaboration company and this Slack partnership you can see is an example of a collaboration at a company-to-company level between best-of-breed partners and best-of-breed companies in their own areas for the benefit of our collective customers, right?
Our focus is going to continue to be on building the best products that we can and the R&D centric model that we have, and so I think you’ll continue to see us doing that. Obviously we’re going to build deeper integrations. Obviously we’re going to continue to make sure that our customers can use the product family together with the Slack communications platform as efficiently and easily as possible.
Keith Bachman:
Okay. Then my follow-up perhaps in the context of the guidance going forward, your subscription revenue this quarter was once again incredibly strong. As you think about the context of the guidance you provided, can you give us any puts and takes on how we should be thinking about subscription revenue?
Mike Cannon-Brookes:
I would just observe that both our cloud products and the data center products that are part of the behind the firewall business that are both accounted for in subscription revenue, both continue to grow very nicely, and we’re very pleased by the recent performance. Then to the plan that we’ve put together for the coming fiscal year. That’s an area that I would certainly be looking for of significant strength in the overall accounts.
We will, of course, be lapping last year’s benefit on the cloud side from per user pricing, so we’ll see some benefit in Q1, and then that process will have fully lapped out. Of course, recall also that Q4, just
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2018 Earnings Conference Call, July 26, 2018
finished, that was the first quarter, the full quarter where we had lapped the Trello acquisition from a year or so ago.
Keith Bachman:
Okay. Many thanks.
Operator:
Again, if you have a question, please press star, then one. The next question comes from Rishi Jaluria with D.A. Davidson. Please go ahead.
Rishi Jaluria:
Thanks. Hey guys, thanks for taking my questions. Nice to see some continued momentum in the business. Two questions. First, wanted to circle back and talk about GitHub. From some of the folks in the Valley I’ve spoken to there’s been some negative pushback to the acquisition, and there’s some developers are fearing some long-term vendor lock-in with Microsoft and others talking about loss of neutrality. Has there been kind of an ability to capitalize on this with Bitbucket, and is there maybe a strategy to continue to grab these types of customers that churn off during a big acquisition like that?
Then the second question is just around Trello. Trello acquisition is about a year-old now. Can you just give us a sense for how it has been trending relative to your initial expectations? Thanks.
Scott Farquhar:
Thank you. It’s Scott here. When the GitHub acquisition was announced, we did see sort of more of a one-time spike from the sign-ups on our Bitbucket cloud instance, but I think there’s a little uncertainty. It’s done and then people take a wait and see approach. We do believe that what we’ve seen over the last couple of months since that announcement is sort of nothing materially changed in our customer acquisition, but I expect to see that play out over time one way or another rather than something happening on Day 1.
I’ll let Mike answer the Trello question.
Mike Cannon-Brookes:
We’ve included Trello obviously going forward and in the past. As we mentioned beforehand, a year ago, I suppose, Trello was around $20 million of the revenue number for FY18, and we were materially over that, I think you could say, for the year. We maintain strong bullishness on Trello as an acquisition and its ability to move all teams forward in the way that they communicate and collaborate, and as a part of the Atlassian family.
Male Speaker:
I’ll just add to that. We’re all internally really happy with Trello. Their culture fit has been fantastic. We’ve inherited a great management team. It really fits like part of Atlassian, like we were separated at birth, and as Mike said, the financial performance has been stronger than we had put in our forecast, so we’re really happy with that.
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2018 Earnings Conference Call, July 26, 2018
Rishi Jaluria:
Thanks, guys. Well done.
Operator:
The next question comes from Jonathan Kees with Summit Insights Group. Please go ahead.
Jonathan Kees:
Great. Thanks for taking my questions and congrats on the quarter. I just have a couple of specific questions actually. This partnership with Slack, is it safe to assume they’re going to be your partner of preference in terms of communications platform? You have a couple of partners, communications platform in your Atlassian marketplace, like 8x8, which also has like a Slack type of service and obviously VoIP or UCaaS. Is this system more of a preference with Slack as the partner of choice?
Then, second, I wanted to ask more of a, I guess a lesser mentioned product Status Page. Is it still meeting expectations, and is there—if you can give any qualitative script in terms of monetization for that and for Fiscal ’19, that’d be great. Thanks.
Mike Cannon-Brookes:
Sure, Jonathan. I can take the first one and I’ll leave Scott to take the second one. Look, a partnership has obviously been made between Atlassian and Slack and we’ll continue to build deeper and deeper integrations between the two products. At the same time, we do have our marketplace and we do have integrations with lots of other communication vendors through the Marketplace and through many other channels. We’ve always maintained a very open perspective when it comes to the Marketplace in terms of APIs that are available and other things, so I think you’ll continue to see other vendors obviously building on the Marketplace to serve their customers needs, but from our perspective we are focused on building the best integrations for people that use Slack as a communications platform and that use the Atlassian family of products across those integrations. You can see that the Marketplace continues to power along strongly as does the broad strength of the economy that exists around Atlassian in partners, vendors and in all the people that work around the company and we’re very happy to have them.
Scott Farquhar:
On Status Page, just a reminder to everyone out there, Status Page is a small company we acquired I think about a year and a half ago, and they provide a way of communicating uptime or downtime, the status of key services to customers. Companies around the world that are cloud companies use Status Page to communicate with their customers whether their services are up or down. That product is going really well. It fits our suite really well in terms of if you think about companies moving to the cloud. Every company is going to need to communicate their availability and uptime to their customers, and so we’ve seen a lot of demand for Status Page.
We can’t break out that individually, unfortunately, but it’s been a strong acquisition for us.
Jonathan Kees:
Great. Thank you.
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2018 Earnings Conference Call, July 26, 2018
Operator:
The next question comes from Pat Walravens with JMP Securities. Please go ahead.
Pat Walravens:
Oh great, thank you. Congratulations on the execution this quarter. Scott and Mike, obviously you guys have been remarkably successful. Some things have worked; occasionally, some things don’t. I’m just wondering what lessons, if any, you feel like you may have—you’ve taken away from the HipChat/Stride experience?
Mike Cannon-Brookes:
Sure, Pat. I can take that. We have a philosophy about how we approach enterprise software, and that comes with a very strong model that you’re well aware of in terms of a higher level of R&D investment, a high level of customer focus and delivery, and then a very friction-free, high volume approach to the market in terms of sales and marketing. That model comes with certain investments. It requires a lot of discipline, it requires a lot of patience, and it requires making hard decisions to start things and obviously to move away from things as they go.
You’ll see us continue to stick to that model and those philosophies as we move forward, as we have for 17 or 18 years now, and we do believe that philosophy and the model ends with the results that you’ve seen and you can feel free to judge us on those.
Pat Walravens:
Great. If I could follow-up just a little bit, what is it about communications? What are the investments that were going to be particularly difficult? Is it around the sale?
Mike Cannon-Brookes:
It’s just as a space. As we said, the investments required to continue to compete effectively with all of the players in the market, we didn’t deem to be as worthwhile a way to play in the space as a partnership, especially compared with the other opportunities that we have around the business. We are spoiled for opportunity in the spaces that we’re in, and we’re continuing to invest in those using the same disciplined model that we’ve had in terms of approaching enterprise software.
Pat Walravens:
Great. Thanks for that perspective.
Operator:
Okay, seeing no further questions in the queue, this concludes our question and answer session. I would like to turn the conference back over the Management Team for any closing remarks.
Scott Farquhar:
I just want to thank everyone for joining our call today. We appreciate your time and look forward to keeping you updated on our further progress. Thank you everyone.
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2018 Earnings Conference Call, July 26, 2018
Operator:
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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