Atlassian Corporation Plc
Fourth Quarter Fiscal Year 2017 Earnings Conference Call
July 27, 2017
Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2017 Earnings Conference Call, July 27, 2017
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
Murray Demo, 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
John DiFucci, Jefferies
Bhavan Suri, William Blair & Company
Heather Bellini, Goldman Sachs
Matt Broome, Cowen & Company
Rob Oliver, Robert W. Baird
Sanjit Singh, Morgan Stanley
Michael Turits, Raymond James
Keith Bachman, Bank of Montreal
Patrick Walravens, JMP Group
Clarke Jefferies, KeyBanc Capital Markets
Nate Cunningham, Guggenheim Partners
P R E S E N T A T I O N
Operator:
Good afternoon, ladies and gentlemen. Thank you for joining Atlassian’s Earnings Conference Call for the Fourth Quarter of Fiscal 2017. 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.
1 ViaVid has made considerable efforts to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www.viavid.com
Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2017 Earnings Conference Call, July 27, 2017
All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
I will now hand the call over to Ian Lee, Atlassian’s Head of Investor Relations. Please go ahead.
Ian Lee:
Good afternoon and welcome to Atlassian’s Fourth Quarter Fiscal 2017 Earnings Conference Call. On the call today we have Atlassian’s Co-Founders and CEOs, Scott Farquhar and Mike Cannon-Brookes in Sydney, and our Chief Financial Officer, Murray Demo, and our President, Jay Simons in San Francisco.
Earlier today, we issued a press release and a shareholder letter with our financial results and commentary for the fourth quarter and fiscal year 2017. 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.
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 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 our updated Investor Data Sheet on our IR website.
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 titled Risk Factors in our most recent Forms 20-F and 6-K.
Before we proceed with the call, a quick reminder that we will holding our first Investor and Financial Analyst Session at our U.S. user conference, Atlassian Summit, at the Hilton San Jose. The Investor and Analyst Session will be held on September 15 beginning at 1:00 p.m. Pacific time. Attendees at the session are also welcome to attend the open keynotes and breakout sessions at U.S. Summit. These are being run on September 13 and 14 at the San Jose Convention Center.
I will now turn the call over to Scott for his brief opening remarks before we move to Q&A.
Scott Farquhar:
Good afternoon. Thanks everyone for joining today. We capped off Fiscal 2017 with another great quarter. We grew revenue 37% year-over-year and generated over $44 million of free cash flow. For the full year, revenue grew by 36% year-over-year to almost $620 million with over $183 million of free cash flow and more than 28,000 net new customers. We now have over 89,000 customers in total and have 100,000 customers firmly in sight.
2 ViaVid has made considerable efforts to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www.viavid.com
Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2017 Earnings Conference Call, July 27, 2017
Mike and I mentioned in our Shareholder Letter that it’s now been 15 years since we started Atlassian. So much in workplace technology has changed dramatically over that time. Fax machines and pages seem like distant memories now that we communicate in real-time with our team through group messaging and video conferencing. Some things remain the same though. Teams still hold the key to making meaningful progress and teamwork is still hard.
Our mission to unleash the potential in everything is more important than ever. We help millions of workers at thousands of companies get the job done, whether that’s operating a national railway, designing the car of the future or reporting on the latest news.
We believe openness is a critical component to changing how teams work. Our products are pioneering new ways for teams to create, share, organize and connect through more fluid and open approaches. Our products remove barriers within and between teams, giving them simple ways to plan, collaborate and deliver work. We help create more effective teams, and a result, fanatical and loyal users and vocal champions of new ways of working.
We took many steps forward in Fiscal 2017, and Fiscal 2018 looks even more promising. Mike, I and the rest of the team are looking forward to sharing more about our business and what’s in store for the future at the Atlassian Summit in September.
Separately, we also announced today that our CFO, Murray Demo, will be leaving Atlassian on December 31, 2017, to focus on his corporate and non-profit board work. After serving on Atlassian’s Board for four years, Murray joined as CFO in 2015 to help support our transition to a public company. We will soon begin a search for a CFO to succeed him. Mike and I really appreciate everything Murray has done for Atlassian over the past six years.
With that, I’ll turn the call over to the Operator for Q&A.
Operator:
We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster.
The first question comes from John DiFucci of Jefferies. Please go ahead.
Scott Farquhar:
John, are you there?
John DiFucci:
I’m sorry. Can you hear me now? Sorry about that. I was going through and I was on mute. I’ve got to learn how to do this.
The question I have, I think it’s for Murray, but Scott, if you have any comments too. The numbers look really good here. The top line really validates what looks to be a robust opportunity which we believe and we want to always measure, but expenses were a bit higher than what we had modeled and I’m just wondering what the cause of that might have been? Was it the integration of the acquisitions, or was it more investment in cloud because it sounds like that’s really taking off and you have to invest there more? If you can comment on that, that’d be great.
3 ViaVid has made considerable efforts to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www.viavid.com
Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2017 Earnings Conference Call, July 27, 2017
Murray Demo:
Hey John, this is Murray. I’ll take that. A couple of things. One is that in the fourth quarter we had our first European Summit so there was additional expenses around that event. It was a very successful event for us and that obviously would have gone through the Marketing and Sales line.
We also had some other discrete expenses in the quarter where we made some investments in various projects as well as we did some additional advertising and marketing spend in the quarter, and that brought us to a 14% operating margin that we had guided for the quarter. It was not headcount related; it was more on just various activities we had.
Just keeping in mind that at the outset of the year we targeted operating margin of 15% and we achieved 17% for the year. So, we continue to look at expenses carefully. We believe in our leverage model and we look forward to our Fiscal ’18 targets.
John DiFucci:
Okay, great. If I could, a follow-up, Murray, just to get this question out of the way. Whenever a CFO leaves a company as sort of keeper of the numbers, there’s always some investor concern. Like I said, the numbers look good here and Scott in his opening remarks talked about 2018 being an even better opportunity. If you could in your words, can you help to comment here a little bit on your—I guess relative to your expectations for Atlassian’s future financial performance?
Murray Demo:
Well, first of all, I think it’s typical or wise if there’s going to a be a CFO transition to do it on the fiscal year, first of all. Obviously we have an audit for our full year and so we couldn’t be releasing earnings unless we had gotten through all that, so no one should be worried about any kind of accounting issues.
Clearly, we’re also giving guidance for the full year of Fiscal ’18. There’s always a question, “Hey, does the CFO see something here?” Well, look at our targets for next year. We’re very excited about where we’re going in Fiscal ’18. So, kind of on the fiscal year is a wise time to do it, and was the same as I did in two prior public companies.
I’m super excited by the opportunity for this company. I know you’ve heard it since we’ve been public about just a huge opportunity, the size of our market, the great products we have or how they are compelling, pricing, the value of our products and our frictionless model. I’m more convinced today than ever that this is a terrific model with a huge opportunity and I’m very bullish on the Company going forward.
John DiFucci:
That’s really helpful. Thank you very much.
Murray Demo:
Yes.
Operator:
Our next question comes from Bhavan Suri with William Blair. Please go ahead.
Bhavan Suri: 4 ViaVid has made considerable efforts to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www.viavid.com
Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2017 Earnings Conference Call, July 27, 2017
Hey guys, can you hear me okay?
Ian Lee:
Yes, we hear you fine.
Bhavan Suri:
Great. Thank for taking my question and congrats. Nice job there on the numbers and guidance. Murray, obviously I’ll be sad to see you go but best of luck.
Just a question on the product pricing. Obviously it’s been announced; we’ve seen a number of things come out. I guess just touching on Service Desk, you had really good growth. You sort of stated the fastest growing product. I’d love to know how that’s going vis a vis expectations, and given the sort of pricing umbrella—you know you guys have a way lower price than anyone else—I guess I was just trying to understand, guys, why you lowered price on Service Desk when you sort of raised it on Conference. I just wondered the strategic thought process there, would be really helpful.
Jay Simons:
Hey Bhavan, this is Jay. Just to tackle the first part of the question, really pleased with JIRA Service Desk’s growth. I mean outside of JIRA software and Confluence, that is one of our largest products and a quick grower. I think still early in a market that’s expanding in front of us, both in terms of the internal help desk use cases and then also the external service and support use cases where JIRA Service Desk for our customers’ customers gets closely connected to what they’re doing with our other products around the software that they’re building. I think great opportunity in front of us and really happy with its progress.
In terms of the pricing, JIRA Service Desk has a slightly different—even though we’re licensing per user, the user that we’re actually licensing is the agent, so it’s a little different. Most of the other products, every user is effectively an equal user of JIRA software or Confluence or HipChat or Trello. In the case of JIRA Service Desk, a lot of companies basically measure the value that they’re getting on the number of agents that are servicing a wide variety of either regular or itinerant customers that are basically asking for help. That’s sort of I think the rationale there.
Murray Demo:
Hey Bhavan, this is Murray. I’d also add that we’re in it for the long game here, and as Jay said, Service Desk is doing very well relative to how we’re looking at it internally. It’s not a reaction from a competitive standpoint; it’s just that we’re in it for the long haul and the product is still just growing really fast and is emerging to be one of our largest products.
Bhavan Suri:
That’s helpful, guys. One quick follow-up on Confluence. We’ve talked about it previously Murray, I know you and I have, too. Obviously the integration with JIRA has helped a lot, but we’ve also heard it’s sort of standalone implementation to Confluence where people are taking the content management system, potentially share a file and replacing them—sorry, SharePoint, Microsoft SharePoint, and replacing them with Confluence. Is that something that’s one-off or are you starting to see that happen on a more regular or frequent basis? Again, not use your material but sort of just trying to think if that’s something that you guys are seeing more frequently. Thank you.
5 ViaVid has made considerable efforts to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www.viavid.com
Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2017 Earnings Conference Call, July 27, 2017
Jay Simons:
Hey, Bhavan. The frequency isn’t necessarily increasing. I think it’s been kind of a common expansion use case for Confluence over its history and it can start within a team and I think as it builds more momentum and attracts more teams, I think it becomes the user choice for how content gets created and shared. So I think in some cases companies might move off SharePoint in favor of standardizing on Confluence wall-to-wall. In other cases, it’s often that it co-exists. There’s an integration connector and add-on in the marketplace that connects Confluence to SharePoint, so some parts of the organization might still use Office documents heavily and put them in a SharePoint, and then sync or connect them back into Confluence for a better way maybe to iterate and share with other teams.
Bhavan Suri:
Got it. Helpful, guys. Thanks for taking my questions.
Operator:
The next question comes from Heather Bellini from Goldman Sachs.
Heather Bellini:
Great. Thank you for taking the question, and Murray, best of luck in your going back to the Board roles. Quick question, a couple of questions. The first one was on the new product, the Premier product that you offer, the Data Center product. I’m just wondering if you could share with us what the revenue uplift might look like as people upgrade to the Data Center offering?
Then, I noticed you said Trello was I think $3 million in the quarter, and I believe you talked about last quarter that being $20 million as a target, if that’s still intact? Thank you.
Murray Demo:
Hey Heather, it’s Murray. I think I missed part of that on the Data Center what the question was, and if you could just repeat that.
Heather Bellini:
Yes. What’s the price uplift for the new product that you mentioned? The Data Center product and support services. How do we think of the uplift that you could get if your customers migrate to that?
Jay Simons:
Hey, Heather. I might take that. It sort of depends on tier. At the 500 user and 1000 user tier, it’s basically a wash. What the customer is doing is moving from their maintenance model for the perpetual license to a subscription at sort of roughly the equivalent cost. Then as you move up tiers, it kind of varies. It can be anywhere from two to three times as much, depending on the tier, and again, Data Center, what they’re upgrading to is subscription from perpetual licensing.
Murray Demo:
Hey Heather, it’s Murray. Two things. One is on our Investor Day we’re going to talk more about pricing so we’ll be able to help folks better understand some of those relationships. In terms of the target for revenue for next year, it assumes approximately $20 million for Trello, the same as what we had stated on the last call. 6 ViaVid has made considerable efforts to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www.viavid.com
Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2017 Earnings Conference Call, July 27, 2017
Heather Bellini:
Great. Thank you very much.
Operator:
The next question comes from Gregg Moskowitz with Cowen & Company. Please go ahead.
Matt Broome:
Hi. This is Matt Broome on for Gregg. Thanks for taking my call. I guess it’s somewhat early but has there been any cross-selling of Trello to JIRA and Confluence or vice versa?
Mike Cannon-Brookes:
Hi Matt. I can take that. It’s Mike. I’d say in Trello things are going really, really well on both the integration and the product front. We’ve only just started, you’ll see, announcing and talking about Trello to our customer base. The European Summit, it was mentioned on the opening remarks in Barcelona in May was the first time that our customer base has really been exposed on a personal level. Obviously again in September we’ll start to do that. So, pretty happy with how we see Trello fitting in. If anything, I would say no major surprises on the integration and the last few months have really reinforced that the people and culture, as well as the product of Trello has fit brilliantly inside the Atlassian family.
We have said that we’re not going to rush in at cross-selling the product aggressively into the audiences. It’s very early in that piece and like is sort of our DNA, we’re going to pragmatically do what makes sense for both businesses. Trello has built an amazing product and an amazing business, and priority number one is to continue that momentum for us. Priority number two is to build obviously connections between the families.
Matt Broome:
Okay, great. Thanks. I guess I would expect the sales cycles could be quite a bit longer than usual, but what are your expectations for adoption of Atlassian Stack going forward?
Jay Simons:
It’s early days, and we just announced Atlassian Stack. Just to remind people what it is, it’s basically a relatively straightforward packaging of all of Data Center, individual Data Center products into a single license that customers can purchase that want. I think over half of companies with more than 500 users have three or more products. That’s the cohort that we’re focused on upgrading the Data Center as they achieve scale and continue to grow with Atlassian.
I would say it’s still early. Customers have the ability to either add Data Center a la carte, one at a time, as they’re ready to basically move from a single server to the high availability clustered configuration that Data Center provides, or if they’re interested in basically upgrading the entire server family to Data Center, they can do that and Stack offers basically a 25% discount off of the a la carte.
Matt Broome:
Thanks very much.
Operator: 7 ViaVid has made considerable efforts to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www.viavid.com
Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2017 Earnings Conference Call, July 27, 2017
The next question comes from Rob Oliver with Baird. Please go ahead.
Rob Oliver:
Great. Thanks guys for taking my question. Murray, you mentioned on the expense question earlier about some of the additional marketing expense. I know you guys hired a CMO in May so just curious if that additional marketing cost was somehow correlated with that, and if not, if you guys could speak, a little bit more broadly about some of his initiatives here early on?
Murray Demo:
Rob, it’s Murray. I’ll turn over that to Jay as far as what Robert is going to be focusing on, but it was not correlated to his arrival. It was just other things that we were focused on in Sales and Marketing, and also some activities we did in G&A. We also, with the European Summit, we launched more languages, local languages of our products which incurred costs in our gross margin so that was a little lighter because of that. There was a lot of sort of discrete items in the quarter of what Sales and Marketing made up part of it.
Jay Simons:
Hey Rob, this is Jay. I would just say that we’re really excited about Robert. He had a long and storied career at eBay and what he will focus on I guess is like three main things. One would be he’s going to be familiar with our high velocity, high volume automation model, right? He’s going to be familiar with sort of the patterns that we see and the way that we are building awareness and converting into active, happy customers and then growing with products. That’s sort of emotion that he will be familiar with, so continue to scale that part of the growth machine.
Second, we are a really interesting brand opportunity. I mean we want to be a household name inside every workplace globally around teamwork and what teams can do. So continuing to build a brand having more resonance around all the products that are changing the way that modern teams function and work is a big part of what he’ll do.
Then finally, third, a big part of our business is just this fanatical customer base that appreciates basically the change that our products help introduce for their teams and activate as evangelists, kind of around the globe. I think there were a lot of people that had the same sort of activation evangelism in eBay, so continuing to grow and scale that.
Murray Demo:
Hey Rob, it’s Murray. Just some more on the expenses that I wanted to make sure that everybody saw in our Shareholder Letter, and that really is reference to Fiscal ’18. We provided a target of operating margin of 18% to 19% for Fiscal ‘18. We also provide a little bit of color about how to think about the four quarters of Fiscal ‘18. The first three quarters, we said would be relatively consistent op margins and the fourth quarter will be higher. There are a number of things going on this year. We have our U.S. Summit. It’s in Q1. It’s normally in Q2. So, you know, you should think in terms of the sales and marketing expenses being higher in Q1 this year because of some of the activities that we have going with Summit. We also have a number of very important IT projects and other infrastructure projects going on that will involve some consulting expense and those kinds of things, that are going to span sort of Q1 through Q3, and then January 1, we have our employees, it’s the annual salary increase time. So, those things will kind of play across the first three quarters. As we get into the fourth quarter, some of those things now wane, in terms of some of the projects, and we wouldn’t have the U.S. Summit, obviously, that’s in Q1,
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2017 Earnings Conference Call, July 27, 2017
and so that’s why the fourth quarter, now we see a higher a margin, and the leverage that comes with greater revenue expanding as we finish out ’18.
Rob Oliver:
That’s very helpful, guys. Thank you very much.
Operator:
The next question comes from Sanjit Singh with Morgan Stanley. Please go ahead.
Sanjit Singh:
Hi, all. Thank you for taking the question, and, Murray, sorry to see you go, but best of luck in your next endeavors. I just wanted step back and maybe ask a longer term question. If you just extend the trend lines, you guys are going to become a billion-dollar business in the next couple of years, and so my question is, as previous software companies that have been fortunate enough to hit that billion-dollar revenue milestone, they’ve had to—you know, they’ve either had some “growing pains” or they’ve had to make some changes to the organization to realign for overall larger scale. So, I guess the question for you guys is do you see any changes that you guys would have to make as you guys become a billion- dollar company, or do you feel like the model that you have today, the organizational structure that you have today, supports scaling right past that billion-dollar revenue threshold?
Scott Farquhar:
Yes, Sanjit, it’s Scott here. Well, thanks for that. We all look forward to that day, if it comes, but the thing we’ve always looked at, although, is building a long-term company, and we have since the start, since— you know, 15 years ago, we’ve always wanted to build a sort of multi-generational, long-term company, and so that hasn’t changed through being a private company, being a public company, through every revenue threshold we’ve had. There’s always change internally in terms of how we tweak the model and how we build and add new products to our stable of products over time, but the thing we’ve always been true to is that sort of high-velocity model and the fact that we’re after the Fortune 500,000, and we really want to beat the people everywhere. So, there’ll be tweaks and changes over time, but I wouldn’t look at anything drastic that we need to do in the next coming years to achieve our mission. At least in the potential of every team, I think we’re really well set up for that. We are in really big markets. Our products are really respected and brought in by our customers, and we continue to do that as we grow.
Sanjit Singh:
That’s really helpful. Then, Murray, maybe just a follow-up for you. In terms of your capex guidance, it does imply a pretty significant increase over this past fiscal year. I just wanted to see what the investments are there. I assume it’s sort of related to the cloud infrastructure, but wanted to get a sense of whether that’s the sort of new level we should think about going forward; and then, in terms of the pricing impact, are we still thinking about a low single-digit impact for fiscal year ’18 revenue?
Murray Demo:
Yes, Sanjit. So, our capex, as we are transitioning to really having a public cloud provider doing all the hosting for us as opposed to ourselves, the amount of capex that we’ll have going forward that’s involved in acquiring servers and things like that is diminished rapidly, and for the most part, our capex, on a go- forward basis, is going to be tied to facilities, and that's what we really got here in Fiscal ‘18. We’ve grown in headcount, we’ll grow again in headcount this year. As you know, with facilities, you go through a stair-stepping, you know it’s going to happen every year, just this year we’re going to have more in 9 ViaVid has made considerable efforts to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www.viavid.com
Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2017 Earnings Conference Call, July 27, 2017
terms of, you know, leasehold improvements and just building out some of the facilities that we’re expanding in, in the San Francisco Bay area and other parts of the world, and that’s what it is. It’s not about buying IT equipment or servers, and things like that. So, there’ll be years where we’ll have more around facilities, activities, and there’ll be other years that we won’t, and we didn’t have as much in Fiscal ‘17.
Sanjit Singh:
Great, thanks, and then on the pricing impact, we’re still thinking low single-digits?
Murray Demo:
Yes, in terms of pricing, yes, no change to that. I just want to talk a little bit about it. Obviously, we’ve gone out now—we announced this at the end of June and it’ll take effect July 31. A few things that go into this. We obviously put a tremendous amount of effort into the analysis that went into this and it’s not just as simple as we’re changing prices. We’re moving customers in the cloud from what was kind of a server-based model in terms of tiers to a per user model that you tend to see in a cloud environment. So, if you’re a monthly user, you’re going to be on a per user pricing, and if you’re going to be annual, it’s going to be granular tiers, kind of getting close to being like a per user. So, it’s really important that we move to that industry standard. We also—it’s really important that we maintain our low price, high value, targeting the Fortune 500,000 pricing. That’s the long game. That’s giving us incredible competitive advantage and we’re not looking to change that. However, we did look at optimized pricing and that did lead to some increases in pricings as part of this transition to per user pricing.
In addition to just changing the prices, though, we have to model things like will there be some customers that churn, will there be some customers that say, “Hey, I’m going to go from monthly to annual, to get an annual discount. Will I try to actively manage my number of users? So maybe now I’ll try to, like, bring my users down a little bit to see if I can kind offset some of that price increase.” There’s just so many things that go into this analysis, that I think it would be kind of hard to figure it out by just looking at our public pricing, and that’s why we’ve done the work for you guys and said it’s low single-digits points of revenue growth in Fiscal ‘18.
Sanjit Singh:
Great, that’s tremendously helpful. Thank you, Murray.
Murray Demo:
Yes.
Operator:
The next question comes from Michael Turits with Raymond James. Please go ahead.
Michael Turits:
Hey, guys, thanks for taking my questions, and, of course, best of luck to you, Murray, and thanks for everything. The first question is sort of, I think, an extension of what Bhavan was asking about on Confluence and SharePoint. Can you talk about where, in each of the different major silos, where you’re seeing competition, especially outside of the IT realm? So, for example, Confluence, SharePoint, maybe HipChat, Slack, and JIRA, with anywhere else workflow, whether it’s ServiceNow, or others?
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2017 Earnings Conference Call, July 27, 2017
Yes. Hey Michael, this is Jay. I think you mentioned a lot of them, right? I mean, remember, I think if you take any one sort of point product, it would have different things, different alternatives that it’s competing against, and you mentioned a lot of them. We mentioned before that our focus and philosophy is we want to make sure that we win head-to-head contests based on the merits of that individual product. That’s what we sort of lead with when a customer is comparing. I think if you step out, you know, take a step back from that, the advantage we have as a company is I think we are sort of the singular company that’s focused on teamwork holistically, and all the dimensions of what makes teams function and work better. People need to organize things, they need to create and share content, they need to communicate and message and discuss work, and I think that the value that we provide companies, and I think one of the reasons that we’re growing the way we are, is people see that holistic approach to changing teamwork. Even when we lose a particular contest against a SharePoint or a Slack or a Zendesk, or fill in the blank, we have three or four other category-leading, compelling products that that customer might choose and over time swaps out the one particular thing we lost. So, I think, you know, we’re in a unique and I think a pretty interesting market and competitive position.
Michael Turits:
Okay, thanks for that, thanks, Jay. Then one for Murray. On the guidance for next year, you guided above on revenue above the street, and above the street on margins, and yet EPS is guided slightly below the street. So, is there anything that you think that might be a disconnect in terms of where the street was modeling?
Murray Demo:
Yes, between Fiscal ‘17 and ’18, there’s a change in the tax rate. The income and deductions across the various global jurisdictions started to change for us between ’17 and ’18, and that’s led a higher tax rate, which you’ve seen in our earnings per share. Our focus from a global tax strategy is going to be focused on cash flow and not on book tax. That’s where we’re going to focus our efforts, and have been, but this year you’re seeing it leading to a higher book tax, but not having an impact on cash tax.
Michael Turits:
Yes, maybe I missed it, but did you have that book tax rate for us to use?
Murray Demo:
We don’t provide a tax rate. It gets quite complicated on IFRS and non-IFRS reconciliation, and so it’s implied in the guidance. We did have a brief comment in the letter about this change in the tax rate, so that’s really what’s driving it.
Michael Turits:
Thanks, Murray. Good luck.
Murray Demo:
Thank you, Michael.
Operator:
The next question comes from Keith Bachman with Bank of Montreal. Please go ahead.
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2017 Earnings Conference Call, July 27, 2017
Keith Bachman:
Hi, many thanks. I wanted to go back to pricing for a bit. It’s been out for a brief period of time and I just wanted to get your feedback on what customer reaction has been to date. You mentioned churn, and at some price points it looked like—or some usage levels, I should say, it looked like the price increase was fairly high, and I just wanted to see if you had any incremental thoughts on churn. The second part of the question is does the price increase have a duration that’s longer than this year? In other words, might some of the price increases actually impact the following year, as well, to help revenue growth?
Jay Simon:
I’m going to take part of that, Keith, and pass it over to Murray for the back half. Just in terms of the earlier part of the question, it’s still relatively early until the price change goes into effect. I would say that there hasn’t been much negative reaction to the change. I think, in part, because the change was driven by customer demand and want. The biggest frustration that customers expressed to us was having to jump through this kind of antiquated tier model and what they really wanted was sort of a per user approach, where they get paid for the users they’re adding over time. So, I think that was a big win from the base. Then, I think we also talked about it in the letter, that the majority of accounts in the cloud products that we’re affected either had no change or could see a decrease based on their actual active user accounts they could adjust. I would say it’s still early, but, generally, the reception, I think, to the model shift is positive.
Keith Bachman:
Okay, fair enough, and then on duration?
Murray Demo:
Yes, at this point, we haven’t commented on duration. We’re just focusing on Fiscal ‘18. Obviously, at a future point, we’ll have more to say on that, but for right now the focus is on Fiscal ‘18.
Keith Bachman:
Okay. Many thanks. Best of luck.
Murray Demo:
Thank you.
Operator:
The next question comes from Patrick Walravens with JMP Group. Please go ahead.
Patrick Walravens:
Oh, great, thank you. Murray, I’m not going to say good-bye to you yet, I still wanted to talk to you for a while. So, here’s a question for, I don’t know if it’s Scott, Mike or Jay. You know, I’m signed up for the Incident Reports and I feel like I get a lot of them, you know, like three or four a day. So, I’m just wondering, are you guys—how satisfied are you with sort of the maturity and consistency of your hosting operations and where do you think that goes from here?
Scott Farquhar:
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2017 Earnings Conference Call, July 27, 2017
Well, Patrick, I appreciate you signing up for the Incident Reports. That’s a first for us, having an analyst sign up for that, so I appreciate the interest. There’s a couple things there. One is that our culture of openness and transparency leads us to be really open with our customers where we are with things, and if there’s something negative, even the most minute problem, we want to make sure we’re open and honest with our customers about it, in case they face that. So, that, I think, (inaudible) into, I guess, the frequency, with what you say being. Obviously, we have a product called StatusPage that allows other companies to be open and transparent with their customers around how their services are running at the same time. With the cloud, as other companies would realize, you know, taking on running things for our customers is a huge responsibility for us and we spend a lot of time on that responsibility and improving it every single year, so you’ll see every single year our improvements in that area with our customers is a big part of our business.
Patrick Walravens:
Okay. Thank you.
Operator:
The next question comes from Ben McFadden with KeyBanc Capital Markets. Please go ahead.
Clarke Jeffries:
Hi, this is Clarke on the line for Ben. I was wondering if I could ask about JIRA software and Confluence, some of your more established products. Between the two of those, which is growing faster still? And maybe, if that can be broken out, sort of which is becoming more important to the strategy of multiple solutions being sold in, whether the attach rate of one of those is fairly significant, Confluence with maybe outside of software development?
Murray Demo:
This is Murray, yes. So, you know, we don’t break out our individual products in terms of their specific growth rate, things like that. All we can say is that JIRA and Confluence have been around since really almost the inception of the Company. They’re absolutely critical products for us. What we have said in the past is that at the time of the IPO they represented approximately two-thirds of our total revenue. They have huge market opportunities. We’ve got a long way to go with those products. It’s early days for those.
Clarke Jeffries:
All right, thank you, and for JIRA Core, I was wondering if there would be any color that you could provide on the deal side, whether it’s still being sold from department to department, or whether you’re seeing it more often sold across department into the entire firm?
Jay Simon:
Hey, Clarke. Not different, actually, with other products in our model. It’s really coming for us to land within a small team. With JIRA Core, it could be within IT or it could be within a Business team that sort of begins with it, and then, again, the nature of the products and the network effects of adding other people from other departments or other teams to work on a project aids the expansion and spread of that project. So, it’s far less common for a company to say, “I’m going to start with JIRA Core and just like blanket the whole organization at the get-go.” It’s typically one team proving to another team it’s just a better way to work.
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2017 Earnings Conference Call, July 27, 2017
Clarke Jefferies:
All right, great. Thank you very much.
Operator:
Again, if you have a question, please press star, then one. The next question comes from Nate Cunningham with Guggenheim. Please go ahead.
Nate Cunningham:
Hey, guys, thanks for taking my question. Could you give us a sense of how many of your customers are on subscription versus maintenance today?
Murray Demo:
Well, what we said in the past is generally that sort of from a cloud versus server, it’s generally sort of 50/50 in terms of the mix. However, each quarter, when we look at new customers, on average, it’s been about three-quarters of new customers are going straight to cloud. This quarter was particularly strong in cloud adoption, and kind of part of the reason for why the perpetual license revenue number in Q4 was maybe a little lower than you would expect it, you know, from a trend line perspective, was because new customers were choosing cloud in a big way this quarter. It was nothing that we were trying to do. We’re agnostic on their deployment model, we’ll let them choose, but the secular trend of moving to the cloud is clearly in place and this particular quarter we saw more moving to cloud.
Nate Cunningham:
Okay, and could you give us a range or like a sweet spot for your average number of seats on the subscription side?
Murray Demo:
We haven’t provided that. Obviously, it would depend on cloud versus Data Center. Data Center subscription product has huge numbers of users on that. So, it’s really quite a mix. It can be from a very small number to larger numbers, but the largest ones are going to be on Data Center.
Nate Cunningham:
Yes, I’m thinking more on the cloud side.
Murray Demo:
We have not provided any specifics on that.
Nate Cunningham:
Okay. Thank you.
Operator:
This concludes our question and answer session. I would like to turn the conference back over to Mike Cannon-Brookes for any closing remarks.
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Atlassian Corporation Plc – Fourth Quarter Fiscal Year 2017 Earnings Conference Call, July 27, 2017
Mike Cannon-Brookes:
Yes, thanks everyone for joining the call today, we really appreciate your time, and look forward to keeping you updated on our progress, and just a reminder that we hope to see as many of you as possible at our Investor and Analyst Sessions at the Atlassian Summit in September. Thank you.
Operator:
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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