“You don’t want to invest in growth companies, you want to invest in companies that are growing their ambition.”
– Mike Cannon-Brookes
Every time I watch an Atlassian Investor Day I think, “This is one of the best businesses I’ve ever seen.” This year’s was no different.
Atlassian is mission-critical enterprise software that can be adopted frictionlessly by small companies all the way to enterprise scale.
The company’s philosophy is not to be cheap, but to deliver exceptional value. Judging by its ever-growing number of customers, and how much those customers increase their spend with Atlassian over time, that philosophy is delivering on its promise.
This is for cloud customers only (Atlassian has been transitioning from on-premises and datacenter to cloud) but the point stands: customers tend to grow their spend with Atlassian over time.
Exceptional value delivered results in a business that is resilient to economic shocks like the one we’re living through today. Co-founder Scott Farquhar explained (lightly edited for clarity):
“Atlassian was a business that was founded in 2001, in the dot-com crash. We went through the '08, '09 financial crisis. There are a lot of youthful people in the audience here, who maybe didn't have to go through that, and who also weathered it like we did.
In '08, '09, we grew significantly. We wish we'd grown faster, but we didn't go negative. And it was an opportunity for us to invest in staff. We picked up some of the best staff who are still with us today.
The reason I think we can do that is, (A) we're very price competitive and (B), we almost don't hit on any of the CIO's [Chief Information Officer’s] radar.
I talked to CFOs about this recently. They don't even know what they spent with Atlassian because it doesn't reach their budget.
From a trimming spend perspective, we don't hit that [threshold].
And then lastly, we've got a lot collaboration across the entire company, a lot of developers and all the software teams use us and software teams are not the first thing to get culled in a macro contraction.
You often see [cuts in] discretionary marketing spend, sales and those types of areas.
People are loathe to cut back on those sorts of R&D investments that have taken so long to build up. And so all those areas give me confidence in a macro thing.”
After launching its bug tracking and agile project management tool Jira in 2002, Atlassian kept solving customer problems and today sells a growing list of software products across three interconnected markets:
Agile and DevOps – Agile is the term for iterative, continuously deployed software, in contrast with the “waterfall” method of software development that is slower to build and adapt. DevOps is the combination of software development and IT operations. With software eating the world and every company becoming a software company, demand for these tools will continue to grow.
IT Service Management – Tools for IT managers, helping them with requests such as, “I need a new laptop” to “why is our server down?” This sounds simple, but as companies scale and have thousands of IT components they need to manage (devices, databases, API calls, cloud instances, etc.) with their associated dependencies, ITSM software becomes increasingly important. The 800-pound gorilla in the space, ServiceNow, is aimed at high-spending enterprise customers. Atlassian, on the other hand, pursues a strategy of inexpensive, low-friction bottom-up adoption.
Work Management – Collaboration software for technical and non-technical teams to discuss, organize and complete work together.
Atlassian has built an exceptionally efficient sales funnel. Most customers land on its website, start on a free tier, and then adopt a paid plan. Over time, they spend more with Atlassian by growing the number of users, adopting more products, and using one of the thousands of apps on Atlassian’s app store.
This efficiency means Atlassian invests the least in sales and marketing of any enterprise software company, and the most in R&D, while delivering mouth-watering free cash flow margins of over 30 percent. Higher R&D spend should translate into more innovation over time, feeding Atlassian’s sales machine. As a strategy, it’s hard to beat.
Given the vast proliferation of software tools and SaaS applications used by corporations today—a theme repeated over and over in Atlassian’s keynotes—the company is positioning itself as the neutral coordinator of all the tools, not as a vendor that seeks to be a one-size-fits-all.
Atlassian’s Investor Day was held during its Team ’22 user conference, in Las Vegas, where it made two important announcements: the launch of Atlas and Compass.
Compass is a catalog of all the pieces of software running inside the enterprise, including their security requirements and approvals, the teams working on each component, who is on call to deal with any problems, and more.
Atlas is a work directory that weaves together people and the work that is getting done, whether it’s on Atlassian’s own tools like Jira, Trello and Confluence, or in external tools like Asana. Atlas has a Twitter-like feed for work, complete with Twitter’s 280 character limit to encourage brief updates.
This is where Atlassian is walking a fine line: while it’s telling customers “We are not a Swiss Army knife, you can use the best tools for the job,” it’s also saying, “Here, we built a great tool for this job.” The key is that said tool is always optional. The customer chooses whether to pick Atlassian’s solution, or anything else. Atlassian’s integrations keep the customer firmly in the driver’s seat.
Atlassian believes it’s still quite early in its corporate journey. The company has 226,000 customers from a universe of 800,000 possible customers with technical teams, and 2.2 million companies globally with 10 or more knowledge workers. Ultimately, though, the prize is quite larger: the over one billion knowledge workers worldwide. In dollar terms, Atlassian’s $2.7 billion in expected revenues this year are a fraction of a growing $176 billion worldwide market.
The flywheel that Atlassian built—build great products, keep prices low, sell to anyone online, make money to build more great products—has amplified its ambitions. (This video is dated, but still a great intro to Atlassian's flywheel.)
Without giving investors a specific timeframe, the company said it has line of sight to more than triple that revenue number, to $10 billion, in the coming years. This will require heavy investment in hiring: 25,000 new Atlassians, with the resulting lower operating margins in the interim. This is the capacity to suffer that few companies have; of those that do, most, like Atlassian, are founder-led.
Towards the end of the investor day, co-founder Mike Cannon-Brookes served up the best explanation of this expanding vision:
“I just want to be clear on the first section of Scott's reply there. That $10 billion number that's in the paper, that's a number we have clear line of sight to, firstly. Secondly, that's entirely organic using the current products in the current markets. It's not dependent on entering any new markets. It's not dependent on any inorganic activities, that is organic line of sight with the current products.
On the last question, I think one way to phrase this may be helpful. You don't want to invest in growth companies. You want to invest in companies that are growing their ambition. Atlassian has a 20-year track record of growing our ambition of what we're going after. And I think people will look back on this particular time as a time where we've greatly increased that ambition because of the opportunity that's in front of us, right? The ambition is going after the opportunity that we clearly see in our customers. And our ability to do that with the platform, Team Anywhere, everything else we've put into this paper. But it's really important to note that our ambition is growing here for the current markets and opportunities that we have, and we're going to play offence to go after that, which is exactly what we’re telegraphing here.”
This phrase by Cannon-Brookes—"You want to invest in companies that are growing their ambition”—is obviously a pitch for investing in Atlassian, but it’s empirically true as well: in a world dominated by power laws, very few companies become outliers and deliver the bulk of investment returns over long periods of time. The only way to be an outlier is to have growing ambitions.
This is why investing in companies with enormous markets and the ambition to tackle them is important. This is why we look for empire builders. And this is why we’re invested in Atlassian.