No “High” in $TEAM: Why Atlassian Will 10X Or Get Acquired

We take a break from our regular programming to talk big picture. No snarky earnings comments, no self-promotional charts, no Rebecca Black, just real talk: The future of work is a topic very near and dear to our hearts. At Sentieo we belong to the Slack generation, and we find no better joy in our jobs than in seeing the very real way we are helping our users, large and small, both work with better tools and work better with too people. Atlassian is one of the greatest SaaS success stories of all time; better commentators than us have described their growth in far more breathless superlatives, from Fortune to Bloomberg to VCs. Here they are in their own words, fresh out of IPO:

Focus On Fundamentals

Now at a $6bn market cap (9.3x sales, 45x ebitda, on universally bullish street estimates), short-term investors have to contend with an admittedly rich multiple relative , without doubt, get this out of the way right now: there is without doubt some point in the future you will be able to purchase $TEAM for cheaper than today. Expectations for the print on Thursday are very high, partially due to high visibility company guidance. And thanks to the epic 30% run up into earnings, the company has to guide very aggressively for 2017 to surprise on the upside. If that is all you care about, the pages of the Motley Fool welcome you.

The stock will wax and wane with hairline percentage point differences in results, but also appetite for growth. As surely as we are in a conducive environment for growth right now, we will also inevitably revert to a risk off situation where growth will be seriously questioned and can be bought at cheaper multiples. There are plenty of ways and plenty of stocks with which to hedge that risk. Beta, and more generally style factor risk, is not a valid criticism for sophisticated investors.

Fortunately, the company’s superior product development and organic growth has never been guided by its private or public market valuation. Our focus for Atlassian is not in handicapping what the stock price will be next year, nor whether its a better buy at $29 or at $25, but rather what its fundamentally different business model and strategy could imply for the company in 10 years. Can the company realistically 10x its revenues?

It is too trite to compare Atlassian’s current 57,000 customers to their goal of “selling to the Fortune 500,000” and call it a 10X-er if they reach their goals. Let’s think about how it could actually get there.

The Long Term Implications of Atlassian’s Core Strategies

  • Marketing: “Better for Less” Product
    • Atlassian is a “true unicorn” in that most people who build a better product and simply expect the world to beat a path to their door often have their hopes dashed. Where most fail, they have succeeded, in part thanks to low pricing, but in large part due to a fundamentally superior experience.
    • The company’s R&D spend is uncapitalized CapEx and a large off balance sheet asset that pays for itself in both lifetime value and marketing (and if they ever normalized R&D spend, which they won’t, the aggressive P/E multiple would be slashed by a third).
    • The momentum they have built from doing this for 14 years is not the kind that goes away in a year. Adjusted for the grandfathering impact from their price tiering change two years ago (a positive event, unlike certain video platforms), they are growing revenues north of 30% a year and adding 3,000 customers a quarter.
    • Assuming a slight slowdown to 26% a year for the next 10 years, the math leads to Atlassian 10x-ing its revenues in 10 years. The rest of this piece focuses on addressing the longevity of this high octane growth.
  • Reach: They are ALREADY at 450,000 globally
    • Atlassian has a tremendously long tail. With 5 million MAUs across 450,000 organizations in over 160 countries, having only 57,000 customers is a laughably poor monetization – until you recall that they don’t count a (corporate) customer until they are over $10 per month, and that all those sales were made without a traditional sales force.
    • Some organizations will churn for any number of reasons, but it cost Atlassian little to acquire them in any case. Because software has little incremental cost, churn at the low end doesn’t matter. What matters is getting in to the winners on the ground floor, the wet dream of every VC, employee, and, more to the point, business partner. And the demonstrated stickiness of software that is fundamentally core to how teams work (dollar retention is estimated north of 110%) means that Atlassian grows with the fastest growing parts of the economy.
    • A frequent pushback from critics is that Atlassian, and in particular, JIRA, may have exhausted the early adopter curve and so find the monetization for the rest of the Fortune 500,000 much slower than the first 57,000. To that, we ask in return: how did Atlassian find 14 years’ worth of “early adopters”? The term is a red herring.
    • The point is heavily belabored but we cannot underestimate how difficult and important it is to be in 160 countries which fundamentally increases the visibility and longevity of the growth path.
  • Upsell: Platform rather than Point Solution
    • Atlassian didn’t stop at JIRA. They added Confluence, then bought Bitbucket, HipChat, and a number of other smaller companies. Each time, they hooked up those different products to their growing distribution, made them interoperable, and sold both. Yes, there are serious point solution competitors to each, for example Slack vs HipChat. But we strongly believe the value delivered by the gestalt effect of a platform solution is a far more sustainable competitive advantage (and a better customer experience) than adding more layers to an existing point solution.
    • Atlassian has also demonstrated a keen ability to segment existing products to open up more parts of the organization. Quote Murray Demo, CFO:

We did a survey a few years ago and found out that about a third of the use cases actually were not on the software teams, but they were actually in IT doing IT help desk. So, in the fall, we segmented our product JIRA into really three offerings… we believe that all organizations provide service inside an enterprise. So, if it’s purchasing, they’re providing some services. In HR, on-boarding an employee, making sure that the new employee’s got a place to sit and the right chair and they’ve got the right computer. And then they need a credit card or something like that for travel, that kind of — the on-boarding of an employee. So, that’s another service desk. HR, purchasing, legal, finance all have service desks. And so, we think that’s a big opportunity, and that was important as part of the segmentation. And lastly, we came out with JIRA Core, which is a product really sort of designed for that HR or finance, legal, marketing organization that’s going to be doing projects together and doesn’t have some of the software terminology that the previous JIRA product did. You can get that in JIRA Software today, but the JIRA Core is really tailored to the non software IT user. 

  • Ecosystem: Marketplace turns Self Interest into Vested Interest
    • Every successful tech company from Microsoft to Apple to Slack eventually opens itself up to truly embed themselves as in their customers’ hearts and minds. If a simple network effect from collaboration isn’t enough, if a gestalt effect from platformization isn’t enough, a two sided network feeds the growth funnel even further. 200 vendors building businesses on your business is good, not only because it generates revenues ($6.6m in other revenue in 3Q16), but because they help to sell you to their customers, but also give you critical information as to what other market opportunities you should pursue next.
  • Demographics: Evolutionary Shifts Have A Very Long Tail
    • This isn’t a “millennials simply like this more than their parents” argument. The nature of work and collaboration is changing at an evolutionary rather than revolutionary pace and it affects all ages. There is no “mobile generation”, the entire developed world simply went mobile in under two decades. The shift to mobile enabled people to do things they couldn’t do alone and made the world smaller. Atlassian is part of a cohort of new Enterprise Software companies that are working to do the same.
  • Note that this is all possible even without assuming that Atlassian hires traditional quota carrying “closers” for large organizations as the sellside does for their “bull case”, because that is all they know to model.

Atlassian has proven success at all of the above, but we are most encouraged by what they have continued to do post IPO. On July 14 they acquired StatusPage, a very young startup that they were early adopters of. The acquisition not only serves all existing Atlassian customers, but opens up the flywheel in a completely new way – the Status Page is a fundamentally outward facing part of an organization and gives a venue for Atlassian to reach even more users by simply reaching users of its users. It is very early days, but we are excited.

Worth More To Others

At the risk of drowning in the Kool-Aid (this is far too soon after IPO), the main way Atlassian does not 10x is if it gets acquired by far larger legacy Enterprise Tech companies that have more cash sitting around than Atlassian is currently worth. Microsoft investors didn’t blink at spending $26bn to have the data to reach professional users. We think Atlassian’s existing suite of products, price points, and customers will be decently differentiated, yet additive, to a Microsoft or a Salesforce. Given current cashflow, Atlassian will deal on its terms, its schedule, and no one else’s.