Atlassian Wants To Triple Its Revenue

Software projects are the bread-and-butter of enterprise-class business in today's world.

For an increasing number of these companies, software IS the product. Sure, there are obvious examples like Google (GOOG) or Facebook (META).

But think about this from a wider perspective. Any company you interact with primarily through a website or a mobile app is relying on a piece of software to conduct its business. That includes ordering Chipotle (CMG) through the mobile app. Or Christmas shopping on Target's (TGT) website. Or scheduling a doctor's appointment through Teladoc (TDOC). Or hailing an Uber (UBER).

The list is endless. There are fewer and fewer companies that DON'T rely on software to interact with their customers.

Now you can see the real scope of software's impact on the world!

Like any construction, to build and maintain software you need tools. Today's review highlights a company that provides the tools that companies need to plan, track, deliver, and maintain their software projects.

That company is Atlassian (TEAM). Let's take a look.

The Software To Build The Software

Software development follows a well defined lifecycle of plan, design, develop, test, deploy, and maintain. Atlassian tools are designed to facilitate each of these steps, and easily integrate together to cover the entire lifecycle.

The firm's best known and biggest selling product is JIRA. JIRA is a project management tool. It allows software teams to plan through projects that contain work tickets. Tickets can be any number of things, from new features to bug fixes to service requests (and more). JIRA is used to organize and track this work in real time, providing dashboards, flow charts, automation, and much more.

JIRA Service Management is a natural extension of JIRA, acting as a request portal for internal IT teams. For example, a software team needing a network change could request it through JIRA Service Management, which would create a ticket, assign the appropriate team(s), and keep the requester updated on the status automatically.

These are probably the two best-known and most-used tools, but Atlassian has a huge collection of products. Some notable other offerings:

Confluence: A sharable content management system. Teams can create knowledge documents and share them with the rest of the organization.

Bitbucket: A git-based source code management platform. The code lives here.

Bamboo: A continuous integration, deployment, and release management system. Bamboo builds the software products and is used to release them to customers.

Trello: Similar functionality to JIRA, but in a much more visual, appealing user interface.

Opsgenie: Operational management system for quickly reporting production incidents and getting the right people involved.

There are more, but these are the highlights. Many companies standardize their entire software lifecycle efforts around this collection of tools, as they integrate seamlessly.

Partly Cloudy With More To Come

Let's take a look at Atlassian's revenue model.

There are two ways to deliver software: self-managed and cloud.

The self-managed model is the classic method. Customers download the software and install/configure it on their own servers. They pay one price depending on the maximum number of users they must support, and are required to manage their own updates, security patches, etc. There is also a term license and maintenance fee annually, which allows limited support and the ability to download updates.

Self-managed revenues are not particularly attractive. On the good side, it allows the vendor to book large chunks of revenue immediately. But these should be considered "one-time" purchases, and maintenance fees are usually not particularly profitable. This can create a "boom-and-bust" cycle of revenue based around major update releases. We used to see this a lot in the software industry, and still do in some segments (like video gaming).

The other model is cloud. Here, the vendor (in this case Atlassian) hosts the software for you, automatically installing and configuring all updates, security patches, and so forth. The customer pays a per-user/per-month subscription fee that is recurring until canceled. Cloud is a much more attractive model, as it ensures a steady and predictable flow of sales over a longer period of time.

Atlassian utilizes both models, but is charging hard to move clients to Cloud. Currently, 59% of sales come from Cloud, vs. 52% a year ago. Expect this number to continue to rise going forward.

As Atlassian collects more and more of its sales as cloud subscriptions, we will have the reliably recurring revenue model we are looking for.

As for growth, there's plenty of it. The 3 year average annual growth rate is 32%, and the company is still delivering similar rates at present. Combining Atlassian's target markets of DevOps, ITSM (IT Service Management), and Agile development software, the total addressable market could exceed $80 billion by 2030. Management itself has talked about a path to $10 billion in revenues in the mid-term. That would represent more than a tripling of the current run rate.

However you slice it, there is PLENTY of potential for Atlassian to continue growing organically.

The Competitive Picture

In a set of markets as large as this, there are bound to be plenty of competent competitors.

More and more competitors are popping up to challenge JIRA. Three notable ones are Asana (ASAN), monday.com (MNDY), and Smartsheet (SMAR). All 3 offer more "modern" interfaces than JIRA, although none are as popular or established. In fact, Atlassian purchased Trello back in 2017 to compete with these more visual competitors.

All of the company's other products also have strong competition. JIRA Service Desk competes with ServiceNow (NOW) and Zendesk. Bitbucket competes with GitHub and Gitlab. And so forth.

One of Atlassian's big advantages is its breadth of product and how they integrate together. A check-in in Bitbucket can link directly to a ticket in JIRA, for example. This is much more difficult to implement with a hybrid model of several vendor point tools.

But Atlassian's biggest advantage is its first mover status. They led the way on agile and DevOps, and as a result, is now established as the vendor of choice for almost 30,000 companies. This matters a lot because this kind of software has HUGE SWITCHING COSTS! Nearly all of the data managed is human generated and notoriously difficult to migrate.

I've worked in software for over 25 years and I can assure you that re-training staff, re-developing business processes, and migrating project data to a new system is EXTREMELY disruptive and costly (in both time and money). Companies will only do it if there are very sizable financial advantages. This can be seen in Atlassian's 120%+ net revenue retention rate with existing customers. They are spending MORE every year, not less.

Finally, Atlassian is simply a well-known, tried and true choice. Companies looking for a solution will gravitate towards it naturally as a "safe" alternative. The old IT saying "you never go wrong by choosing IBM" applies here as well.

All-in-all, I feel Atlassian has a very strong competitive position. In any case, the addressable market is large enough to support many success stories.

Management and Financials

Mike Cannon-Brookes and Scott Farquhar co-founded the company in 2002 on credit cards! Today they continue to operate it as co-founder co-CEOs.

It is an unusual setup for sure, but it has worked for Atlassian. I love founder-run companies. The two still-young men (both are just 42) have built the company up from scratch into a global enterprise software behemoth. Both also retain massive personal stakes in the company, owning 22% each and controlling almost 90% of the voting stock.

Their leadership to this point has been impeccable. We've already touched on the company's massive growth. The firm has done it in an impressive manner financially. Free cash flows have averaged over 32% of revenue for the past 5 years. Cash returns on capital exceed 50%, one of the best numbers in the business world, particularly for its size. The balance sheet has over $500 million in net cash, and was debt-free just a couple years ago.

This is a well-run company with very little financial risk.

Risks

Everything has been looking pretty good up to this point, but what are some risks facing Atlassian?

I see a few. Competition combined with the company's ongoing cloud transition is the biggest. Atlassian recently "end of lifed" its Server product, forcing customers that require self-hosted solutions to upgrade to its Data Center offering. Forced transitions always create the risk of a customer choosing to go with a competitor instead. This is something to keep an eye on, although to date there have not been many signs of retention loss.

As with many growth stocks, the valuation of 12 times sales implies significant future growth. If those growth rates do not materialize, the stock will fall. Atlassian has not been immune to macroeconomic factors. When there are fears of recession - like today - customers are sticking with the free tier or not adding users at as rapid a rate, creating lower-than-expected revenue growth.

Conclusion

With a lot of growth potential, a majority and improving recurring revenue model, strong competitive advantages in the form of switching costs and brand, an excellent management team, and unimpeachable financial strength, Atlassian checks all the boxes as a "green dot" stock! It will be added to the Watch List for future consideration as a buy. Check out the TEAM stock page for our thoughts on valuation and what a is a good price to buy at (for members).