Atlassian Corporation

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Atlassian Corporation is a global technology company that designs, develops, licenses, and maintains software and provides cloud software, hosting services to help teams organize, discuss, and complete shared work.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Atlassian is a unique company because their products have become core parts of many of the tech industry’s working structure.

Business Overview:

Atlassian’s core business revolves around providing software tools for collaboration and team productivity. Their primary products, Jira Software, Jira Work Management, Confluence, and Trello, facilitate different aspects of teamwork, from project planning to knowledge sharing and communication.

  • Subscription Revenues: This revenue makes up approximately 70% of Atlassian’s overall revenue. It includes cloud-based, multi-tenanted offerings, and recurring subscriptions for its software. This revenue stream is crucial and is a main driver of growth. The company emphasizes the move to its Cloud platform, particularly their SaaS offerings, which is a major focus of their ongoing business strategy. A trend that they foresee continuing into the future.
  • Marketplace and Other Revenues: This segment encompasses revenues from sales of apps, add-ons, and other products offered through the Atlassian Marketplace, and includes revenues from the server data center options. A large segment of the company’s marketplace and their partner’s operations. However, it is relatively small compared to subscription services. This includes training, consulting and support services and other ancillary services. A point of emphasis for them is on migration to the cloud version. They also aim to grow the marketplace faster, as more customers are moving to the cloud.
  • Data Center & Server: This segment represents the revenue from the sale of self-hosted software and is steadily declining as they shift towards the cloud offerings. In line with that they’re emphasizing their cloud offerings and expect a decline to be a normal process.

The collaborative software market is highly competitive with a mix of well-established tech companies and disruptive startups. Trends in the industry include:

  • Shift to Cloud: The industry is heavily shifting from self-hosted solutions to cloud-based ones, including SaaS, due to scalability and cost savings. Atlassian seems to be heavily pushing the same and expects cloud revenues to dominate its overall revenues by 2024.
  • Integration: Platforms are integrating a wider range of tools and services, making it easier for teams to collaborate seamlessly. Atlassian’s focus on connectivity with other third-party programs is in line with these trends.
  • AI and Automation: AI-powered analytics and automation features are becoming increasingly common, as companies look to boost productivity. The company is investing into new tools and solutions, which they believe will help drive further revenue growth.
  • Remote Work and Hybrid Teams: The prevalence of remote teams and hybrid workforces is driving demand for tools that enable efficient and accessible communication and collaboration.
  • Market Saturation: As more entrants come into the market, competition intensifies which might reduce their profit margins going forward.

Atlassian’s products are well established and deeply integrated into the work of their users.

  • Atlassian differentiates itself through:
    • Integration: Extensive integration across its products allows streamlined workflows across different teams and project types.
    • Extensibility: The Atlassian Marketplace allows developers to build a range of apps and integrations, making their tools more customizable. This is an important growth engine for them.
    • Flexibility: A highly varied customer base requires flexibility, from small startups to large tech companies. The pricing model and the products themselves are very flexible and customizable to serve a diverse set of users.

Financial Analysis

  • Revenue: Atlassian has demonstrated strong revenue growth, particularly with their subscription revenue. Subscription revenues, making the bulk of revenues, are expected to continue to increase and drive the growth in coming years.

  • They’ve provided guidance that revenue will be between $1.125 billion and $1.145 billion for Q1 of Fiscal 2025, which means that they’re expecting to post double digit growth year on year.

  • Profitability and Margins: Gross profit margins remain strong, but the operating income and net income have seen some declines due to increased costs of operations and workforce reductions during the transition to cloud and cost controlling measures.
  • Operating expense was increased due to a greater push for marketing, research and development, and sales. However, some restructuring charges have also had a short-term impact.

  • The management team have announced multiple times that they will manage their costs going forward, to reach profitability.

  • Cash Flows: Cash flow from operations has been positive and increasing over the years, which indicates good underlying business performance.

  • Free cash flows for Q4 were a record for the company, indicating its strong business model that can quickly bounce back and become profitable after all the expenses are accounted for.
  • Balance Sheet:
    • The balance sheet is reasonably strong, with a very large cash balance and not much debt. The debt is mostly long-term, related to a credit facility they have.
  • Current assets are higher than current liabilities indicating a healthy short-term position, which also allows them to take better opportunities for investments, or return capital to shareholders.

Moat Analysis

  • Network Economics: As we already pointed out, most of Atlassian’s products are used by multiple people and have network effects. A key component to the success of Atlassian’s products lies in their collaboration tools, that helps multiple people work efficiently. As a result, the more people and teams join the more beneficial it becomes to new customers and new business, this is their primary source of strength.
  • Switching Costs: Atlassian’s tools are complex and take a significant amount of time to setup and use, which creates high switching costs for their customers. This gives Atlassian strong pricing power and ensures that they keep a major fraction of their customers for a longer period. It also means competitors have a hard time eating away at their market share.
  • Intangible Assets: They have built a solid brand name and offer very unique products. Their brand name is synonymous with team work and software management.
  • Scale: Although they are a decently big company, they don’t seem to benefit much from scale itself. This is due to the nature of their software products. However, as they continue to grow they can utilize their network effect more effectively.
  • Moat Rating: Based on the above analysis, we give the company a 3/5 moat rating. While they have a powerful network effect and switching costs, they are less powerful compared to a truly wide moat company. Their competitive advantages may be chipped away slowly over a longer period of time.

Risks to the Moat and Business Resilience

  • Technological Disruption: Rapid advancements in technology can disrupt the current methods of communication, and a new innovation may force Atlassian’s hand.
  • Competition: The industry is quite competitive, and the competitors can mimic the current offerings and provide a better version at a cheaper price.
  • This risk may be slightly mitigated by their pricing power over its established customers, thanks to the switching costs and network effects.
  • Industry Consolidation: Consolidation among other software and tech companies is common, which can lead to increased competition and also eat up on the margins for profits.
  • Poor Strategy: If Atlassian fails to develop better tools and products or fails to integrate with other platforms in the market, they could lose their edge.
  • Regulatory & Political risk: Regulations from governments across the world pertaining to technology and data privacy might affect the company and its ability to operate and function smoothly.

    • Economic Down Turns: In a recession, businesses are more keen on cost-cutting and may reduce their software expenditure leading to lower growth rate for Atlassian.

    • Business Resilience: Atlassian is a software company with a high gross profit margin and low debt, which is a sign of a financially stable company. While the risks mentioned can cause disruptions, the company will most likely be able to survive through them, thanks to its strong underlying business model. They must focus on keeping operating costs under control and continue to push for the migration to cloud to improve profitability.

Understandability

  • Rating: The understandability of Atlassian business model is 2/5, as their business is easy to grasp at the surface level, however, the nuances of all their products combined together along with the tech and financial aspect makes it tough to comprehend as a whole.
    • The company has more than 10+ core products all with a very wide range of functionality. To truly understand their business model, an investor should know them in and out.

Balance Sheet Health

  • Rating: Atlassian’s balance sheet health is 4/5.
    • They have a very large cash balance compared to their total liabilities, meaning they have sufficient resources to make further investments and survive any down turn in the market. Their debt is reasonably low.