Atlassian - Premium Research Report - Sneak Peek
Our fundamental analysis of Atlassian. Established in 2001 by Mike Cannon-Brookes and Scott Farquhar, it has grown into a leading producer of productivity software.
“To unleash the potential in every team!”
Atlassian
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In this sneak peek, we will dive into competitive advantages, risks, and opportunities.
IntroductionBusiness model
Competitive advantageManagementFinancial analysisRisks and opportunitiesValuation
Closing thoughts
2) Business model
Atlassian earns 87% of its revenue by selling subscriptions to various software products to companies. These products include Jira Software, Jira Service Management, Jira Work Management, Jira Product Discovery, Confluence, Trello, and Bitbucket. Atlassian does not provide insight into the number of users or the revenue of individual services. However, market research and careful reading of Atlassian's annual report reveal that Jira and Confluence are by far the largest products for Atlassian.
The remaining 13% of revenue is almost equally divided between maintenance income and other revenue (mainly from the Atlassian Marketplace).
In the geographic distribution of Atlassian's revenue, it is evident that the majority is earned in North and South America. Revenue is growing at a similar rate across all three continents.
2.1 Jira
It is good to know that Jira consists of four different products:
Jira Software
Jira Service Management
Jira Work Management and
Jira Product Discovery.
All these products can be used on the same Jira platform. The interface is the same for all products, but the functionalities differ significantly. The division between technical teams using Jira (and Confluence) and non-technical teams using Jira is about half-and-half. However, Jira started out as a product that mostly technical teams used. Today, this part of Jira is called 'Jira Software.'
Jira Software
Jira Software is primarily designed for (software) teams that want to work agilely and utilize methodologies such as Scrum or Kanban. Agile is a widely used and flexible approach to software development (see Figure 5). Scrum is a form of Agile working through 2-4 week sprints. Kanban is another form of Agile working that focuses on the status of tasks. To work with Scrum or Kanban, it is useful to create boards, sprints, and epics. Jira Software facilitates this.
In the United States, Jira Software costs $12.48 per user for a premium plan.
Personal experience with Jira Software
I am an account manager at an ICT company where Jira Software is used. Jira Software is the foundation of collaboration within the company. During the development of a software product, there are hundreds of “issues” that need to be resolved to continuously improve the product. Jira Software provides an overview of all the tasks that need to be completed, which sprint they will be addressed in, who will perform them, and the status of the various issues. Developers within a team do not email each other; they provide updates on the relevant issues within Jira Software. In other words, Jira Software ensures that the team works much more efficiently and prevents costly mistakes. It provides a clear overview of the tasks that still need to be completed. Figure 7 below shows a simple Jira workflow.
Jira Service Management
Jira Service Management is designed for (software) teams that do not work Agile. These are often support teams, such as customer service, teams handling issue reporting within software systems, and teams communicating future improvements. In other words, outside forces are responsible for these teams.
Jira Service Management provides a clear overview of incoming tasks or issues and allows users to prioritize tasks, assign responsibilities, set deadlines, and view the status. Unlike Jira Software, those who add tasks or issues do not need a subscription to do so.
In the United States, Jira Service Management costs $44.27 for a premium plan per agent. This is significantly more expensive than Jira Software because only those who process the issues need to pay. With Jira Software, every user needs to pay.
Jira Work Management
Jira Work Management is designed for all teams outside of software development, such as marketing, sales, HR, legal, and finance. Jira Work Management helps with tasks like setting up a content calendar, assigning tasks like "write a blog," and ensuring everyone can see the status of the respective task. For example, to do, in progress, it needs reviewing, ready to publish.
In the United States, Jira Work Management costs $5 per user.
Jira Product Discovery
Jira Product Discovery is the most recent product launched by Jira. It functions as an idea board where product managers can gather ideas for new products. With Jira Product Discovery, it's easy to add information to ideas, prioritize them, and provide management with insights into current ideas.
Jira Product Discovery is largely free. However, if users want to use the service intensively, a subscription costs $10 per month per user.
2.2 Other products
Confluence
Confluence can be thought of as a version of Word that is seamlessly integrated with Jira. It serves as a shared drive for Word documents. In Confluence, the entire documentation process for many ICT teams or companies takes place. It is easy to display issues from Jira and show details such as status and responsible parties alongside the documentation.
Trello
In 2017, Atlassian acquired Trello for $425 million. Within Trello, it is easy to prioritize tasks and work with boards, lists, and cards. This allows projects to be organized efficiently. While Jira focuses more on project management for software developers and teams within large companies, Trello is geared more towards project management for small projects. Trello is therefore much more accessible than Jira. As a result, customers are less dependent on Trello, making it challenging to charge higher fees for its services.
Bitbucket
Finally, we have Bitbucket. Bitbucket is a Git code management tool that provides software teams with a single place to plan projects, collaborate on code, test, and deploy. For example, team members can engage in discussions directly within the source code with inline comments. Teams can build, test, and deploy using continuous integration and deployment. Microsoft's GitHub, the largest competitor to Bitbucket, is significantly larger with a market share of 52% compared to Bitbucket's 11%.
Atlassian Marketplace
In 2012, Atlassian launched a marketplace for developers. Many developers love being able to customize products to perfectly fit their needs. Because the founders themselves are developers, they understood this, prompting Atlassian to start the Atlassian Marketplace. Here, plugins can be downloaded or APIs can be obtained to build add-ons for Atlassian products. An API allows two different programs to communicate with each other.
The Atlassian Marketplace was indeed a smart move. It now boasts more than 25,000 external developers. With Atlassian taking a 25% commission on each sale, the marketplace generated $229 million in revenue in 2023.
To encourage app developers to create cloud apps, the take rate is lower than for server and database apps. This strategy appears to be effective. In 2023, revenue from cloud applications grew ten percentage points faster than Atlassian's own cloud products. This underscores Atlassian's continued focus on the cloud.
2.3 Focus on storage in datacenters and cloud
In recent years, Atlassian has essentially been pushing its customers to store data in the cloud or in a data center. Since February this year, no maintenance or customer service has been provided for server revenue. It is expected that server revenue will be $0 by the end of 2024. I think this is a good decision by the founders; it shows that Atlassian is focused. It's impressive to convert 30% of your revenue into more future-proof segments within five years.
2.4 Sector & industry
Atlassian operates in three closely related markets with its products:
Agile/DevOps
This market caters to technical teams involved in software development. Atlassian is active in this market with Jira Software, while Microsoft competes with Azure DevOps as the largest competitor.
IT service management (ITSM)
This market focuses on delivering support and handling issues/improvements brought in by external parties. Atlassian operates in this market with Jira Service Management, while ServiceNow stands as the largest competitor.
Work management
This market serves non-technical teams. Atlassian participates in this market with Jira Work Management, competing against companies like Asana, Monday.com, and Microsoft Projects as the major competitors.
Jira Software VS Azure DevOps
In terms of functionalities, Jira Software is better suited for teams managing issues (new features), while Azure DevOps is more focused on teams looking to improve planning and testing. Nevertheless, both platforms share many similarities. Jira's interface is more aesthetically pleasing, but Azure DevOps offers more functionalities at a significantly lower price.
Jira Software costs approximately $12.50 per user, whereas Azure DevOps costs $6 per user. With Jira Software, every user, including external users, must pay to use the platform. In contrast, Azure DevOps provides free access to external users for key functions like bug tracking and feedback submission. Additionally, users do not need to pay extra for most additional functionalities, such as GitHub integration, with DevOps.
Overall, I believe the platforms differ little from each other. However, due to Azure DevOps being cheaper and offering slightly better functionalities, the advantage leans towards Azure DevOps.
Jira Service Management VS ServiceNow
ServiceNow currently dominates the IT Service Management market with a 45% market share, while Jira Service Management is its direct competitor with an 18% market share. This difference is significant, but even more pronounced is the disparity in revenue between the two players. ServiceNow boasts a total of 6,900 customers, averaging an impressive $273,000 in revenue per customer. In contrast, Jira Service Management has 35,000 customers but averages only $33,428 per customer.
The reason for this lies in ServiceNow's focus on large enterprises, whereas Jira Service Management has a lower barrier to entry and offers lower prices. For instance, Jira Service Management provides a free trial and is priced four to five times cheaper. ServiceNow, on the other hand, requires interaction with a sales representative before access is granted.
One might assume that ServiceNow offers a superior product. However, various independent comparisons suggest that Jira is easier to implement and has a more attractive interface. Although both services boast good integrations, Jira Marketplace is reportedly more user-friendly. Another advantage is Jira Service Management's seamless integration with Jira Software and Jira Work Management.
Based on these findings, I believe that Jira Service Management will gradually gain market share. This growth will likely be gradual due to switching costs. Of course, ServiceNow will not lose all its customers, but I anticipate that Jira Service Management will eventually capture more market share than ServiceNow.
7) Valuation
7.1 Ratios from the past
In Table 1, you can see the ratios at which Atlassian has traded in the past. Because Atlassian is still unprofitable, the price-to-earnings ratio has been omitted. However, Atlassian is free cash flow positive, but as we saw in Chapter 5, a large portion of the free cash flow consists of stock-based compensation (SBC). I have corrected for this when valuing Atlassian. After adjusting for SBC, there is little free cash flow left, resulting in a sky-high valuation. The only other ratio that indicates Atlassian's valuation is the price-to-sales ratio. Although this has significantly decreased, ten times the revenue is still very high.
7.2 Scenario analysis
The valuation based on ratios was quite high. Since SBC is considered an expense on the income statement, I believe valuing Atlassian based on net profit is not the best approach. Therefore, I have prepared a scenario analysis based on the expected free cash flow over the next five years.
In Chapter 5, we read that revenue growth is trending towards 20% per year. This year, Atlassian is still expected to achieve 24% revenue growth. However, as Atlassian continues to grow and the rapid growth seen in 2021 appears to have subsided, Atlassian should be content with 20%+ revenue growth over the next five years. This also aligns with analysts' predictions.
Regarding the free cash flow margin, I have taken into account the current margin of 30%. Note that a large portion of this free cash flow is SBC. Considering a price-to-free-cash-flow ratio that includes SBC, the scenario analysis looks as follows:
A return of 13.7% might seem attractive, but keep the following two points in mind:
Your shareholding will be diluted by (at least) 2% per year.
Even in 2029, there is a high likelihood that SBC will account for at least 20% of the revenue. This means that out of the $3.3 billion in free cash flow, $2.2 billion is SBC. In other words, 2/3 of the free cash flow will likely go to employees. Investors might remain blind to the phenomenon of SBC, but if more investors start adjusting for SBC, the return is likely to trend towards 4% per year.
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Chapter 1 - Introduction
Chapter 2 - Business model (free)
Chapter 3 - Competitive advantage
Chapter 4 - Management
Chapter 5 - Financial analysis
Chapter 6 - Risks and opportunities
Chapter 7 - Valuation (free)
Chapter 8 - Conclusion