A to Z Software and SaaS Operational Benchmarking Series: Atlassian

Introduction

The next company covered in the A to Z Software and SaaS Operational Benchmarking Series is Atlassian.

Atlassian provides software and tools for software development teams to work better together, and collaborate with non-developer teams with respect to software innovation. The company’s products help teams organize, discuss and complete workflows across various points in time, and across the entire organization.

The company’s primary products include: Jira Software (which focuses on software / development teams); Jira Core (which targets other business teams); Confluence (which focuses on content creation and sharing); Trello (which focuses on adding structure to rapidly-growing teams); Bitbucket (which focuses on code sharing and management); Jira Service Desk (which focuses on team service and support); Opsgenie (which focuses on incident management); and Jira Align (which focuses on enterprise agile planning).

Atlassian has been able to generate significant growth and customer adoption across its platform, which is driven by the company’s pricing transparency and affordability for customers of all types and sizes. As of the latest quarter ended September 30, 2019, the company served 159,787 customers over numerous industries and over 190 countries. Atlassian’s management team mentions that it currently serves over two-thirds of the Fortune 500, which utilize a combination of the company’s product suite.

I will walk through Atlassian’s key operational metrics across the company’s financial statements and key trends, and have compiled scorecards to compare the company to a variety of software / SaaS company benchmarks. This article serves as another example on how to evaluate a company’s financial and operational profile through a detailed assessment of available data and metrics. This can help business owners and investors apply similar approaches and analyses for other companies of interest.

For those who are not interested in going through the entire article and want a brief snapshot of the company’s key metrics as of its latest publicly available quarter (three months ended September 30, 2019), here is a compilation of summary charts:

Revenue Profile

According to management commentary in its public filings, the company generates roughly two-thirds of its total revenue from its Jira Software and Confluence modules. In terms of revenue streams, the company derives revenue from subscriptions, maintenance, perpetual license, and other revenue (such as revenue from third-party applications, training services, and deployment of technical account management).

The company’s subscription revenues are generated from fees earned from customers that are granted the right to use the company’s cloud-based software tools. The subscription revenues are driven by number of licenses and average deal size, and range from one to twelve months in terms of contract terms, with the majority being one month in length. With respect to the company’s maintenance stream, the company earns revenue related to providing future updates, upgrades, enhancements, and technical support to customers.

From a mix standpoint, as of LTM ended September 30, 2019, the company generated ~54% of its revenue from subscriptions and ~32% of its revenue from maintenance, which combined to total ~85% of the company’s total revenue base. This amounts to the company’s recurring revenue base. The remainder of the company’s revenue in LTM ended September 2019 was generated through perpetual licenses (~7%) and other revenue (~7%).

Atlassian went public in December 2015, listing its stock on the NASDAQ stock exchange under the stock ticker TEAM (very appropriate name for its product suite and the company’s focus on driving collaboration and team efficiencies through adoption of its tools). The earliest quarterly data provided by the company goes back to 9/30/2013.

It is also worth noting that the company has a fiscal year that ends in June 30, but for the purposes of this article (consistent with others I have written), I have presented the company’s data on a calendar quarter and calendar year basis.

Here is the view of the Atlassian’s quarterly revenue by type, quarterly YoY revenue growth rates by revenue type and revenue mix over time:

The company possesses a healthy, stable, and diverse base of revenue that has grown nicely over time through a combination of the company’s organic initiatives and customer acquisition, along with M&A that the company has executed upon. Overall, Atlassian’s subscription stream has been its fastest growing and remained most consistent in terms of growth trajectory through its publicly disclosed financials.

Generally, this trend is preferred by management teams and investors, and is a good sign for companies in the software / SaaS realm, as this subscription revenue tends to be high quality (and generally has strong dynamics, like high margin and long lifetime value). Given that the subscription revenue growth has been robust, the company has been able to increase its recurring revenue as a % of its total base from ~76% in CQ3 2013 to ~86% in CQ3 2019.

Overall, Atlassian’s revenue profile is very positive, and has generally trended and remained between 35% and 45% since it has disclosed information to the public markets. Although some of its streams have lost some momentum in many of its recent quarters (e.g. maintenance and perpetual licenses in particular), the company’s acquisition activity, along with its growth in the subscription segment, makes up the loss in revenue growth.

From an annual standpoint, here is a view of Atlassian’s revenue by type and growth rates going back to 2014, along with a view on the company’s recurring (subscription and maintenance) revenue: 

The company utilizes M&A and acquisitions as an avenue to generate sustained growth, as well as add complementary products to its overall suite. Over its history, Atlassian has made 13 total acquisitions that have been disclosed publicly, including five since 2017. Some of the most notable acquisitions include Trello (acquired in January 2017 for $425M), OpsGenie (acquired in September 2018 for $295M) and AgileCraft (acquired in March 2019 for $166M). The company discloses data on some of these transactions within its public filings that I have used to derive the financial figures and data throughout this article, but I have not made adjustments for any pro-forma details.

As is standard when assessing software companies, it is important to understand the impact of seasonality across its revenue and financial profile. In typical scenarios for software companies, we see a revenue skew towards the back-half of the year, especially the fourth quarter.

The company does not explicitly mention the impact of seasonality on its overall revenue or financial profile, but it is evident that Atlassian generally sees a good portion of its revenue consistently in the back-half of the year, particularly in the fourth and final calendar quarter of the year.

The graphs below show this trend for the company’s total revenue base, as well as its recurring revenue (subscription and maintenance revenue streams):

Atlassian has been a company that has been able to generate high levels of growth, which as we saw above, generally have sat between 35% and 45% on a total blended revenue basis. The company’s subscription revenue has generally been above / around 50% in recent periods, and had been above 60% and 70% in many past quarters.

The below graphs depict Atlassian’s revenue growth trends vs. a representative high-growth benchmark range of I have also included a summary revenue profile scorecard for the company as a reference. Based on these metrics, I have classified Atlassian as a high-growth company.

Expense Profile

Before we dig into Atlassian’s costs and expense profile, here is a typical composition of expense categories for most software and SaaS companies:

• Cost of Sales / Cost of Goods Sold: costs to deliver, maintain, service and host product / services and support existing customers on platform
• Sales & Marketing: costs to directly / indirectly sell and market product / services
• Research & Development: costs to develop new products / services (incremental of the maintenance of existing product / services, which typically falls under COS / COGS)
• General & Administrative: costs that do not fall under other buckets; typically include: legal, finance, admin, executive, rent and other general corporate costs

When assessing Atlassian, we can see that the company possesses each of the above line items within its income statement.

I will dive into each of the company’s expense categories as a % of revenue over time to develop an understanding of key trends. At the end of this section, I have included benchmarks to compare against as well, serving as useful rules of thumb.

Here are quarterly summaries of Atlassian’s expenses as a % of revenue over time:

As of its latest public reporting period ended LTM September 2019, Atlassian had annual revenues of ~$1,306.2M. The company has utilized savvy M&A acquisitions, along with good organic growth, to sustain its strong scale and ability to maintain growth rates above 30% and 40%. Given this, I have classified the company as a scaled, high-growth company, given it is (way) above $100M in annual revenue and growing its revenue at rates above 40%.

Not only has Atlassian been a strong growth company for a long period of time, but it has also effectively managed its costs. The company has an attractive cost profile across its key business functions. Atlassian’s “high-velocity, low-friction” go-to-market model creates a scalable, efficient business and cost structure, which is a key focus by its management team and employees.

This intentional effort allows Atlassian to keep its sales & marketing, deployment, and customer support costs down over time because the company has found ways to generate continued customer traction and growth via expansive word-of-mouth and low-touch lead and demand generation, along with automated distribution and customer support functions.

We can see this focus from management evident in the trend in the company’s sales & marketing expense ratio as a % of revenue over time, along with its cost of revenues ratio. Both ratios have either remained steady or declined through time as the company’s continued to scale, which is a testament to the success of Atlassian’s business model and operations.

In lieu of spending on cost of revenue and sales & marketing to continue generating strong growth, the company’s management mentions that more emphasis is put into investing in its research & development function. This is atypical when comparing to other software / SaaS companies, who tend to have more investment in the sales & marketing function to generate continued growth and customer acquisition.

According to the company’s filings, Atlassian takes a contrarian view to other companies and puts more money into research & development and maintains pricing transparency to its customers to remove the time it takes for initial adoption and solution deployment, and also creates opportunities for continued expansion and penetration into existing customers. Thus, its research & development ratio is above the typical software / SaaS benchmark, but this is a unique nuance given that the business intentionally uses this functional category as a driver of customer acquisition and retention, along with market leadership in development and technology.

According to its fiscal year ended June 2019 filing, the company had over 150K customers, with 4,091 of these customers each paying the company over $50K annually during the fiscal year. Atlassian states that these customers started off at a lower annual rate of payment to the company, but have since scaled over time. This is in line with the company’s customer growth and expansion model, and is another testament to the effectiveness of the company’s approach of sustained scale.

The below expense profile scorecard details each of Atlassian’s expense categories: 

The benchmarks shown above are representative of what similarly sized software and SaaS companies should attempt to attain based on my experience in the industry and working with clients. A note of caution / disclosure – these benchmarks are not applicable to every single software and SaaS company, but illustrative ranges that business owners and investors can use as rules of thumb. 

Profitability Profile

The three selected profit metrics that I will focus on in this section are: gross profit, EBITDA and operating cash. Here are some primary reasons on why each of these profitability metrics are important to consider for all software and SaaS businesses:

• Gross Profit: conveys a company’s profitability considering departments and business areas such as hosting, IT operations and customer support
• EBITDA: conveys how profitable a business is across all major functions and departments, including the impact of operating expenses (S&M, R&D and G&A)
• Operating Cash: conveys how profitable a company is on an operating cash basis (i.e. how effective a company is converting EBITDA into cash)

The company does not disclose a gross profit by individual revenue segments / types.

Below is a summary of Atlassian’s gross profit and gross profit margins on a quarterly and annual basis, along with a consolidated view:

As mentioned, Atlassian does not breakout its cost of revenue by each of its individual revenue streams. The majority of the company’s revenue is recurring in nature (subscription or maintenance), which tend to have a lower cost of revenue profile, and thus a higher gross margin. Given that ~85% of the company’s revenue is recurring, it is no surprise that the company’s total blended gross margin is at / above 80%. This results in a stable, attractive gross margin profile.

The company has a streamlined customer support function that can scale with the company’s growth and does not require intensive investment to support its increasing customer acquisition. This allows the company to gain leverage on its gross margin over time. Additionally, the company utilizes over 500 implementation partners (500+ parties), which provide implementation, custom support, and professional services to its customers. By outsourcing these functions to partners, Atlassian can trade away some of the lower services margin, and thus see better-than-average gross margin ratios when compared to other software / SaaS companies.

Throughout its filings and public disclosures, Atlassian does not disclose an EBITDA figure. As a result, I have calculated EBITDA for the company in each period as follows: operating income / losses plus depreciation & amortization plus stock-based compensation.

Please note that I have not made any other adjustments (e.g. no add-backs for any one-time, non-recurring items like litigation, M&A expenses, etc.) outside of the additions of D&A and stock-based compensation.

Here is a view of Atlassian’s calculated EBITDA and EBITDA margin on an annual basis: 

Atlassian has been able to sustain a stable (and efficient) cost profile, but has maintained robust growth of 30%+ over time. This has resulted in the company becoming more profitable on an EBITDA basis, seen especially in the company’s annual numbers above. With further penetration into its existing customer base, continued customer acquisition, and an increasingly maturing cost profile, we should expect that this number can only continue to improve over time.

The third and final profitability metric I have prepared for Atlassian in this article is operating cash. As I have done in previous articles in this series, I am calculating operating cash as follows:

EBITDA less capital expenditures less the period-over-period change in net working capital (net working capital is defined as current assets (excluding cash) minus current liabilities)

Given the company’s EBITDA profitability, Atlassian also possesses a strong operating cash and operating cash margin as well. The company has grown significantly, and also has a negative working capital balance, especially when you include the short-term deferred revenue on the balance sheet. Despite this, the company does not have major swings in its monthly net working capital balances that would contribute to negative impacts on its operating cash as we see above. We will go over this further in the balance sheet section, as we look through Atlassian’s key balance sheet trends.

Here is Atlassian’s profitability profile for the aforementioned metrics compared against a variety of representative benchmarks:

Balance Sheet and Capex

Detailed views and analyses into a company’s balance sheet and capital spending trends can provide insight into a company’s working capital trends (e.g. is there any seasonality or nuances within accounts?) and cash flow generation (e.g. how a company bills and collects on customer contracts; what the company spends on capital outlays). In this section, I will go into Atlassian’s cash and cash equivalents balance, working capital accounts (excluding cash) and capital spending trends.

The below cash and cash equivalents balance shows the company’s balance trending over time (note — Atlassian had held some short-term investments on its balance sheet that I have not included in these figures).

Readers can choose to include these assets in the cash balance if they so choose, as there is an argument that they are liquid, “cash-like” assets. I have chosen not to include these in the cash balances for Atlassian, as I wanted to maintain comparability to other companies I have covered in the series that do not have these short-term assets.

In the company’s second calendar quarter of 2018, we can see that there was a massive jump in the cash and cash equivalents balance. This was a result of Atlassian issuing $850M worth of senior debt notes, and the cash proceeds related to that financing event.

It is essential to assess a company’s working capital to understand how operating cash is generated over time. I have calculated working capital for Atlassian based largely on the following current asset and current liability accounts:

• Current Assets: Trade and Other Receivables, Prepaid Expenses & Other Current Assets
• Current Liabilities: Trade and Other Payables, Provisions, and Deferred Revenue (short-term)

Given that Atlassian operates primarily as a subscription and maintenance software company, the company has a good amount of deferred revenue. Because most of the company’s subscriptions range from 1 month to 12 months in length, Atlassian has a lot of deferred revenue that is short-term in nature. Additionally, the company has continually generated strong growth, which will inevitably continue to increase its deferred revenue balance over time. Thus, as we will see below in the deferred revenue chart, the company’s deferred revenue has grown steadily over time as a result of its short-term balances.

With respect to the company’s other working capital accounts, the other notable trend that we can see that affects the period-over-period change / swing is the trade and other payables account balance. Within this account, the company includes typical payables related to vendors, accrued compensation, accrued expenses, and other minor payables and deposits. Of these sub-accounts contained in the trade and other payables balance, Atlassian sees a dip in the accrued compensation number from the second calendar quarter to the third calendar quarter in each year.

The company’s fiscal year ends June 30th (the end of calendar quarter two) and the company pays out larger sums of bonuses and employee accruals following the end of each fiscal year. The accrued compensation balance (and thus, the trade and other payable balance) builds up steadily from the fourth calendar quarter through the second calendar quarter of each year, and then declines in each third calendar quarter. This will result in the slight swing in the net working capital balances between those periods, as we can see below.

The below charts highlight the working capital and net working capital trends of Atlassian:

Here is a view of the company’s Trade and Other Receivables, Trade and Other Payables, and Deferred Revenue balances over time for additional detail:

With respect to the company’s capital spending, Atlassian made some growth investments in 2014 that have since declined. We can see this in each the quarterly and annual capital expenditure trends. As of the LTM ended September 2019, the company had capital expenditures that were 3%. It is also worth noting that the company does not capitalize software development costs.

For software / SaaS businesses, capital expenditures are typically limited to investment in office space, equipment such as office items and computers and other tech-related items such as data centers, IT systems and infrastructure used for hosting. A good benchmark / rule of thumb for the capital expenditures as a % revenue ratio is between 5% to 15% of revenue. Atlassian has been within and below the range for capital expenditures every period I have seen and analyzed.

Company-Specific KPIs and Other KPIs

Atlassian provides two key metrics related to its specific business and operational performance that are important to monitor to track the company’s success over time. These metrics, free cash flow and total customer count, have shown an upward trajectory, much like the other financial information and data that the company has provided across its filings.

With respect to for other operational KPIs we typically like to assess and understand, Atlassian provides its periodic stock-based compensation, full-time employee counts every quarter (I have used these full-time employee counts to calculate average LTM revenue per employee over time), and CEO compensation figures in its fiscal year ended June 30 annual filing.

The company has grown its employee base over time to support its sustained scale, and has also been able to increase revenue per employee over time as well.

These additional operational KPIs and trends are shown in the graphs below:

As for the company’s customer acquisition costs, I have calculated Atlassian’s CAC ratio over time using its total GAAP Sales & Marketing spend, its total Subscription and Maintenance combined revenue and LTM total gross profit margin as the main components of the calculations.

Given that the company does not disclose its cost of revenue by revenue segment, I have to use the total blended gross margin to calculate the CAC ratio.

For reference, here are the calculations I have used for CAC:

Without gross margin: (LTM ended Current Quarter Sales & Marketing Expense) / ((Sum of the company’s Subscription and Maintenance Revenue in Current Quarter x 4) – (Sum of the company’s Subscription and Maintenance in Last Year’s Comparable Quarter x 4))

With gross margin: (LTM ended Current Quarter Sales & Marketing Expense) / ((Sum of the company’s Subscription and Maintenance Revenue in Current Quarter x 4) – (Sum of the company’s Subscription and Maintenance Revenue in Last Year’s Comparable Quarter x 4) x LTM ended Current Total GM %)

Here is what Atlassian’s CAC ratio looks like over time with and without the impact of gross margin:

A useful benchmark for software and SaaS CAC ratios is between $1 to $3. Atlassian is well below / within this illustrative benchmark range on both calculations (with and without the effect of gross margin), which is unsurprising given that the company has been growing so significantly and has a relatively lower sales & marketing spend vs. other software / SaaS companies.

In reality, it can be argued that some of the company’s research & development expenses / spend may be worth including in its CAC ratio since Atlassian uses investment in that function to acquire and retain customers. Regardless of the inclusion / exclusion of these costs, the calculated CAC ratios are very impressive, and show the effectiveness of the company’s business model.

To note – because I utilized the total blended gross margin in the second calculation, it may be artificially overstating the CAC ratio. However, the company’s gross margin is still very strong, so it should not substantially impact the calculated CAC ratios.

The Rule of 40 represents the sum of a company’s revenue growth rate and its EBITDA margin in a given period. The Rule of 40 has become commonplace as an effective measurement of a company’s health, as it blends growth and profitability into one metric for business owners and investors to monitor. Although this metric is certainly not a panacea for all financial reporting concerns, it is indeed a useful tool to convey how balanced a company is in its growth and profitability.

The company’s strong profitability and growth results in a highly impressive Rule of 40 metric, which has never been below 53% over the time periods disclosed and used in my calculations for this article. For a company with the scale and growth that Atlassian possesses, having a healthy Rule of 40 KPI shows the effectiveness of the business model.

Here are the quarterly and annual views of the Rule of 40 metric over time:

Concluding Thoughts and Summary

This detailed assessment provides useful operational benchmarks for Atlassian that can be used as a basis to analyze other software and SaaS companies, both public and private. With further compilation of these metrics and averages from other companies covered in this series I have crated, there will be an increase in the availability and precision of the operational benchmarks used as reference points. This will provide business owners and investors with incremental detail to be used in their financial planning, reporting, and analysis of companies.

To learn more about this article and gain other valuable insight into your business, please visit www.rtdinsights.com or contact me directly at [email protected].