Long or Short $TEAM: Must Read

The Guidance Doesn't Add Up

Atlassian is a terrific company that has developed collaboration software for software developers and project managers that is in the process of transitioning its entire business to the cloud. The transition from perpetual licenses, where the software developer receives a one time fee and then charges 20% annually of the purchase price for maintenance, is a 1990s relic on its last legs. Software companies figured out it works better for them, post transition, and their customers, over time, to lower the upfront cost of implementation and charge a fraction annually of the perpetual price and that become known as the SaaS model (Software as a Service).

The SaaS model can be used by customers on-premises or off-premises. The on-prem option offered by Atlassian is called Data Center, where the customer uses the software and rents workload usage from the behemoths Microsoft Azure, Amazon AWS and Google Cloud. The data still “lives” with the customer (think behind a firewall) which in many cases is imperative for various regulatory, privacy and confidentiality reasons. The Cloud version of the Atlassian products run on Atlassian Cloud computing, where the data hosting and processing costs are paid for by Atlassian and passes onto the customers as a cost. Both are subscription models with the former having higher gross margins (no data center cost pass thru) and the latter lower given the data center costs. The Server, or perpetual license model, phased out in February 2024 and all customers need, if you want ongoing support (all do!), to transition to the DC product or the Cloud product. Got it?

It is easy to move from server to data center than it is to the Cloud. In fact, the company describes it as a 30 second process. Atlassian raised its pricing for the data center version in order to incentivize customers to move full tilt to the Cloud. Nothing unusual here on the transition to cloud except the company has not done a terrific job in explaining the moving parts from Server to Data Center or Cloud. They explained recently at several conferences that the transition is customer friendly, will take time measured in years, but overall they are pleased with the transition to the Cloud. They recently purchased the company “Loom”, the online video recording product which many investors have had a hard time understanding the rationale. It hasn’t been the focus but it is worth noting. The transition to Cloud and the growth rate ahead is the key narrative to focus on with Atlassian as a stock.

So, I modeled it!