Software Winners In a Post-Pandemic World – Atlassian Is a Refreshing Value Play

COVID-19 has forced software companies and their suppliers to refocus efforts around prioritizing systems and workflows that are nearly 100% digital in nature. As a result, Info-Tech has observed the quick emergence of six market themes that are highly relevant post COVID-19. This note series will profile key vendors and how they fit into the post-COVID-19 world.

In this note series, we classify companies as either "Cure" or "Treatment," based on how they fit into the post-COVID-19 world. A cure company is deemed critical in nature, providing an immediate solution to mission-critical problems and is expected to drive strong demand post pandemic. Treatment companies are essential, but more discretionary in nature. They increase overall health and productivity, but in our opinion, the spend for these solutions can be deferred. Spending on cures has already started to accelerate during the pandemic, while treatment companies will benefit later, from pent up demand, as the recovery takes root and digital transformation accelerates.

Six Key Market Themes for a Post-Pandemic World

The themes that will likely garner a more significant share of technology spend as we move through the pandemic and emerge post pandemic are:

A seventh market theme that is benefitting from the COVID-19 disruption is cybersecurity. Cybersecurity is interwoven across the six core themes noted above, among others, and will be profiled separately. Cybersecurity spending has notably increased with the shift to remote work. It was already the number one area for IT spend increases forecasted for the year 2020, and thus has been amplified. The surge in security spending may prove temporary as the focus on endpoint protection, virtual firewalls, and overall network security concerns are rapidly addressed to accommodate the remote workforce.

Workflow planning and e-commerce top the Cures list categorically as they have been and continue to play critical roles in navigating the pandemic where people are now working from home and most office or site-based work has been or was temporarily shuttered. While these are slowly starting to reopen with restrictions, flare-ups, evolving company policies, and regional regulations will likely see increased staff working remotely well into 2021.

In the Treatment bucket, digital engagement and DevOps possess an enhanced value proposition. They provide a path to the customer and employee visibility, improved productivity, and improved enablement through software between and across teams. As IT spend normalizes, we expect these categories to accelerate with an initial sharp rebound due to pent up demand.

To learn more about these foundational themes, their classifications, and key vendors associated with each theme, please see our note Software Winners In a Post-Pandemic World – Microsoft Ticks All The Boxes.

Vendor Focus: Atlassian

Vendors can be both cure and treatment in this model, as some products may fit better in one bucket vs. the other. Atlassian is a vendor that addresses the acute needs of customers in the cure segments of cloud, remote work, and workflow planning while continuing to innovate in the treatment bucket of DevOps.

Source: SoftwareReviews Application Lifecycle Management, Report Published August 5, 2020

The dynamic founder duo of Mike Cannon-Brookes and Scott Farquar continue to deliver on their promises to bring to market new products, advanced integrations, and a consolidated set of software solutions focused on enabling an overall faster and better quality of application development lifecycle. Even amid the COVID-19 pandemic and economic contraction, Atlassian has announced that it is doubling down on its technology investments, intending to add 1,000 Atlassians to the company over the next year. Considering the base employee count is 4,500, this level of growth is a considerable number. Atlassian re-invests ~44% of revenue back into the business, which is more than double the R&D investment of most technology companies. With a customer base of over 170k, Atlassian sells to companies of all sizes and across all industries.

Cloud Transition (Cure)

Atlassian has been and will continue to be a beneficiary of the accelerated pace of digital transformation during and post COVID-19, with the pandemic acting as a positive catalyst for the acceleration of Atlassian's cloud migration strategy. Atlassian sees the migration of its customer base to Atlassian's cloud-native environment as the organization's number one strategy. Atlassian believes that customers on the cloud platform receive a better experience using cloud solutions. Of course, customers end up spending more with the company (adding seats and modules) while Atlassian also reduces customer churn.

Of the company’s 174k customers, 150k already use Atlassian's cloud products in some form. However, almost 75% of the company’s paid users continue to use and deploy Atlassian products behind the firewall. Ninety-five percent of Atlassian's new customers are signing up for the cloud versions of Jira, Confluence, and other offerings while migrations from server to the cloud increased by 60% in the preceding year.

From FY16 through FY17, Atlassian completed the forking of the codebase to be cloud-only and hosted on a multi-tenant AWS environment from the previous self-hosted single tenant. The past three years through FY20 saw the addition of four cloud editions and included eight cloud acquisitions. This investment has delivered proven results for Atlassian customers by materially improving development speed and end-user scalability. The goal for FY21 and beyond is to derive 90% of revenue from cloud subscriptions while migrating 100% of customers to the cloud offering. Cloud platform improvements strive to provide the ability to support an unlimited user model (currently capped at 10k) with over fifty new enterprise features to be added.

Atlassian offers existing on-premises clients a seamless transition path to its cloud offerings via an extended trial cloud option that enables migration to the new product SKUs without losing their investment in on-premises products already paid for.

Remote Work/Workflow Planning (Cure)

At its core, Atlassian is a project management tool, initially designed for developers to manage project planning, design, and execution. The Atlassian toolsets are increasingly used by non-developers (e.g. Marketing, Sales, Service, Operations, Legal, and HR) that work closely with developers on various projects. Atlassian's tools are tightly integrated, easy to use, and flexible enough to be used by non-development teams for collaboration and workflow automation both within and across teams.

Given the shift to remote work, Atlassian’s collaboration tools complement the likes of Zoom Video, Slack, and Microsoft Teams, as the Atlassian tools are built more for asynchronous and sophisticated project work that requires coordination.

Recent acquisitions of Mindville and Halp further bolster Atlassian’s capabilities in the workflow planning and collaboration space. Mindville acts like a CMDB repository for IT service management (ITSM) scenarios. This product allows for the automated discovery and tracking of enterprise assets, both within IT and beyond, and provides insights into the assets' interdependencies. The solution provides visibility into how a change to the assets may affect the customer experience. Mindville is already present in the Atlassian Marketplace and should be an enhancing add-on to the Jira Service Desk product.

Halp is a start-up that provides the technology to build an integrated help desk ticketing system within a Slack environment. Combined with integrations with Confluence and in the future, Jira Support, it will further enable a seamless integration environment for users that prefer to stay within the Slack UI.

Over time, a significant use case for Mindville will be enabling Atlassian to become a full-scale ITSM provider. One research firm has identified Atlassian as the leader in its Strategic Development Index, well ahead of more entrenched and enterprise-scale ITSM providers. The combination of a customer-friendly business model and a leading strategic vision should have the likes of Service Now, BMC, and HPE shaking in their boots!

DevOps (Treatment)

Atlassian has increasingly focused on DevOps tools, complementing its wholesale shift to the cloud. Atlassian is seeking to solve the problem of too many disconnected tools, manual processes, and changing collaboration practices, as indicated in its DevOps survey.

Driving overall improvement in this toolbox includes DevOps roadmaps layered across the full Jira tool suite with specific products adding DevOps functionality:

1. Jira Software Cloud with DevOps Automation Triggers
2. Jira Service Desk integration with CI/CD tools and Live Status (with Jira Automation)
3. Bitbucket with Code Insights, Your Work Dashboard
4. Bamboo with improved branch configurations
5. Improved agent queues
6. AWS Service Catalog connector for Jira Service Desk
7. Opsgenie and Bitbucket Cloud integration

Atlassian is weaving together a world-class DevOps toolchain supporting the development community and a burgeoning IT service management portfolio, both of which are tethered together by a user-friendly project management toolset.

Source: Atlassian DevOps Survey

It is clear from the critical traits section of the DevOps Survey that Atlassian’s tools are geared towards breaking down the obstacles to effective collaboration and problem solving to drive a technology-supported cross-functional team alignment. The ability to succeed in these areas is critical, as over 61% of survey respondents indicate that priorities change either daily or weekly in the DevOps world.

Business Model

One of the most under-appreciated aspects by potential customers of Atlassian is its dynamic business model. The founders of Atlassian embrace a guiding philosophy that places a heavy emphasis on an exceptionally high R&D expense ratio (~44%) and a meager sales and marketing expense metric (~16%). To boil it down, the philosophy says that if you provide developers with the tools to develop efficiently and enhance developer workgroups and teams' experience, you simply don't need salespeople.

This analyst fondly recalls negotiating with his Atlassian account representative about ten years ago. The customer company was told that all companies get the same price, whether you are the mom-and-pop shop on the corner or IBM. This customer-friendly and transparent commercial model was most welcome to this technology buyer! While the products and plans have grown over time, as well as the price tag, the model remains as simple, straightforward, and transparent as ever.

Source: Atlassian Pricing

In light of the pandemic, Atlassian has even backed off its usual annual price increase (which can range from 10-25% and up), which will be more modest in nature in an effort to “…be sensitive to customers facing challenges due to COVID-19.”

Finally, Atlassian has introduced free tier versions of its Jira Software, Jira Service Desk, Jira Core, and Confluence products for up to three (Service Desk) or ten (Software and Confluence) users. While the free tier options have substantial limitations on capacity, support, and overall functionality, it is yet another tool to attract new customers during tough economic times. Atlassian just added 3k new customers in the most recent quarter.

Source: Atlassian Shareholder Letter Q4 FY20

Our Take

The COVID-19 pandemic is a tailwind accelerator for Atlassian’s growth prospects both mid and post pandemic. The powerful combination of a customer friendly and transparent business model coupled with extraordinarily effective products that link teams cross-functionally will fuel customer expansion for years to come. Atlassian has found a way to merge the niche specialties of technology development, operations, and overall code management with the more mainstream functions of IT service management and overall business process management. Migrating its technology stack to a cloud-only environment over time will further enhance the benefits that are derived from its best in class R&D investment levels. In closing, this is a vendor that can grow with your business due to the expanding breadth and depth of the Atlassian product library.