How Atlassian Is Making the Transition to the Cloud

Atlassian (TEAM -0.91%) is one of the rare cloud stocks that is putting up strong growth and delivering significant proifts.

In this episode of "Beat and Raise" recorded on Jan. 28, Fool.com contributors Nicholas Rossolillo and Brian Withers discuss Atlassian's recent performance, it's fast-growing cloud business, and its acquisition strategy.

Nicholas Rossolillo: Let's talk about Atlassian again, knockout earnings report yesterday afternoon, right, Brian?

Brian Withers: Absolutely.

Nicholas Rossolillo: Let's just run through the numbers really quick because I think the really interesting thing to talk about is what's actually going on with the business itself. But the financials we're good. Revenue up 37 percent year-over-year. That was a beat, adjusted earnings per share up 35 percent, also a beat. Also I'd point out that's incredible considering this is a cloud software company. They're spending heavily on research, on marketing. It's still generating lots of profitability, which is fantastic. Then a great outlook for the next quarter, as much as $705 million, which would be 27 percent year-over-year increase at the midpoint of their guidance. Brian, I know you've owned this one for a long time. Atlassian I almost think of this as like the Adobe of collaboration software, because they used to be all off-premise software, but they've had to make a transition to the cloud, and they're doing that. Their cloud revenue was up 64 percent year-over-year, you pointed out earlier, that's because they're migrating existing clients over to the cloud so that's why that number is higher than total revenue.

Brian Withers: Yeah, you said the stat this morning, 98 percent of all new clients that they're getting are starting on their Cloud product.

Nicholas Rossolillo: Right. Out of those 10,000 net new customers, just in the last quarter, 98 percent of them they said were Cloud. Then kinda fun, there was a classic rock reference in their earnings letter, which is fun. They always drop some pop culture and puns on there. I won't spoil it. It has to do with the Cloud though, if you want to read the letter.

Brian Withers: I love their letter. They are very much transparent, very straightforward, very plain-spoken. If you want an example of a shareholder-friendly business, it's worth taking a look at their shareholder letter. We do have a question here, Nick. I don't know if you've seen the announcement they talked about acquiring Percept AI for a billion bucks. It's it's like this virtual chat boat, I don't know l if you had any comments on that, I can talk to it if you want.

Nicholas Rossolillo: I think it's a good deal. They have the cash. This was a cash-rich business and they're generating lots of free cash flow. The reason I like it is, I think Atlassian is one of these rare Cloud software products that is bridging that gap between products to platform. Whenever you can launch an app store, and your users go to the app store to integrate other stuff in with your core products, that's fantastic, so I think Atlassian is at that point now where they can like grab these like bolt-on acquisitions, and it's going to be a great value-add for shareholders. That's my take anyways.

Brian Withers: To me, it supports their IT service management business, which is after a product is released to users, sometimes there's stuff that happens, there's bugs or whatever, and they're going to incorporate this chatbots into their service management tools. They do a fantastic job of the companies that they buy. They integrate and incorporate them across their enterprise so that everything works seamlessly together. I think that's like huge benefit that Atlassian brings is there's so many different products where customers can come in to experience Atlassian and then land and expand over time.

Nicholas Rossolillo: I agree. I think you might look at Atlassian, I know I have in the last couple of years and maybe concerned that, this is historically not a Cloud business, and we had two IPOs in recent years that are Cloud native competitors, Asana and Monday.com. You might look at it and think those two are growing much faster, maybe that's a risk to Atlassian, but clearly the last quarter's numbers debunked that Atlassian's doing more than OK. I think the runway ahead of them is huge because of collaboration software of all kinds, I think it's just going to continue to do really well, in the wake of the pandemic.

Brian Withers: Especially in the hybrid environment where people can't collect around a status whiteboard or you sticky stake to keep track of stuff anymore.