Atlassian's push to the cloud is complicated by the recession and its impact on customers

Key Points
  • Atlassian is offering discounts to big companies that want to adopt its cloud products.
  • Cloud services come with a lower gross margin than on-premises software, but Atlassian sees benefits for itself and customers.
  • The company gave weaker-than-expected guidance as some customers are struggling during the recession.
Atlassian co-founders Mike Cannon-Brookes and Scott Farquhar

Atlassian has long allowed customers to deploy its collaboration and code-sharing software in their own data centers or in the cloud. As it nears its five-year anniversary on the public market, Atlassian says the cloud is clearly the future.

Cloud today represents less than half of Atlassian's total revenue, a figure the company wants to push to 90% or higher. Delivering its tools over the web, with Amazon Web Services hosting the technology, could translate into a higher-quality experience for more clients, because Atlassian will be able to make more rapid enhancements, taking into account customer feedback, co-CEO Scott Farquhar told CNBC this week.

The company's cloud services have a lower gross margin than on-premises products, partly because Atlassian pays hosting fees to AWS. While that may not be great for Atlassian's financials in the short-term, it means lower operating costs in part by cutting back server expenses.

"Customers do not want to be in the business of downloading software, putting it on an operating system, keeping both of them up to date," Farquhar said.

Atlassian sees the longer-term benefits as so great that it's extending considerable discounts for users willing to move to the cloud. Customers with at least 1,001 users that start annual subscriptions before Jan. 1, can get 55% off, for example

"There's a lot of cost savings moving to cloud," said Farquhar. "What we want to do is say, 'All those cost savings are in your pocket in the first year."  

Atlassian shares are up 43% this year, benefiting alongside other subscription software companies like Zoom and Slack, because its products have assumed greater importance with developers working remotely during the pandemic.

Atlassian performance this year

In response to concerns among some users of the on-premises products, Atlassian engineers worked to make sure that cloud performance is at least equal to what they've experienced to date and that there are just as many integrations available, said Cameron Deatsch, Atlassian's chief revenue officer. 

The company provides automated tools to help big customers migrate, and the cloud products can now handle an unlimited number of users.

"Our cloud products must meet the needs of all of our on-prem customers today," said Deatsch, who once encouraged the company's top prospects to adopt its server products.

On Thursday, Atlassian reported earnings and revenue for its fiscal fourth quarter that beat analysts' estimates. But its forecast trailed expectations, sending the stock down 9% in extended trading. And with some customers struggling from the recession, executives chose not to provide a forecast for the full year.

Atlassian has waived bills for some clients or allowed them to defer payments, Farquhar said, along with offering cloud services to small teams free of charge.

In its quarterly shareholder letter, Atlassian said the cloud shift will lower its free cash flow margin as well as its gross margin. The company expects maintenance revenue for the full year to be flat because of a smaller impact from price increases, as well as the migrations to cloud products.

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