Platypus As a Service. Why I Own Atlassian

I recently did a short, intentionally light-hearted Atlassian write-up.  So sharing it here.  I own a big chunk of Atlassian for the reasons below.  I plan to keep it for 5-10 years.  Note, however, that it is very richly valued and this is in no way a  investment recommendation.

I am also fond of Platypi…

The Platypus and the SAAS company Atlassian have two things in common. Both are native to Australia and both are unique in their class. The Platypus is the only mammal that lays eggs. Atlassian is the only major SAAS (Software as a Service) player without a salesforce.

Conventional wisdom holds that software is sold, not bought. Most SAAS companies have invested heavily in Sales and Marketing. In the last year, SalesForce spent 46% of revenue on Sales. ServiceNow spent 46%. ZenDesk spent 49%. WorkDay spent 32%.

Last year, Atlassian spent 0% of revenue on Sales and 21% on Marketing its software development and workflow tools.  I won’t even try to detail what the software does here.  Suffice it to say that, with 138,000 paying customer accounts and 39% revenue growth last quarter, Atlassian’s services have evidently been bought not sold.

Atlassian still posted a -1.5% operating loss in 2018. Where did it spend? Atlassian plowed 46% of revenues back into Research and Development. Contrast that with R&D/revenue ratios of 14%, 20%, 27%, and 43% at Salesforce, ServiceNow, ZenDesk, and WorkDay respectively.

So software that sells itself isn’t cheap to build. But R&D spending accretes and compounds in value over time. Most Sales spending walks out the door every night. In the next ten years, most SAAS investment will go into making Sales millionaires. Atlassian’s investment will be building a mountain of well maintained code.

That code mountain will stack up high versus others. Atlassian spent $475m on R&D in 2018. Almost as much as ServiceNow on less than half the revenues. That dollar spending level is probably enough to both maintain Atlassian’s base and invade adjacent markets. Notably, Atlassian is already attacking ServiceNow’s and ZenDesk’s Service Desk markets from the bottom up.

R&D investment also doesn’t increase in lock-step with revenue growth like Sales spending does. Atlassian will eventually level off R&D investment and drop incremental revenue growth directly to profits. Atlassian’s peers risk slowing revenue growth if they ever ease off on Sales spending.

The Platypus hasn’t had much success outside of its singular ecological niche. The oddities of its Antipodean cousin Atlassian, however, may give it an evolutionary advantage over its conventional peers.

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