April 11, 2019 | 07:41 ET | 07:41 ET~

Atlassian Corp. Plc Class A

TEAM-NSDQ Rating Price: Apr-10 Target Total Rtn Software

Market Perform $112.74 $100.00 -11%
Keith Bachman, CFA Analyst
keith.bachman@bmo.com (212) 885-4010
Stefan A. Styk Associate
Structurally Well Positioned stefan.styk@bmo.com (212) 885-4095
Jung Pak Senior Associate
jung.pak@bmo.com (310) 395-0456
Bottom Line: We attended TEAM’s user group and analyst events in Vegas. We came Daniel Asulin Associate
away from the meetings a bit more positive, including feedback on new product Daniel.Asulin@bmo.com (212) 885-4136
Jira Align. We think TEAM is one of the best positioned software/SaaS companies in Legal Entity: BMO Capital Markets Corp.
our coverage universe, and run/operated in a very thoughtful manner with a focus
2YR Price Volume Chart
on longer term potential. However, we struggle with valuation. No changes to our 140
estimates, rating, and FCF. 120

100
Key Points
80 10

Relatively Inelastic Demand Curve: Management stated its intent to remain a low 60
5
cost leader. With that said, we think TEAM can keep raising prices over the next few 40

years without impacting unit demand, thus meaningfully helping total revenue growth. 20
Oct Apr Oct Apr
0

TEAM announced “Premium” SKUs on several products, and we think most, if not all, LHS: Price ($) / RHS: Volume (mm) Source: FactSet

products/services will have premium SKUs over time, and that net like for like prices
Company Data in $
will increase.
Dividend $0.00 Shares O/S (mm) 239.5
Larger Opportunity: TEAM announced that it has 175k starter customers, who are Yield 0.0% Market Cap (mm) $27,001
paying customers under $10/month. This compares to a customer base paying > EV (mm) $24,412 AD Vol. (mm) 1.71
$10/month of 138k. In 2015, TEAM had 51k >$10/month customers and 78k starter
BMO Estimates in $
customers. We think TEAM will have continued success in increasing monetization of
(FY- Jun .) 2018A 2019E 2020E
its starter customers, since these customers are already paying some nominal amount
to TEAM. We also note that TEAM has millions of unpaying customers, although we Revenue (mm) $881 $1,198 $1,522
think starter customers are significantly more likely to become full paying customers EPS $0.51 $0.82 $1.03
compared to existing free users. CFPS $1.15 $1.53 $1.91

Jira Align, Good Opportunity: Customer and channel feedback was positive on Align. Consensus Estimates
We think that Jira Align, which was recently acquired by TEAM as AgileCraft last month, 2018A 2019E 2020E
is most appropriate for large enterprise customers. We note that AgileCraft’s revenues EPS $0.82 $1.02
were very small (likely $6-8 million), and the acquisition is dilutive to TEAM’s margins. Valuation
However, we think that large enterprises are increasingly using TEAM’s products as part
2018A 2019E 2020E
of their strategic imperatives, rather than the more traditional bottoms-up expansion
P/E NM NM NM
pattern for the company. Also, we note that Align has much higher ARPU compared to
TEAM's traditional products. Hence, we think Align can be additive to revenue growth in EV/FCF NM NM 49.9x
FY20 and FY21. EV/Revenue 27.7x 20.4x 16.0x
QTR. EPS Q1 Q2 Q3 Q4
2018A $0.13 $0.13 $0.09 $0.15
2019E $0.20a $0.25a $0.18 $0.19
2020E $0.24 $0.26 $0.25 $0.28

Our Thesis
We like a lot about Atlassian, including what we
believe is a compelling product suite, as well as an
innovative distribution and pricing strategy. However,
we don’t believe the current valuation creates a
Please refer to pages 4 to 6 for Important Disclosures, including Analyst's Certification. favorable risk/reward.
Atlassian Corp. Plc Class A - Block Summary Model

Income Statement 2018A 2019E 2020E

Revenue $881 $1,198 $1,522
Cost of Revenues 140 170 248 Valuation
Gross Profit 741 1,028 1,274 Our target price is based on 13x EV/FY2020E revenues and
Operating Expenses 567 783 943 41x EV/FY2020E FCF.

Operating profit (Non-GAAP) 174 245 331 Upside Scenario $115.00

Other income (expense) 8 25 20 Our upside case for TEAM is $115 based on revenue growth
of 28.0% and FCF margin of 33.1% with a target multiple
Earnings Before Taxes 182 270 351
of 18.0x EV/FY2020 revenue. Our upside case includes an
Taxes 57 68 88 additional 100 bps of revenue growth and 100 bps of FCF
Net Income (Non-GAAP) 124 203 264 margin versus our base case assumption.

EPS (Non-GAAP) $0.51 $0.82 $1.03 Downside Scenario $75.00

Diluted Shares Outstanding 244 249 256 Our downside case for TEAM is $75 based on revenue
growth of 24.0% and FCF margin of 29.1% with a target
Cash Flow Statement 2018A 2019E 2020E
multiple of 11.9x EV/FY2020E revenue. Our downside case
Depreciation & Amortization 79 75 137 reduces 300 bps from revenue growth and 300 bps from FCF
Stock-based Compensation 163 248 289 margin versus our base case assumption.

Change in Working Capital 121 163 136 in USD

Cash From Operating 311 420 539

-33% -11% +2%
Capex (30) (40) (49)
Cash From Investing (52) (304) (49) Downside Target Current Upside
Scenario Price Price Scenario
Cash Flow From Financing 907 (2) 0 75.00 100.00 112.74 115.00
Net Change in Cash 1,166 114 489
Key Catalysts
Free Cash Flow 281 380 489
Upside to consensus billings estimates
Balance Sheet 2018A 2019E 2020E
Company Description
Cash and Cash Equivalents 1,733 1,828 2,317
Atlassian provides collaboration and software development
Total Current Assets 1,822 1,967 2,494 tools designed to help teams organize, communicate, and
complete work more efficiently. In addition, Atlassian has
Total Assets 2,422 2,947 3,507
a unique go-to-market strategy that utilizes viral marketing
Current Liabilities 445 624 792 to drive sales through its website rather than a traditional
Deferred revenues (ST & LT) 343 497 641 quota-carrying sales force.

Total debt (ST & LT) 820 836 836

Total Liabilities 1,515 2,008 2,182
Total Shareholders' Equity 907 940 1,325
Source: BMO Capital Markets, Company Reports

TEAM-NSDQ Glossary Company

Research Models

Atlassian Corp. Plc Class A | Page 2 April 11, 2019

 Additional Thoughts
Solid Business Model: As we have previously expressed, we do not think that TEAM’s business model
(lack of sales force) is a negative. Rather, we think it is a positive. We think TEAM will continue to
penetrate enterprise customers due to creating 1) solid products, 2) with low prices, and 3) with mostly
viral marketing reach. While we think TEAM overpays at times for M&A deals, we nevertheless think
TEAM’s emphasis on R&D creates sustainable product/services revenue growth potential. Further, TEAM
management highlighted that in many cases, non-IT buyers account for more than 40% of purchases. In
FY19, 16% of customers started with Jira Services desk, which we think indicates that TEAM is
penetrating non-IT users even without a traditional enterprise sales force.

Growing ITSM/ITOM Competitor: We think Jira Service Desk, OpsGenie, and Statuspage is increasing
competition in the ITSM/ITOM market segment. That being said, we think TEAM’s target market is more
down market from NOW’s focus on the G2K. We believe TEAM has been successful in building these
capabilities, and 16% of new customers in FY19 YTD have landed via Jira Service desk, which
demonstrates the stand-alone interest in TEAM’s ITSM and ITOM.

Greater Emphasis on Cloud: We think TEAM created a bit more emphasis on cloud migrations at the
latest user group event. TEAM will now be able to support 10k users per customer on cloud versus 5k
previously. We think that larger customers are increasingly demanding cloud deployment at a larger
scale, so we expect TEAM to continue to increase the limit to support growth in large enterprise
customers. We note that TEAM generates greater revenue per customer after three years in cloud versus
license models, though at lower margins. More than 90% of new customers are starting in cloud. We
thought it was interesting that TEAM offered free cloud subscriptions for all user group attendees, up to
2k users.

Tighter Integration, More Upsell: We think one of the main messages was importance of upsell to the
broad base of existing customers. To help in this effort, management is focused on ensuring that
products work well together. We attended a session on Confluence. We believe that part of the value
proposition of Confluence is that it works well with many other products, which thus eases cross sell.

High Retention: Management stated that retention is above 98% for customers above $50k in revenues.

Elevated Valuation: We have liked TEAM’s fundamentals for some time, but have remained Market
Perform due to valuation. This has proven to be a poor decision given share price performance, but we
still struggle with valuation at current levels. Based on our recent note, Snapshot on Valuation, published
on April 1, TEAM’s NTM EV/revenue multiple of 18.0x is 1.6 and 2.2 standard deviations above the one-
and three-year averages and sits near an all-time high of 19.3x. The company has the highest NTM
EV/revenue multiple in our software coverage. TEAM’s (EV/rev) / (revenue growth) of 0.60 based on
CY2019 estimates is the second-highest among the Growth software segment and compares with the
Growth universe average of 0.39x. However, TEAM's model is uncommon among the growth software
universe, particularly considering its 30%+ revenue growth potential over the next two CYs and its
strong cash flow generating capabilities. If we look at CY2020 (EV/revenue) / (rev growth + FCF
margins), TEAM trades at 0.25x, which compares to the Growth software group average of 0.19x-0.22x.

Atlassian Corp. Plc Class A | Page 3 April 11, 2019

 At la ssia n Cor p . Plc Cla ss A Ra t in g H ist or y a s of 0 4 /1 0 /2 0 1 9
I:Mkt :$28.00 Mkt :$29.00 Mkt :$33.00 Mkt :$40.00 Mkt :$42.00 Mkt :$43.00 Mkt :$51.00 Mkt :$56.00 Mkt :$65.00 Mkt :$64.00 Mkt :$82.00
01/04/2017 01/20/2017 04/28/2017 07/06/2017 07/26/2017 07/28/2017 10/19/2017 01/18/2018 04/17/2018 04/19/2018 07/27/2018
$120

$100

$80

$60

$40

$20
Jul 2016 Oct 2016 Jan 2017 Apr 2017 Jul 2017 Oct 2017 Jan 2018 Apr 2018 Jul 2018 Oct 2018 Jan 2019 Apr 2019
Mkt :$100.00
01/17/2019

Closing Price Target Price

Out perform (OP); Market Perform (Mkt ); Underperform (Und); Speculat ive (S); Suspended (Spd); Not Rat ed (NR); Rest rict ed (R)
Source: Fact Set , BMO Capit al Market s

IMPORTANT DISCLOSURES
Analyst's Certification
I, Keith Bachman, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or
issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views
expressed in this report.
Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and
their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in
generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service
to clients.
Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA. These
analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the FINRA Rule 2241 and 2242
restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Methodology and Risks to Target Price/Valuation for Atlassian Corp. Plc Class A (TEAM-NSDQ)
Methodology: Our target price is based on 13x EV/FY2020E revenues and 42x EV/FY2020E FCF.
Risks: Risks to our target price include slower revenue from increased competition, price sensitivity, and lack of product diversification. If
these risks are greater than we expect, the stock could have difficulty achieving our target price. Likewise, if these risks are less than we
expect, the stock could trade above our target price.

Distribution of Ratings (April 10, 2019)

Rating category BMOCM US BMOCM US IB BMOCM US IB BMOCM BMOCM IB StarMine

BMO rating
Universe* Clients** Clients*** Universe**** Clients***** Universe~
Buy Outperform 48.2 % 23.4 % 64.4 % 49.9 % 63.0 % 57.7%
Hold Market Perform 49.0 % 11.7 % 32.7 % 47.3 % 35.5 % 37.7%
Sell Underperform 2.8 % 18.8 % 3.0 % 2.8 % 1.6 % 4.6%

* Reflects rating distribution of all companies covered by BMO Capital Markets Corp. equity research analysts.
** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking services
as percentage within ratings category.
*** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking
services as percentage of Investment Banking clients.
**** Reflects rating distribution of all companies covered by BMO Capital Markets equity research analysts.
***** Reflects rating distribution of all companies from which BMO Capital Markets has received compensation for Investment Banking services
as percentage of Investment Banking clients.
~ As of October 4, 2018.

Ratings Key (as of October 2016)

We use the following ratings system definitions:
OP = Outperform - Forecast to outperform the analyst’s coverage universe on a total return basis;

Atlassian Corp. Plc Class A | Page 4 April 11, 2019

Mkt = Market Perform - Forecast to perform roughly in line with the analyst’s coverage universe on a total return basis;
Und = Underperform - Forecast to underperform the analyst’s coverage universe on a total return basis;
(S) = Speculative investment;
Spd = Suspended - Coverage and rating suspended until coverage is reinstated;
NR = No Rated - No rating at this time; and
R = Restricted - Dissemination of research is currently restricted.
BMO Capital Markets' seven Top 15 lists guide investors to our best ideas according to different objectives (CDN Large Cap, CDN Small Cap, US
Large Cap, US Small Cap, Income, CDN Quant, and US Quant have replaced the Top Pick rating).
Prior BMO Capital Markets Rating System
(April 2013 - October 2016)
http://researchglobal.bmocapitalmarkets.com/documents/2013/rating_key_2013_to_2016.pdf
(January 2010 - April 2013)
http://researchglobal.bmocapitalmarkets.com/documents/2013/prior_rating_system.pdf

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