Atlassian is one of the last old-fashioned software companies - and Wall Street loves it for now
Its stock jumped 32% on the first day of trading Thursday, giving it a market cap of $5.7 billion. That's nearly $2.5 billion more than its last private market valuation, a rare feat in today's weak tech IPO market.
A lot of things that make Atlassian stand out from the rest of the pack: it's been profitable for the past 10 years, and has been able to grow without taking any direct VC investment or employing any large salesforce.
But one of the biggest differences from other red-hot software companies is the fact that Atlassian's business is still deeply rooted in the old, on-premise licensing model, in which users install the software in their own servers, as opposed to the "cloud," or software delivered over the web.
Cloud, schmoud
At a time when on-premise software is considered a dying breed, Atlassian's successful IPO shows public market investors are still willing to bet on companies with an old business model, as long as it shows growth and has a strong product.
"The interesting part is that the market didn't penalize them for not having mostly subscription revenue," Jason Lemkin, one of the most prominent investors in the cloud space, told Business Insider. "What it proves is that there is no one perfect model. The market wants great software companies first."
Lemkin may have a point. While most of the popular "unicorn" startups are all-cloud based, only a few of them have been able to go public so far. Even the ones that did IPO saw their stock get hammered in the public markets, as seen with Box and HortonWorks.
Atlassian gets nearly 73% of its sales from on-premise software, with maintenance fees accounting for more than half of the total revenue. Although its cloud subscription revenue is growing fast, now 27% of the total, Atlassian's on-premise maintenence and perpetual license revenue each increased over 90% and 74%, respectively, in the past two years.
Why the old way is so great for business
There's a reason traditional software is such a great business - a reason that companies like Microsoft and Oracle discovered decades ago.
With software, the cost of developing the product is all up front. Once you've covered that cost, every additional sale is almost pure profit. Sales, marketing, and distribution add to the final costs, but the incremental cost of production for each unit is extremely low, and stays low even as you scale to thousands or millions of customers.
Cloud software is different. The more your customers use it, the more you have to pay in terms of hosting costs, bandwidth costs, and so on.
Atlassian does see its customers eventually converting to the cloud, as it noted in its prospectus, "We believe that over time more customers will move to the cloud offering, and the cloud offering will become more central to our distribution model."
Lemkin stressed that Atlassian's move to the cloud is only natural, noting the top performing software companies are all-cloud based, like Salesforce, Workday, and Adobe. But it won't happen immediately.