Secondly, Atlassian didnt hire enough people, specifically in its R&D teams. In part this was due to a decision to deliberately slow hiring to focus on the performance of its cloud computing products during the quarter. Margins improved as a result, but Farquhar and Cannon-Brookes said investing towards long-term goals is more important than numbers that look strong on paper.
Thats not a good thing, Cannon-Brookes said of the hiring miss. Thats something weve got to improve and we are committed to doing that.
What matters most to Cannon-Brookes and Farquhar was the progress towards Atlassians widening vision.
A company that started out building project management platforms for software developers (a total addressable market of about 23 million) has almost naturally grown to encompass IT teams more broadly (a target market to the 100 million). It now wants to become embedded in teams more broadly, with a suite of collaboration tools that can be used by a market of knowledge workers that Atlassian puts at somewhere between 800 million and 1 billion.
Cannon-Brookes emphasised on Friday morning that the digitisation of enterprise remains in the early innings. He pointed out that you only need to think about the amount of work done in spreadsheets and emails to understand the opportunity to Atlassian products like Confluence (a collaboration tool that allows teams to create and share content and documents via spaces, pages and blogs) and Trello (a tool that allows teams to visualise lists, based on the Kanban style of management made famous by Toyota).
Confluence, launched 15 years ago, now has 60,000 corporate customers. Trello went through 50 million registered users in the quarter.
We obviously feel very good about where were positioned and how that market is evolving, Cannon-Brookes said. We are incredibly bullish on the overall space and opportunity.
Given the five- to 10-year view they say they are taking on product development and growth, it must surely frustrate Cannon-Brookes and Farquhar to have to address the market every three months.
But thats the price of gaining access to US capital markets, the worlds most important for technology firms.
Asian profit plunge
Of course, Americas gain is Australias loss an idea very much borne out by research produced by McKinsey for the World Economic Forum in Davos this week.
The report explores how economic profits that is, profits after the cost of capital is subtracted have moved over the decade from 2005-07 through to 2015-17.
The big picture is not exactly a pretty one. Total economic profits from the G5000 (the worlds largest 5000 firms by revenue) fell from $US726 billion to an economic loss of $US34 billion.
The picture is even uglier in Asia, where the largest portion of G5000 companies (43 per cent) now resides. Over the decade in question the total economic profit of the region went from $US152 billion to an economic loss of $US207 billion.
In other words, Asia accounted for half of the deterioration in global economic profit over the decade, despite $US1 in every $US2 of new capital being invested in the region.
According to the McKinsey team behind the report, which included Australian-based pair Chris Bradley, a senior partner at the firm, and Ben Stretch, an associate partner, there were three key reasons for the fall in global economic profitability over the decade.
The first was the end of the commodities super cycle, which saw prices plunge (the average oil price fell from $US110 a barrel between 2011 and 2014, but had halved by 2015) and hit energy and materials companies.
The second was the turmoil in the European financial sector, which forced banks to take remedial action to rescue their balance sheets in the wake of the financial crisis.
The final factor was the almost breathtaking misallocation of capital in China. Over the past 10 years, some $US10 trillion of capital has been invested into the country, but 80 per cent of that went into sectors that earned below their cost of capital, particularly utilities, telecommunications, transportation, and real estate and construction.
A lot of capital has gone into the enabling of domestic services sectors, where in todays terms the value has been destroyed, Bradley says.
Capital allocation in the Asia region outside of China was only marginally better, with 68 per cent of capital going into sectors that earned less than their cost of capital.
This of course means capital is not getting to the right sectors, namely consumer goods and technology, including health tech. These two sectors delivered the most growth in economic profit over the past decade and yet only 20 per cent of the worlds capital went towards these sectors.
The US did better 30 per cent of capital was pumped into these sectors in America, which notably saw economic profit fall only slightly over the decade, from $US276 billion to $US245 billion but Asia did much worse, with only 12 per cent of capital going towards consumer and tech.
Australia’s loss
Which brings us back to Atlassian and Australias big problem. While the number of firms from Australia and New Zealand rose to 118 from 91, Bradley and Stretch say the country remains overly exposed to the energy and resource sector, which saw the same tough conditions as the rest of the world, and financial services, which enjoyed relatively strong returns over the decade.
But with energy and resources eternally cyclical, and financial services likely to see its profitability drained by a range of well-recognised headwinds, there is an obvious question as to how Australia develops a third growth engine.
How does Asia and Australia participate more in these new pools of value that are happening in the world? Stretch asks.
The glib answer is by growing more companies like Atlassian globally focused technology businesses with real competitive advantage and real ambition.
How many of these do we have of any scale? CSL, the company thats helped propel the ASX 200 index to record highs in the past 12 months, is certainly one. Aristocrat Leisure is arguably another. BHP and Rio Tinto are certainly global and would love to be portrayed as technology companies, but dont quite fit the bill.
At least half of our 20 biggest companies are domestically focused. Yes, theyre mainly pretty well run, and certainly their returns have been reasonable in recent times, albeit boosted by low rates. But its hard to argue that we have a surfeit of true global growth businesses.
The bigger question for Australia is whether we have the conditions in place to support the creation of another generation of Atlassians the right policies in place, the right regulatory settings, the right attitude, even.
This should matter for investors as much as it should matter for policymakers. The market might be at record highs now, but its hard to see the next set of big growth companies that can keep pushing it higher.