Motley Fool Hidden Gems Investing - Sheryl Sandberg Leans Out

Episode Date: June 2, 2022

After 14 years at Chief Operating Officer at Meta Platforms Sheryl Sandberg is stepping down in the fall. (0:25) Asit Sharma discusses: - Sandberg's leadership in growing revenue and defending the company in public - How the company's pivot to the metaverse most likely contributes to her departure - Chewy's strong 1st-quarter profits against, albeit, modest expectations - Why the pet retailer needs to focus on getting fulfillment and infrastructure right - The numbers behind Chewy's customers spending more each year (16:04) Tim Beyers talks with Cameron Deatsch, Chief Revenue Officer at Atlassian, about the software company's humble origin and its cloud transition that could be worth billions. Stocks discussed: FB, CHWY, TEAM, MNDY, ASAN, AMZN Host: Chris Hill Guests: Asit Sharma, Tim Beyers, Cameron Deatsch Producer: Ricky Mulvey Engineers: Dan Boyd, Spencer Daniel Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hillenbrand. We've got a retailer on the rebound and a conversation with one of Atlassian's top executives. Motley Fool Money starts now. I'm Chris Hillen. I'm joined today by Motley Fool Senior Analyst Asit Sharma. Thanks for being here. Asit Sharma. Chris, as always, thanks for having me. Let's start with the news from big tech. Sheryl Sandberg is stepping down after 14 years as the Chief Operating Officer at Meta Platforms. Javier Olivan, who is the Chief Growth Officer, is going to be stepping in to be the new Chief Operating Officer when she steps down this fall. There are a few different ways we can go here. Let me start with this.

Were you surprised by the timing of this? Because I think I was. I think I was a little surprised at the timing. Not that I think anything nefarious is going on. I wouldn't have been surprised if she stepped down a couple of years ago. This seems a little out of the blue, but look, she's had a tremendous run. That's true. Sheryl Sandberg has been onboard for 14 years now, helped to grow this company from a very small platform into this behemoth that it is today. There's almost never a good time to leave. It will always feel like bad timing when someone so central to a business goes away, although she's taken a bit of a step back, I think, from being

a really visible member of the management team. In some ways, her influence has waned just a bit. I don't think this is anything on Sheryl Sandberg. I think it's just more Mark Zuckerberg wanting to take full control and listen to his own counsel. I will say, I just saw something, Chris, this morning, this article in Fortune, in which she cited as saying that the Roe v. Wade, possible overturning of that by the Supreme Court, is one of the reasons that she decided now is a good time, because she's amassed a lot of wealth as the Chief Operating Officer of Facebook, now Meta Platforms. I think part of the philanthropy that she was talking about yesterday when this was announced seems to

have a very focused intent. Maybe that's part of the reason of the timing, but yeah, it never feels good when such an important person steps down from your company. Yeah, it's not often that, look, I think if you ask me to go through the stocks that I own, I would do a much better job being able to name the CEOs of the company than I would the chief operating officers. And the legacy for Sheryl Sandberg, among other things, is she's been one of the most consequential chief operating officers really of this century. When she joined, She did such an amazing job helping to grow the revenue, but I'm assuming part of it, and this is why I would not have been surprised if she'd stepped down a couple of years ago,

I'm assuming part of it for her is her job evolved to the point where it went from how do we grow our revenue as being the North Star question guiding what she did on a week-to-week basis to, how do I protect the company? Because as often as not, when there's been a scandal of some kind at Facebook slash Meta platform, Sheryl Sandberg is the one out in front. She's the one taking the tough questions and trying to deliver the message and smooth things over. It is not lost on me, by the way, that her replacement, Javier Olivan, is going to have an easier gig. The reason he's going to have an easier gig is because at the moment, the policy department, the legal department, and the HR department all report up to Sheryl

Sandberg. The restructuring that's going to take place in the fall when she leaves means that none of those are going to report up to Olivan. I think if you're a meta-platform shareholder. You have to be a little disappointed that she's leaving because she has been such a consequential leader. I don't think it impacts the business though. To your point, the direction that Mark Zuckerberg wants to go in with the metaverse, that's not really her sweet spot. I think that is probably a contributing factor as well. I think you're onto something there. This is part of the business, a new foray into another type of business model for meta platforms that she hasn't seemed as interested in. You

haven't seen Sheryl Sandberg out front and center cheerleading their effort into the metaverse. Going back, the number of portfolios that did report up to Sheryl Sandberg is atypical of companies this size. So, over time, that was bound to change. And I'll point out that at a certain point in everyone's career, after you've done something for 14 years and you've been successful, if you sense the motivation shifting a bit and feel that you've got a lot to give in your career, it's pretty natural to do something like this. And to your point about her impact and influence, Chris, I mean, I feel that although Sheryl Sandberg's tenure wasn't without controversy. I think that she and Mark Zuckerberg rightly deserve some pushback

for some of their decisions on customer privacy and how they handled cataclysmic PR events. All in all, she's a pretty fierce feminist icon for a lot of women in the business community. I've admired her for a long time. I put her up on the scale of an Indra Nooyi, former CEO of Pepsi, a trailblazer and an inspiration for younger executives. I think that she can leave feeling that while the trajectory of her time at Meta Platforms ended with her a little bit more disconnected from strategic direction and the things she loved doing most, she's got a lot that she can be proud of. I think this isn't the last that we'll hear of her in both a business context and maybe a wider context out in the world.

I'll just close with this. If you're a shareholder, I don't think you're worried about the impact of the business, as positive an impact as she has had on the business to this point. I don't think you're worried about the underlying business of Meta Platforms. However, the next time there's a scandal at this company, I'm going to be interested to see who's out in front and I am absolutely going to compare their performance to what Sheryl Sandberg's performance has been in the past, because she's been amazing as a crisis leader at that company and really big shoes to fill for whoever's out there next. Let's move on to Chewy because Chewy's first quarter profits were much higher than Wall Street was expecting.

Their revenue was a little bit higher, but shares of the pet retail are up more than 15% today. Was this low expectations for Chewy? Because Chewy has taken some hits lately, and it seemed like the expectations weren't high. I'm just wondering how low you think they were? I think that most analysts seem to be expecting a net loss for the quarter. Coming in with a net margin that is slim, 0.8%. Just squeaking by in the black, I think just the ability to write the quarter in some black ink rather than red ink is something that caught many market participants by surprise, and it also pleased shareholders who want to see some glimpses of this long-term destiny for Chewy. Chewy has amazing customer loyalty,

and we can see that in these numbers. Active customers grew only by 4% year-over-year, but net sales per active customer through the roof at 15%. I say through the roof, not to be hyperbolic here, but this is a high inflation environment. That impressed me very much. Also impressive, Autoship customer sales. This is their set it and forget it part of their business subscription model, that number grew by about 19%. As a percentage of the total top-line, auto-ship customer sales reached their highest point ever at 72%. Chris, I want to say one thing really briefly here that Sumit Singh, the CEO, highlighted in the earnings call. He was talking about that strong behavior out of these active customers. He noted that, look, only about

two-thirds of our active customers have been with us for any amount of time. We acquired them the last three years. When you look at Chewy's cohort spending, these are the figures he cited. Typical lifelong cohort spend less than $200 in their first year, over $400 by their second year, approximately $700 by their fifth year. The oldest cohort at Chewy spend nearly $1,000 a year. This is the picture the company would like longer-term shareholders to look at. Look, margins are still tough, our cash flow isn't that great, but with this loyalty over time, we're going to scale this business into something much more profitable. Let's put aside the stock performance of the past year. What do you think they need

to do as a business over a couple of years? What you just described in terms of the behavior of their customers, what they're seeing with people. This is what most any business would want. We have to spend money to acquire new customers. When we get them in the door, we want to do such a good job delighting them that not only are they going to stick around, they're going to spend more money with us. It seems like at least if the margins aren't where they want them to be right now. They're doing a good job in terms of customer satisfaction. How do they juice those numbers without just spending a ton of money on marketing? That's one pathway to do that, but I'm assuming they're looking to pull other levers.

Chris, directionally, they're headed in the direction you'd like. Advertising and marketing spend this quarter, $145 million. This time last year, $144 million. They held advertising and marketing spend level while sales managed to increase about 14%. But to your question, what Chewy really needs to do is to get fulfillment right and to keep investing in their logistics and distribution infrastructure. For them, that's the only way they're really going to make their business model work, which is a little constrained on the top end. They've got gross margins around 27%. That's not a huge gross margin. Constrained on the bottom end by the amount of complexity and scale that's needed to serve all these customers

who are frequently ordering so much. That's an expensive business. Every penny of operating cash flow always seems to go to capital expenditure, but this is where they have to invest. They have to invest in these large distribution centers. There's a huge one a couple of hours outside of my house. You can see it from the highway on the way from Raleigh, where I live, to Charlotte. They've got a few of these across the United States. The investment in both refining their logistics, refining their relationship with partners, and the physical spaces themselves, all of this really is a thing that has to come together. The rest of the model looks like it's in place. They're never going to have super high gross margins, but they've

got the customer loyalty, that increasing spend. They don't have to market quite as aggressively as they used to, so that piece is stable. They've got decent control of the rest of their fixed operating costs. Focus on how you get that product to the customer efficiently, save some pennies on the dollar there, and Chewy is off to the races. They also appear to have a good reputation amongst people in the industry. The reason I say that is because a few weeks ago, I wanted to buy a dog toy for a friend of mine, and I went to a local shop here in Alexandria, and they didn't have what I was looking for. I said, well, what do you recommend? The person said, you might want to check Chewy. I want

to go online in Chewy. I drove to another store, a larger store, and the exact same thing happened. I thought, well, they'll have it at the bigger store. When they didn't, asked a guy, he's like, just go online, I'm sure Chewy has this, which I just thought, boy, I wonder if the management at your company knows that this is the recommendation that you're making to potential customers. Like, oh, we don't have it, so you should go online and go to Chewy.com, I'm sure they have what you're looking for. Yeah. I was critical about the sheer number of SKUs that Chewy offers when they first went public. But hey, here's the advantage of that. You build a lot of brand power. This is reminiscent, Chris, of my favorite secondhand

bookstore. Back in the day when I used to ask, hey, can you order this book for me? They would be like, just go online, go to Amazon years and years ago. Now, this secondhand bookstore is still around. But brand power can often be foretold in what your retail shops are telling their customers when you can't get an item. I think Chewy's got that. They definitely have now the scale. They're the biggest of these online pet retailers. I think they have the most mind share as well. It's just a matter of keeping that at this point. Chewing on some of those margins, as we mentioned, and maybe this model comes together. But this one is a really fun one to watch, especially for those of you who

have pets and order frequently. One of our colleagues, Chris, sent me a picture this morning of the huge box that arrived from Chewy at his doorstep. I hate to rely on anecdotal evidence, but it motivated me to get a little closer. I still haven't bought shares, but I like the the company more and more each quarter. Asit Sharma, thanks so much for being here. Thank you, Chris. Software used to come on a disk that you paid for once. Now it's in the cloud and you pay a subscription to access it. And that change has been one of the biggest growth drivers for Atlassian. It's possible you've encountered some of their software programs at work.

if you've ever used a Trello board, for example. Tim Byers talked with Cameron Deitch, Atlassian's chief revenue officer, about the company's humble origin and its cloud transition that could be worth billions. Tim Byers Atlassian's been around for quite some time. Am I right? Is this year 20? Okay. So year, year 20, just to give folks an overall flavor of this, do you see like the way we're moving work management as a practice? Is this just an industry that's ballooning because boy, there are a lot of people that want to get in on this business. Yeah. It's the, hold on. We got a bunch of people that need to work together in a business. We need

to track how they work. They need to collaborate how they work. And we need to basically make sure that's all tied to a business outcome or a customer value or what have you. So the, the need is gigantic. Um, we really look at it as there's two massive waves that we're writing when it comes to our business. All the first is, you know, very trendy. You'll see it everywhere. It's digital transformation, which is largely how are we transforming, how we deliver value to our customers using technology. That is a massive part of what Atlassian provides because we have such a large core and helping software development teams be more productive, but more importantly, software development teams work with their business counterparts, which is probably the

more critical part as companies digitally transform. So that's a big wave that we ride. The next big wave is largely probably you and I still working from home is that every company over the last two years is forcing a cultural transformation on how they work and they're figuring out new ways to work together. Um, and that's another place is how do I stay track of teams around the world that aren't in an office together anymore? And that's another great way that we can help the organizations change how they're actually working. Those two things are driving massive adoption. We have 234,000 paid customers today still growing rapidly and yeah. And lots of new offerings in the market. We actually embrace that. And if you look at

Alassian, we don't provide one product to help with this complex thing called work management. And we offer multiple products because different teams track work in different ways. And we realize that everyone's going to use different tools and different products going forward. And we provide a variety of them to solve different business problems. It's a really interesting model founded by, I think you've, you've called it, uh, two guys that didn't want to wear suits to work. I think I've seen you say this and Mike Cannon Brooks and Scott Farquhar, who are the co-CEOs

of Atlassian. Um, take us into, before we get into where the business is today, take us into the culture a little bit of, of Atlassian because it does seem kind of interesting to say the least interesting, uh, you know, I, uh, unique. I mean, I talk with my teams, like I was in our European headquarters last week meeting with a bunch of people that had never met before. We hired hundreds of people out there in the last couple of years. And I tell them it's like, it's hard to put your finger on it, but there's something magical and special about this place. And it's on all of us to keep it as we scale. Um, but you're absolutely right. Mike and Scott, two dudes from Australia, engineers, like engineering grads in

2002, who basically want to live in Australia. And as a developer, you basically could go work for a telco or work for a bank. That was largely where the options are, where you had to wear a suit to work. You haven't been to Australia. It's really hot and very uncomfortable, the place to suits, but yeah, they basically built a business with the goal in mind that they would make as much money as if they were wearing a suit, but as their own business. And they had a little bit left, right. But eventually built some software. They're still the founder CEOs. 20 years later, I worked for Scott and working for those guys for many years. Like they're in like the amount of detail that those guys get into this business, the, the level, the metrics, the teams and what

have you, they're very much permeate through us. Like the first piece that you feel Mike and Scott, when you come in here and everything we do. Um, more importantly, we support it with like five, very, very specific values. Um, where there's swear words, I don't want to offend your audience. You can go to the lasting values on our website, but open company, no BS play as a team build with heart and balance. Like we have, and I've worked for a variety of large software companies where we talk values and talk mission. This is the first place where it's like, we truly live by them. We're like, when we come into hard decisions and we can talk about hard decisions, we're always looking back to our values as the thing that doesn't change that,

that shows up how we show up to work, how we work with one another. It's still a bunch of people. It's still crazy and you can't scale this much without having problems and issues. But it's one of those places where I just say, people here are genuinely enjoyable to work with. Everyone is nice. You know, we will collaborate, you know, we will always collaborate more and more and be open on everything we do. And that comes with some faults. You know, you have to take a few,

two decisions, take a little bit longer. You got to bring more people along for the ride. But in the end, I think it ends up being a much healthier business in the end. I mean, it's been a very high growth business for a long period of time for Fools who do not yet follow Atlassian. Over the last five years, companies grown revenue by 35% annualized during that period. It's been a good growth story recently with the market getting completely whacked. I mean, it's pulled back quite a bit. But the business seems to be on a pretty good trajectory here, and you talked about hard decisions. A few years ago, I need you to give

me the timeline because I don't know the exact moment that this happened, but Scott and Mike made a decision to move to the cloud. This has been a business that was an install and manage software primarily built on Jira. I've heard you talk about this. Customers can control their own data, they can control their environment, and that was a big piece of what was very alluring about the Atlassian model, and now you're moving away from that. And you've been very clear, if I have this right, correct me if I don't, that a lot of the innovation, especially in things like user experience, are going to be in the cloud side of the product, but you still have this legacy piece of the business. And now it looks like it's all gas, all gas, no brake on the cloud.

So tell us more about what's happening there. Well, specifically we have, uh, you know, we have told everyone that we are aiming for 50% plus cloud growth for the next two years. You know, it's a public statement we've made. So that's, if that's all gas, it's all gas. As you mentioned, we started 2002 selling on-prem software. Maybe we give you the bits, you run it on your hardware. In 2009, we launched our first cloud offerings, which we called on demand.

in roughly 2015, 2016, right around when we went public, we decided we were going to be a cloud first company. We at that time effectively re-architected our entire cloud offerings on top of our cloud platform, built a microservices architecture based on AWS and largely told our customers of the on-prem will be there, but cloud is the future. Why did we do that? Well, the reality is we can deliver way more value and much quicker to our customers. Like there's no value in them managing their bits on their boxes and paying an administrator to do upgrades. Like, let us take care of that. But more importantly, every new competitor in the market, if there was a competitive threat in the market, it's going to be a SaaS provider. Like it's going

to come from the cloud. So for us to be long-term competitive, you know, Micah Scott made the hard call of, you know, we're going to the cloud and we're going to tell our customers effectively, you know, a year and a half ago, February of 2021, we announced the end of life of one of our on-prem deployments. And I won't go into the complexity. So we still have a more expensive on-prem version, which customers can stay on, but effectively our legacy license, our server licenses will be end of life to February, 2024, giving our customers a few years to go make their choice. If they want to go to cloud or do they want to go to our premium on-prem version? And we're going through that transition today. That migration is driving, you know, a decent amount of our growth

over the next couple of years. That makes perfect sense. I mean, I think if I have the number right from the shareholder letter cloud growth in the last quarter was 60%, 60% revenue growth. So it's, it's certainly resonating with, with customers today, but I wonder if part of the reason for this too, and I would love for you to speak to this is once you have a cloud platform or you have customers on the cloud, that's probably a little, it's a little easier to generate higher average contract values when you're on one platform? Like if, if you're, if you're in the cloud, then you, it might be a little easier to adopt, say, if you've got Jira to adopt Confluence or to adopt Trello and so forth. Yeah. It might be once it comes down to how do we deliver the

most value to our customers, right? And cloud first and foremost, like if someone just has 50 users on Jira on-prem today and moves those 50 users to the cloud, they're going to get more value more quickly from us. We're doing multiple releases a day of new capabilities, new mobile experiences, you name it. So like granted, there's a great expansion story there, but the first thing is you move to our cloud. Yeah. You're going to pay us more than you have historically, but you're going to get a better experience, happier developers, better users, more productivity, right? And we can, and we have that measured qualitatively and quantitatively until the end of time, after you go to our cloud, is it easier to add more users or add more products than it

was on-prem? Absolutely. And you think about it, if you were using Jira software and you want to use one of our other popular products, Confluence for rich document collaboration, you know, if you were, you know, to install that, you would have to be, I want Confluence. Okay. I have to go find someone who can actually download the bits and server to deploy them to, uh, integrate them with my current identity system. I think it'd be a day or two of work without even talking about purchasing, you know, for many of our cloud customers, you can get Confluence going for free within, you know, 10 seconds, right? And any user can do that. So then that'll be all integrated in tied into your identity services. And if you're on a monthly credit card, we just update your

credit card when you start paying for it. So the amount is just all that friction of using products goes away, but that's also adding users or adding products from us. Chris Hill. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening, we'll see you tomorrow. Thank you.