Atlassian’s Layoffs are AI-Inspired

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0:24Tyler Crowe:Matt Frankel and Jon Quast. It's a bit of a smorgasbord of a show today. We're going to look at the math behind the release of the Strategic Petroleum Reserve and a little bit of the update on the oil situation in the markets right now. We're going to do a quick check on retail company Dollar General. But first, we want to take a look at Atlassian. Earlier today, the company made a decision that they were going to have a rather large round of layoffs. As we're taping, shares are up about 0.4%. So, not really much of a huge market reaction, almost like, yeah, we were expecting this. John, you dug into the numbers for us.

1:01Tyler Crowe:Kind of give us a brief rundown of what Atlassian is planning, and what were your knee-jerk reactions to the decision?

1:07Matt Frankel:I think most of the time, this wouldn't be considered a large layoff necessarily, roughly 10 % of the workforce. But for Atlassian, this is a massive shift in how it is talked about its employee workforce in the past. I just want to do a little bit of basically go back in time. If you look at the headcount for Atlassian back at June 30th, 2021, the reason I'm choosing June 30th is because its fiscal year is a little bit wonky. That's the end of its fiscal 2021. It had just over 6 ,400 workers. By the end of the next fiscal year, it had over 8 ,800 workers. That's an increase of 37 % in a single year.

1:48Matt Frankel:This was at a time when tech companies were laying off. This is coming out of the pandemic. A lot of these companies saying, hey, we overhired, now we need to right size. And in the 2023 letter to shareholders, Atlassian's management said, tech's labor market is such right now that we're able to hire amazing talent who might not otherwise be available. Essentially, what they were saying is, as these other companies lay off, we are picking up this quality hires that we wouldn't be able to pick up otherwise. And it's kept that ethos in its company, if you will, of hiring, hiring, hiring. The second quarter of last year, 12 ,750 workers.

2:28Matt Frankel:Now the second quarter of this year that it just reported, over 14 ,600 workers. That's another 15 % increase in a single year, nearly 1 ,900 hires in the past year. Now they just released a letter saying, hey, we're going to let go 1 ,600 workers, which is fewer than what they've hired in the past year. but it says that we're doing this to self-fund further investments in AI and enterprise sales, but just so interesting that it's a massive, I'd say, reversal of what its hiring policy has historically been.

3:01Tyler Crowe:Yeah. And this is one of those like eye of the beholder sort of things. I think about like what they're saying to the market and why they may be actually doing this. And Matt, I want to ask this to you is like this, this layoff at tech has been a common narrative we've seen over the past year, two years, going back to 2023, as John was alluding to. One of the things I can't quite parse out of this, though, is do we really believe the narrative? It's like AI is making this more efficient and therefore we can cut payroll? Or is it more of a, hey, we probably overhired over the past five years and this is giving us an excuse to do layoffs by just stamping the word AI on top of it?

3:42Jon Quast:I mean, it's a little bit of both, if you ask me. We've seen this elsewhere recently. Block is the biggest example that I know of recently. They laid off 40 % of their staff in one swoop, supposedly because of AI productivity gains. Yes, there's some of that. AI has automated some tasks that you used to have to pay people to do and combine a few jobs into fewer jobs. Atlassian, like John said, is only letting go about 10 % of their workforce. It's less than the amount of workers they added over the past year alone. it does beg the question of whether they hired too aggressively, especially in a year when really the writing was on the wall for AI advancements, automating tasks, like I just mentioned.

4:22Jon Quast:So reading between those lines a little bit, I think Atlassian might be in panic mode just a little bit and really trying to change the narrative that AI is going to disrupt its business. They're one of the SaaSpocalypse companies. They're one of the biggest victims. The stock is down 70 % from its 52-week high, and there's a reason. On a different episode, I grouped all these SaaS stocks that are getting hit into three general categories. And the one that I said has the most to worry about are companies with one or two good products, but whose products are such that customers can switch to alternatives without major disruptions to their business.

4:58Jon Quast:Atlassian and their productivity software, they're in that basket. So they might be more worried than they're leading on.

5:04Matt Frankel:I want to share the problem that I've kind of seen for a while. Actually, I want to share a couple of things with Atlassian, right? So it's been a fantastic revenue growth story. It really has. And you look at the gross margin, consistently been around 90 % almost. This is the kind of business that is supposed to scale incredibly well into profitability. It's supposed to gain operating leverage with growth because that gross margin is so high. But what we've seen over the years is that its operating expenses go up often just as much as revenue, sometimes even more than revenue. That was certainly the case in the most recent quarter.

5:43Matt Frankel:Operating expenses up 25 % and revenue only up 23%. It's a software company. It's supposed to gain operating leverage, but it has continue to hire, hire, hire, and hasn't really been able to gain those operating leverage gains. And so that's been kind of a problem with the business model that I've been a little bit frustrated with looking at Atlassian from the sidelines. But what's interesting about the company is it's saying we're doing this to self-fund further investment. Now, one can make the argument that it's already self-funding because it's free cash flow positive. But you look at how it hires a lot of stock-based compensation in that gap profitability hasn't been there.

6:24Matt Frankel:In a way, the shareholders are the ones who have been funding the growth all along because it's been diluting shareholders by issuing so much stock-based compensation. So pulling back on that hiring, now saying we want to get to gap profitability, yeah, we want to sell fund. That's an interesting way to put it. But the other thing I want to point out here is that it is a software as a service company. And I wonder if it's saying, look, we're a little bit concerned here about the outlook for a business such as ours because they sell by the seat. Many of these software as a service companies sell by the seat.

6:58Matt Frankel:You look at a company like Block just laying off 40 % of its workforce. Okay. That's less potential seats if Block was a Atlassian customer, right? And so there may be some of these software companies that are integrating AI into their workflows, maybe needing less workers. That means less seats. That means less potential seats to sell for Atlassian. So I don't know. Am I saying that the sky is falling? I hope that's not what I'm saying. I'm just saying it's a concern of mine for companies such as Atlassian, enterprise software, software as a service companies going forward.

7:32Tyler Crowe:You touched on a point for me, at least when it comes to SaaS companies, software companies, and especially companies with a lot of stock-based compensation where there's been this promise of scale of, you know, once we reach a certain, you know, threshold economic scale is going to take over and, you know, the operations are, the cost for operations are going to kind of flatline and revenue is going to grow and we're going to see scale. But, you know, we're several years into a lot of these companies and we haven't seen that. And, you know, a little bit on the nose here on this idea of companies laying people off that are software vendors, there has to be some realization that your clients are doing it.

8:12Tyler Crowe:And Matt, this is what I wanted to ask you. How are these companies looking at this and being like, hey, we need to cut for efficiency. How do they not see that with their clients doing the same thing in terms of reductions of seats for these SaaS licenses?

8:27Jon Quast:Yeah, it would seem a little contradictory if they weren't seeing that, right? I mean, as I mentioned a bit ago, some of these SaaS companies, I feel like are closer to panic mode than they're really letting on. It isn't just Atlassian by any means, but they're a prime example. It's not just AI disrupting the product itself. You're spot on. The core customer base is the tech industry. I think they've used the term knowledge workers in the past. And SaaS seat usage could definitely suffer with the layoffs.

8:52Tyler Crowe:I feel like if it were not for the story that we're going to hit after the break, we would be covering a lot more of software companies. but this past week has been all about oil. And we're going to touch on that next.

9:34Tyler Crowe:There's a theory in commodity and supply chains called the Bullwick effect, where when variability, like a supply disruption, it tends to have amplifying effects down the value chain. And I think the volatility in oil prices over the past few days has been so extreme that even the biggest Bullwick effect disciples of economic theory are watching this and going, Dang, I don't even think I was planning on that. This week alone, we kind of started before the week Sunday. Oil prices were probably in like the$70 a barrel range. They whipped all the way up to$110, I think it was on Monday or Tuesday, back down to$80, and today we're back up to$95 a barrel as we tape.

10:14Tyler Crowe:Now, all this is related to the closure or the extremely limited transport of crude for the Strait of Hormuz and several other commodities because of its proximity to Iran and the conflict that's going on there today. Now, earlier today, the United States and several other countries announced that they would release crude oil from their strategic petroleum reserves as a way to kind of fill the gaps, if you will, with this closure of the Strait of Hormuz. Now, John, you're the numbers guy for today. I want to see, what does the math behind the announcement of the strategic petroleum reserve release actually mean?

10:50Matt Frankel:Well, I thought it was going to be a big deal as far as improving the price. And the immediate reaction was the price of oil started going up again. So it started doing a little bit of digging. Essentially, yes, there are countries that are releasing the strategic petroleum reserves. USA is one of them. Roughly about half of what is agreed on to be released is coming from the USA. 172 million barrels from the US. Now, that sounds like a lot, but here is some of the detail here. over 120 days this is being released. And so that's about 1.4 million barrels a day. That's only about 1 % of daily global consumption of oil.

11:32Matt Frankel:And for more perspective, almost 21 million barrels go through the Strait of Hormuz daily if things are normal. Things are not normal, obviously nothing's going through or very little right now. But assuming that normal pace of 21 million, you look at the 1.4 million a day that is going to be released from the U.S. strategic petroleum reserves, that's only about 7 % of that supply choke point. So it really, because of how it's being spread out, it doesn't make as big of an impact as you might think. And so that is, I think, why the market is reacting why it is. The price of oil hasn't dropped very much since the announcement.

12:10Tyler Crowe:Yeah, there's a lot of on-the-margin things that we're trying to do with strategic petroleum releases. There's the pipeline that goes across the Saudi Arabian Peninsula that we can maybe up production there. There was an announcement that Iraq was going to start sending via pipeline into Turkey, through Syria and into Turkey, just basically finding ways to avoid the Strait of Hormuz by any means possible. And countries are trying to react in some way because we're seeing some pretty violent price actions here. Matt, this is one of those, like, What does this all mean? For a lot of investors, this can be really hard to wrap their minds around, not just for people who are investing in oil, but just investing in the markets in general because there's a lot of things that this is going to have knock-on effects or the ripples through the entire markets, as you will.

12:58Tyler Crowe:So it's really hard to pin down, especially when we're operating with kind of a lack of information. Or even when we do get information, they do seem to be conflicting stories depending on who's delivering the information. Now, I know that oil isn't exactly your cup of tea when it comes to investing. What are some of the sectors of the market you are looking at as a result of what's going on right now, and how could they be affected?

13:23Jon Quast:You know, I mean, oil has, as we've seen, has kind of like ripple effects throughout the market. It's not just oil stocks that are moving, for example. I see this as a potential helpful move, and some of the other things you said, but they're not game changers. There's been no solution that's going to up the world's oil production by 20 % anytime soon. The U.S., they also appear set to suspend the Jones Act, for example. That would make it easier for foreign flagged vessels to bring oil to the U.S. So, that's one other thing to keep in mind. And that's priced in, too. It's not really moving the market that much, and that's for a reason.

13:57Jon Quast:It's not just that we don't have a lot of information or that the information is conflicting. It's that the information, it constantly changes, not just with the steps that are being taken to potentially fix the supply chain disruptions, but with the trajectory of the conflict itself. Is it going to be over next week? Is it going to be over next month? Is it going to be over next year? Is that even too soon? We hope not. I mean, one politician will come on TV and say, it'll be very quick. Someone else, a general or something will come on TV soon and say, this could drag on. We don't know. And that's a long way to say that I don't think that the volatility that you mentioned, going from 70 to 110 to 95 and back again, I don't think that's going to go away anytime soon.

14:38Jon Quast:If we do get extended supply disruptions, it could be a bad thing for consumer prices in general. So many industries are sensitive to fuel costs, like grocery stores have to get their product there on trucks that run on diesel fuel. There are a lot of examples where price increases could be passed on to the consumer. So hopefully it will be a short-lived conflict. But if it's not, we can start to see trickle-down effects throughout a lot of our portfolios.

15:04Matt Frankel:I just want to weigh in here for the everyday listener like myself. When we see the price of gas go up at the pump, we might not expect that because the U.S. is a net exporter of oil. And so why is it that things going through the Strait of Hormuz are affecting prices here domestically? the thing that we have to remember is that domestic prices are based on global supply and demand, not domestic supply and demand. And what I mean by that is when you have a disruption in one part of the world, those countries that now aren't getting their oil, if they get their oil from oil that's coming through the Strait of Hormuz, they still need it from somewhere.

15:45Matt Frankel:And so now they're going to start sourcing that somewhere else, or at least trying to. And so that does raise the prices globally. And yeah, the U S oil, of course that become, it goes up in price because that's how it works. Right. And so we do see those effects here domestically. And so I'm thinking about this, you know, I'm not so much interested in the oil industry. I think that that's just not my cup of tea as you, as you pointed out, Tyler, but I am curious about the knock-on effects specifically in technology, because we already see, for example, technology hyperscalers, they're already impacting energy prices.

16:22Matt Frankel:And it's already been a topic with the current administration. Hey, who's going to foot the bill for this rising cost of AI and trying to get these hyperscalers to ensure that they're going to make sure that the price they're going to pay their more than fair share for the energy, right? What happens when the energy market is further disrupted in that environment? Are the hyperscalers going to be forced to kind of slow down depending on how long the conflict drags out. What does that mean for hardware orders that are already ordered, but maybe not serviced yet? What does this do to the backlog of work?

16:57Matt Frankel:Does this create an oversupply? I'm curious about the second order, third order effects of a thing like this.

17:04Tyler Crowe:Last question before we head out here, Matt, it's to you because John kind of answered it already. So I'm not going to make him repeat himself on investing in oil and gas or commodities or some Some of the things we're talking about, the Strait of Hormuz affecting fertilizer, aluminum, things like that. A lot of investors are probably thinking, should I get into it now? Because if we expect higher prices, maybe it's going to be bumper crops for a lot of these commodities and things like that. Is it worth looking at them, investing in them today? Or do you still view this as like, this is a hot stove, I really don't want to touch it?

17:37Jon Quast:Well, I mean, if we get$150 oil, of course, energy stocks, you'd look foolish for not buying them right now and things like that. But the opposite could be true if you bought them now and oil crashed back to$60. I don't like to go near commodities in com time, so I'm probably the wrong one to ask here. But if you're not already a big energy investor, you don't already understand the supply-demand dynamics of that market, now probably isn't the best time to dive right in just for the sake of adding some exposure to your portfolio. But that's my take. And again, I get that I'm biased because I'm not the biggest energy investor, even when markets are calm.

18:18Jon Quast:Yeah, I can certainly sympathize with that.

18:20Tyler Crowe:As someone who has studied the oil market, probably a little bit more, I've always been like, hey, if you don't like it when the price of oil is really, really cheap, then you probably don't want to be involved in what's really expensive either. Coming up after the break, we're going to talk about Dollar General and the market reaction to its most recent earnings report.

19:05Tyler Crowe:YRC SIPC. On a slightly lighter topic than strategic portfolio reserves and the Strait of Hormuz and things like that, shares of Dollar General are down about 5 % as we taped today after the company reported earnings. Now, John, turning to you as the numbers guy again, the numbers look solid. What was the fly in the ointment that the market didn't like here?

19:30Matt Frankel:Yeah, let me start with what the numbers were, and then I'll address the fly. If you've been following Dollar General for the last couple of years, you realize what's been going on. Basically, coming out of the pandemic, the company was super excited, bought way too much inventory, inventory piled up, sales didn't keep growing the way that they had, and now they've been working through all this inventory for quite some time. It's been damaged, it's been stolen, it's been marked down just to get it out of there. That put a damper on the business for a little bit. It's climbing back out of that.

20:05Matt Frankel:Traffic was up in 2025. That was so good to see. It's projecting same-store sales growth here in 2026. You want to see that as a shareholder. The earnings are making massive jumps now, but that's from a relative basis, because earnings have been weighed down as it's worked through this inventory problem. So yes, earnings are up on a year-over-year basis, but still down from peak. It's still climbing out of the hole that it dug itself. But inventory down again in 2025, you want to see that down 7 % on a per store basis. The dividend is stuck. It hasn't been raising. It didn't repurchase any shares.

20:39Matt Frankel:Here's what the fly in the ointment is, as far as I'm concerned. Right now, it trades at about 20 times forward earnings. I would say that's about right for Dollar General based on its growth, based on how its profits are right now. I'd say 20 times earnings is about right. And so I think the market is just looking at this and saying, okay, the numbers are fine, but what is this business worth? It's worth about 5 % less.

21:03Tyler Crowe:This has certainly been a fascinating story to follow over the past 15, 16 years. I mean, this was a company that was an absolute darling coming out of the great recession and through much of the 2010s, but it started to face some troubles around like 2020, you know, perhaps got a little out over its skis in terms of expansion of its footprint with new stores. And now it's been trying to turn things around, as John indicated, with inventory down, trying to clean up the store experience, things like that. Based on the stock performance of the past year, it looks like this turnaround is working.