Over the past year, we’ve talked about playing offense in this challenging environment to strengthen our position and build an enduring 100+ year company. That’s exactly what we’ve done.

You won’t find Atlassian sitting still, waiting for macro conditions to change. We continue to push hard on cloud, enterprise, and ITSM (covered in detail last quarter). Cloud momentum remains high, with the number of users migrated over the past year up nearly 50%. Customers are adopting Premium and Enterprise editions of our cloud products at a high rate in response to the steady stream of innovation and enterprise-grade capabilities we roll out each quarter. And more companies like Domino’s, Breville, and the NRMA are switching from legacy ITSM solutions to Jira Service Management so they can deliver outstanding service at scale.

Those three big bets continue to pay off, but we’re doing much more than that. We’re also playing offense in the following four areas:

1. Shipping ever-more innovative new products
2. Delivering AI-powered capabilities that will transform how our customers get work done
3. Strengthening our position through strategic acquisitions, large and small
4. Building a championship team

There’s a lot of exciting news. Let’s get cracking!

Compass: a new and improved way to navigate the developer experience

Just one quarter after launching Jira Product Discovery (which is off to a flyer with several thousand paying customers already), we launched our newest product, Compass, into general availability last month.

The rise of microservice architecture has radically changed software development over the past decade. But until now, teams haven’t had a unified way of managing the myriad components they work with every day. Compass fills that gap. It improves the day-to-day experience for engineers and operators by giving them a comprehensive view of the ownership, dependencies, compliance, and overall health of the pieces comprising today’s SaaS products. With better visibility, teams can improve how they build and collaborate, unleashing more of their productivity – and ultimately, their potential.

Customers at hundreds of companies large and small participated in our early access program and, in their words, “love the hell out of it.” Feedback like this confirms that we’re addressing one of our customers’ biggest challenges: how to make development teams happier and more productive.

Compass was built on our cloud platform so it benefits from the analytics, automation, and AI capabilities we’ve been building. And it also provides another compelling reason for customers to migrate to the cloud.

Unleashing the power of AI across our platform

Atlassian invests more in R&D than our peers, which gives us a huge competitive advantage. We’ve also designed our best-in-class cloud platform such that we can build a feature once, then surface it across multiple products. The combination of these two strategies means we have deep expertise across a wide range of engineering domains and can deliver new capabilities like AI to more customers faster (and better) than our peers.

Case in point: virtual agents are now available to Jira Service Management customers, allowing teams from IT to HR to provide always-on, conversational support at scale. The built-in AI engine analyzes intent, sentiment, context, and profile information to personalize each interaction. It then dynamically generates answers from internal sources like knowledge base articles, onboarding guides, and FAQs. If necessary, the virtual agent can escalate the conversation to human experts, along with the context they need to get up to speed quickly.

We’re also debuting additional AI capabilities powered by Atlassian Intelligence , that reduce manual tasks and cognitive load for support agents. When an issue transitions to a new agent, they’ll get a concise summary of all the conversations and recommendations from previous agents for a seamless hand-off. When it’s time to communicate with customers, AI will help them draft responses, adjust their tone, and summarize articles to provide concise instructions. Plus, intelligent assignment and routing capabilities based on the contents of the request help expedite a resolution. These powerful new features are currently available through our early access program.

But it’s not just Jira Service Management. Due to our “build once, run anywhere” platform, thousands of customers are already experiencing these powerful new Atlassian Intelligence features (also in early access) across our cloud portfolio:

• When using the editor in Confluence, Jira Software, Jira Work Management, Trello, Atlas, and Bitbucket, AI helps customers create and improve content in seconds by generating summaries and titles, tightening up their wording, perfecting their tone, finding action items, and brainstorming new ideas.
• Jira Software and Jira Service Management customers can search for issues using natural language instead of a structured query language.
• Confluence customers can see explanations of unfamiliar terms and get answers to questions, drawn from the content they have access to.

AI capabilities like these are already making customers more efficient and will keep drawing more teams to our cloud.

Welcome, AirTrack and Loom!

Building on our history of strategic acquisitions, we’re adding AirTrack and Loom to the Atlassian family to supercharge our capacity for innovation.

AirTrack taps into an IT team’s various systems of record to help them find and fix bad data (think missing asset tags or broken workflow configurations). With a complete and accurate picture of all their systems, IT leaders can make smarter decisions, respond to incidents faster, and even prevent them entirely by reducing the risk associated with changes.

Atlassian has a strong record of inspiring customers to think beyond IT when it comes to service management – over 60% of Jira Service Management customers also use it for non-IT support. Adding AirTrack builds on this momentum by giving enterprises a single place to manage data challenges around security and compliance, inventory and billing, forecasting and planning, and much more. Airtrack will be integrated with Jira Service Management, with connectors to 30+ systems that let teams aggregate and reconcile data across their entire IT landscape.

But we didn’t stop there. Last month we announced a definitive agreement to acquire Loom, the asynchronous video messaging platform with over 200,000 customers, whose business users create nearly 5 million videos each month.

The continuing rise of distributed work means a greater reliance on working asynchronously, which might happen across geographies and time zones, or just across the hallway. Compared to text or slide decks, video is a far more human means of communication and has become an indispensable part of how teams work today. It’s also the medium of the future, with video-loving Gen Z comprising a greater share of the workforce.

Trouble is, getting a “quick call” with your team on the books can be a scheduling nightmare. But with Loom, collaborating via video doesn’t have to happen in real time – it can happen at any time. And when we “weave” Loom into Atlassian, it can happen in just about any product. Customers will be able to transition seamlessly between video, transcripts, documents, tickets, and workflows. Engineers will file bug reports with embedded videos demonstrating the problem. HR teams will convert Looms into rich Confluence pages with a single click.

Even better, AI will change the way we consume and create video, giving rise to more of both.

No time to watch the full-length video? No worries – soon, AI will be able to generate shorter versions by identifying the most important segments and knitting them together. Alternatively, users who want to watch the full video will be able to search and jump ahead to the parts they’re interested in.

On the creation side, AI takes the pain out of editing videos. Whereas traditional video involves multiple takes that are painstakingly stitched together, AI-powered video creation is as easy as editing a document. Just edit the transcript to say precisely what you want, and AI does the rest.

With new ways to make, share, and watch, we expect teams will soon embed videos in nearly every aspect of work. And Atlassian products will be there to support them.

Assembling an all-star team

Great people build great things. That’s why Atlassian is playing offense on talent, using a three-pronged strategy:

• Retain and hire the best talent to compete (and win) at the highest level
• Amplify our reputation as a top employer
• Build a strong senior leadership team that people are excited to work for

Atlassian is a “destination employer.” Compared to last year, we see nearly twice as many applications per role – a credit to our legendary culture, inspiring mission, meaningful values, and hyper-flexible approach to distributed work. This affords us the privilege of being incredibly selective, looking for people who have experience with the journey we are on (e.g., AI, platform, video) and can help us move faster.

And employees stay with us, as evidenced by retention rates that are higher than our peers’ and a slew of workplace awards.

Running a good offense also means knowing how to adapt. With our Chief Revenue Officer, Cameron Deatsch, leaving at the end of the year, we’re using this opportunity to evolve our GTM org so we can continue to fuel both our self-serve flywheel and our growth in the enterprise segment.

First, we are delighted to announce that Zeynep Ozdemir joined our team last month as Chief Marketing Officer. With a PhD in machine learning and a broad marketing background, she brings the deep technical expertise and product marketing chops needed to lead a world-class marketing organization in the age of big data and AI. Welcome aboard, Zeynep!

On the sales side, we’ve been iterating on our approach to serving enterprise customers for a number of years, all without sacrificing our product-led roots and best-in-class GTM efficiency. To push our team forward and keep the momentum high, Kevin Egan has been promoted to Chief Sales Officer based on his record of effectively scaling our flywheel model to better serve larger customers. Congratulations, Kevin!

We also added star player Vikram Rao to our line-up, as Chief Trust Officer. Vikram’s rich experience spanning consumer, enterprise, and cloud customers will be instrumental in advancing our products’ compliance, governance, and security in the cloud. We look forward to the fresh insights he’ll bring to the team as we further solidify Atlassian’s position as a trusted leader in our industry.

Atlassian has a strong track record for anticipating workplace trends and making bold moves to capitalize on them. We believe a ripper team, an expanding customer base, and our steady drumbeat of new innovations will drive long-term durable growth.

We look forward to discussing all this and more during our call later today. Here’s to the road ahead, and to unleashing the potential of every team.

-Scott and Mike

Taking care of business

Updates from across Atlassian.

Customers: a new perspective on our expanding base

Atlassian exited Q1 with over 265,000 customers, including over 40,000 customers with more than $10,000 in cloud annualized recurring revenue (“cloud ARR”), representing companies of all sizes from nearly every industry. We continuously evolve our GTM approach to make deeper inroads with our largest and highest-potential customers while our self-serve flywheel brings in thousands of new organizations each quarter.

Attracting new customers is critical as we seek to serve the “Fortune 500,000.” In concert, we’re increasingly focused on moving existing customers to the cloud and driving expansion within our massive base. These two efforts go hand-in-hand. Our cloud platform strategy layers on additional expansion vectors like our full ladder of editions and unique product offerings – all of which are easier to try, adopt, and purchase in the cloud.

To provide a transparent view into the health and trends of our business and enable investors to evaluate our progress against our strategic priorities, we’re sharing a new metric: the number of customers with more than $10,000 in cloud ARR. This measures our ability to successfully shift customers to the cloud and expand within our existing customer base.

Customers with >$10,000 in cloud ARR represent over 75% of total cloud ARR and continue to grow as a proportion of our overall cloud business. In Q1, this cohort grew 18% year-over-year.

Recall that as a result of the macroeconomic environment, we’ve had to make thoughtful tradeoffs, which included consciously shifting some marketing resources to prioritize growth in customers with the highest lifetime value, and we’re seeing this strategy pay off.

Ecosystem: growing our roots in the enterprise

Capitalizing on every last opportunity in front of us would be impossible if Atlassian were going at it alone. Thankfully, we’re not. We’re surrounded by a thriving ecosystem that many envy but few can replicate.

This quarter we expanded our partnerships with PwC and Deloitte to help further our success in enterprise agility and service management. Their extensive experience guiding enterprise transformations will strengthen our position as a strategic partner with our existing customers and will bring new customers to Atlassian’s door. This, after establishing our partnership with Accenture last year, which is off to a great start. All told, our 1,000+ channel partners drive roughly 40% of total revenues, with cloud sales from this group up nearly 2x over the past year.

Sustainability: learning from yesterday, building for tomorrow

Part of building a 100-year company is taking sustainability just as seriously as our products; our long-term success as a business depends on both.

As part of our sustainability program this year, we signed our first virtual power purchase agreement to match in-office electricity and work-from-home energy use in the United States. We also conducted a pay equity audit, which found no observable statistically significant gaps in salary or equity on the basis of gender (globally) or race/ethnicity (in the U.S.) and revealed insights that will inform our compensation programs going forward. Last, we published our Responsible Technology Principles detailing Atlassian’s commitment to putting privacy, security, and human rights at the center when we’re developing or deploying new technologies like AI.

You can learn more about our efforts to foster stronger communities and a healthier planet in our 2023 Sustainability Report.

Financial highlights

Steady execution drove a good start to our fiscal year, with results across revenue, gross profit, and operating income exceeding our expectations.

Revenue growth benefitted from stronger renewals, migrations, and paid seat expansion, while gross profit and operating income continued to benefit from our focus on cost management.

Overall, we continue to deliver innovative value to customers with a strong operational focus and disciplined strategic investments in our unique opportunities to drive durable, long-term growth.

Highlights for Q1’24 include:
All comparisons below relate to the corresponding period of last year, unless otherwise noted.

• Revenue of $978 million increased 21%, driven by growth in our Cloud and Data Center offerings.
• GAAP gross margin of 82% decreased 1 percentage point. Non-GAAP gross margin of 84% decreased approximately 1 percentage point driven by investments to support growing demand for our Cloud offerings and the continued revenue mix shift to Cloud.
• GAAP operating loss was $19 million and GAAP operating margin of (2%) increased approximately 2 percentage points. Non-GAAP operating income was $225 million and non-GAAP operating margin of 23% increased approximately 5 percentage points driven by greater operating leverage through cost management.
• Operating cash flow of $167 million increased 81% driven by strong collections and lower employee bonus payouts. Free cash flow of $163 million increased 115%.

Revenue growth in Q1 was driven by subscription revenue, which grew 31%. Customers continue to turn to our products to help their teams track and deliver work, share knowledge, get help, and build high-performing teams. Overall, trends from the prior quarter continued with healthy migration activity from Server to both our Cloud and Data Center offerings.

Cloud revenue growth of 27% was in line with our expectations driven by paid seat expansion within existing customers, healthy migrations, and cross-sell to additional products. Prior quarter macro headwinds on paid seat expansion and free-to-paid conversions persisted in Q1, although the rate of deceleration continued to moderate slightly. Upsell to Premium and Enterprise editions, customer retention, and monthly active usage across the business remain healthy, driven by the high-value, mission-critical nature of our products.

Data Center revenue growth of 42% exceeded expectations driven by continued strength in renewals, migrations, and seat expansion within existing customers.

Lastly, deferred revenue increased 28% year-over-year to $1.5 billion reflecting growth in annual and multi-year customer commitments to the Atlassian platform.

GAAP operating expenses increased 17% year-over-year driven by higher employment costs, including stock-based compensation. Headcount at the end of Q1’24 was 11,151, which was 14% higher than a year ago.

Non-GAAP operating expenses increased 11% year-over-year and were lower than expected due to the timing of certain headcount investments that shifted to future quarters and our focus on driving efficiencies across the business.

GAAP operating margin of (2%) and non-GAAP operating margin of 23% benefited year-over-year from moderation in the pace of hiring as well as our continued focus on disciplined cost management.

As a reminder, we experience quarterly seasonality in our free cash flow results, with Q1 typically having the lowest free cash flow of the year due to employee bonus payments in the quarter.

Fiscal 2024 outlook

Total revenue

While we are pleased with the solid results in Q1 and our healthy sales pipeline in Q2, our revenue guidance continues to account for two significant factors that may impact our results in FY24, consistent with what we highlighted last quarter.

First, the macroeconomic environment remains uncertain. Our guidance assumes that macroeconomic headwinds continue to negatively impact growth in paid seat expansion at existing customers and free-to-paid conversion rates, and that the trends we’ve seen in these areas throughout the last year persist in FY24.

Second, customer purchasing and migration decisions related to the end-of-support for our Server offering in February 2024 are expected to drive greater levels of variability in our Cloud and Data Center revenue growth rates depending on when and how Server customers ultimately choose to migrate: direct to Cloud, direct to Data Center, or to some combination of Cloud and Data Center. Our guidance continues to assume that Server customer migration rates to Cloud and Data Center are consistent with historical trends and that some proportion of our Server customers will not migrate in FY24. As a reminder, a portion of Data Center revenue is recognized up-front in the period the subscription begins, while the remainder is recognized ratably over the life of the subscription. Cloud revenue is recognized ratably over the life of the subscription.

Further detail and expected trends are provided below:

SUBSCRIPTION REVENUE

Cloud revenue

We continue to expect Cloud revenue growth of approximately 25% to 30% year-over-year in FY24, of which migrations will drive approximately 10 points. At the mid-point of our guidance range, we expect Cloud revenue growth rates to improve in H2 driven by easier prior year comparisons.

Data Center revenue

We expect Data Center revenue growth of approximately 31% year-over-year in FY24, with growth decelerating over the course of the year primarily driven by difficult prior year comparisons, declining migrations from Server, and increasing migrations to Cloud.

MAINTENANCE REVENUE

In line with our announced end-of-support for Server, we expect Server revenue to continue to progressively decline throughout the remainder of FY24.

As a reminder, we will no longer recognize Server revenue beyond February 2024, and therefore expect Server revenue to be zero in Q4’24.

OTHER REVENUE

We continue to expect Other revenue, which is primarily comprised of Marketplace revenue, to be roughly flat year-over-year in FY24, driven by continued sales mix shift to cloud apps.

As a reminder, there is a lower Marketplace take rate on third-party cloud apps relative to Server and Data Center apps to incentivize further cloud app development, and Marketplace revenue is recognized in full in the period of the Marketplace sale.

Gross margin

We continue to expect GAAP gross margin to be approximately 81.0% and non-GAAP gross margin to be approximately 83.5% in FY24. We expect gross margins to decrease over the course of FY24 due to the continued revenue mix shift to Cloud.

Operating and free cash flow margin

We expect GAAP operating margin to be approximately (5.5%) and non-GAAP operating margin to be approximately 20.0% in FY24. Operating expense growth will continue to be driven by our investments in key strategic priorities that expand our opportunity to help our customers and drive durable, long-term growth. These priorities include cloud migrations, serving enterprise customers, AI, and delivering innovative customer value across our product portfolio.

We expect free cash flow margin in Q2’24 to be impacted by a discrete tax payment of approximately $60 million related to transfer pricing.

Share count

We continue to expect diluted share count to increase by less than 2% in FY24.

FORWARD-LOOKING STATEMENTS

This shareholder letter contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. In some cases, you can identify these statements by forward-looking words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations, but these words are not the exclusive means for identifying such statements. All statements other than statements of historical fact could be deemed forward-looking, including risks and uncertainties related to statements about our products, product features, including AI and large language models, customers, channel partnerships, Atlassian Marketplace, Cloud and Data Center migrations, macroeconomic environment, anticipated growth, outlook, technology, potential benefits and synergies from acquisitions, hiring capabilities, sustainability strategy and progress, and other key strategic areas, and our financial targets such as total revenue, Cloud and Data Denter revenue and GAAP and non-GAAP financial measures including gross margin and operating margin.

We undertake no obligation to update any forward-looking statements made in this shareholder letter to reflect events or circumstances after the date of this shareholder letter or to reflect new information or the occurrence of unanticipated events, except as required by law.

The achievement or success of the matters covered by such forward-looking statements involves known and unknown risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management’s beliefs and assumptions only as of the date such statements are made.

Further information on these and other factors that could affect our financial results is included in filings we make with the Securities and Exchange Commission (the “SEC”) from time to time, including the section titled “Risk Factors” in our most recently filed Forms 10- K and 10-Q. These documents are available on the SEC Filings section of the Investor Relations section of our website at: https:// investors.atlassian.com.

ABOUT NON-GAAP FINANCIAL MEASURES

In addition to the measures presented in our consolidated financial statements, we regularly review other measures that are not presented in accordance with GAAP, defined as non-GAAP financial measures by the SEC, to evaluate our business, measure our performance, identify trends, prepare financial forecasts and make strategic decisions. The key measures we consider are non-GAAP gross profit, non-GAAP operating income and non-GAAP operating margin, non-GAAP net income, non-GAAP net income per diluted share and free cash flow (collectively, the “Non-GAAP Financial Measures”). These Non-GAAP Financial Measures, which may be different from similarly titled nonGAAP measures used by other companies, provide supplemental information regarding our operating performance on a non-GAAP basis that excludes certain gains, losses and charges of a non-cash nature or that occur relatively infrequently and/or that management considers to be unrelated to our core operations. Management believes that tracking and presenting these Non-GAAP Financial Measures provides management, our board of directors, investors and the analyst community with the ability to better evaluate matters such as: our ongoing core operations, including comparisons between periods and against other companies in our industry; our ability to generate cash to service our debt and fund our operations; and the underlying business trends that are affecting our performance.

Our Non-GAAP Financial Measures include:

• Non-GAAP gross profit. Excludes expenses related to stock-based compensation and amortization of acquired intangible assets.
• Non-GAAP operating income and non-GAAP operating margin. Excludes expenses related to stock-based compensation and amortization of acquired intangible assets.
• Non-GAAP net income and non-GAAP net income per diluted share. Excludes expenses related to stock-based compensation, amortization of acquired intangible assets, gain on a non-cash sale of a controlling interest of a subsidiary, and the related income tax adjustments.
• Free cash flow. Free cash flow is defined as net cash provided by operating activities less capital expenditures, which consists of purchases of property and equipment.

We understand that although these Non-GAAP Financial Measures are frequently used by investors and the analyst community in their evaluation of our financial performance, these measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. We compensate for such limitations by reconciling these Non-GAAP Financial Measures to the most comparable GAAP financial measures. We encourage you to review the tables in this shareholder letter titled “Reconciliation of GAAP to Non-GAAP Results” and “Reconciliation of GAAP to Non-GAAP Financial Targets” that present such reconciliations.

ABOUT ATLASSIAN

Atlassian unleashes the potential of every team. Our agile & DevOps, IT service management and work management software helps teams organize, discuss, and complete shared work. The majority of the Fortune 500 and over 265,000 companies of all sizes worldwide – including NASA, Audi, Kiva, Deutsche Bank and Dropbox – rely on our solutions to help their teams work better together and deliver quality results on time. Learn more about our products, including Jira Software, Confluence and Jira Service Management at https://atlassian.com.

Investor relations contact: Martin Lam, IR@atlassian.com

Media contact: M-C Maple, press@atlassian.com

The post Our FY24 Q1 letter to shareholders appeared first on Work Life by Atlassian.

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Fellow shareholders,

We knew we’d be putting in the hard yakka this year, and that’s exactly what we’ve done. Atlassian ended FY23 with over 260,000 total customers and generated over $3.5 billion in revenue in the face of a challenging economy. And importantly, our three biggest bets are paying off, further strengthening our conviction in our strategy.

1. Cloud – 250,000 customers now power collaboration using our world-class cloud platform. And we’re delivering more platform innovations and enhancements to our 14 integrated products every quarter. Millions of users migrated from Server and Data Center to our Cloud offerings in FY23, drawn by the incredible customer experience we’ve been building.
2. Enterprise – Driven by platform updates such as support for 50,000-user instances, and bolstered by a robust network of partners and dedicated customer success teams, enterprises are deepening their commitment to Atlassian. Sales to enterprise customers grew over 50% year-over-year in FY23, all on the back of our best-in-class GTM efficiency.
3. ITSM – We’re delivering the sophisticated capabilities IT teams need, along with features tailored to support teams like Legal and HR, at an unparalleled value. Over 45,000 customers now use Jira Service Management, and we’re seeing increased demand from enterprise customers with cloud sales to this segment up 80% year-over-year in FY23.

We also took advantage of mind-blowing developments in AI to bring generative capabilities into our products and unleash even more of our customers’ potential. And we responded to a rapidly shifting environment by rebalancing our teams so we can meet our customers’ needs faster.

In other words, we did what we said we were going to do: play offense.

There are massive opportunities in cloud, enterprise, and ITSM that will drive Atlassian’s growth for years to come. Plus, tech’s labor market is such right now that we’re able to hire amazing talent who might not otherwise be available.

These moves set Atlassian up to win over the long term and reflect our enduring confidence in our business model, our strategy, and our team. We aren’t afraid to make tough tradeoffs in support of durable growth that others shy away from, even when it may be uncomfortable in the short term.

This is consistent with the strategy we communicated to you at our Investor Day in April 2022. It was there that we also committed to returning to historical operating margins. That hasn’t changed. Starting in FY25, we expect operating margins to expand from the FY24 guidance we’re providing today and begin trending towards the historical margins Atlassian is known for, driven by durable revenue growth combined with moderating investment in areas we’ve accelerated over the past two years, like cloud migrations.

Our job in this next year is to keep the momentum high on cloud migrations and continue delivering differentiated value across our three markets. Execute on the massive opportunities in front of us and we’ll exit FY24 in an even stronger position.

Looking toward the next leg of our cloud journey

Atlassian generated over $2 billion in cloud revenue and migrated millions of users to the cloud in FY23. The cloud-only offerings we launched in FY23, like Jira Product Discovery and Beacon, are resonating with customers, and Atlassian Analytics is proving to be especially compelling to our enterprise customers. We know we’re on the right track, and we’re not looking back.

We beat our migration goals for Q4, as well as resolved major barriers to migration around data residency, user management, and backup capabilities. Becoming a cloud-first company has been our top priority in recent years. As a result, over 250,000 Atlassian customers now use at least one of our Cloud products. Or, in the case of Roblox, a half dozen of them.

Noticing the high caliber of our cloud-only offerings, Roblox, a wildly popular online gaming platform, knew it was the perfect time to move off Data Center, as well as replace their legacy ITSM tool with Jira Service Management. Now they benefit from cloud-only offerings like virtual agents for AI-driven service management, Beacon for threat detection, and cross-product smart links that keep it all connected.

Migrations will continue to be an important lever of growth for us beyond FY24, particularly with our enterprise customers. In speaking with them, it’s clear the cloud is their ultimate destination. We’ve already made great strides here, with Data Center customers accounting for approximately 50% of migrations to Cloud. So we’re putting even more energy into offering instances beyond 50,000 seats, as well as delivering on their data governance requirements, supporting their extensibility needs, and working on capabilities tailored to enterprises.

You can’t spell “Atlassian” without “AI”

Whilst AI is great, AI plus data is where the real value lies. This gives Atlassian a huge advantage. With two decades’ worth of insights about teamwork, and the data customers store across our products (including long-form text from Confluence), we can enhance generic AI answers with contextual information on a per-customer basis. The result is exceptionally useful output, tailored to each customer’s unique knowledge base and organizational structures.

So when generative AI exploded onto the scene this year, we seized the moment and rolled out a new “virtual teammate” for our customers that we call Atlassian Intelligence.

Generative AI is poised to expand Atlassian’s opportunities in a big way. In the near term, customers are considering fast-tracking their moves to the cloud so they can take advantage of these powerful capabilities. And as the high-value, high-volume leader, we’re building differentiated levels of AI capabilities across our Cloud editions, as a way to attract new customers and give existing customers compelling reasons to upgrade.

Beyond these nearer-term opportunities, we see the potential for more Atlassian users over the long term. AI will enable more people to create software, which is currently supply constrained. More creators means more collaboration needs, as well as more teams to build, deploy, and sell this technology.

The year in review across our three global markets

Atlassian products solve five primary teamwork challenges for our customers: tracking work; sharing knowledge; getting help; creating high-performance teams; and doing it all at scale. But no single product can cover all five jobs for every team across the three global markets we serve. Our approach is to offer a range of purpose-built, fully-integrated tools so customers can curate a collection that best suits their needs.

Empowering customers with this choice as well as focusing on robust integrations with best-of-breed partners helps Atlassian win across the ITSM, work management, and agile/DevOps markets we serve. Let’s look at highlights from all three and show how we helped customers thrive this year.

We advanced our position in the ITSM market this year, focusing on bringing development and IT teams closer together, while also helping a wider range of non-technical teams deliver great employee support. We were named a Leader in the 2022 Gartner® Magic Quadrant for IT Service Management Platforms¹. We also grew cloud sales to enterprise customers by 80% year-over-year – proof that doubling down on ITSM was the right call.

Some of the highest-value updates we shipped to our 45,000+ Jira Service Management customers include:

• New CI/CD integrations with GitHub and GitLab that automate change approvals
• Cross-product insights via Atlassian Analytics that correlate incidents and changes
• Device42 and Lansweeper integrations for easier incident and change impact analysis
• Virtual agent technology powered by Atlassian Intelligence (Early Access)
• Chat-based ticketing so employees can get help right from Slack and Microsoft Teams
• Employee support templates that help teams like Finance, Marketing, Design, and Sales deliver service faster
• Support for up to 20,000 agents per instance (Early Access)

Atlassian is the only vendor that brings technical and non-technical teams together on the same platform, yet lets them work with tools that are designed for their respective crafts. We’ll continue to build on the existing trust we have with development teams to expand into more IT departments (and beyond) so their teams can deliver what would be impossible alone: exceptional service.

Atlassian delivered new forms of collaboration this year, like the ability to structure and visualize information differently with databases and whiteboards in Confluence. We also launched Atlas into general availability, giving teams of all types better ways to manage projects and ensure they contribute to the organization’s most important goals. Jira Work Management added a Premium edition, which includes multi-project summaries, timelines, and calendars so leaders can get a holistic view of all the work they manage. And to top it all off, Confluence made the top five in G2’s Best Software for Enterprise Business list for 2023.

The non-technical teams market, which we estimate at $14 billion, represents a huge opportunity. Atlassian unites technical and non-technical teams through the common language of our Jira products and the connective tissue of our integrated cloud platform. No other vendor can match this, so we’ll keep leaning in hard here.

For software teams, Jira is still the GOAT and developer experience remains a priority for Atlassian. As such, we created a Security tab in Jira that brings DevSecOps into all aspects of software development by turning alerts from leading security vendors (e.g., Snyk, Mend, Lacework, Stackhawk, JFrog) into issues, making it easy to track remediation work. And we rolled out a dark theme for Jira’s UI, satisfying a popular enhancement request.

Atlassian is leading the charge in helping organizations master the complexity introduced by the shared microservices and myriad other components that comprise modern software. Not only did we get Compass into customers’ hands this year, but we also delivered configuration-as-code enhancements that help teams catalog and manage all the elements involved in distributed software architecture.

But creating software goes far beyond developers writing code. That’s why we launched Jira Product Discovery, which lets product managers capture and prioritize ideas. It’s also why we’re confident in our approach of connecting developers, designers, marketers, support engineers, and others. Atlassian’s Open DevOps framework allows for interoperability between Jira products and a variety of best-of-breed 3rd party tools. We believe being named a Leader in the 2023 Gartner® Magic Quadrant for DevOps Platforms² is the type of recognition that lets us know we’ve got a winning strategy.

Team Anywhere: a win for employees and customers everywhere

Three years ago this month, we placed another big bet: we declared Atlassian a remote-first company. Whether all-remote or hybrid, distributed teams are the future of work. We’re committed to living that future now and pioneering solutions to the challenges of working across geographies and time zones. When we uncover valuable insights, we bake them into our products or share them with our customers through content.

Team Anywhere allows us to hire the best person for the job regardless of how close they live to one of our offices. In fact, over half of the people we hired in FY23 live more than two hours away from an office. As of Q4, we have full-time employees in 13 countries on four continents, spread across urban centers and rural areas. 91% of our employees say Team Anywhere is an important reason for staying at Atlassian, and 92% say it allows them to do their best work.

While some business leaders accuse us of abandoning something essential to our esprit de corps, we see it differently. We see a chance to lead. Atlassian is one of the only enterprise companies to go all-in on distributed work. Customers and peers are turning to us for advice, inspired by the example we’re setting.

To be clear, getting 10,000 distributed employees to sing in perfect harmony is no small feat. But with an average of 67% of the company connecting in an office each quarter and strong participation in our in-person “intentional togetherness” events, Atlassian is demonstrating that distributed work and deep connections between teammates can go hand-in-hand, even at this scale. The more we lean in here and lead the way, the deeper our competitive advantage.

With FY24 already underway and teams in full execution mode driving towards this year’s big goals, we feel pretty damn lucky. Not every entrepreneur makes it to the 10-year mark, even when they do all the right things, and here we are, 21 years into our Atlassian journey. (Not bad for a couple of mates from uni, if you ask us!) We’re more excited than ever about the opportunities in front of us and fired the F up to get after them.

A bittersweet farewell

After almost 11 years of tireless leadership and dedication, Cameron Deatsch, our Chief Revenue Officer, has decided to leave Atlassian at the end of the calendar year for new life adventures.

Cameron has played a central role in helping our customers in their journey to cloud over the past several years and has had a tremendous impact in every area he’s overseen at Atlassian over his decade-plus tenure. From building out our customer-facing teams and evolving our GTM model, to leading our Server and Data Center product organizations, and even a stint as Head of Corporate Development – Cameron has seen and done it all. Equally important is the strong and experienced team he has built to continue that legacy.

We, the founders, and our entire Atlassian family will be forever thankful to Cameron for his inspirational leadership over the years. We are thankful for the huge impact he has had on our customers, our growth, and our culture. We will miss you, Cameron.

Here’s to the road ahead, and to unleashing the potential of every team.

– Mike and Scott

Customer highlight reel

Despite the tough macro environment we encountered in FY23, Atlassian made steady progress against our long-term goals across our broad, diversified customer base. We closed out the fiscal year with 262,337 total customers – up nearly 20,000 over the prior fiscal year.

Net new customer additions for Q4 were 2,562.

Conversions from Free editions to paid products remain challenged by the macroeconomic environment. However, we continue to be encouraged by the activity at the top of our funnel, as the number of teams coming to our site and trying Free editions of our products continues to grow. And importantly, customer churn continues to be stable, as is usage across our products, reflecting the value and inherent demand for our products.

And as a result of the macroeconomic environment, we’ve had to make thoughtful tradeoffs this year, including consciously shifting marketing resources to prioritize growth in customers with the highest lifetime value. The great news is, we’re seeing this strategy pay off.

As a volume-based business, we aim to serve the “Fortune 500,000.” That’s what our flywheel-led GTM motion is designed for, and that’s not going to change. However, we’re constantly improving our enterprise capabilities and evolving the higher-touch motions that help us make deeper inroads with enterprise customers.

Our Cloud platform now meets some of the strictest compliance standards in the world (think EBA, BaFin, HIPAA), and as discussed earlier, we have our sights set on supporting well beyond 50,000 users. Marquee features like Atlassian Analytics and the Atlassian Data Lake are already prompting customers to upgrade to Premium and Enterprise editions. For example, H&M moved up to Enterprise this quarter so they could identify trends in their data and make sure their teams’ work aligns with strategy. Plus, data residency options in new regions like Germany and Singapore give enterprise customers even more confidence in the Atlassian platform.

Looking ahead, the economic environment is still uncertain and on top of that, we’ve entered the final year of support for our Server products, which ends in February 2024. But the reality is, Atlassian is extremely well prepared to roll with the changes as they come and keep the momentum high as we come out the other side of the current downturn.

– Cameron

Financial highlights

Q4’23 highlights

We closed out FY23 with strong execution, delivering revenue, gross profit, and operating income that exceeded our expectations.

Greater-than-expected enterprise sales driven by the expiration of our loyalty discount program and record migrations resulted in revenue outperformance in Cloud and Data Center, while gross profit and operating profit also benefited from our focus on disciplined hiring and cost management.

Guided by our mission of unleashing the potential of every team, we remain committed to delivering compelling value to our customers as we invest in our unique opportunities to drive long-term growth in FY24 and beyond.

Highlights for Q4’23 include:

All growth comparisons below relate to the corresponding period of last year, unless otherwise noted.

• Revenue of $939 million increased 24%, driven by growth in our Cloud and Data Center offerings.
• GAAP gross margin of 82% decreased 1 percentage point. Non-GAAP gross margin of 84% was flat.
• GAAP operating loss was $50 million and GAAP operating margin of (5%) was flat. Non-GAAP operating income was $203 million and non-GAAP operating margin of 22% increased 8 percentage points driven by greater operating leverage.
• Operating cash flow was $273 million. Free cash flow of $270 million increased 42%.
• Returned $118 million to shareholders through share repurchases in the quarter.

Revenue growth in Q4 was driven by subscription revenue, which grew 34%. Enterprise sales were particularly healthy with focused sales execution ahead of the end of our loyalty discount program on June 30, 2023. This drove record migrations to Cloud and Data Center, with strong uptake of Premium and Enterprise editions as well as annual and multi-year subscriptions.

Cloud revenue growth of 30% was better than expected driven primarily by stronger migrations and net seat expansion. The macro headwinds on paid seat expansion observed throughout FY23 persisted in Q4, however, the rate of deceleration began to moderate slightly towards the end of the quarter, particularly with enterprise customers. Free-to-paid conversion rates remain challenged, while customer retention and monthly active usage trends across the business remained stable as we continue to maintain our strong competitive position.

Data Center revenue growth of 46% was driven by renewals, migrations, and seat expansion, while also benefiting from the stronger-than-expected enterprise sales previously noted.

Lastly, deferred revenue increased 31% year-over-year to $1.5 billion reflecting strong growth in annual and multi-year subscriptions and customer commitment to the Atlassian platform.

GAAP operating expenses increased 22% year-over-year driven by higher employment costs, including stock-based compensation, due to the year-over-year increase in headcount.

Non-GAAP operating expenses increased 10% year-over-year and were lower than expected due primarily to payroll savings from lower headcount and greater-than-expected savings in discretionary spending.

GAAP operating margin of (5%) and non-GAAP operating margin of 22% benefited year-over-year from moderation in the pace of hiring, cost savings from our Q3’23 restructuring activities, lower bonus expense, and disciplined cost management and operating efficiencies across the business.

Free cash flow in Q4’23 was affected by $18 million of payments for employee severance and other termination benefits related to our Q3’23 restructuring activities.

Financial targets (U.S. $)

FY24 outlook

Total revenue

While we are pleased with our momentum exiting FY23, our guidance accounts for two significant factors which may impact our revenue results in FY24.

The first is the outlook for the macroeconomic environment, which remains uncertain. Our guidance assumes the macroeconomic environment continues to negatively impact growth in paid seat expansion at existing customers and free-to-paid conversion rates, and that the trends we’ve seen in these areas throughout FY23 persist into FY24.

The second is customer purchasing and migration decisions related to the end-of-support for our Server offering in February 2024. We expect this event to drive quarter-to-quarter variability in our Cloud and Data Center revenue growth rates depending on when and how our Server customers ultimately choose to migrate: direct to Cloud, direct to Data Center, or to some combination of Cloud and Data Center. Our guidance assumes Server customer migration rates to Cloud and Data Center are consistent with historical trends, and some portion of our Server customers will not migrate in FY24. As a reminder, a portion of Data Center revenue is recognized up-front in the period the subscription begins, while the remainder is recognized ratably over the life of the subscription. Cloud revenue is recognized ratably over the life of the subscription.

Further detail and expected trends are provided below:

SUBSCRIPTION REVENUE

Cloud revenue

We expect Cloud revenue growth of approximately 25% to 30% year-over-year in FY24, of which migrations will drive approximately 10 points. We also expect Cloud revenue growth rates will gradually improve throughout the year driven by easier year-on-year comparisons.

Data Center revenue

We expect Data Center revenue growth of approximately 30% year-over-year in FY24, with growth decelerating over the course of the year primarily driven by tough year-on-year comparisons, declining migrations from Server, and increasing migrations to Cloud.

MAINTENANCE REVENUE

In line with our announced end-of-support for Server, we expect Server revenue to progressively decline throughout the course of FY24, with a sequential dollar decline in Q1’24 like that observed in Q4’23.

As a reminder, we will no longer recognize Server revenue beyond February 2024, and therefore expect Server revenue to be zero in Q4’24.

OTHER REVENUE

We expect Other revenue, which is primarily comprised of Marketplace revenue, to be roughly flat year-over-year in FY24 driven by the continued sales mix shift to Cloud apps.

As a reminder, there is a lower Marketplace take rate on third-party Cloud apps relative to Server and Data Center apps to incentivize further Cloud app development and Marketplace revenue is recognized in-full in the period of the Marketplace sale.

Our focus remains on driving higher growth rates on sales of third-party Cloud apps relative to our own first-party Cloud products, and in FY23 we accomplished this as gross sales of Cloud apps in the Marketplace grew 10 percentage points faster than sales of our own Cloud products.

Gross margin

We expect FY24 GAAP gross margin will be approximately 81.0% and non-GAAP gross margin will be approximately 83.5%, lower than FY23 due to the continued revenue mix shift to Cloud.

Operating and free cash flow margin

We expect FY24 GAAP operating margin will be approximately (8.0%) and non-GAAP operating margin will be approximately 18.5%. We expect operating expense growth will be driven by continued investment in key strategic priorities like cloud migrations, penetrating our enterprise opportunity, and delivering compelling innovation and customer value across our three core markets. These investments will drive long-term growth as we continue to execute on the multi- year strategy shared at our Investor Day in April 2022.

And, as Mike and Scott highlighted above, we remain committed to returning to historical margins following this period of accelerated investment, and we expect that to begin in FY25 with non- GAAP operating margin above the 18.5% we expect to achieve in FY24.

As a reminder, our free cash flow margins have quarter-to-quarter seasonality, with Q1 historically the lowest driven by the timing of employee bonus payouts.

Share count

We expect diluted share count to increase by less than 2% in FY24.

FORWARD-LOOKING STATEMENTS

This shareholder letter contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. In some cases, you can identify these statements by forward-looking words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations, but these words are not the exclusive means for identifying such statements. All statements other than statements of historical fact could be deemed forward looking, including risks and uncertainties related to statements about our products, product features, including AI and large language models, customers, Atlassian Marketplace, Cloud and Data Center migrations, macroeconomic environment, anticipated growth, Team Anywhere, outlook, technology, and other key strategic areas, and our financial targets such as revenue and GAAP and non- GAAP financial measures including gross margin and operating margin.

We undertake no obligation to update any forward-looking statements made in this shareholder letter to reflect events or circumstances after the date of this shareholder letter or to reflect new information or the occurrence of unanticipated events, except as required by law.

The achievement or success of the matters covered by such forward-looking statements involves known and unknown risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management’s beliefs and assumptions only as of the date such statements are made.

Further information on these and other factors that could affect our financial results is included in filings we make with the Securities and Exchange Commission (the “SEC”) from time to time, including the section titled “Risk Factors” in our most recently filed Forms 20-F and 10- Q. These documents are available on the SEC Filings section of the Investor Relations section of our website at https:// investors.atlassian.com.

ABOUT NON-GAAP FINANCIAL MEASURES

In addition to the measures presented in our condensed consolidated financial statements, we regularly review other measures that are not presented in accordance with GAAP, defined as non-GAAP financial measures by the SEC, to evaluate our business, measure our performance, identify trends, prepare financial forecasts and make strategic decisions. The key measures we consider are non-GAAP gross profit, non-GAAP operating income and non-GAAP operating margin, non-GAAP net income, non-GAAP net income per diluted share and free cash flow (collectively, the “Non-GAAP Financial Measures”). These Non-GAAP Financial Measures, which may be different from similarly titled non-GAAP measures used by other companies, provide supplemental information regarding our operating performance on a non- GAAP basis that excludes certain gains, losses and charges of a non-cash nature or that occur relatively infrequently and/or that management considers to be unrelated to our core operations. Management believes that tracking and presenting these Non-GAAP Financial Measures provides management, our board of directors, investors and the analyst community with the ability to better evaluate matters such as: our ongoing core operations, including comparisons between periods and against other companies in our industry; our ability to generate cash to service our debt and fund our operations; and the underlying business trends that are affecting our performance.

Our Non-GAAP Financial Measures include:

Non-GAAP gross profit. Excludes expenses related to stock-based compensation, amortization of acquired intangible assets, and restructuring charges.
Non-GAAP operating income and non-GAAP operating margin. Excludes expenses related to stock-based compensation, amortization of acquired intangible assets, and restructuring charges.

Non-GAAP net income and non-GAAP net income per diluted share. Excludes expenses related to stock-based compensation, amortization of acquired intangible assets, restructuring charges, non-coupon impact related to exchangeable senior notes and capped calls, gain on a non-cash sale of a controlling interest of a subsidiary and the related income tax effects on these items, and a non- recurring income tax adjustment.
Free cash flow. Free cash flow is defined as net cash provided by operating activities less capital expenditures, which consists of purchases of property and equipment.

We understand that although these Non-GAAP Financial Measures are frequently used by investors and the analyst community in their evaluation of our financial performance, these measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. We compensate for such limitations by reconciling these Non-GAAP Financial Measures to the most comparable GAAP financial measures. We encourage you to review the tables in this shareholder letter titled “Reconciliation of GAAP to Non-GAAP Results” and “Reconciliation of GAAP to Non-GAAP Financial Targets” that present such reconciliations.

ABOUT ATLASSIAN

Atlassian unleashes the potential of every team. Our agile & DevOps, IT service management, and work management software helps teams organize, discuss, and complete shared work. The majority of the Fortune 500 and over 260,000 companies of all sizes worldwide – including NASA, Kiva, Deutsche Bank, and Salesforce – rely on our solutions to help their teams work better together and deliver quality results on time. Learn more about our products, including Jira, Confluence, Jira Service Management, Trello, Bitbucket, and Jira Align at https://atlassian.com.

Investor relations contact: Martin Lam, IR@atlassian.com

Media contact: M-C Maple, press@atlassian.com

¹ Gartner, Magic Quadrant for IT Service Management Platforms, Rich Doheny, Chris Matchett, Siddharth Shetty, 31 October 2022.

² Gartner, Magic Quadrant for DevOps Platforms, Manjunath Bhat, Thomas Murphy, Joachim Herschmann, et al, 5 June 2023.

Gartner Disclaimer

Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner research organization and should not be construed as statements of fact. Gartner disclaims all warranties, express or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.

GARTNER is a registered trademark and service mark of Gartner, Inc. and/or its affiliates in the U.S. and internationally, and MAGIC QUADRANT is a registered trademark of Gartner, Inc. and/or its affiliates and are used herein with permission. All rights reserved.

The post Our Q4 FY23 letter to shareholders appeared first on Work Life by Atlassian.

The past months have been a dynamic period in Atlassian’s history. We reorganized our company in response to the changing and difficult macroeconomic environment. We made tough calls to prioritize the most critical work and rebalanced our team so we can run faster at our top priorities, which unfortunately meant saying goodbye to roughly 500 Atlassians.

Now we’re focused on executing. As a company, we have massive growth opportunities in front of us, particularly in cloud migrations, ITSM, and serving our enterprise customers in the cloud.

Just as our agile DNA helps us respond to changes in the economic environment, our unique business model allows us to move quickly as new technologies emerge. When advances in generative AI exploded onto the scene early this year, we already had years’ worth of experience building AI-powered features. Now we can combine large language models (LLMs) with our existing machine learning models, and deliver results tailored for the customer’s context to create entirely new, hyper-customized experiences.

Our excitement around AI is grounded in the fundamental belief that no matter what technologies are trending, teamwork is always the backbone of human achievement. As we build new ways to supercharge collaboration, we see three forces shaping the way teams work together:

1. Software continues to eat the world, turning every business into a digital business. And the meteoric rise of AI technologies in the workplace is giving this trend a turbo-boost.
2. Many organizations prescribe narrow ways of working in an attempt to keep their teams aligned. But collaboration isn’t “one size fits all” and teams need the autonomy to adopt the tools and practices that suit them best.
3. Distributed work is here to stay. Even though many companies mandate some in-office time, we believe the days of coming in every day from 9 to 5 are over. Atlassian is leading the way in this space, leaning into flexible work arrangements at scale and sharing the lessons we learn.

Atlassian’s mission is to unleash the potential of every team so they can meet whatever challenge comes their way. Our products set teams up for success – allowing them to work differently, together – so they can turn today’s dreams into tomorrow’s reality.

More and more customers on cloud nine

Enterprise migrations have nearly doubled over the past year, with customers continuing to move to the cloud from both Data Center and Server. This is one of our highest priorities as a company and an area where we’re increasing our investment in support services and tooling so we can migrate more customers, faster. (To wit, a certain US-based home improvement giant completed their Confluence migration from Server to Cloud in under a week!)

Unlocking cloud for the enterprise

Enterprise-focused improvements across our entire platform removed barriers to cloud for even more customers. First, we shipped support for 50,000-user Confluence instances, more granular data residency controls and 20,000-agent support (beta) in Jira Service Management, and the ability for customers to centrally manage security for their Atlassian cloud users in a more flexible way.

In concert, we launched Atlassian Analytics into general availability after working with customers like DISH Networks, PayPal, and H&M during the early access phase. It is now incorporated into the Enterprise editions of Jira Software, Jira Service Management, and Confluence.

With Atlassian Analytics, customers can bring data from their Atlassian products together with data from 3rd-party tools like GitHub, Salesforce, Workday, and Circle CI to uncover insights into how their teams work and where they’re struggling, then use those insights to make faster, more confident decisions. We also included 20+ data visualization templates that let customers create dashboards in just minutes, and the ability to embed dashboards and charts in other Atlassian products for easier sharing.

Preventing incidents before they happen

Finally, we launched the early access program for Beacon, our new threat-detection and mitigation product. With cyberattacks becoming more frequent and sophisticated, our customers are prioritizing security in the hopes of staying out of the headlines. Thanks to the power of our platform, we can help.

Beacon gives customers a simple way to detect, investigate, and address risky or suspicious user behavior across their Atlassian cloud products. Is someone opening loads of Jira issues in a very short time? Running suspicious-looking searches in Confluence? Changing authentication rules in Bitbucket? Beacon will alert customer admins to red flags like these so they can take action before things get out of hand.

Three global markets, one common platform for teamwork

As a regulated financial institution managing cryptocurrency assets, trust is a requirement for Atlassian customer Finoa, not a luxury. What’s more, innovating in financial services is complex, especially in Germany, home to some of the most advanced crypto regulations.

Finoa began with collaboration tools from various vendors and an on-premises wiki. But information was often difficult to find, and few people used the wiki because it wasn’t intuitive. They wanted more automation and better alignment across their teams. As Finoa started comparing options, they learned about our Enterprise edition for cloud, and knew they’d found the right fit.

Today, every Finoa department uses Jira Software, Jira Service Management, and Confluence in their daily work. By standardizing on Atlassian, Finoa is innovating with the speed, flexibility, and visibility of a startup, along with the organization and security controls of an established financial institution.

Finoa’s story has played out inside the walls of thousands of our customers over the years. And with our three-pronged approach of addressing the work management, agile/DevOps, and ITSM markets, we aim to help thousands more reap the same benefits.

Work management

Teams such as finance and marketing have been using Jira Software since back when it was called “JIRA,” configuring their way around the developer-oriented nature of the product. Two years ago, we introduced Jira Work Management: a friendly and intuitive way for business teams to harness the power of Jira. Today, we’re happy to say that Jira Work Management’s customer base has grown nearly 50% year-over-year, with monthly active users up more than 80% in the same time period.

As part of our Atlassian Together offering for cloud (which also encompasses Confluence, Trello, and Atlas), Jira Work Management is helping customers unlock wall-to-wall teamwork by bringing technical and non-technical teams onto a common platform while still allowing each team to choose the tools that work best for them.

Atlassian has been in the work management game since we launched Confluence in 2004. From its humble beginnings as a wiki-like workhorse powering the exchange of knowledge and ideas across an organization, Confluence has evolved into a world-class collaboration engine supporting ever more ways to create and share rich content. This quarter we built on that legacy with new content types and easier ways to work with people outside your company.

Brainstorm without borders using whiteboards

Every project starts with an idea. The best thing about Confluence is that it gets those ideas out of people’s heads and into a shareable format. Historically, Confluence has done that through text and images. Now, we’ve introduced whiteboards: a new modality for sharing ideas with as much (or as little) structure as teams care to impose.

With Confluence whiteboards, teams can sketch, type, and use digital sticky notes to jot down ideas, then turn them into deliverables. One click converts a note into a Jira issue that can be edited directly from the whiteboard. And with the ability to embed artifacts from other Atlassian tools, teams can use whiteboards to create a sharable canvas showing how all the pieces of a project connect.

Connect the dots automatically with native databases

The moment a project kicks off, it generates a flurry of interconnected data around tasks, owners, dates, deliverables, and more. Customers told us they want a structured way to connect work in Confluence without manual updates across multiple pages and we’re responding with another new content type: databases.

Databases are structured dynamic tables that help teams organize information that they can reference anywhere else in Confluence. Table entries are synced in real time so information is always up to date, regardless of where it’s surfaced.

External collaboration features let teams share with anyone, anywhere

Confluence now features public links, which provide a read-only view of pages teams can share with customers and vendors without needing to manage additional user seats. And when it’s time for deeper collaboration, guest access facilitates it. Users can give up to five guests access to a single Confluence space, removing logistical barriers to collaboration at a time when organizations need to streamline wherever possible.

Agile/DevOps

Not-so-fun fact: some studies show that three-quarters of product managers struggle to determine how valuable their product is to customers. That’s why product discovery – the process of refining ideas based on a deep understanding of user needs – is quickly becoming an essential part of the software development lifecycle. It’s also why we built Jira Product Discovery.

When product teams are in the pie-in-the-sky envisioning phase, they need to gather and organize information that is well upstream of epics and tasks. In the past, ideas and feedback have been scattered across spreadsheets, backlogs, and notebooks (or just lived in product managers’ heads). Chaos! Now, Jira Product Discovery offers a dedicated space for PMs to collaborate with each other, and just as importantly, with their development teams.

Product managers can proceed with more confidence by gathering context and insights that help them prioritize what will make the biggest difference for their customers. From there, custom roadmaps keep both the team and their stakeholders abreast of the what, when, and why. And because it’s part of the Jira family, it only takes a few clicks to turn the best ideas into issues for the development team to work on.

Tested (and adored) by customers like Canva and Cisco while in beta, Jira Product Discovery will be generally available in the coming months.

IT service management

An under-recognized affliction has been plaguing enterprises for years. We call it “Bad Service Management” (or, BSM). BSM flares up when development, operations, and business teams work in silos, making it impossible to deliver great service experiences. Tell-tale symptoms include bloated budgets, irritable teammates, dizziness from complex setups, nausea from clunky outdated interfaces, and blurred vision.

Fortunately, there’s a reliable cure for BSM: replacing legacy ITSM systems with Jira Service Management.

At our ITSM-focused event in December, we kicked off our crusade to end BSM. While we’ve had a lot of fun with this lighthearted make-the-switch campaign, we’re dead serious about stealing the competition’s thunder. As demonstrated by customers like The Very Group and Zocdoc, we’re winning over organizations of all shapes and sizes.

Meanwhile, our product team has been nose to the grindstone building always-on virtual agents that deliver basic service to employees while human IT staff focus on more complex requests. With the help of LLMs, the virtual agent reads and understands customers’ internal knowledge and processes, then uses that information to field requests raised in Slack or Microsoft Teams. The virtual agent can also ask follow-up questions that help it resolve the request automatically. And because it’s built into Jira Service Management, it can easily escalate requests to humans as needed, bringing the entire context along with it.

For even better precision, admins can train their virtual agent to understand more requestor intents using their internal knowledge bases and service more requests by setting up custom routing workflows. Given many of our customers already use Jira Service Management beyond IT, we anticipate this ability will increase adoption even further among HR, legal, and finance teams. They can also track the virtual agent’s performance on a dashboard that displays stats like number of conversations, resolution rate, and customer satisfaction scores.

Virtual agents are just one way Atlassian is taking advantage of the mind-blowing AI capabilities that have become available over the past few months. Speaking of which…

Atlassian customers just won the AI lottery

Atlassian has been using machine learning to enhance core experiences in our products for years, from personalized search to predictive algorithms that make finding the right person, project, or page a snap. Now that generative AI has reached consumer-grade maturity with LLMs, we can create magical new experiences for our customers.

Of course, so can every other vendor. What sets Atlassian apart is that customers have been trusting us with their knowledge – their roadmaps, decision registers, announcements, tasks, and so much more – for decades. Now we can enrich that knowledge with machine learning and LLMs to create tailored experiences they never imagined. Like everything we do, our approach to AI is rooted in our values, specifically “Open company, no bullshit” and “Build with heart and balance,” as reflected in our Responsible Tech Principles.

At Team ‘23 we introduced Atlassian Intelligence, built on our own machine learning models and technology from OpenAI. Leveraging the power of our cloud platform, Atlassian Intelligence creates a teamwork graph tailored to each customer that accelerates their work across all our cloud products. Just as the teamwork graph informs how Jira Service Management’s virtual agents escalate requests, it tells Atlassian Intelligence who to assign tasks to or what tests should be run before releasing new code.

Atlassian Intelligence also saves time by getting team members up to speed faster than ever before. A support engineer taking over a ticket can see the entire conversation recapped at the top, including all the troubleshooting articles already sent to the customer. A project manager can instantly turn the transcript of a meeting into a summary of the decisions made and actions agreed upon.

And when it’s time for knowledge workers to face their greatest fear – an empty document whose cursor seems to mock them with every blink – we’ve got their backs. A marketer planning a campaign can ask Atlassian Intelligence to articulate the biggest selling points of a new feature based on product specs and user stories, or even generate social media posts. And if the posts it drafts don’t strike the right tone, they can ask Atlassian Intelligence to rewrite them to be more empathetic, professional, reassuring, etc.

Looking farther ahead, Atlassian Intelligence will soon be able to define any term or acronym for users based on contextual information found across our products – again, powered by the teamwork graph generated for that specific customer. Atlassian Intelligence will even be able to take a question asked in natural language (in fact, we support 20+ languages) and convert it into Jira Query Language, empowering even first-day users to run sophisticated searches.

AI gives Atlassian the ability to unleash even more of our customers’ potential. Buckle up – this one’s going to be a ripper.

Marketplace is having a moment (again)

We are beyond excited to announce that the Atlassian Marketplace surpassed $3 billion in lifetime sales this quarter! At 5,300+ apps, Atlassian has one of the largest and most diverse software marketplaces, with over 1,700 independent developers and Marketplace Partners. It’s a massive growth lever for us, enabling us to satisfy specialized use cases and integrate with 3rd-party tools – both of which make our products stickier.

It took seven years to reach Marketplace’s first billion dollars in sales. Then two years to hit $2 billion, and now here we are just over a year later past the $3 billion mark. We attribute this exponential growth to our dynamic and passionate ecosystem of developers who substantially extend the capabilities of our product suite, increased app adoption by our enterprise customers, and the growth of our cloud business overall.

Hard times don’t last, but great teams do

According to our employees, Atlassian is one hell of a great team to be on. For the fifth year in a row, we appeared on Fortune magazine’s “100 Best Companies to Work For” list. This year, we moved up 40 places to rank #7. Not only that, but we were also named to LinkedIn’s list of the 50 best workplaces to grow your career in the U.S. Massive thanks to all the decision-makers, culture carriers, and everyday Atlassians who make working here a joy – you beaut!

As we move into the final quarter of our fiscal year, we’re finding new ways to navigate these challenging times and help our customers do the same. For example, our virtual agent has already saved us a full person-month in the weeks since we deployed it internally, and we’re keen for customers to realize similar benefits from their new virtual teammate.

It was great seeing some of you at Team ‘23 in Las Vegas last month. We look forward to taking your questions and sharing more about Atlassian’s direction with you on our earnings call shortly.

Here’s to the road ahead, and to unleashing the potential of every team.

– Mike and Scott

Customer highlight reel

We’re fresh off Team ‘23, and my voice has nearly recovered from the million-or-so conversations I had with our customers and partners who were thrilled about the announcements we made and are committing even deeper to Atlassian. We also gathered with industry analysts, financial analysts and investors (watch the recording if you missed it), Atlassian Community leaders, and our Customer Advisory Board to learn what’s on their minds and share our latest updates.

What we heard from customers, as we consistently do, is that Atlassian delivers mission-critical tooling for their teams with a price-to-value ratio that is unmatched. Our announcements around AI, Confluence whiteboards, Atlassian Analytics, and Beacon only make them happier about choosing cloud. (And those yet to migrate say they’re all the more eager to do so now.)

If you missed the live event, you can catch up on all the keynotes as well as many of the breakout sessions in our on-demand library. A huge thanks and congratulations to all the teams who worked so hard to make Team ’23 an amazing event for the entire Atlassian community. You’ve set a high bar for next year.

We ended this quarter with nearly 260,000 customers, with thousands more organizations embarking on their Atlassian journey through Free editions of our cloud products. While the macro environment continues to send headwinds at us, we’re not seeing underlying problems with demand or above-average churn.

Across the board, our customers and partners say they’re delighted by the value Atlassian is delivering, and chomping at the bit to get their hands on our new AI-powered features. So now that the chairs have been cleared away and the confetti swept up, it’s time to get back to doing what we do best: rolling out a steady drumbeat of innovative products, features, and practices that help our customers do whatever it is they do best.

Whether it’s NASA searching for undiscovered planets or Bombas helping keep our feet comfy here on Earth, teams are what move humanity forward. It’s why we come to work every day thinking about new and better ways to unleash their potential. Go team!

Financial highlights

In Q3’23, we incurred charges associated with rebalancing our resources to accelerate progress against our highest priorities and consolidating leases to optimize our real estate footprint consistent with our Team Anywhere strategy. These restructuring charges are excluded from our non-GAAP results and are as follows:

Third quarter fiscal year 2023 highlights

We delivered another quarter of solid financial results amidst a challenging macroeconomic environment in Q3, while making difficult but necessary decisions to enable faster execution against our largest growth opportunities and better serve our customers. Revenue, gross profit, and operating income exceeded our expectations demonstrating our ability to navigate the near term while remaining focused on the long term.

Trends in the quarter were largely consistent with the first half of our fiscal year. Cloud revenue growth was driven by existing customers and migration activity, while impacted by macro headwinds. Data Center revenue benefitted from strong renewals. And lastly, we continued to deliver on our plan to align costs with revenue growth by driving efficiencies and slowing the pace of hiring, while investing in our strategic priorities to provide compelling value to customers and drive long-term growth.

We continue to have conviction in the long-term opportunities we see ahead of us and are focused on executing to achieve them.

Highlights for Q3’23 include:

All growth comparisons below relate to the corresponding period of last year, unless otherwise noted.

• Revenue of $915 million increased 24%, driven by growth in our cloud and Data Center offerings.
• GAAP gross margin of 82% decreased 3 percentage points. Non-GAAP gross margin of 85% decreased 1 percentage point driven by revenue mix shift to the cloud.
• GAAP operating loss was $162 million and GAAP operating margin of (18%) decreased 22 percentage points. Non-GAAP operating income was $197 million and non-GAAP operating margin of 22% decreased 2 percentage points driven by the gross margin decline discussed above and growth in R&D and sales investments across our target markets and strategic priorities.
• Operating cash flow was $352 million. Free cash flow of $350 million increased 13%.

Revenue growth in the quarter was driven by subscription revenue, which grew 37%. Customers continue to turn to Atlassian in this challenging macroeconomic environment to help their teams work differently, together – allowing them to drive innovation and progress against their biggest challenges.

Cloud revenue growth of 34% was in line with our expectations driven by expansion from existing customers and migrations, as well as higher average revenue per user (ARPU) from increasing sales of our Premium and Enterprise editions and pricing tailwinds. The moderating growth rate of cloud revenue continues to be impacted by worsening macroeconomic headwinds on paid seat expansion from existing customers, free-to-paid conversions, and modest seat count reductions in some customers that have announced layoffs. Despite the challenging macroeconomic environment, we’re not seeing changes in our competitive position or in the inherent demand for our products. Monthly active users and customer retention remains healthy given the high-value, mission-critical nature of our cloud products and services.

Data Center revenue growth of 47% was driven by strong renewals and seat expansion from existing customers.

Lastly, deferred revenue increased 28% year-over-year to $1.4 billion driven by growth in annual cloud subscriptions and multi-year customer commitments to the Atlassian platform.

GAAP operating expenses increased 54% year-over-year driven by restructuring charges of $89 million, which contributed to 15 percentage points of the year-over-year increase. Non-GAAP operating expenses increased 26% year-over-year, and were lower than expected due to payroll savings from lower bonus expense and headcount, as well as greater than expected savings in discretionary spending areas such as professional services and travel and entertainment as part of our commitment to drive operational efficiency.

Headcount

Total employee headcount was 11,067 at the end of Q3’23, which includes approximately 500 employees that were impacted by the company’s rebalancing of resources and will not be included in our headcount by the end of Q4’23. We added 280 net new Atlassians in Q3, as we moderated headcount growth consistent with our plans to slow the pace of hiring in the second half of FY23.

Q3’23 GAAP net loss includes the restructuring charges of $98 million, and an income tax charge of $42 million for an adjustment to our uncertain tax provisions related primarily to transfer pricing. These charges increased GAAP net loss per diluted share by $0.54, net of tax effects.

Free cash flow in Q3’23 includes $5 million of payments for employee severance and other termination benefits related to the restructuring actions discussed above. We expect to make the remaining $21 million of payments for severance and other termination benefits in Q4’23.

Financial targets

Q4’23 Outlook

Total revenue

For Q4’23, we expect total company revenue to be in the range of $900 million to $920 million. This guidance implies full-year FY23 total revenue growth of approximately 25% year-over-year, consistent with our prior FY23 guidance. This guidance assumes the macroeconomic trends we have seen to date continue to worsen in Q4. Further detail is provided below:

SUBSCRIPTION REVENUE

Cloud revenue

We expect Q4’23 Cloud revenue growth of approximately 26% to 28% year-over-year, with increasing macroeconomic impacts on paid seat expansion from existing customers and new customer conversions, as well as headwinds in areas we have yet to see significant impact such as churn or upsell to Premium and Enterprise editions of our products. We continue to expect migrations to perform in line with our plan, and assume approximately 10 points of Cloud revenue growth to be driven by migrations.

This guidance implies full-year FY23 Cloud revenue growth of approximately 37% year-over-year, within the range of our prior FY23 guidance of 35% to 40%.

Data Center revenue

We expect strong renewals and seat expansion to continue to drive healthy Data Center revenue growth in Q4’23, albeit at a more moderate rate than Q3’23.

MAINTENANCE REVENUE

In line with our announced Server end-of-life, we expect maintenance revenue to continue to decline to approximately $85 million in Q4’23. As a reminder, we will no longer provide maintenance and support for our Server offerings beginning February 2024.

OTHER REVENUE

We expect Q4’23 Other revenue, which is primarily comprised of Marketplace revenue, to be sequentially flat compared to Q3’23. As a reminder, revenue on the sale of third-party Marketplace apps is recognized in the period the product is purchased, which adds quarter-to-quarter volatility in Marketplace growth rates.

Operating margin

We expect Q4’23 GAAP operating margin will be approximately (11%) and non-GAAP operating margin will be approximately 17%. Our Q4’23 operating margin will benefit from approximately $20 million, or 2 percentage points, of employee and lease related expense savings from our Q3 restructuring actions discussed above. We plan to reinvest these savings in FY24 in strategic priorities that deliver differentiated innovation and customer value with durable, long-term growth. We are well positioned to deepen our competitive advantages in each of our three large and growing markets, and emerge from this macroeconomic environment as a stronger company.

Sharecount

We expect less than 2% year-over-year increase in diluted share count in Q4’23.

Forward-looking statements

This shareholder letter contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. In some cases, you can identify these statements by forward-looking words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations, but these words are not the exclusive means for identifying such statements. All statements other than statements of historical fact could be deemed forward looking, including risks and uncertainties related to statements about our products, product features, including the introduction of AI and large language models, customers, Atlassian Marketplace, cloud migrations, macroeconomic environment, anticipated growth, the effects of our recent restructuring, outlook, technology, and other key strategic areas, and our financial targets such as revenue and GAAP and non-GAAP financial measures including gross margin and operating margin.

We undertake no obligation to update any forward-looking statements made in this shareholder letter to reflect events or circumstances after the date of this shareholder letter or to reflect new information or the occurrence of unanticipated events, except as required by law.

The achievement or success of the matters covered by such forward-looking statements involves known and unknown risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management’s beliefs and assumptions only as of the date such statements are made.

Further information on these and other factors that could affect our financial results is included in filings we make with the Securities and Exchange Commission (the “SEC”) from time to time, including the section titled “Risk Factors” in our most recently filed Forms 20-F and 10-Q. These documents are available on the SEC Filings section of the Investor Relations section of our website at: https://investors.atlassian.com.

About non-GAAP financial measures

In addition to the measures presented in our condensed consolidated financial statements, we regularly review other measures that are not presented in accordance with GAAP, defined as non-GAAP financial measures by the SEC, to evaluate our business, measure our performance, identify trends, prepare financial forecasts and make strategic decisions. The key measures we consider are non-GAAP gross profit, non-GAAP operating income and non-GAAP operating margin, non-GAAP net income, non-GAAP net income per diluted share and free cash flow (collectively, the “Non-GAAP Financial Measures”). These Non-GAAP Financial Measures, which may be different from similarly titled non-GAAP measures used by other companies, provide supplemental information regarding our operating performance on a non-GAAP basis that excludes certain gains, losses and charges of a non-cash nature or that occur relatively infrequently and/or that management considers to be unrelated to our core operations. Management believes that tracking and presenting these Non-GAAP Financial Measures provides management, our board of directors, investors and the analyst community with the ability to better evaluate matters such as: our ongoing core operations, including comparisons between periods and against other companies in our industry; our ability to generate cash to service our debt and fund our operations; and the underlying business trends that are affecting our performance. 

Our Non-GAAP Financial Measures include: 

• Non-GAAP gross profit. Excludes expenses related to stock-based compensation, amortization of acquired intangible assets, and restructuring charges.
• Non-GAAP operating income and non-GAAP operating margin. Excludes expenses related to stock-based compensation, amortization of acquired intangible assets, and restructuring charges.
• Non-GAAP net income and non-GAAP net income per diluted share. Excludes expenses related to stock-based compensation, amortization of acquired intangible assets, restructuring charges, non-coupon impact related to exchangeable senior notes and capped calls, gain on a non-cash sale of a controlling interest of a subsidiary and the related income tax effects on these items, and a non-recurring income tax adjustment.
• Free cash flow. Free cash flow is defined as net cash provided by operating activities less capital expenditures, which consists of purchases of property and equipment. 

We understand that although these Non-GAAP Financial Measures are frequently used by investors and the analyst community in their evaluation of our financial performance, these measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. We compensate for such limitations by reconciling these Non-GAAP Financial Measures to the most comparable GAAP financial measures. We encourage you to review the tables in this shareholder letter titled “Reconciliation of GAAP to Non-GAAP Results” and “Reconciliation of GAAP to Non-GAAP Financial Targets” that present such reconciliations.

About Atlassian

Atlassian unleashes the potential of every team. Our agile & DevOps, IT service management and work management software helps teams organize, discuss, and complete shared work. The majority of the Fortune 500 and over 250,000 companies of all sizes worldwide – including NASA, Kiva, Deutsche Bank, and Salesforce – rely on our solutions to help their teams work better together and deliver quality results on time. Learn more about our products, including Jira Software, Confluence, Jira Service Management, Trello, Bitbucket, and Jira Align at atlassian.com.

Investor relations contact: Martin Lam, IR@atlassian.com
Media contact: M-C Maple, press@atlassian.com

The post Our Q3 FY23 letter to shareholders appeared first on Work Life by Atlassian.

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Fellow shareholders,

Atlassian closed out 2022 proud of everything we accomplished in yet another unpredictable year. Despite the current macroeconomic headwinds, the massive opportunities in front of us have not changed, and we’re ready to execute with relentless focus throughout 2023.

Continuing the trend from last quarter, existing customers are expanding their paid seats at a slower pace. We also continue to see solid growth in free editions of our cloud products, but more hesitancy to upgrade to paid editions. While these two macro-induced headwinds became more pronounced in Q2, calendar year 2023 will be all about helping our customers navigate these challenging times, absorbing the downstream impacts on our business, and setting ourselves up for long-term success.

To be clear, our competitive position remains unchanged. As customers seek to work more effectively, and accelerate digital transformation in an uncertain environment, they’re deepening their commitment to Atlassian. Cloud migrations are moving right along, customers are signing longer contracts, and retention remains healthy.

As we said last quarter, we intend to continue playing offense in our three large markets while balancing
our investments against the growth of our business overall. Atlassian’s unique business model, broad customer base, and agile approach to planning allow us to adapt to changes quickly, which is exactly what we’re doing.

We’re rebalancing our talent and resources to put increased focus on our largest growth opportunities: cloud migrations, the IT service management market, and serving enterprise customers. Atlassian is well positioned in these areas with significant momentum that can help us power through the turbulence ahead.

Of course, centering our investments on top growth initiatives also means shifting away from lower-priority endeavors. We’ll continue to manage expenses, invest responsibly for the long term, and be prudent stewards of capital as we respond to macroeconomic conditions.

Over our seven years as a public company, you’ve consistently seen us play the long game while being incredibly capital efficient. That’s a winning strategy and we’re sticking with it.

We have a passionate, versatile team that can adapt when priorities shift and address a multitude of challenges. We have innovative products that satisfy the most crucial use cases for companies large and small. And we have an incredible model that allows us to be patient and disciplined, even amidst a rapidly changing economy, so we can emerge even stronger.

Increasingly “cloudy” with sustained migration momentum

Atlassian remains focused on building a world-class cloud platform and making sure our customers benefit from everything it has to offer.

Migrations are tracking well, up nearly 2x year-over-year, and we continue to expect migrations to account for approximately 10 points of cloud revenue growth in FY23. We’ve also made it easier for enterprise customers to determine which migration approach is right for them with a dynamic automated form that matches them to the right migration support team based on their answers to a few simple questions.

Additionally, we completed two of our biggest migrations to date in Q2. One of Australia’s largest banks migrated 25,000 users to Jira Software Cloud’s Enterprise edition, and a major UK-based bank moved a total of 30,000 user seats from Data Center editions of Jira Software and Confluence to our cloud platform. Working with mega-migrators like these resulted in tooling improvements and lessons learned that are already proving valuable for migrations of all sizes.

On the R&D side, our investment in “build once, run everywhere” platform capabilities and commitment to developer productivity allow our teams to roll out a steady stream of features and enhancements that make Atlassian’s cloud ever more accessible (and attractive) to customers.

In the case of the UK-based bank, the ability to archive Jira issues and support for multiple identity providers in Atlassian Guard unblocked their move to the cloud. And the launch of data residency in Germany in Q2 is unlocking cloud for more of our customers in regulated industries. Financial firms like Finoa and Giesecke+Devrient GmbH, as well as other security-conscious enterprise vendors like Celonis and Software AG migrated to our cloud products recently, backed by the growing list of compliance certifications and data residency options our platform has achieved.

To further incentivize migration and upgrades to higher editions, we launched new automation capabilities in Confluence Cloud’s Premium and Enterprise editions. Now admins can keep spaces organized by automatically archiving inactive content and any user can automate page creation for recurring team practices like monthly business reviews or retrospectives. With the average cloud customer already running over 650 automated operations each day, we know customers will get a lot of value out of this new feature and the Confluence Automation Template Library.

And it’s not just Confluence. We’re investing in automation capabilities that extend across – and even beyond – our platform. Jira Software users can connect with Bitbucket, GitHub, GitLab, and LaunchDarkly to automatically create development branches and feature flags. And thanks to a new integration with Amazon Web Services (AWS), ITOps teams can automate manual tasks like notifying stakeholders of an incident or restarting a server if it stops running. The result is that customers can spend more time where it matters. That’s some pretty good ROI.

Market deep-dive: IT service management

As companies move through digital transformation and grapple with aging systems that can’t keep up with the demands of the modern world, IT has gone from being a cost center to a strategic partner for the entire business. Recent CIO surveys and our own conversations with customers reveal that cybersecurity and incident management, plus automated workflows and reporting, top their list of priorities. This, as IT teams continue to forge closer relationships and tighter alignment with sales, HR, finance, and other teams across the business. All of which is exactly what Jira Service Management and our other ITSM products are designed for.

Jira Service Management steals the competition’s thunder

The ITSM market is one of Atlassian’s biggest areas of opportunity, with Jira Service Management leading the way as our fastest-growing product at scale.

• We’re the only vendor that brings software and IT teams together on the same platform.
• Developers have trusted us for over two decades, expediting expansion into IT and ops teams at companies of all sizes and in every industry.
• We have a consistent track record of investment delivering amazing customer value, including a handful of smart tuck-in acquisitions and a metric ton of home-grown innovations.
• Unlike competitors with interminable sales cycles and roll-out processes, teams can get up and running with Jira Service Management in as little as a day.

Between the superior time-to-value for customers, the steady drumbeat of improvements, and a price point that’s accessible to companies of all sizes, we are not surprised and believe this is why the industry is taking note. Atlassian was named a Leader for the first time in the 2022 Gartner® Magic Quadrant for IT Service Management Platforms¹. This comes on the heels of being named a Leader in The Forrester Wave: Enterprise Service Management, Q4 2021.

Not only that, but according to the Gartner 2022 report, A Buyer’s Guide to ITSM Platforms, “eight out of 10 IT organizations overspend on their IT service management (ITSM) platform subscriptions by half of the contract value because they purchase functions that do not get fully used²”. So we’ve introduced attractive incentives for customers who switch from their hulking ITSM monoliths to Jira Service Management.

Our “End Bad Service Management Now” campaign offers large companies compelling pricing incentives for their first year when they make the switch from a legacy vendor, and smaller companies can get up to 10 agents for free for 12 months. These moves, as we’ve done throughout our history, demonstrate our willingness to make bold, short-term trade-offs in the service of long-term payoffs.

Companies like PostNord, Saint Gobain, and Engie, massive enterprises going through intense digital and cultural transformations, have already switched over. Engie had been using a large-scale legacy solution but found it difficult to configure and use (not to mention the share of their budget it ate up). Since the switch, they’ve cut licensing costs by 67% and are saving roughly 200 hours of their IT team’s time each month. And from an end user’s perspective, the transition literally happened overnight: Engie’s admins turned off the old system one evening and turned on Jira Service Management the next day.

Today, teams at over 45,000 companies use Jira Service Management, and we’re just getting started.

Ready and able to meet the challenges ahead

With Q3 underway, we will execute on the decisions we’ve made so far and continue to rebalance our investments as the situation calls for. We’ve played offense amid uncertainty more than once in our 20 years as a company, and we’re confident that our trademark vigilance and discipline will guide us through successfully once again.

As always, we’re incredibly grateful to the Atlassian team for staying focused on delivering great products, and to our customers and partners for their passion in building a vibrant community around us. Our teams are focused and fired up. We’ve positioned ourselves for success in a challenging environment, and we’re ready to get after it. (As we say in Australia, “we’re not here to #@!% spiders.” )

Here’s to the road ahead, and to unleashing the potential of every team.

– Mike and Scott

Customer highlight reel

As mentioned above, we continue to see headwinds impacting new customer conversion. We added 4,004 net new customers in Q2, bringing our total customer count to 253,177. I’m encouraged by the number of people coming to our sites and signing up for Free editions of our products, which continues to grow at healthy rates. The number of monthly active users also continues to perform well, underscoring the mission-critical role our products play for our customers.

The “High Velocity” ITSM event we hosted in London was a big highlight of my December. We spent the day with hundreds of customers and prospects from across industries, plus thousands of virtual attendees, discussing service management practices and digital transformation.

I had the privilege of hosting a live Q&A with two of our enterprise customers, Edenred and Arvato Systems, where we discussed their adoption of Jira Service Management and the incredible benefits they’ve experienced to date. We also saw a great response to our new “End Bad Service Management Now” campaign with many of our largest enterprise customers asking how Atlassian can help them modernize their ITSM offerings and save money in the process.

And the customer event train keeps on rolling! Next week, on February 9th, we head to Berlin for our agile/DevOps-focused event, “Unleash.” Along with meeting as many of our European customers as possible, I’ll be doing a fireside chat with Atlassian’s Chief Trust Officer, Adrian Ludwig, focused on coping with emerging cybersecurity threats, both from a technical and customer relations perspective.

If you happen to be in the area, I’d love to set up a time to meet on or around the 9th. Otherwise, you can register for the live stream here and experience the event virtually. I look forward to speaking with you soon, either at the event, on our earnings call this afternoon, or whenever we cross paths.

– Cameron

Financial highlights

A reconciliation of GAAP to non-GAAP measures is provided within the tables at the end of this letter as well as in our earnings press release, and on our Investor Relations website.

Second quarter fiscal year 2023 highlights

We delivered solid financial results in Q2 with steady execution in a challenging and uncertain macroeconomic environment resulting in revenue, gross profit, and operating income exceeding our expectations.

Strong revenue growth from Data Center and Marketplace offerings offset weaker-than-expected results in cloud, which continues to be impacted by macro headwinds, particularly in the SMB customer base. We continue to be responsive to these changes by managing costs while investing against the long-term opportunity in our three large markets and related strategic priorities. 

We are managing the company for the long term and are well-positioned to successfully navigate the near-term macroeconomic turbulence and emerge a stronger company.

Highlights for Q2’23 include:

All growth comparisons below relate to the corresponding period of last year, unless otherwise noted.

• Revenue of $873 million increased 27%, driven by growth in our Cloud and Data Center offerings.
• GAAP gross margin of 82% decreased 2 percentage points. Non-GAAP gross margin of 85% decreased 1 percentage point, driven by business mix shift to the cloud.
• GAAP operating expenses of $816 million increased 47%. Non-GAAP operating expenses of $566 million increased 36%, driven by growth in R&D and sales and marketing investments across our target markets and strategic priorities.
• GAAP operating loss was $99 million. GAAP operating margin of (11%) decreased 15 percentage points. Non-GAAP operating income of $175 million decreased 1% and non-GAAP operating margin of 20% decreased 6 percentage points.

Lastly, we are pleased to announce the initiation of a share repurchase program of up to $1 billion. This program underscores our confidence in our business, conviction in our significant long-term opportunities, and view that our shares are undervalued. Our scale, balance sheet, and unique business model which generates consistent free cash flow allow us to opportunistically return capital to shareholders while also investing for durable long-term growth.

Revenue growth in the quarter was driven by subscription revenue, which grew 40%. Despite ongoing macroeconomic uncertainty, customers continued to choose Atlassian products to help their teams organize, discuss, and complete their work, illustrating the mission-critical role our products play in their success.

Cloud revenue growth of 41% continued to be impacted by the challenging macroeconomic conditions in the form of moderating growth in 1) paid seat expansion from existing customers and 2) free to paid conversion rates. These headwinds were consistently observed across geographies, industries, and products – and were particularly pronounced in December and in our SMB customer base. Beyond these two areas, we were pleased with the performance in other cloud drivers including monthly active users, seat migrations, dollar-based churn, and upsell to Premium or Enterprise editions, all of which continued to perform in line with our expectations and underscore the value our cloud products deliver to customers and their continued desire to move to our cloud.

Data Center revenue growth of 40% was driven by strong performance of renewals, seat expansion from existing customers, and migrations from Server.

Revenue growth rates across geographic regions were consistent with the exception of the Americas, which grew 23% due to a tough prior year comparable. As a reminder, in Q2’22, the Americas benefited from particularly strong Data Center sales, a portion of which is recognized up-front in the period the subscription begins.

Lastly, deferred revenue increased 31% year-over-year to $1.3 billion driven by growth in annual Cloud subscriptions and multi-year billings, which highlight customer commitment to our platform.

GAAP net loss includes a non-recurring income tax charge of $83 million for Q2’23 for uncertain tax provisions related to transfer pricing. This charge increased GAAP net loss per diluted share by $0.32 in Q2’23.

Free cash flow in Q2’23 includes a discrete tax payment of $57 million related to transfer pricing. Excluding this payment, free cash flow would have increased 5% year-over-year to $203 million, and free cash flow margin would have been 23%.

Financial targets

Fiscal 2023 outlook

Total revenue

For FY23, we expect total company revenue growth of approximately 25% year-over-year. This guidance assumes the macroeconomic environment continues to worsen in H2. Further detail provided below:

Subscription revenue – Cloud

We expect FY23 Cloud revenue growth of 35-40% year-over-year, with an increasing macro impact on both paid seat expansion within existing customers and new customer conversions. We continue to expect approximately 10 points of Cloud revenue growth to be driven by migrations. While we have yet to see significant impact in areas like churn or upsell to Premium and Enterprise editions of our products, the lower end of our range contemplates some macro impact in these areas.

Subscription revenue – Data Center

While we continue to see healthy demand for our Data Center products driven by stronger-than-expected renewals and seat expansion from existing customers, we expect Data Center revenue growth rates to moderate in H2.

Subscription revenue – maintenance

In line with our announced Server end-of-life, we expect maintenance revenue to continue to contract over the course of FY23 to approximately $85 million in Q4’23. As a reminder, we will no longer provide maintenance and support for our Server offerings beginning February 2024.

Other revenue

We expect FY23 Other revenue to be approximately flat compared to FY22. The majority of Other revenue is comprised of Marketplace revenue, which we expect to grow in the mid-teens % year-over-year in FY23. Marketplace revenue will be impacted by the ongoing mix shift of third-party app sales from Server and Data Center to Cloud, which has a lower take rate to incentivize cloud app development. We look to drive sales of third-party cloud apps at a rate that exceeds those of our own products. As a reminder, revenue on the sale of third-party Marketplace apps is recognized in the period the product is purchased, which adds quarter-to-quarter volatility in Marketplace growth rates. As a reminder, perpetual license revenue, which is reflected in Other revenue, will be $0 in FY23 and totaled approximately $30 million in FY22.

Operating margin

We expect FY23 GAAP operating margin will be approximately (11%) and non-GAAP operating margin will be approximately 17%. Despite the uncertainties in the macroeconomic environment, we continue to have strong conviction in the long-term opportunities in front of us and will continue to play offense. In terms of costs, we will invest to drive long-term growth in the business while being responsive to macroeconomic changes. We continue to expect operating expense growth to decelerate in H2 as we follow through on our previously announced plans from last quarter to reduce discretionary non-headcount related spending and moderate the pace of headcount growth.

Share count

In FY23, we expect less than 2% year-over-year increase in diluted share count.

FORWARD-LOOKING STATEMENTS

This shareholder letter contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. In some cases, you can identify these statements by forward-looking words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations, but these words are not the exclusive means for identifying such statements. All statements other than statements of historical fact could be deemed forward looking, including risks and uncertainties related to statements about our products, customers, Cloud migrations, macroeconomic environment, anticipated growth, outlook, technology, share repurchase program, and other key strategic areas, and our financial targets such as revenue and GAAP and non-GAAP financial measures including gross margin and operating margin.

We undertake no obligation to update any forward-looking statements made in this shareholder letter to reflect events or circumstances after the date of this shareholder letter or to reflect new information or the occurrence of unanticipated events, except as required by law.

The achievement or success of the matters covered by such forward-looking statements involves known and unknown risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management’s beliefs and assumptions only as of the date such statements are made.

Further information on these and other factors that could affect our financial results is included in filings we make with the Securities and Exchange Commission (the “SEC”) from time to time, including the section titled “Risk Factors” in our most recently filed Forms 20-F and 10-Q. These documents are available on the SEC Filings section of the Investor Relations section of our website at: https:// investors.atlassian.com.

ABOUT NON-GAAP FINANCIAL MEASURES

In addition to the measures presented in our condensed consolidated financial statements, we regularly review other measures that are not presented in accordance with GAAP, defined as non-GAAP financial measures by the SEC, to evaluate our business, measure our performance, identify trends, prepare financial forecasts and make strategic decisions. The key measures we consider are non-GAAP gross profit, non-GAAP operating income, non-GAAP net income, non-GAAP net income per diluted share and free cash flow (collectively, the “Non-GAAP Financial Measures”). These Non-GAAP Financial Measures, which may be different from similarly titled non-GAAP measures used by other companies, provide supplemental information regarding our operating performance on a non-GAAP basis that excludes certain gains, losses and charges of a non-cash nature or that occur relatively infrequently and/or that management considers to be unrelated to our core operations. Management believes that tracking and presenting these Non-GAAP Financial Measures provides management, our board of directors, investors and the analyst community with the ability to better evaluate matters such as: our ongoing core operations, including comparisons between periods and against other companies in our industry; our ability to generate cash to service our debt and fund our operations; and the underlying business trends that are affecting our performance.

Our Non-GAAP Financial Measures include:

Non-GAAP gross profit. Excludes expenses related to stock-based compensation and amortization of acquired intangible assets. Non-GAAP operating income. Excludes expenses related to stock-based compensation and amortization of acquired intangible assets.
Non-GAAP net income and non-GAAP net income per diluted share. Excludes expenses related to stock-based compensation, amortization of acquired intangible assets, non-coupon impact related to exchangeable senior notes and capped calls, gain on a non-cash sale of a controlling interest of a subsidiary and the related income tax effects on these items, and a non-recurring income tax adjustment.

Free cash flow. Free cash flow is defined as net cash provided by operating activities less capital expenditures, which consists of purchases of property and equipment.

We understand that although these Non-GAAP Financial Measures are frequently used by investors and the analyst community in their evaluation of our financial performance, these measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. We compensate for such limitations by reconciling these Non-GAAP Financial Measures to the most comparable GAAP financial measures. We encourage you to review the tables in this shareholder letter titled “Reconciliation of GAAP to Non-GAAP Results” and “Reconciliation of GAAP to Non-GAAP Financial Targets” that present such reconciliations.

ABOUT ATLASSIAN

Atlassian unleashes the potential of every team. Our agile & DevOps, IT service management and work management software helps teams organize, discuss, and complete shared work. The majority of the Fortune 500 and over 250,000 companies of all sizes worldwide – including NASA, Kiva, Deutsche Bank, and Salesforce – rely on our solutions to help their teams work better together and deliver quality results on time. Learn more about our products, including Jira Software, Confluence, Jira Service Management, Trello, Bitbucket, and Jira Align at https://atlassian.com.

Investor relations contact: Martin Lam, IR@atlassian.com Media contact: M-C Maple, press@atlassian.com

¹Gartner, Magic Quadrant for IT Service Management Platforms, Rich Doheny, Chris Matchett, Siddharth Shetty, 31 October 2022.

²Gartner, A Buyer’s Guide to ITSM Platforms, Chris Matchett, Rich Doheny, 4 August 2022.

Gartner Disclaimer

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Gartner Peer Insights Customers’ Choice constitute the subjective opinions of individual end-user reviews, ratings, and data applied against a documented methodology; they neither represent the views of, nor constitute an endorsement by, Gartner or its affiliates.

GARTNER and MAGIC QUADRANT are a registered trademark and service mark, and PEER INSIGHTS is a trademark and service mark, of Gartner, Inc. and/or its affiliates in the U.S. and internationally and are used herein with permission. All rights reserved.

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Fellow shareholders,

Atlassian’s mission to unleash the potential of every team advances ever onward, and Q1 was another momentous quarter of executing against our long-term initiatives. We announced a new subscription offering, launched a product into general availability, and held our first large-scale customer event focused on a single market, which got rave reviews from attendees. That said, companies in nearly every industry are facing headwinds, and we’re beginning to see the impact on our business.

In the spirit of our “Open company, no bullshit” value , let’s start with the topic that’s top of mind for shareholders: macroeconomic impacts.

1. Last quarter, we shared that we saw a decrease in the rate of Free instances converting to paid plans. That trend became more pronounced in Q1.
2. This quarter, we started to see a slowing in the rate of paid user growth from existing customers.

To be clear, we’re not seeing any changes in our competitive position or in the inherent demand for our products. Looking across our customer base of 249,000+, there has been no overall decrease in usage or change in churn. The above two trends are the result of companies tightening their belts and slowing their pace of hiring. In other words, Atlassian is not immune to broader macro impacts. Our outlook assumes these trends will persist, but we’ll monitor, respond, and keep you updated accordingly.

Turbulent markets provide an opportunity to shake up the leaderboards, and we are poised to play offense in this environment. Buoyed by the secular tailwinds of digital and cultural transformation, Atlassian is incredibly well-positioned to capture additional share in each of our three massive markets – agile/DevOps, IT service management, and work management – and we’re working to do just that. In particular, we have huge opportunities in cloud migrations, serving enterprises, and ITSM – areas where we’ve already seen significant momentum and strong ROI. In the past year, migrations and enterprise deals in the cloud were both up more than 2x, and Jira Service Management added 10k customers.

We will focus our investments on strengthening our market position and scooping up top-tier talent in this environment. But we will balance these investments with the growth of our business and be responsive to macroeconomic conditions. So while we’re lowering our revenue outlook for FY23 based on macroeconomic headwinds, we are maintaining our mid-teens % operating margin outlook for the year. (For further detail, see the Fiscal 2023 Outlook section below.)

Despite the near-term instability in the world around us, we remain certain about the incredible long-term opportunities in front of Atlassian and our ability to capitalize on them. We’ve talked about having a line of sight to $10B in annual revenue. This hasn’t changed.

We have the right products, the right leaders, and the right strategies in place to come out of this downturn in an even stronger position. When obstacles emerge along the way, we’ll navigate around them as we always have: with vigilance, pragmatism, and agility.

Cloud update: migrations and innovations continue, rain or shine

Migrations from Server and Data Center keep on rolling like thunder. For enterprise customers, the shift to the cloud is all about reclaiming more capacity for innovation and creating customer value as it frees their admins from managing backups and installing new upgrades. In fact, UK-based cybersecurity firm Sophos was able to move engineers off of routine admin work and onto value-driven projects after migrating.

With the end of support for Server products coming up in February 2024, we’re putting in the hard yakka removing blockers and smoothing the way to the cloud. With the help of our recent and upcoming hires in R&D, we continue to improve speed, increase the scale of our offerings, and introduce additional capabilities like data access control via API token and enhanced support for HIPAA compliance.

Our Data Center business continues to benefit from a segment of Server customers who are choosing Data Center as a stepping-stone on their way to our Cloud products. We’ll continue to develop our Data Center offerings even as we focus the lion’s share of our investments in the cloud. We’ve seen this pattern play out over the years, so we know it’s a matter of when (not if) these customers arrive in the cloud.

To that end, we’re delighted to share two new reasons for customers to get excited about Cloud.

Atlassian Analytics begins delivering insights to customers

We celebrated an exciting milestone in Q1 when Atlassian Analytics graduated into open beta for customers of Jira Software and Jira Service Management’s Enterprise edition. Atlassian Analytics gives users countless ways to visualize data from their Atlassian products and integrated 3rd-party sources, stored in the underlying Atlassian Data Lake. The ability to glean holistic insights into how work gets done across teams is a powerful new capability that will accelerate our migration pipeline and facilitate upsell to Cloud Enterprise editions.

Names like Paypal, DISH Network, and Yum! Brands are already participating in Atlassian Analytics’ beta program – with more signing up every week. We’re keen to consult with our beta customers over the coming months and incorporate their feedback into the product. A general availability launch is planned for later this fiscal year.

Smart Links make the app explosion less taxing

In a world where knowledge workers flip between applications a staggering 1,200 times a day on average, the “toggle tax” is real. Researchers estimate that the time it takes to reorient oneself after each switch adds up to roughly four hours every week – nearly 10% of their time on the job! That’s why we built Smart Links: a great example of how our platform investments ease customers’ pain points today and into the future (because the Cambrian explosion of apps isn’t likely to fizzle out any time soon).

Smart Links allow customers to find, view, and edit work items across products. Whether it’s a designer embedding a Figma file in a Jira Software issue or a marketer changing the status on an Atlas project without leaving the Confluence page they’re working on, teams get better visibility across the organization and easier access to work regardless of where it happens.

Smart Links are rooted in our principle of helping teams work differently, together. They’re available today in Atlas, Confluence, Trello, Bitbucket, Jira Software, Jira Service Management, and Jira Work Management, where users can embed content from 40+ 3rd-party partners like Google, Microsoft, Miro, Loom, Figma, and Salesforce. It’s one more way our cloud platform’s extensibility brings more value to customers, faster than ever.

Market deep-dive: work management

Every team has work that complements their craft such as planning, tracking, providing updates, and making decisions. So when we look at the massive work management market comprising an estimated 2.2 million companies (those with more than 10 knowledge workers), we see virtually endless opportunities for Atlassian products like Confluence, Jira Work Management, Trello, and Atlas.

Today, teams at over 150,000 organizations worldwide use Atlassian’s work management products. Whereas Jira Software traditionally was the product we’d land with, customers are increasingly coming to Atlassian because of Trello and Confluence as well. And last month, we gave companies one more reason to look our way: Atlas has graduated into general availability.

Atlas launches into general availability!

Atlas is the new company-wide teamwork directory customers use to connect the dots between people, projects, objectives, and updates – now available to all Cloud customers. Teams register their “big rock” goals in Atlas, as well as the projects and people contributing to them, giving leaders (or anyone else interested) an easy way to keep tabs on the company’s most important objectives.

Since its introduction, customers in Atlas’ early access program have benefited from new features, including:

• Privacy controls – Atlas now supports private projects, which lets users restrict viewing and editing to specific individuals and teams.
• OKR scoring – Ideal for teams that use the Objectives and Key Results framework, goal scoring allows users to assign a projected score based on how confident they are that the team will meet a goal by the target date.
• Kudos! – Recognizing great work with a “kudos” e-card sent to their Atlas feed is a simple, fun, and personal way to thank peers who go above and beyond.

We’re grateful to our early access program customers who helped us refine Atlas’ feature set in preparation for the general availability launch. Teams of up to 35,000 can use basic Atlas features free of charge. Teams that need advanced features, additional storage, or 24/7 support can upgrade to our Standard or Premium editions.

Introducing Atlassian Together

In September, we announced the launch of Atlassian Together: a single subscription to our entire collection of work management products (Trello, Confluence, Jira Work Management, and Atlas). It also includes Access, our enterprise-grade identity and access management solution.

Atlassian Together brings the idea of “working differently, together” to life. It provides a complete, connected toolset so teams can choose the best tool for their needs while ensuring alignment across the organization.

In other news…

Our “Team Anywhere” program, which gives employees the option to live and work just about anywhere in any country where we operate, continues to be a massive asset for hiring and retaining the best talent. We now have Atlassians in seven Australian territories, 26 Indian regions, 46 U.S. states (plus the District of Columbia), four E.U. countries, and other countries for a total of 13 countries around the globe.

Last month we launched a new recruiting vehicle – literally. The “AtlassiVan” is a branded RV that made its way all around Australia with members of our recruiting team taking applications and interviewing candidates on the spot. Through this campaign, we’re taking advantage of the opportunity to become an even more geographically diverse company, as well as demonstrate Atlassian’s commitment to making distributed teamwork work.

We also just released our annual Sustainability Report, highlighting our strategies and achievements related to climate change, human rights, DEI, and social impact. We are ahead of our goals in reducing emissions directly linked to our operations and are now working with our top suppliers on setting their own targets. Our investment in expanding our DEI team and focus on recruitment partnerships is paying off, with hiring rates increasing for underrepresented groups. And we’re incredibly proud of the impact our amazing Atlassians made this year, contributing over 45,000 hours of volunteer time to non-profits in their communities.

Unlike Jira issues, sustainability never moves to the “done” column. We’re not yet where we want to be on emissions or equitable representation among our staff, but we’re excited to build on this progress as we believe that understanding the connections between people, customers, communities, and the planet is essential for building a 100-year company.

We enter Q2 with immense gratitude to our customers for continuing to build a vibrant community around Atlassian; to our partners for ensuring customers’ success; and to our global team of 9,800 for staying focused on delivering innovative products that enable our customers to do the best work of their lives.

Here’s to the road ahead, and to unleashing the potential of every team.

-Mike and Scott

Customer highlight reel

As mentioned above, conversions of Free instances to paid products continue to be affected by the macroeconomy. We added 6,550 new customers this quarter, bringing our total to 249,173. Importantly though, the number of teams coming to our site and trying Free editions of our products continues to grow.

In keeping with historical trends, nearly 99% of new customers chose our Cloud products. Our Free editions serve as a key step in our sales funnel and are an important driver of long-term growth for Atlassian. Although we keep our marketing budget leaner than any of our peers, we’ll continue to iterate on our GTM tactics and make targeted investments that get users into our products with as little friction as possible.

Last month we took another step in our GTM evolution when Accenture expanded their partnership with Atlassian. (Welcome, Accenture! ) This partnership will strengthen our strategic position with enterprise customers and give them the opportunity to work with a partner they already know and trust.

Getting face-time with customers, one market at a time

The reviews are in: Atlassian’s first market-specific event was a hit. We gathered with partners and customers like Salesforce, Sprout Social, Hubspot, and DISH Network for an afternoon of product announcements, learning about the latest trends in work management, and networking at the Chase Center in San Francisco. Thousands of attendees joined us virtually through live streams and on-demand content.

For me, the best part was meeting face-to-face with leaders from some of our largest customer organizations. We sat down as a group to discuss their thorniest collaboration challenges, swap ideas, share lessons learned, and take in their feedback on Atlassian’s products and services. We’re honored by their participation and continued trust in Atlassian as a strategic partner for their business.

Looking ahead, we’re thrilled to invite customers and partners to our next event, this time focused on IT service management. We’ll be featuring product demos, a fireside chat with customers, and breakout sessions designed to help IT teams work at high velocity.

I’ll be in London for the event on December 8th and would love to see you there. Whether you join us in person or take advantage of the live streams and on-demand content, I hope you’ll make the most of this opportunity to see how Atlassian is unleashing the potential of IT teams everywhere. 

– Cameron

Financial highlights

As a reminder, during Q1, we completed the redomiciliation of Atlassian’s parent company from the United Kingdom to the United States. As a result, we have transitioned our accounting standards for reporting purposes from IFRS to GAAP. The primary financial impacts of this transition are detailed below and in supplemental materials on our Investor Relations site.

A reconciliation of GAAP to non-GAAP measures is provided within the tables at the end of this letter as well as in our earnings press release, and on our Investor Relations website.

First quarter fiscal year 2023 highlights

We were pleased with our steady financial performance and strong execution in an increasingly challenging macroeconomic environment.

Our cloud migration progress continues to track well with our expectations, and we are making consistent progress toward the long-term goals we laid out at our 2022 Investor Day. Despite the near-term macro headwinds, we remain as excited as ever about the long-term opportunities ahead of us.

Highlights for Q1’23 include:

• Subscription revenue grew by 50% year-over-year. Cloud revenue grew by 49% year-over-year and Data Center revenue grew by 54% year-over-year.
• We added 989 net new Atlassians, of which approximately 200 were new college graduates, and ended the quarter with a total headcount of 9,802. We hired across all functions, with the majority in R&D. This is in line with our strategy of adding talented employees to achieve our long-term ambition, and we believe hiring in the current macroeconomic environment is to our advantage.

As discussed by Mike and Scott above, we encountered two primary revenue headwinds during the quarter from changes in the macroeconomic environment: 1) We saw a more pronounced continuation of the trend discussed last quarter, where fewer Free instances converted to paid plans; and 2) we also saw the growth of paid users from existing customers slow in the second half of Q1, largely due to customers slowing their rate of hiring. The impact these headwinds will have on our future revenue growth is detailed in the Fiscal 2023 Outlook section below.

Overall, the underlying fundamentals of our business remain healthy. We continue to focus on hiring great talent, taking share, delivering strong progress in customer cloud migrations and building enterprise capabilities, and investing for long-term success across our three target markets. 

As a reminder, we primarily bill our customers in U.S. dollars, and therefore our revenue results in EMEA reflect the impact of the strengthening U.S. dollar.

Net income includes a loss from the mark-to-market accounting of the company’s strategic investment portfolio of $11.6 million in Q1’23 and $31.4 million in Q1’22. These losses resulted in headwinds, on a GAAP and non-GAAP net income per diluted share basis, of $0.05 in Q1’23 and $0.12 in Q1’22.

As a reminder, we experience seasonality in our free cash flow results, with Q1 typically having the lowest free cash flow due to the timing of employee bonus payments. We also saw an impact from the timing of cash tax payments of approximately $17 million that shifted into Q1 from Q2.

Financial targets

Fiscal 2023 outlook

Our revenue outlook factors in the current macro-related trends we are seeing in our business. We have assumed the current macroeconomic conditions remain unchanged and the trends we saw in Q1 around new customer conversions and paid seat expansion within existing customers persist through the rest of fiscal 2023.

In terms of costs, consistent with our management philosophy and approach, we plan to balance sustained strategic investments across our three core markets and platform to drive long-term growth, with responsiveness to the current environment. We plan to do this through focused operational excellence and execution, prioritized investment decision-making, and disciplined management of our cost structure.

We see the challenging macroeconomic environment as an opportunity to take share and continue to invest in strategic high-growth areas – all with the goal of strengthening our competitive position.  

Revenue

In FY23, we expect to see the following trends:

SUBSCRIPTION REVENUE

• Cloud revenue
  • Based on the macro headwinds described above, we are lowering our Cloud revenue growth outlook to a range of approximately 40% to 45% year-over-year for FY23.
  • We continue to expect approximately 10 points of this growth to be driven by migrations.
• Data Center revenue
  • We continue to expect Data Center revenue growth to moderate on a year-over-year basis over the remaining three quarters of FY23, driven by event-driven demand in the prior year resulting from price increases and the reduction of loyalty discounts.
  • As a reminder, for Data Center revenue, a portion is recognized up-front in subscription revenue in the period that the subscription begins, while the remainder is recognized ratably over the term of the contract. This may add quarter-to-quarter volatility in Data Center growth rates.

MAINTENANCE REVENUE

• In line with our announced Server end-of-life, we expect maintenance revenue to continue to slowly contract over the course of FY23 to approximately $75 million in Q4’23.
• As a reminder, we will no longer provide maintenance and support for our Server offerings as of February 2024.

OTHER REVENUE

We continue to expect:

• Other revenue to be slightly down relative to FY22.
• Marketplace revenue will be impacted by the ongoing mix shift of third-party app sales from Server and Data Center to Cloud. Sales of third-party Cloud apps have a lower Marketplace take rate relative to Server and Data Center, which is designed to incentivize further Cloud app development. Our focus remains on driving a growth rate on sales of third-party Cloud apps greater than that of our own products.

As a reminder:

• Perpetual license revenue, which is recognized in other revenue, will be $0 in FY23 and total approximately $30 million in FY22.
• Revenue on the sale of third-party Marketplace apps is recognized in the period the product is purchased.

Profitability

We continue to expect the following dynamics to impact our margins in FY23:

• Gross margin will decrease modestly in FY23 due to the continued business mix shift to the cloud and investments we are making to support cloud migrations.
• Operating margin will be in the mid-teens % for FY23, consistent with our previously issued target, despite the macroeconomic headwinds and adjustments to our revenue outlook.
• Free cash flow is expected to be impacted, on a comparative basis, due to the lower operating margin in FY23 versus FY22. Additionally, free cash flow may be impacted as a result of the continued business mix shift to the cloud. Maintenance contracts for our Server products and subscription contracts for our Data Center products are only offered on annual terms, while we offer subscriptions for our Cloud products on both annual and monthly terms. In the short term, the shift to the cloud and the potential mix change in billing terms may create a headwind for free cash flow. Over the long term, as more enterprise customers migrate to the cloud, we expect any such headwind to subside.

Given our transition to GAAP, we are required to recognize unrealized gains and losses on our strategic investments portfolio in other income (expense), which can create quarter-to-quarter volatility and are inherently difficult to forecast.  As a result, we will focus our future profitability targets on operating margins and discontinue EPS targets.

Share count

In FY23, we expect an approximately 2% year-over-year increase in diluted share count.

Conversion from IFRS to GAAP

Effective September 30, 2022, we completed the redomiciliation of Atlassian’s parent company from the United Kingdom to the United States. As a result, we transitioned our accounting standards from IFRS to GAAP. We have published materials on our Investor Relations website summarizing the primary impacts of the transition and historical financial results under IFRS and GAAP.

The following areas will be affected:

• Stock-based compensation – GAAP utilizes “straight-line” ratable expense recognition instead of “graded” front-loaded expense recognition under IFRS. 
• Leases – Under GAAP, total lease expense is recognized on a straight-line basis over the lease term. Under IFRS, the expense recognition method results in a higher portion of the total lease expense recognized earlier in the lease term.
• Strategic investments – Under GAAP, quarterly mark-to-market fair value movements of equity investments are recorded in other income (expense) on our Condensed Consolidated Statements of Operations, while under IFRS, it is recognized in other comprehensive income (loss), a component of equity, on the Statement of Financial Position. This change introduces quarterly fluctuations on our Condensed Consolidated Statements of Operations.   
• Exchangeable senior notes – The amortization of the debt discount and issuance costs relating to our exchangeable senior notes, which were fully settled in Q2’22, follow different timing recognition rules under GAAP. This difference resulted in a portion of amortization shifting from FY21 to FY22.
• Reclassifications –
  • Under GAAP, we will characterize certain cash interest payments on financing arrangements as operating cash flows, while IFRS allowed for these to be classified as financing cash flows. This difference impacts cash flow from operations and free cash flow.
  • Under GAAP, implied interest related to leases is recognized in cost of revenues and operating expenses on the Condensed Consolidated Statements of Operations instead of in interest expense as it is under IFRS. This difference increases cost of revenues and operating expenses and decreases non-operating expenses.

Forward-looking statements

This shareholder letter contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. In some cases, you can identify these statements by forward-looking words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations, but these words are not the exclusive means for identifying such statements. All statements other than statements of historical fact could be deemed forward looking, including risks and uncertainties related to statements about our products, customers, partnerships, sustainability initiatives, macroeconomic growth, anticipated growth, outlook, technology and other key strategic areas, and our financial targets such as revenue and GAAP and non-GAAP financial measures including gross margin and operating margin.

We undertake no obligation to update any forward-looking statements made in this shareholder letter to reflect events or circumstances after the date of this shareholder letter or to reflect new information or the occurrence of unanticipated events, except as required by law.

The achievement or success of the matters covered by such forward-looking statements involves known and unknown risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management’s beliefs and assumptions only as of the date such statements are made.

Further information on these and other factors that could affect our financial results is included in filings we make with the Securities and Exchange Commission (the “SEC”) from time to time, including the section titled “Risk Factors” in our most recently filed Forms 20-F and 6-K (reporting our quarterly results), as well as Forms 10-K and 10-Q. These documents are available on the SEC Filings section of the Investor Relations section of our website at: https://investors.atlassian.com.

About non-GAAP financial measures

In addition to the measures presented in our condensed consolidated financial statements, we regularly review other measures that are not presented in accordance with GAAP, defined as non-GAAP financial measures by the SEC, to evaluate our business, measure our performance, identify trends, prepare financial forecasts and make strategic decisions. The key measures we consider are non-GAAP gross profit, non-GAAP operating income, non-GAAP net income, non-GAAP net income per diluted share and free cash flow (collectively, the “Non-GAAP Financial Measures”). These Non-GAAP Financial Measures, which may be different from similarly titled non-GAAP measures used by other companies, provide supplemental information regarding our operating performance on a non-GAAP basis that excludes certain gains, losses and charges of a non-cash nature or that occur relatively infrequently and/or that management considers to be unrelated to our core operations. Management believes that tracking and presenting these Non-GAAP Financial Measures provides management, our board of directors, investors and the analyst community with the ability to better evaluate matters such as: our ongoing core operations, including comparisons between periods and against other companies in our industry; our ability to generate cash to service our debt and fund our operations; and the underlying business trends that are affecting our performance. 

Our Non-GAAP Financial Measures include: 

• Non-GAAP gross profit. Excludes expenses related to stock-based compensation and amortization of acquired intangible assets.
• Non-GAAP operating income. Excludes expenses related to stock-based compensation and amortization of acquired intangible assets.
• Non-GAAP net income and non-GAAP net income per diluted share. Excludes expenses related to stock-based compensation, amortization of acquired intangible assets, non-coupon impact related to exchangeable senior notes and capped calls, gain on a non-cash sale of a controlling interest of a subsidiary and the related income tax effects on these items.
• Free cash flow. Free cash flow is defined as net cash provided by operating activities less capital expenditures, which consists of purchases of property and equipment. 

We understand that although these Non-GAAP Financial Measures are frequently used by investors and the analyst community in their evaluation of our financial performance, these measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. We compensate for such limitations by reconciling these Non-GAAP Financial Measures to the most comparable GAAP financial measures. We encourage you to review the tables in this shareholder letter titled “Reconciliation of GAAP to Non-GAAP Results” and “Reconciliation of GAAP to Non-GAAP Financial Targets” that present such reconciliations.

About Atlassian

Atlassian unleashes the potential of every team. Our agile & DevOps, IT service management and work management software helps teams organize, discuss, and complete shared work. The majority of the Fortune 500 and over 240,000 companies of all sizes worldwide – including NASA, Kiva, Deutsche Bank, and Salesforce – rely on our solutions to help their teams work better together and deliver quality results on time. Learn more about our products, including Jira Software, Confluence, Jira Service Management, Trello, Bitbucket, and Jira Align at https://atlassian.com.

Investor relations contact: Martin Lam, IR@atlassian.com
Media contact: M-C Maple, press@atlassian.com

^{*Source: video shown at Atlassian Presents: Work Life in September, 2022.}

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