Atlassian Corp. Plc (TEAM) Q4 2016 Earnings Call

Corrected Transcript

04-Aug-2016 Atlassian Corp. Plc (TEAM) Q4 2016 Earnings Call

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016

CORPORATE PARTICIPANTS

Ian Lee Murray J. Demo Head-Investor Relations Chief Financial Officer Scott Farquhar Jay Simons Co-founder, Chief Executive Officer & Director President Michael Cannon-Brookes Co-founder, Chief Executive Officer & Director ......

OTHER PARTICIPANTS

Bhavan Singh Suri Michael Turrin William Blair & Co. LLC UBS Securities LLC Michael Turits John DiFucci Raymond James & Associates, Inc. Jefferies LLC Heather Bellini Jason Velkavrh Goldman Sachs & Co. Robert W. Baird & Co., Inc. (Broker) Richard Hugh Davis Patrick Walravens Canaccord Genuity, Inc. JMP Securities LLC Sanjit K. Singh George Iwanyc Morgan Stanley & Co. LLC Oppenheimer & Co., Inc. (Broker)

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016

MANAGEMENT DISCUSSION SECTION

Operator: Hello, ladies and gentlemen. Thank you for joining Atlassian Earnings Conference Call for the Fourth Quarter of fiscal 2016. [Operator Instructions] . I will now turn the call over to Ian Lee, Atlassian's, Head of Investor Relations...... Ian Lee Head-Investor Relations Good afternoon, and welcome to Atlassian's fourth-quarter fiscal 2016 earnings conference call. On the call today we have Atlassian's co-founders and CEOs Scott Farquhar and Mike Cannon-Brookes; our Chief Financial Officer, Murray Demo; and our President, Jay Simons. Scott, Murray, and Jay are in San Francisco, while Mike's calling in from Sydney today. Scott and Mike will begin by recapping some of the highlights from the fourth quarter and full fiscal year 2016.

Murray will then cover Atlassian's financial results for the fourth quarter and full fiscal year 2016, and provide our financial targets for the first-quarter and full-year fiscal 2017. Following our prepared remarks, we will have a brief question-and-answer session. Jay will be joining for Q&A. The press release with our results for the fourth quarter and full fiscal year 2016 was issued earlier today and is posted on our Investor Relations website at investors.atlassian.com. There is also an accompanying presentation and data sheet available on our IR website.

Statements made on this call include forward-looking statements. Forward-looking statements involve known and unknown risks, certainties, and other factors that may cause other than actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. 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. In addition, during today's call, we will discuss non-IFRS financial measures.

These non-IFRS financial measures are in addition to and not as a substitute for or superior to measures of financial performance prepared in accordance with IFRS. There are a number of limitations related to the use of these non-IFRS financial measures versus the nearest IFRS equivalents. For example, other companies may calculate non-IFRS financial measures differently or may use other measures evaluate the performance, all of which could reduce the usefulness of our non-IFRS financial measures as tools for comparison.

A reconciliation between IFRS and non-IFRS financial measures is available in our earnings release and in our updated investor data sheet on the investor relations section of Atlassian's website. Further mentioned information on these and other factors that could affect the company's financial results is included in the filings we make with the Securities and Exchange Commission from time to time, including the section titled risk factors in the company's form F-1 previously filed with the SEC in connection with our IPO, and form 6-K report that was filed on May 12, 2016.

I will now turn the call over to Scott...... Scott Farquhar Co-founder, Chief Executive Officer & Director

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016 Good afternoon. Our fourth quarter was another strong quarter, and I'm proud of both our results and the groundwork we laid for the future. For the fourth quarter of fiscal 2016, we achieved revenue growth of 39% year- over-year, non-IFRS operating margin of 12.2%, and over $17 million of free cash flow. When we look back to fiscal 2016, we grew to over $450 million of revenue, expanded to more than 60,000 customers, and generated over $95 million of free cash flow. fiscal 2016 was also the year in which made the transition to a public company. While the IPO [indiscernible] (3:34) was an important milestone, and it's a very early one on our mission to unleash the potential in every team. We really appreciate the support from our customers, employees, ecosystem partners, and the many investors and analysts we have met over the past few years, and to everyone who is listening in today.

Our products provide the fundamental building blocks of great teamwork. Specifically shared projects, content, and communications. We believe we're the only company to combine these essential capabilities, foc us purely on teams into an integrated collection of products.

Our goal is to do for team productivity what Microsoft Office has done for personal productivity. That's a huge goal and remains enormous opportunity. There are close to 900 million knowledge workers globally, and the most important aspect of productivity is how well they all work together. Successful teamwork is hard, and many knowledge workers today are still stuck with tools from the past decades or inefficiently cobbled together email and desktop tools for word processing and spreadsheets. Atlassian provides a better way.

Moving teams to a shared online system of collaborative projects, content, and communications is as significant to their productivity as the shift from fax machines to e-mail. Atlassian helps answer the questions that have plagued teams for generations. What's the status of this project? Where is the latest version of this document? Who changed it and why? Where can I find information about X? Teams are the most innovative c ompanies, from Tesla to Twilio to Warby Parker have moved working from their inboxes to Atlassian. And these teams rely on Atlassian, and we plan to reach all teams.

Our early focus on software teams helped shape our products to support some of the most c omplex teamwork in any organization and simultaneously provided an important beachhead to expand from. We took an important step forward with our JIRA product family in October 2015, with the launch of JIRA 7, which introduced three purpose-built versions of JIRA, to service the specific needs of software teams with JIRA Software, IT and service teams and JIRA Service Desk, and general business teams with JIRA Core.

This release was significant as it both increased our expansion opportunities within existing customers, and created new end opportunities for IT and business teams. Subsequent to this release, we've seen strong growth across the JIRA family, and strong expansion within existing customers.

JIRA Service Desk is worth highlighting here. It's the fastest growing product in our history with more than 17,000 organizations using it actively, and now lands new customers through IT. Pretty remarkable for a product in its infancy.

To add even more value to software development and IT teams, we recently completed the acquisition of StatusPage, a fast-growing leader in the status and internet communications space. In a world where service companies must run their products 24/7, StatusPage lets these companies easily communicate the status of their services, much like signal bars communicate status on a cell phone.

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016 In a cloud-centric world where every company is a service company, providing this information to customers is critical. We expect StatusPage to be an immediate complement JIRA Service Desk. Teams managing IT operations can use StatusPage to save time and money by significantly reducing repetitive emails and phone calls when the service goes down or providing a better customer experience.

Another highlight of the quarter was the momentum we continued to demonstrate with our developer ecosystem, where we saw two significant milestones. First, our marketplace, which provides add-on for our core products, crossed a milestone with over $150 million of cumulative sales. We also hosted our fifth annual developer event, AtlasCamp, in Barcelona, where we hosted a record 500 developers from more than 40 countries, all united around extending and building on Atlassian's products.

We also used the event to launch the beta of Bitbucket Pipelines, which combines a continuous delivery service with the cloud version of Bitbucket. Software developers can now build, test, and deploy code all within Bitbucket, instead of having to switch between various tools to manage these tasks. This is relevant both to our ecosys tem developers and to our customers' developers, and the beta saw tremendous interest, with more than 18,000 sign- ups within the first month after launch.

Bitbucket continues to be the code management platform adopted by professional development teams. In July, Bitbucket Cloud reached a significant milestone, it now supports more than 5 million developers and 900,000 teams across the world. These achievements underscore the powerful reach that Atlassian has with software teams.

Alongside our strong business results for this quarter and financial year 2016, I'm also very proud of the social impact Atlassian continues to make through the Atlassian Foundation, and our leadership of the Pledge 1% program. In June, we launched a new $1 million initiative to help expand access to technical education and coding, and to support underrepresented minorities in technology. We've established partnerships with Coursera, Code Academy, Code 2040, and Women Who Code, to help expose technology to communities that have traditionally been less likely to pursue a career in our industry, whilst also introducing many new groups to Atlassian.

I'll now hand the call over to Mike, who will cover additional highlights from the fourth quarter...... Michael Cannon-Brookes Co-founder, Chief Executive Officer & Director As Scott mentioned, we had a strong quarter of revenue growth and positive free cash flow. We also added more than 3,500 net new customers during the fourth quarter of fiscal 2016, bringing our total customer base to 60, 950 in over 170 countries. During the last year, we added more than 12,300 net new customers in total. Similar to prior quarters, about three-quarters of the new customers we added during the quarter were in the cloud.

As a reminder, our definition of a customer is an organization that has at least one active and paid license or subscription for which they paid more than $10 per month. During the fourth quarter, we continue to add thousands of customers across industries and geographies. A few of our 3,500 new customers that highlight the breadth of our customer base are: IMS Health; Esurance; Dassault; online payments company Stripe; the Puerto Rico Electric Power Authority; Korean technology company, Kakao Bank; and financial institution Meriwest Credit Union.

We're also serving a growing number of large enterprise customers. Our data center product family provides the scalability, reliability, security, and peace of mind that the largest enterprises demand, and has helped us grow

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016 our presence in large accounts. Today, we count over 290 of the Fortune 500 as customers as of the end of fiscal 2016. Additionally, we had more than 1,200 customers spending over $50,000 with us annually at the end of fiscal 2016, up significantly from 865 at the end of fiscal 2015.

We've continued to achieve this customer growth with a go-to-market model that is built around an online, highly- automated distribution platform that does not rely on a fleet of quota-carrying salespeople. Our low touch model enables us to deliver our products at prices that appeal to a wide audience. This translates into our long-term objective of serving not only customers in the Fortune 500, but across the entire Fortune 500,000.

Let me shift gears a little and provide a few customer examples that show the power of Atlassian and how we're helping different kinds of teams across enterprises. We continue to see strong adoption within our traditional beachhead of software teams, combined with rapid expansion to IT teams and broader business teams.

I'll start with cloud communications company Twilio, which recently completed its IPO. In the past three years, Twilio has grown from about 170 employees and 10 engineering teams to more than 500 employees and more than 50 engineering teams worldwide.

As it has tripled in size, the company needed the right tools to scale the business in a cohesive, efficient way. Twilio has leveraged the flexibility of Atlassian's products to automate and streamline the work. JIRA and Confluence are used to manage processes and communication across the organization, the JIRA family is used extensively by the engineering team to build and manage projects. The engineering team tailors JIRA Software to its specific needs, whilst also using plug-ins from the Atlassian marketplace to shave days off their software development cycle.

Confluence is also used as a single source of truth for Twilio's distributed engineering teams to find information, plans, workflows, and processes across their international offices. But Atlassian is not just for the engineering team at Twilio; business teams including HR, operations, finance, and marketing are using Confluence as their information hub, and JIRA as their ticketing system. Whether it's on-boarding a new employee, managing a travel request, or running a budget review, Twilio's teams are taking advantage of Atlassian's powerful family of products.

At a large financial software and media company in New York, we have seen amazing expansion over the past few years. The customer originally adopted Confluence in 2008, spending about $8000 initially. They've added many of our other products and many more users over the years, and today, spend more than $0.5 million annually. As our tools are flexible and can be applied to nearly any business process, this customer found a creative use for JIRA Service Desk. It employs hundreds of data analysts aggregating and publishing financial and news data through a subscription service they provide to their customers.

Automated web crawlers and bots scan the web for relevant news and events and automatically create JIRA Service Desk tickets assigned to their analyst to verify, fact check, and then publish into their systems. This makes Atlassian core to one of their central business processes. Another of our customers one of the world's largest financial institutions started with us in 2005, by purchasing a single JIRA license, spending $2400 in their first year as a customer.

Since then, it has adopted most of our products, including Bitbucket, HipChat, Bamboo, JIRA Core, JIRA Software, and JIRA Service Desk. Usage of Atlassian's products have spread rapidly across their organization, the customer recently deployed the data center version of Bitbucket in order to scale from 9000 engineers to an

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016 expected 14,000 engineers by the end of this calendar year. Confluence is used by over 50,000 users across their company with one of its largest divisions running an [ph] instance (14:41) that has more than 1 million pages.

With regard to JIRA, the company has created over 3 million issues since adopting it, with usage of the JIRA family extending well beyond the development of our IT teams. The customer's digital teams use JIRA Software to stage and track news to be published on various marketing channels. Additionally, the company's HR team has its own dedicated [ph] instance (15:04) of JIRA Service Desk to manage and track human capital issues and tasks.

Overall in fiscal 2016, this customer spent more than $1.5 million annually on our products and services. This is a prime example of how our products land within a team and then spread virally over a decade across an entire organization to many types of teams and across many disparate use cases. These are just a few of the many thousands of customer stories that illustrate how Atlassian becomes central to the daily activities of many kinds of teams.

Our low touch distribution model enables us to not only at large volumes of new customers, but also drive meaningful expansion within existing customers over time. When we look back at fiscal 2016 we can be proud of the continued evolution of our products, the growth of our customer base, and another step in the growth of the organization. We've achieved a lot of over the past year, but there's still much to do as we move forward in our goal of unleashing the potential of all teams across the Fortune 500,000.

In fiscal 2017 to take the next step towards this goal, you can expect us to continue our focus on building great products that become an indispensable part of how teams work together. None of our achievements in 2016 would have been possible without the commitment and efforts of more than 1700 Atlassians that I'm proud to call colleagues. Scott and I would like to thank them, as well as the entire Atlassian ecosystem for their passion and commitment to shaping the future of how teams work.

With that, I'll turn the call over to Murray...... Murray J. Demo Chief Financial Officer Thanks, Mike and good afternoon. I'll cover Atlassian's financial performance for the fourth quarter and full-year fiscal 2016 and our financial targets for the first quarter and full-year fiscal 2017. I'll begin with our financials for the fourth quarter of 2016.

Total revenue for the fiscal fourth quarter was $127.6 million up 39% year-over-year. As we discussed over the past fiscal year, our revenue over the past few years has benefited from some pricing optimizations to JIRA and Confluence that we initiated in calendar year 2012. Approximately eight of the 39 percentage points of the revenue growth in the fourth quarter of fiscal 2016 were attributable to these pricing optimizations.

Turning to revenue by line item, I'll provide a brief overview of each. First, subscription revenue primarily relates to fees earned from sales of our cloud products. A small portion of this revenue also relates to sales of our data center projects, which are server products sold to our largest enterprise customers on a subscription basis. We recognize subscription revenue ratably over the term of the contract. For the quarter, subscription revenue was $43.6 million up 68% year-over-year. The growth in subscription revenue reflects more of our customers choosing the cloud, as well as strong growth in enterprise data center offerings during the quarter.

Second, maintenance revenue represents fees earned from providing customer updates, upgrades, and technical product support for a perpetual license products. Maintenance revenue is recognized ratably over the support

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016 period which is typically 12 months. For the quarter, maintenance revenue was $58.8 million up 28% year-over- year. Maintenance revenue has been the primary beneficiary of the prior pricing optimizations to JIRA and Confluence.

Third, license revenue is related to fees earned from the sale of perpetual licenses for our server or behind the firewall products and is recognized at the time of sale. For the fourth quarter of fiscal 2016, license revenue was $17.9 million up 17% year-over-year. While the majority of our revenue today is from the sales and maintenance of server products, we are experiencing a transition to cloud as more customers choose that deployment option. Consequently, our license revenue growth rate this quarter is reflective of this transition.

And finally, other revenue includes our portion of the fees received for sales of third-party add-ons and extensions in the Atlassian marketplace and for training services. For the quarter, other revenue was 7.3million, up 59% year- over-year.

I'll next spend a few minutes reviewing our margins, operating expenses and our results of operations. Unless otherwise noted, all references to our expenses and operating results are on a non-IFRS basis and are reconciled to our IFRS results within the tables posted in our earnings press release in our investor relations website. All comparisons listed here are with the fourth quarter of fiscal 2015 unless otherwise noted.

Gross margins of fourth quarter of fiscal 2016 was 86.2%, consistent with our gross margin in the fourth quarter of 2015. Fourth quarter operating expenses were $94.4 million up 39% from $67.8 million last year. Looking at operating expenses R&D expense for the fourth quarter was $48.3 million or 37.8% of revenue, compared with $36.7 million or 40% of revenue last year. Marketing and sales expense was $27.6 million or 21.6% of revenue, compared with $17.2 million or 18.8% of revenue last year. Marketing expenses were higher in the quarter as we invested in additional advertising and sponsorship activities. G&A expense was $18.5 million or 14.5% of revenue compared with $13.9 million or 15.1% last year.

Total employee head count was 1,760 at the end of the fourth quarter. Headcount growth was across all operating contents categories with the majority in R&D. Fourth quarter operating income was $15.6 million or 12.2% of revenue, compared to $11.3 million or 12.3% of revenue last year. Net income in the fourth quarter was $16.9 million or $0.07 per diluted share, compared with $10.7 million or $0.07 per diluted share last year.

Moving over to the balance sheet, Atlassian finished the quarter with $743.1 million in cash, cash equivalents and short-term investments. Free cash flow for the quarter of fiscal 2016 was $17.6 million comprised of cash flow from operations of $35 million less capital expenditures of $17.4 million. Free cash flow margin defined as free cash flow as a percentage of revenue was 13.8% for the fourth quarter.

Moving over to our full-year fiscal 2016 results, total revenue was $457.1 million up 43% year-over-year. Approximately 11 of the 43 percentage points of revenue growth for fiscal 2016 were attributable to our prior pricing optimizations. fiscal 2016 gross margin was 86.2%, compared to 86.3% in fiscal 2015. fiscal 2016 operating margin was 16.9%, compared to 15.6% in fiscal 2015. For fiscal 2016 net income was $71.3 million or $0.35 per diluted share, compared with $45.5 million or $0.28 per diluted share in fiscal 2015. Free cash flow in fiscal 2016 was $95.3 million or 20.9% of revenue, compared with $65.5 million or 20.5% of revenue in fiscal 2015.

Now I'll provide our financial targets for the fiscal first quarter and full-year fiscal 2017. For the first quarter of fiscal 2017, our financial targets are as follows: for total revenue, we expect the range of approximately $132 million to $134 million or approximately annual revenue growth of 30% to 32%.

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016

The revenue target for the first quarter of fiscal 2017 includes the last full quarter of non-ongoing prior pricing optimization benefits, partially offset by expected lower revenue due to summer seasonality. For gross margin, we expect approximately 81% on IFRS basis and approximately 84% on a non-IFRS basis. For operating margin, we expect approximately minus 10% on an IFRS basis, and approximately 14% on a non-IFRS basis.

For share count, we expect the weighted-average share count to be in the range of 232 million to 234 million shares on a fully diluted basis. For net income per diluted share, we expect approximately minus $0.04 on an IFRS basis, and approximately $0.07 on a non-IFRS basis.

For the full-year fiscal 2017, our financial targets are as follows: for total revenue, we expect a range of approximately $592 million to $602 million, or approximate annual revenue growth of 30% to 32%. For gross margin, we expect approximately 81% on an IFRS basis and approximately 84% on a non-IFRS basis. The gross margin is targeted to be lower than fiscal 2016, as we expect to incur accelerated depreciation expense as part of our transition from our internal data centers to third-party cloud providers during the year.

For operating margin, we expect approximately minus 10% on an IFRS basis, and approximately 15% on a non- IFRS basis. For share count, we expect the weighted-average share count to be in the range of 234 million to 236 million shares on a fully diluted basis. For net income per diluted share for fiscal 2017, we expect approximately minus $0.18 to minus $0.16 on an IFRS basis, and approximately $0.32 to $0.34 on a non-IFRS basis.

For free cash flow, we expect a range of $145 million to $155 million. Included in the free cash flow target, we're assuming a target of approximately $15 million of capital expenditures in fiscal 2017. This is lower than our approximately $34 million of capital expenditures in fiscal 2016. We have reassessed our capital expenditures for fiscal 2017 and now expect lower investment in facilities and also expect to shift more of our data center infrastructure to third-party cloud providers.

With regard to our financial targets, we do not expect our acquisition of StatusPage will have a material financial impact on our financial results in fiscal 2017. Any impact from StatusPage is included in our financial targets.

Also in fiscal 2017, we will begin to hedge a portion of our expenses denominated in Australian dollars. This will reduce the foreign-exchange risk we are exposed to in the normal course of our business. As a reminder, we bill in U.S. dollars, so our revenue was not materially affected by foreign currency movements.

One final note to finish; starting next quarter, we will shift to a new earnings call format. We will publish our prepared remarks, recapping the business and financial highlights of the quarter, as well as our financial targets, prior to our earnings conference call. We will then spend the majority of the earnings call answering Q&A, which we believe is more valuable to our investors and analysts.

And with that, I will turn the call back to the operator for Q&A.

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016

QUESTION AND ANSWER SECTION

Operator: [Operator Instructions] . And the first question comes from Bhavan Suri with William Blair...... Bhavan Singh Suri William Blair & Co. LLC Q Hey guys. Thanks for taking my question and I appreciate the time, and nice job there. Murray, you didn't provide a lot of color there on the gross margin front. You talked about moving to third-party cloud providers. Just some color on sort of, is that why the gross margin's coming down, or it's just because the cloud business is growing so fast? I'm going to start with that before we get into demand...... Murray J. Demo Chief Financial Officer A Yeah, Bhavan. Yes, in terms of the gross margin being a little bit lower in 2017 in terms of our target to 2016, it's related to depreciation expense on our internal data center equipment. It's not related precisely to going to third- party providers. It's more on our internal data center depreciation expense...... Bhavan Singh Suri William Blair & Co. LLC Q Great. And then one quick follow-up just on product, obviously just great set of numbers there, but some of you guys have commented in the past that, once the products are going about the same rate, and then clearly it feels like JIRA Service Desk is growing much, much faster – I'd love to just get a little more color on sort of the scale of that business and sort of who you're winning against? Sort of, what does that look like from a size and growth perspective relative to JIRA, Bitbucket obviously, [indiscernible] (29:08) and HipChat? ...... Jay Simons President A Hey Bhavan, this is Jay. We did see good growth across products, as we mentioned in the call, we highlighted JIRA Service Desk which is still a relatively young product. I think we are proud of the 17,000 organizations it's collected in its infancy. With that particular product, we do see some competition around the traditional IT service desk use case, but a lot of the growth comes from greenfield collaborative service applications that we're seeing kind of across the organizations into business teams. We're typically replacing Excel spreadsheets and a whole bunch of clunky email...... Bhavan Singh Suri William Blair & Co. LLC Q Great, guys. I'll take it from there, but I'll jump back in queue, but thank you for the color...... Michael Cannon-Brookes Co-founder, Chief Executive Officer & Director A Thank you......

Operator: And the next question comes from Michael Turits with Raymond James......

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016 Michael Turits Raymond James & Associates, Inc. Q Hey guys. Thanks very much. Two questions, first of all just back on the margin side, is there anything else you can tell us about expenditures and investments? I mean, work through all the numbers, but is there [ph] any (30:19) higher on OpEx investments that you expected in terms of the guide for the fiscal 2017 margin, and then I have a follow-up question about go-to-market...... Murray J. Demo Chief Financial Officer A Michael, we continue like we continue to invest in obviously R&D it's the lifeblood of our company, we're product company we will continue to invest there, and really across all the different organizations within Atlassian. Some of the things to kind of keep in mind between 2016 and 2017 is in 2016 we did have, again, this pricing benefit looking particularly early in the year. We had higher operating margins because we just really couldn't hire as fast as the revenue growth.

And also there's probably an approximate 1% effect of the Aussie to US dollar exchange rate. It's higher in 2017 than 2016, so we're kind of losing approximately 1 point of margin related to FX and now that we are hedging a portion of our operating expenses, we don't think we are going to have quite the volatility that we had in fiscal 2016...... Michael Turits Raymond James & Associates, Inc. Q And then secondly can you talk a little bit about, I guess, the go-to-market is changing in any way as larger enterprises being in the [indiscernible] (31:32) and get more penetration there. is everything still completely self- served and – or is there any push for direct reps, and have you are doing with technical account managers and premiums support in those areas? ...... Jay Simons President A Yeah, hey Michael, this is Jay. No, no material changes from what we've done in the past and what you've seen us do. And I think this quarter, especially is another good demonstration, the effectiveness of the high-velocity, low-touch approach to both reaching large volume of new customers, but also expanding and growing our biggest ones.

As we mentioned previously, we're always looking to evolve our model and approach in really smart ways. You know, as you saw with the introduction of the data center offerings and the technical management program that you've mentioned. And we've seen, I think, good acceleration and adoption of both of those that product in that level of service within our largest accounts as we reflected in the prepared remarks...... Michael Turits Raymond James & Associates, Inc. Q Great. Jay, Murray, and Mike and Scott, thanks very much...... Michael Cannon-Brookes Co-founder, Chief Executive Officer & Director A Thank you.

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016

Operator: Thank you. And the next question comes from Heather Bellini with Goldman Sachs...... Heather Bellini Goldman Sachs & Co. Q Great. Thank you. I just had a couple of quick ones, first Murray, you might have said it, and maybe I missed it, but what the impact was from the pricing change if you could just update us on that what it was in the quarter.

And then I had a question around Bitbucket I was just wondering how do you kind of assess the competitive landscape in that part of the business that you're going after, and also if you could share with us kind of have you – I guess have you seen the change in the competitive landscape and why are you winning versus the competition? Where do you guys have the better positioning versus them. Thank you ...... Murray J. Demo Chief Financial Officer A Heather, in terms of the pricing benefit, we had 39% top line growth in Q4 ,approximately eight points of the benefit came from this – eight points came from this pricing benefit. It was a little higher in the quarter than we might've expected. We saw a stronger sales of our server products to existing customers, and in that case, they're a paying a higher price than they would have, and so, we saw a little more benefit in the fourth quarter. And that's the kind of pricing benefit that of course would continue on [indiscernible] (33:59) and any time a customer's paying a higher price than they would have really since inception of the data as a company, we would continue to see, but we're quite pleased with our server performance and overall results on a top line of 39%...... Scott Farquhar Co-founder, Chief Executive Officer & Director A And Scott here on your second point, Heather about the Bitbucket competitive landscape. Firstly on the change of the landscape, and as you know, we operate in huge markets and we had seen competitors come and go, and the non-material change in the competitive landscape we've seen over the last few months.

And the reason why we win is same reason why we won historically with the quality of the products and investment we put in there. We're differentiated because we go against a lot of point solutions. We're the only company that provides the whole solution to our customers, and also many of these small teams don't apply professional teams. We're much better for professional teams and business where as many of these are sort of targeted very small or consumer-based end points...... Heather Bellini Goldman Sachs & Co. Q And then Murray just to clarify, is the pricing benefit – does that go away in fiscal 2017? You kind of said some of those people will be playing longer in perpetuity, which I understand, but do you expect that to still be a benefit in your upcoming fiscal year? ...... Murray J. Demo Chief Financial Officer A Yes, so in terms of the pricing benefit that's lapping, it's not going to be material to fiscal 2017, we'll see a little bit in the first quarter that I mentioned, the prepared remarks, that we're sort of see kind of partially offset by some summer seasonality, but the benefits that we saw in the past those days are behind us.

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016 Heather Bellini Goldman Sachs & Co. Q Great. Thank you so much, guys...... Michael Cannon-Brookes Co-founder, Chief Executive Officer & Director A Thank you......

Operator: Thank you. And the next question comes from Richard Davis from Canaccord...... Richard Hugh Davis Canaccord Genuity, Inc. Q Hey, great! Thank you very much. First off, thanks for moving to the worldwide interwebs as we say and not reading the press releases to us next quarter, so I appreciate that. You know, one of the things I think about as you guys are seeing good progress in expanding kind of the multiple different teams, but one of the strengths and weaknesses of the model is you don't spend a lot of money on sales and marketing. You make great products, but are there levers that you can push and pull to kind of make the expansion into other departments inside these firms that you're selling to? You know, more than organic, or kind of had you think about the knobs and buttons that you would pull to do that? Thanks...... Michael Cannon-Brookes Co-founder, Chief Executive Officer & Director A Hi Richard, it's Mike here from Sydney. Great [indiscernible] (36:50) question. Our traditional lending and software teams, expanding into IT and then further into business teams, as a model doesn't change so one of the levers you have to say there is being very strongly thought of in software teams and in the IT teams because they take us into those other teams quite a lot. So we have an example that came up, we talked previously about Sotheby's and we have an example of one of the largest museums in New York, that moves multiple millions of pieces art around their organization using JIRA Service Desk.

Now this is a replacement for paper and e-mail-based system that they hand beforehand, but it came in because we landed in their software team. They were using us for software processes within the museum, and they were the recommender to the business and facilities teams to use this applications, so... To the point that we can keep telling those stories to our customer base, it really shows the power of the expansion model.

And then beyond that ,obviously our automated model, the engine that we've built in terms of the engagement engine to talk to customers, to talk to end users, to illustrate other use cases and to help them spread throughout their organization, that's something we continue to invest in both on the R&D side and on the go to market marketing side to reduce the friction of the spreading across an organization...... Richard Hugh Davis Canaccord Genuity, Inc. Q Great. Now that's helpful. Thank you so much......

Operator: Thank you. And the next question comes from Sanjit Singh with Morgan Stanley......

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016 Sanjit K. Singh Morgan Stanley & Co. LLC Q Congratulations on a successful fiscal year 2016. Murray, can you toggle back to the pricing change one last question on that, if it was eight points this quarter, and it sort of goes away beginning next quarter, it seems like a pretty steep drop-off, and I'm just trying to understand the dynamics of why you would go from eight to pretty immaterial that quickly? ...... Murray J. Demo Chief Financial Officer A So, it's a good question, Sanjit. So, just a little complexity here, there's kind of two things that go into that eight points of growth. There's the pricing that's related to the higher price of the customers paying now than they would have if we hadn't done it, and I comment that earlier notes, any kind of price change, other price increase or decrease since inception the company's flowing through our revenue today, that will sort of continue on. And there's a whole bucket of those kind of things and we wouldn't necessarily break any of that out, that's just the normal course of the business,

The piece that's been going away is the piece that really where it sort of ended in November 2015, and – where someone renewed at a higher price. We're getting that revenue coming from deferred revenue to the maintenance revenue over the 12 months, so we'll see some of that in the first quarter of 2017 and then we're done; and then any kind of price benefit that we're getting it just really again lumped in with all the other pricing changes we've made since inception of the company.

And as I said earlier the targets provided in Q1, they factor in the last of that sort of pricing benefit that's going to be going away and it's sort of being offset by some summer seasonality, so again, both of those are factored into the target of sort of to 30% to 32% or 132 million to 134 million of revenue in Q1...... Sanjit K. Singh Morgan Stanley & Co. LLC Q That's really helpful. I appreciate that, Murray. On HipChat, a little less commentary on HipChat at least in the prepared remarks. So I just wanted to understand how you're feeling about that business as you come to the close of fiscal year 2016 and think about the prospects for HipChat going into next year, whether you need to make any changes to the products or it's sort of ready to continue to scale? ...... Michael Cannon-Brookes Co-founder, Chief Executive Officer & Director A Yes, sure mate, I can take that one. It's Mike, here in Sydney again. It's hard to give commentary on all our products, given the size of the portfolio. There's a clear – again, we're big believers that there is a clear sort of secular shift in the way teams collaborate, where messaging is going to become a key piece of that overall portfolio of collaboration tools. We think it's still very early in the space and we're very confident in HipChat continue to expand, have great top-line growth across FY 2016. So, you know we're excited about the space and its ability to transform the way that teams collaborate...... Sanjit K. Singh Morgan Stanley & Co. LLC Q

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016 Understood. And the last one for me, I wanted to see if you want to take the chance to maybe update some of the metrics that you guys provided around the time of IPO as it relates to maybe monthly active users, what has that reached, and maybe the percentage of JIRA users outside of Software? Any update on this two metrics? ...... Scott Farquhar Co-founder, Chief Executive Officer & Director A Sanjit, it's Scott here. At the moment we're not really commenting on this metric and we will, as you know, provide color and commentary on various metrics from time to time to give you an better understanding of the business, but those two aren't ones that we're prepared to talk about today...... Sanjit K. Singh Morgan Stanley & Co. LLC Q Understood...... Scott Farquhar Co-founder, Chief Executive Officer & Director A But we're really happy with – we're happy with the growth of both of them, but I don't have them in a state to hand out today ...... Sanjit K. Singh Morgan Stanley & Co. LLC Q Fair enough. Congrats on a nice year...... Michael Cannon-Brookes Co-founder, Chief Executive Officer & Director A Thank you......

Operator: Thank you. And the next question comes from Brent Thill with UBS...... Michael Turrin UBS Securities LLC Q Hey guys. This is Michael Turrin on for Brent Thill, thanks for taking our questions. I wanted to talk a little bit more about the decision to shift to third-party cloud service providers. Looking at the fiscal 2017 guidance versus Q4, it looks like a significant step down. I just want to talk about that decision process. Any more color you're willing to provide? Are you planning to use one or multiple providers? And anything else is greatly appreciated...... Scott Farquhar Co-founder, Chief Executive Officer & Director A Thanks Michael. Good question. The way we think about it, it's been a progression for a long time. At Atlassian, we've had a hybrid model of using third-party data providers and our internal data centers where effectively the workloads made most economic sense. As third-party providers are getting better at providing for the types of workloads that we use, we're progressively moving more and more of those workloads into the cloud. That's sort of the philosophies to get other people to run that, rather than us having that on our balance sheet and something we run ourselves. So, there's nothing specific that we are doing in terms of this change of strategy, it's really just the third-party providers that's got to a level of sophistication capability that we can use more of them......

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016 Murray J. Demo Chief Financial Officer A And I'd also add that comment on accelerated depreciation, so, as part of that transition, we are incurring a little more depreciation expense than we otherwise would as part of that transition. That's why you see the gross margin coming down in our fiscal 2017 targets...... Michael Turrin UBS Securities LLC Q Great, that's helpful. And then, you talked a little bit about, during the quarter, the increase in sales and marketing, you referenced some additional advertising and sponsorship campaigns, is there any more detail or color you could provide there and then, how should we think about that continuing into the next year as well? ...... Murray J. Demo Chief Financial Officer A I'll just say that first, that was variable spend, it was not fixed spend per se, so it's something that we made a decision to do in the fourth quarter. As far as any other specifics, Jay, if you would like to add anything more to it? ...... Jay Simons President A Nothing beyond, you see that variability from time to time as we kind of run different broad-based experiments around demand acquisition for various products and markets that we're approaching...... Michael Turrin UBS Securities LLC Q Great. Thanks for taking my questions, guys...... Michael Cannon-Brookes Co-founder, Chief Executive Officer & Director A Thank you...... A

Thanks......

Operator: Thank you. And the next question comes from John DiFucci with Jefferies...... John DiFucci Jefferies LLC Q Thanks for taking my question. I guess I had a question for Mike or Scott, and it has to do with the acquisition of StatusPage. Other acquisitions you bought in the past have been products, and you've bought a product and you've sort of pushed that out through your vast distribution into your customer base. Can you talk – explain a little bit – just I'm not quite sure, is this one going to be a product or is this going to be technology that will be added on to things like JIRA Service Desk and others, and how should we think about your M&A philosophy going forward? ......

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016 Scott Farquhar Co-founder, Chief Executive Officer & Director A John, yeah, great question. It's Scott here. Just for those that aren't familiar with StatusPage, let's go through again what they do, if you look at the way most companies are these days, most companies are software companies, and as a SaaS company, you really become a service company, where you have to provide a service 24/7 to your customers. And when you provide that service, you need some way of communicating the status of that service to your customers, and StatusPage is kind of like the cell phone signal bars on your cell phone, instead of explaining to you with something up or down and where to go for help.

Now, this is a relatively new market, a greenfield opportunity for us, and StatusPage is the leader in this market, and when we look at the customer base, there are a couple of thousand customers – we're not sharing a specific number, but [indiscernible] (46:13) tens of thousands of customers, and so it's a huge opportunity, because all of our Atlassian customers will need a StatusPage over time.

And in terms of how we will combine the products, there's a lot of product integrations we can do over time; for the moment, it's going to be a stand-alone product inside our portfolio, with a separate SKU in pricing, as it is today...... John DiFucci Jefferies LLC Q Okay, great. Great, Scott, and should we – so it sounds like at least initially, it will be similar to previous acquisitions, and is that the way we should be thinking, continue to think the same way going forward, when you do make acquisitions? ...... Scott Farquhar Co-founder, Chief Executive Officer & Director A Yes John, we've got a long history of doing small acquisitions successfully, we've done a couple of dozen of them now, and you'll continue to see us do small acquisitions where they fit our pricing model and our go-to-market approach, and they sell into our customer base or adjacent to that. Obviously, due to our go-to-market model and our approach, it's very difficult for us to buy something large. We'd have to give a lot of consideration to something like that, so you'll continue to see us to do small tuck-in acquisitions...... John DiFucci Jefferies LLC Q Great. Thanks a lot, Scott......

Operator: Thank you. And the next question comes from Steve Ashley with Robert W. Baird...... Jason Velkavrh Robert W. Baird & Co., Inc. (Broker) Q Hi, thanks. This is Jason Velkavrh on for Steve, thanks for taking my questions. First question, just wanted to ask about Europe, it looked like there is a slight deceleration there, although don't have compare from last 4Q. Just curious, how much of that is from kind of seasonal summer slowness versus the macro issues there, and just generally how sensitive is your spend to macro challenges? ...... Murray J. Demo Chief Financial Officer A

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016 Yeah Jason, so we haven't, in terms of like Brexit or whatever, we haven't seen anything in our business that would say that Brexit has led to any kind of softness in our business. What we have seen through – looking through the data and just like in at least all the other software companies I've worked in, a little bit of summer seasonality in Europe, and we have some of that in our business and that's been factored in. But no sort of macro trends or Brexit we're seeing at this point, and that's certainly not factored into our targets. Just the normal summer seasonality is what's included...... Jason Velkavrh Robert W. Baird & Co., Inc. (Broker) Q Great. Thanks, that's helpful. And then just second question. Just sort about renewal rates and how that might vary by customer size, just kind of curious how you expect renewal rates to trend as you may gain traction with larger enterprises and that's it for me...... Jay Simons President A Yeah, hey Jason, this is Jay. Renewal rates have been trending favorably. I think we see a higher renewal rate at the larger institutions, you know, companies that deploy up to thousands of users, tend to, as we mentioned during the road show, tend to have a higher kind of renewal rate and we have a really high logo retention rate. But I think we are happy with retention coming across the breadth of the customer base...... Jason Velkavrh Robert W. Baird & Co., Inc. (Broker) Q Great. Thanks guys...... Michael Cannon-Brookes Co-founder, Chief Executive Officer & Director A Thank you......

Operator: Thank you. And the next question comes from Patrick Walravens with JMP Securities...... Patrick Walravens JMP Securities LLC Q Oh great! Thank you. Congratulations, you guys. I guess, Mike and Scott, I'm curious does the self-service model for go-to-market work as well for legal, HR, and finance as it does for IT and developers is that's something you're sort of monitoring as your solutions appeal to broader and broader audiences? ...... Jay Simons President A I'll take that one, this is Jay. You know, as Mike mentioned, remember the kind of go-to-market model, I think it's effective in [ph] landing instead of software (50:01) increasingly in IT, and then we use a lot of kind of engagement and growth tactics that you're probably familiar with as a consumer of Amazon, where three quarters I think of Amazon's sales come from their in-store recommendation, and so we have the ability kind of in our products to recommend use cases of users that might be part of an IT project that get exposed to how a Service Desk could help their legal team.

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016 In addition the kind of attritional ways we might market those use cases to champion our products inside of the business. So, it really is I think increasingly kind of an expand opportunity outside of the businesses. The business has also looked to IT for recommendations of tools and products to basically help them do their work and so we see I think a lot of growth from strong recommenders outside people like legal, and HR, and finance...... Patrick Walravens JMP Securities LLC Q That's great. Thanks Jay......

Operator: Thank you. [Operator Instructions] . And our next question comes from George Iwanyc with Oppenheimer...... George Iwanyc Oppenheimer & Co., Inc. (Broker) Q Thank you for taking my questions. So, just following up on those HR, finance, legal type of use cases, right now with your Core, where are you seeing the strongest interest. and are you seeing any pressure to add new features to Core to specialize in certain verticals? ...... Michael Cannon-Brookes Co-founder, Chief Executive Officer & Director A Yeah, thanks mat, it's Mike here. George, JIRA Core, as a reminder for those listening, we split JIRA into three different offerings in October of last year, so about eight months ago or nine months ago, to build focused offerings for software teams, IT teams, and again, for business teams. It's been a very good growth story for us so far, it performed extremely well, albeit off a very small base obviously compared to its Software and Service Desk cousins.

We think that the first thing we've done with JIRA Core is to reduce down some of the software and IT specific features, such that the business teams get a cleaner experience of tracking work that they're trying to achieve, and then after that we are certainly listening to HR finance, marketing, legal facilities all the teams that are using Core in our traditional way that we would listen to customers and we will continue to iterate the product and improve it over time, but at the moment there are no sort of glaring feature gaps for those teams in terms of getting their work done, so we've been pretty happy with the reception so far given it's still inside its first year...... George Iwanyc Oppenheimer & Co., Inc. (Broker) Q All right. And just one other question how should we look at head count additions as the year progresses? ...... Michael Cannon-Brookes Co-founder, Chief Executive Officer & Director A George, we'll continue to invest across all the different major expense categories, inside the [indiscernible] (53:08) with OBA, the continued focus on investing in R&D that will be the primary area, but we'll be investing across the company as we scale...... George Iwanyc Oppenheimer & Co., Inc. (Broker) Q All right. Thank you.

Atlassian Corp. Plc (TEAM) Corrected Transcript Q4 2016 Earnings Call 04-Aug-2016 Michael Cannon-Brookes Co-founder, Chief Executive Officer & Director A Thank you......

Operator: Thank you. And as there are no more questions. I would like to return the call to management for any closing comments...... Scott Farquhar Co-founder, Chief Executive Officer & Director Hi, It's Scott here. I just want to thank everyone for joining our call today. We really appreciate the time and look forward to keeping you updated on our progress. Thanks a lot......

Operator: Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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