Our Q3 FY21 letter to shareholders

Fellow shareholders,

As we shared in our pre-earnings announcement, Atlassian posted strong results in Q3, driven by the confluence of the discontinuation of new server license sales and price changes to on-premises products that went into effect during the quarter (more details in the finance section below). While these short-term dynamics drove outperformance at both the top and bottom line, we’re seizing this opportunity to drive additional investment in R&D that will fuel our flywheel of continuous innovation and sustain our momentum for years to come.

Our mission to unleash the potential of every team is more important than ever after over a year of COVID-19 and its myriad ripple effects. United Airlines, for example, had to rethink everything from aerodynamics to finances to logistics as they executed a mid-air pivot from carrying vacationers to transporting vaccines. United’s teams used Jira Software and Confluence to coordinate and move with urgency as the situation evolved – and they pulled off the transition in just seven days.

Their story, and so many others like it, highlight the fact that we’re entering an era where teamwork means bringing people together from across the entire organization and using software to help them collaborate in new, more effective ways.

Atlassian is uniquely positioned to connect teams across software development, IT, and business. We’re helping teams break through organizational silos with products that combine to form a unified collaboration platform. We’re working closely with our customers to create innovative new products through our Point A program. We’re investing in continuous improvement across our portfolio from Jira Software to Jira Service Management to Trello. And we’re doing it in the cloud where we can deliver world-class technology at next-gen speed. ⏱

If you build it (in the cloud), they will come ⛅️

We’re excited about the early momentum we’re seeing around cloud migrations, which are tracking in line with our expectations. Cloud migrations doubled in Q3 compared to the same quarter last year. This is a big increase and we have more hard yakka 🇦🇺 ahead of us. As expected, smaller customers are leading the way and we’re building momentum with larger customers.

Our cloud platform remains our largest investment, facilitating the continuous innovation that allows us to attract customers of all sizes and help enterprises be as nimble as startups. For example, machine data analytics provider Splunk is beginning to migrate 5,000+ users to the Atlassian cloud. The move will allow their IT team to focus more on internal adoption and maximizing the value they get from Jira and Confluence instead of spending time maintaining their server instances.

“Atlassian’s cloud means we’ll have the latest and greatest features, without having to worry about planning releases or applying patches,” says CIO Steve McMahon. “We expect to see a significant return on investment as we embed Atlassian’s software into our core workflow, and the move to cloud is an integral aspect of that plan.”

Our Cloud Premium and Cloud Enterprise editions are proving popular among larger customers like Splunk. These editions put customer admins in the driver’s seat with new, flexible options around user authentication policies and the ability to control how often updates are delivered to their cloud instance. Meanwhile, smaller organizations continue to drive cloud sign-ups overall, powered by our hyper-efficient go-to-market funnel and our free cloud editions. As these organizations grow, our cloud platform allows them to add more users or trial new products with just a few clicks, underscoring our ability to support customers of any size.

Collaborating with customers to keep our products on point ☝🏾

Atlassian’s move to become a cloud-first company is about innovation and customer value. Full stop. We’re leaning into our DNA as creators by investing in a scalable platform that supports cross-product capabilities. This platform allows us to deliver new products that address customers’ challenges today and anticipate their future needs. Our long-term success as a company hinges on making our customers successful. Nail that and the economic benefits will follow – something we’ve seen time and time again throughout Atlassian’s history.

To that end, we launched a program that brings customers into close (virtual) collaboration with our product development teams: Point A by Atlassian.

By internally fast-tracking the most promising ideas and vetting early versions with actual users, customers get value out of Point A products from day 1. These products evolve rapidly thanks to Atlassian’s amazing R&D teams and our multi-year investment in our cloud platform, which lets us bake popular collaboration features like commenting, @mentions, and global search into new products with minimal effort.

These are the five initial products we’re developing in collaboration with our customers.

For technical teams

• Compass – Compass represents a new category of development tool that many of our customers tell us is “the missing piece” within their development stack. Software isn’t just written anymore – it’s assembled. Developers are using third-party services as well as services created internally, which means software architecture has never been more sprawling or complex. But until now, information about all the components that comprise their applications has been scattered across separate tools, with no holistic view. Compass provides a developer portal that helps teams understand and evolve their software architecture. It brings disconnected information together in a central, searchable location so teams can maximize operational health. Compass has changed the way our teams work at Atlassian, and we know customers will love what it does for them, too. 🧭
• Jira Product Discovery – Product managers must understand their customers’ needs in order to build great products. While today’s PMs have more information than ever before on customer behavior, they still lack an elegant way to capture and organize that feedback. Jira Product Discovery helps them prioritize input based on what will make the biggest impact, weigh the opportunities in front of them ⚖️, and integrate those decisions seamlessly into planning and execution.

For business teams

• Jira Work Management – Planning and organizing work is our bread n’ butter 🍞, with Jira at the center. Now business teams can get all the power of Jira, packaged in a streamlined interface built just for them. And because it’s all on a platform shared with their tech team counterparts, information flows automatically across the organization, making dependencies easier to spot. For organizations that already use Jira Software or Jira Service Management, Jira Work Management is an easy “yes.”
• Halp – Imagine if Slack or Microsoft Teams was also an internal help desk. Now it can be. Halp uses emoji reactions to turn messages into tickets, adding just the right amount of process to keep teams in the flow. Over the past year, Halp has created over 1 million tickets and tripled its customer base 💥, which includes high-growth companies such as DoorDash and Peloton.

For all teams

• Team Central – Even though workers are trickling back into offices, we believe distributed teamwork is here to stay. This means staying up to speed is both extremely important and extra challenging – especially when you’re dealing with teams of teams. That’s where Team Central comes in: a shared place to report on project status and track progress toward goals. Designed for people who love effective collaboration but hate mind-numbing meetings 💤, Team Central is perfect for organizations distributed across time zones and makes sharing updates as easy as composing a tweet.

Our ongoing investment in a world-class cloud platform makes Point A possible. We look forward to sharing more updates in future quarters as we work closely with customers on a pipeline of innovative new products. Watch this space! 🔭

Continuous investment in leading-edge products 💡

As companies sprint toward digital transformation, they’re recognizing that IT needs to collaborate effectively with every department in order for the organization to operate at a high speed. At the same time, business teams and technical teams are working more closely than ever before. The agile practices that drive transformation among technical teams flow through to business teams, highlighting the need for a unified collaboration platform to keep everyone in lock-step.

“We’re working in a very competitive market, so it’s important for us to be as efficient as possible,” says Roman Bugaev, CTO of Flo. With the help of Jira Service Management, Jira Software, Bitbucket, and Confluence, this top-rated health app supports 165 million users. “We’ve gone from one big-bang release every month to 10-20 production deployments per day. We also reduced the average development cycle time. Atlassian brings all these teams together.”

That’s why we continue to enhance our core product and platform capabilities, such as these wins we announced at Team ‘21:

For technical teams

Jira Service Management is the product of a multi-year investment that integrates service desk ticketing, incident management, real-time communications, and configuration and asset management. Now we’re increasing our investment with the recent acquisition of ThinkTilt, maker of ProForma, a no-code/low code form builder with 700+ customers worldwide. ThinkTilt lets IT teams create dynamic cascading forms inside Jira that help them deliver better, faster service to the employees they support. 🛠 This is critical for delivering enterprise-wide service management, an area where we continue to see strong growth.

Atlassian supports over 4,000 applications in our marketplace – the result of a decade’s worth of investment to deliver even more innovation to customers through tens of thousands of third-party developers. We also announced we’re taking it even further with Open DevOps: a pre-configured set of integrations that combines Atlassian products andleading partner offerings. We believe the best toolchains are open toolchains. But the overhead of complex set-up and integration can slow development teams down. Using Jira Software as the backbone, this collection of apps makes customers’ development toolchains feel like an all-in-one, yet remains open so teams can customize it to suit their needs.

For business teams

This quarter marked the beginning of a whole new Trello – our flexible work management tool for teams that don’t need the kind of structure Jira provides. Inspired by feedback from customers, we launched innovative new ways to visualize work: as a dashboard; timeline; table; or map. Along with the classic list and calendar views, these new views let teams get the perspective they need to make better decisions and get more done.

We also introduced smart cards in Trello that bring work from tools like Dropbox, Figma, and Salesforce into one place. With companies using 200+ different apps on average, connecting all the dots is more important than ever. Smart cards turn Trello boards into a team’s work management hub, no matter where their data lives.

Laying the foundation for long-term growth 🏗

Atlassian is committed to making long-term investments that set up our customers to do the best work of their lives, no matter where their desks are. We are seizing this moment to drive further investment to build innovative products powered by a world-class cloud platform to unleash the potential of our customers.

Looking back on the past year, what we feel more than anything is gratitude. Thank you to our customers, partners, and everyone else in the Atlassian community for being steadfast allies. When times are tough, you see who your mates really are. We hope the feeling is mutual. ❤️

Finally, we’d like to congratulate one Atlassian in particular: Martin Lam. Martin has been a valued leader for over six years and will now take on the role of Head of Investor Relations. We know he’ll continue to be a trusted partner for our investor community. Congrats also to Matt Sonefeldt, Martin’s predecessor, on his new role as Head of Strategy and Business Operations. Lots to celebrate! 🎉

We look forward to speaking with you on our quarterly earnings call. In the meantime, here’s to the road ahead and to unleashing the potential of every team.

– Scott and Mike

Customer highlights

Team ‘21 is wrapping up, and wow: what a show! This was our second year running our annual conference as a virtual event and included a diverse mix of content exploring the intersections of teamwork, humanity, and technology. 🤖 As we discussed last quarter, Team ’21 is a fantastic example of how we’re delivering value at every level of our funnel and transforming how we engage with our customers at scale. Team ’21 attracted approximately 30,000 registered attendees. Over 25 percent of them came from business teams, and for over 70 percent, this was their first Atlassian event.

A few highlights:

• Best-selling author Malcolm Gladwell came in with some straight-talk about the responsive, creative leadership companies and teams need today.
• “Evolution of Modern Work” keynote with Mike Cannon-Brooks, Zoom CEO Eric Yuan, and Slack CEO Stewart Butterfield.
• Shobz Ahluwalia, Peloton’s CIO, spoke with Scott Farquhar about the future of IT.
• Northwestern Mutual and DE Volksbank shared their journeys to cloud, focusing on migrating from Data Center and navigating the regulatory environment, respectively.
• HP gave a master class in using Confluence for knowledge management.

Initiatives ranging from virtual and partner events to improving free offerings continue to drive strong customer growth, and we continue to see strong customer demand across our cloud product portfolio. We ended Q3 with 212,807 customers, adding 18,473 net new customers during the quarter.

As mentioned during last quarter’s earnings call, beginning in Q2’21 we began to see strong Trello customer growth driven by the rollout of new product features within Trello. Some of these new customers are single-user Trello accounts: 5,658 net new customers in Q3’21 and 2,859 in Q2’21. We’re delighted that our new product features are delivering immediate value to users as well as driving greater conversion, even among single-users. In the spirit of openness, we’re calling out the impact we’re seeing from these customers.

– Cameron

Financial highlights

We posted strong financial performance in Q3’21. More importantly, we are pleased with our progress towards our long-term goals. We continue to see strong customer demand across our cloud products and we are tracking well against our cloud migration expectations – led by smaller customers and momentum that’s building with larger customers.

Our Q3’21 financial results also saw accelerated short-term demand for on-premises products as a result of customers purchasing ahead of both the discontinuation of new server license sales and price changes to on-premises products during the quarter.

Highlights for Q3’21 include:

• Subscription revenue grew 43% year-over-year. Specifically, cloud revenue grew 35% year-over-year. Data center revenue grew 75% year-over-year, driven by the accelerated demand from the discontinuation of new server license sales and customers purchasing ahead of price changes that went into effect during the quarter. Subscription revenue continues to be the primary driver of total revenue growth.
• Server demand was also better than expected, driven by the discontinuation of new server license sales and price changes that went into effect during the quarter. This outperformance comes on an increasingly small base of server maintenance and perpetual license revenues. When compared to Q2’21, server revenue increased by only $11 million quarter-over-quarter across the combination of server maintenance and perpetual license revenue. In comparison, subscription revenue grew by $39 million, quarter-over-quarter.
• The short-term, “event-driven” on-premises demand was primarily driven by partners in EMEA and APAC.
• Other revenue, which is primarily driven by the Atlassian Marketplace, saw revenue growth of 104% year-over-year. Marketplace sales benefited from the accelerated, event-driven purchasing across server and data center. Revenue on the sale of third-party marketplace apps is recognized in the period the product is purchased.
• We continued to execute against our ambitious hiring plans. We added 365 net new Atlassians in the quarter, with the majority in R&D. We will continue to invest purposefully as we position Atlassian to drive durable growth and win in our large addressable markets.
• We posted record levels of operating profit and free cash flow this quarter, a direct result of the event-driven outperformance.

Third-quarter fiscal year 2021 results

Revenue

Headcount

Total employee headcount was 6,117 at the end of Q3’21, an increase of 365 employees since the end of Q2’21. The majority of the increase was in R&D.

Net income

IFRS net income for Q3’21 included a gain of $150.7 million recorded in “other non-operating income (expense), net,” compared with a charge of $141.8 million in Q3’20 relating to Atlassian’s exchangeable senior notes and related capped calls. Of this amount, a gain of $161.3 million is related to marking to fair value the exchange feature of the notes and related capped calls that remain outstanding as of quarter end. In addition, a net loss of $10.6 million is related to the net impact of repurchasing a portion of the notes and the unwinding of the related capped calls during this quarter.

Balance sheet

Atlassian finished Q3’21 with $1.6 billion in cash, cash equivalents, and short-term investments.

During Q3’21, we used $591.6 million in cash to repurchase a portion of the notes in privately negotiated transactions and received $63.3 million in cash from the termination of the corresponding portion of our capped call transactions. The net impact resulted in cash outflows of $528.2 million and was reflected in cash used in financing activities on our statement of cash flows.

Free cash flow

Cash flow from operations for Q3’21 was $377.0 million, while capital expenditures totaled $5.4 million and payments of lease obligations totaled $11.3 million, resulting in free cash flow of $360.4 million. The free cash flow margin for Q3’21, defined as free cash flow as a percentage of revenue, was 63.4%. The strong free cash flow performance was a direct result of the event-driven outperformance during the quarter.

Financial targets

Fourth-quarter fiscal year 2021 outlook

Revenue

We continue to expect variability in our revenue growth as customers choose when to migrate to our cloud or data center offerings. As a reminder, while we have discontinued sales of new server licenses in Q3’21, upgrades of existing server licenses will continue to be available through Q3’22.

In Q4’21, we expect to see the following trends:

• We expect to outperform the mid-30% subscription revenue growth target for fiscal year 2021 which we previously provided at Investor Day. Subscription revenue will continue to be the primary driver of growth.
• While the leading indicators for cloud migrations are encouraging, migrations will only have a modest impact on fiscal year 2021 revenue. Consistent with prior commentary, we expect the impact from migration-related revenue to build steadily over time. As shared at Investor Day and in prior shareholder letters, we expect half of our server customers will migrate in fiscal year 2023 and beyond. It is important to note our assumption that medium and large-sized customers, which have a greater impact on revenue, will take more time to migrate than smaller customers. Of this cohort, we estimate that approximately two-thirds will migrate after fiscal year 2022.
• Total revenue growth will moderate in Q4’21, with the mid-point of our revenue guidance range representing year-over-year growth of 21%.
• We expect the following factors to impact revenue growth in the coming quarters:
  • Contracting server business – Our server business will contract as customers migrate to our subscription offerings. This decline will be seen in both license and maintenance revenue. Beginning in Q4’21, we expect to recognize less perpetual license revenue as we will no longer offer new server licenses. Note that customers will still have the ability to upgrade their existing server licenses through Q3’22 and we expect to see modest perpetual license revenue through Q3’22.
  • Enterprise loyalty discounts applied to migrating customers – At enterprise-level user tiers, we are offering loyalty discounts to both server and data center customers to incentivize migration.
  • Marketplace –Marketplace revenue, which is reflected in “Other revenue,” will be impacted by the accelerated demand we saw in Q3’21 and our temporarily lowered Marketplace take rates on the sales of third-party cloud apps which are designed to incentivize further cloud app development.
  • Tough compare –We observed unprecedented customer purchasing in Q3’21 driven by the confluence of events from the end of new server license sales and price changes to on-premises products. As a result, Q3’22 will be a tough compare from a year-over-year revenue growth perspective.
  • Shape of the revenue growth “curve” –We continue to expect the above factors to impact revenue growth in fiscal year 2022 before improving.

Profitability

We will maintain our approach of “looking through” short-term growth fluctuations and purposefully investing to drive long-term durable growth. We continue to have ambitious hiring plans, with a focus on R&D.

We continue to expect the following trends in Q4’21:

• Gross margin is expected to decline due to the business mix shift from server to cloud. This impact will be primarily driven by additional personnel costs to support cloud migrations and our cloud customer base, as well as increased hosting costs for cloud enterprise customers.
• Operating margin is expected to decline as server revenues contract and we continue to invest heavily in cloud R&D. We will continue investing in our cloud platform, supporting microservices, improving our migration tools, developing new products, and driving product improvements.
• Free cash flow is expected to be impacted as a result of the continued business mix shift to the cloud. Maintenance contracts for our server 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 term 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.

We continue to invest towards realizing our long-term goals: to serve our customers’ mission-critical workflows as a cloud-first company and to deliver technical and non-technical teams world-class innovation in massive markets. Q3’21 was another solid step on this multi-year journey, and we look forward to the road ahead.

– James

FORWARD-LOOKING STATEMENTS

This shareholder letter contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. All statements other than statements of historical fact could be deemed forward-looking, including risks and uncertainties related to statements about our products, customers, anticipated growth, strategy, go-to-market model, Atlassian Marketplace, acquisitions, outlook, effects of the COVID-19 pandemic, technology and other key strategic areas, and our financial targets such as revenue, share count, and IFRS and non-IFRS financial measures including gross margin, operating margin, net income (loss) per diluted share and free cash flow.

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 from time to time, including the section titled “Risk Factors” in our most recent Forms 20-F and 6-K (reporting our quarterly results). These documents are available on the SEC Filings section of the Investor Relations section of our website at: https://investors.atlassian.com.

ABOUT NON-IFRS FINANCIAL MEASURES

Our reported results and financial targets include certain non-IFRS financial measures, including non-IFRS gross profit, non-IFRS operating income, non-IFRS net income, non-IFRS net income per diluted share, and free cash flow. Management believes that the use of these non-IFRS financial measures provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of our results of operations, and also facilitates comparisons with peer companies, many of which use similar non-IFRS or non-GAAP financial measures to supplement their IFRS or GAAP results. Non-IFRS results are presented for supplemental informational purposes only to aid in understanding our results of operations. The non-IFRS results should not be considered a substitute for financial information presented in accordance with IFRS, and may be different from non-IFRS or non- GAAP measures used by other companies.

Our non-IFRS financial measures include:

• Non-IFRS gross profit. Excludes expenses related to share-based compensation and amortization of acquired intangible assets.
• Non-IFRS operating income. Excludes expenses related to share-based compensation and amortization of acquired intangible assets.
• Non-IFRS net income and non-IFRS net income per diluted share. Excludes expenses related to share-based compensation, amortization of acquired intangible assets, non-coupon impact related to exchangeable senior notes and capped calls, the related income tax effects on these items, and discrete tax impact resulting from a non-recurring transaction.
• 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 and payments of lease obligations. Our non-IFRS financial measures reflect adjustments based on the items below:

• Share-based compensation.
• Amortization of acquired intangible assets.
• Non-coupon impact related to exchangeable senior notes and capped calls:
  • Amortization of notes discount and issuance costs.
  • Mark to fair value of the exchangeable senior notes exchange feature.
  • Mark to fair value of the related capped call transactions.
  • Net loss on settlements of exchangeable senior notes and capped call transactions.
• The related income tax effects on these items, and discrete tax impact resulting from a non-recurring transaction.
• Purchases of property and equipment and payments of lease obligations.

We exclude expenses related to share-based compensation, amortization of acquired intangible assets, non-coupon impact related to exchangeable senior notes and capped calls, the related income tax effects on these items, and discrete tax impact resulting from a non-recurring transaction from certain of our non-IFRS financial measures as we believe this helps investors understand our operational performance. In addition, share-based compensation expense can be difficult to predict and varies from period to period and company to company due to differing valuation methodologies, subjective assumptions, and the variety of equity instruments, as well as changes in stock price. Management believes that providing non-IFRS financial measures that exclude share-based compensation expense, amortization of acquired intangible assets, non-coupon impact related to exchangeable senior notes and capped calls, the related income tax effects on these items, and discrete tax impact resulting from a non-recurring transaction allow for more meaningful comparisons between our results of operations from period to period.

Management considers free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by our business that can be used for strategic opportunities, including investing in our business, making strategic acquisitions, and strengthening our statement of financial position.

Management uses non-IFRS gross profit, non-IFRS operating income, non-IFRS net income, non-IFRS net income per diluted share, and free cash flow:

• As measures of operating performance, because these financial measures do not include the impact of items not directly resulting from our core operations.
• For planning purposes, including the preparation of our annual operating budget.
• To allocate resources to enhance the financial performance of our business.
• To evaluate the effectiveness of our business strategies.
• In communications with our Board of Directors and investors concerning our financial performance.

The tables in this shareholder letter titled “Reconciliation of IFRS to non-IFRS Results” and “Reconciliation of IFRS to non-IFRS financial targets” provide reconciliations of non-IFRS financial measures to the most recent directly comparable financial measures calculated and presented in accordance with IFRS.

We understand that although non-IFRS gross profit, non-IFRS operating income, non-IFRS net income, non-IFRS net income per diluted share, and free cash flow are frequently used by investors and securities analysts in their evaluation of companies, these measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results of operations as reported under IFRS.

ABOUT ATLASSIAN

Atlassian unleashes the potential of every team. Our team collaboration and productivity software help teams organize, discuss and complete shared work. Teams at more than 212,000 customers, across large and small organizations – including Redfin, NASA, Verizon, and Dropbox – use Atlassian’s project tracking, content creation and sharing, and service management products to 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: Jake Standish, press@atlassian.com