Atlassian Corporation (TEAM) Earnings Call Transcript & Summary

Yes. Let's hit both of those. So first off, how does cross-sell get easier once people move to the cloud? That's basically the question. Let me tell you just broadly in go to market, we spend a ton of time and energy getting new customers in the door, right? Like the new customer number is the #1 goal. But the majority of the revenue in our business continues to be driven by expansion of our customers. And that's customers adding more users, upgrading through additions of our products and, of course, adding more products. In my experience with the server and data center business for such a long time, cross-sell, you just got to think of the barriers a customer has to go through on a server deployment to add another product. First off, we'll e-mail, we'll market, we'll do ads. We'll do everything we can to surround a customer with potential new products that they could go use. Then someone, preferably with administration access, needs to go to our website, download those products, install them, get an evaluation or a trial, get that -- get -- inform everyone else that might be interested, get them on the product to go through the trial, go through the purchasing experience and then integrate that with whatever product they had on-prem before. Like the amount of time, energy and complexity of that is -- and how much Atlassian has visibility into those different pieces is very gapped, right? Now we are very good at it and very stable, but it's one of those things that it's just -- it's a lot of hard work. With cloud, like the -- like what excites me so much is so much of that just goes away. With -- since all of our products are built on this cloud platform now with share identity, share search, share common navigation, and on top of that we know relatively usage data, so we know what people are -- what type of value they're deriving from our products, it's very easy for us to target user experiences or intuitive workflows that bring them into other products. So for example, we might notice that someone's writing essays on a Jira issue ticket. And we might actually go, you know what, if you're writing 3,000 words on an issue, maybe you should go to Confluence and make a dock. Those are capabilities that we can expose to an end user. And now that everything is built on the platform and we have these free versions of our product that, that end user can kick a free instance off of Confluence without anyone else involved. And just start working and using it, right? Like the simplicity of product expansion just rapidly accelerates. And on top of that, the fact is it's all on infrastructure that we're tracking. So our ability to experiment, test, run data, run cohorts, like we just get so much rich information on how to build richer experiences. And we're not just using the blunt instrument of e-mails and advertising. Second conversation. What about Jira Align? So Jira Align, which most of you might know, is the product AgileCraft, a company we acquired 1.5 years ago. I was happy to be the exec sponsor bringing that product line in and been very happy with the results today. Jira Align is unique in the Atlassian portfolio, in that it is the only product in our portfolio today that we only sell to enterprise customers. We acquired that product for our largest customers because it was built and designed to solve the largest enterprise customer needs, right? It has many of the enterprise capabilities to really -- what it is, is tie all the work that is happening across your business, at a large enterprise with tens of thousands of users, and align all that work to your company's strategies, goals and outcomes. And it's exceedingly powerful to do that. But it's one of those that it's a very enterprise product. The good part there is those large enterprise customers that we are bringing Jira Align to are the customers that have largely standardized on Atlassian products for their software development tool chains, or into their IT operations use cases, like they've already well bought in and are an Atlassian company. And when I meet with CIOs, like this was the core reason why we brought AgileCraft in was they're like, "Listen, we know everyone is doing all of their work in Atlassian, like all the work is happening in Jira and Confluence and Bitbucket, but we just simply can't get a view into it that makes sense as an executive. Like we know everything is all the work is happening there, but how do we know it's the right work?". And that's what the Jira Align promise delivers is that we can tie all of that work to the business outcome that an executive team can actually see. But that allows us to be exceedingly focused to a small subset of our customers with Jira Align, and we've been very successful to date. Some of the largest banks in the world are deploying us just for that, where they're tying multiple large Jira deployments together via Jira Align to tie to their corporate strategies. We've seen very large success in health care and telecommunications as well, like 3 industries that seem more than right for what something like Jira Align can deliver.

If I could perhaps just jump on to that answer, Cameron, and give a few thoughts around cross-sell as well, because we very much believe we are early in this opportunity for our coming growth. Just reading ahead, actually, one of the things we'll note in our next paper is that Jira Software and Confluence, combined, account for around 60% of our revenue. And I think that's a nice illustration of how we have successfully cross-sold historically. And indeed, the ecosystem in the marketplace is another example of that. But the other side of that coin, of course, is that the other several or so of our products represent less than 1/3 or so of our total revenue. So I think there's an illustration there as to the potential for them to continue to expand very nicely through cross-sell. Second point I'd make is that at our last Analyst Day, we made a few observations that Jira has had around 65,000 customers at that point in time, out of a total of about 138,000 customers back then. So this is about 5 quarters ago. That ratio hasn't materially changed up until this point. So I think that, again, illustrates some interesting opportunity ahead of us. Similarly at the last Investor Day, we talked about the time that it was taking to get a customer to the second product, on average, and that was around 2 years. And indeed, around 6 years to get to the third product. And I would say that directionally, again, that hasn't changed in the last handful of quarters or so. So again, I think illustrations of real opportunities ahead. And then I think just to reemphasize, I think the platform work that we've been busy on creates another interesting vector for cross-sell, and that is around products like JSN that, in essence, bring a variety of capabilities into the same offering. And then Access is another, I think, very interesting development over the last year, 1.5 years or so because, again, it cuts across situations where a customer has multiple of our products and gives another lever, another cross-sell vector, if you will. So when you roll all those things together, feel as though there's a lot of opportunity ahead for us to continue to cross-sell. And that's not even including this upsell notion as we bring people along the ladder of our cloud editions, free standard, premium and enterprise.

That's great. So we're running out of time in this section. We're going to combine a couple of questions into one, kind of last topic to explore before we move on to the third section. And I think this kind of goes into the category of understanding our growth rate relative to the past growth rate, especially around the subscription business. So I'm just going to read the questions. One is from Alex Simpson at Jericho, one's from Keith Weiss at Morgan Stanley. And I think we'll have James start here. And then if anyone else wants to follow-on to James, certainly go ahead. So first question is even during the challenging COVID period, you grew cloud ARR, 35% without much help from pricing. Why isn't the subscription migration process added into this growth rate in fiscal '21 and '22, such that subscription revenue growth is faster than the 35% you're expecting? Similarly, it seems strange that you don't see more of a benefit from migration at all in fiscal '22. And then kind of in the same vein, subscription growth has been 44% in the last 12 months. Help us understand what's assumed in the mid-30% growth in terms of churn. So James, why don't you start there? And then we'll let anyone else jump in to finish it up after that.

Okay. So in terms of the migration effect around the subscription revenue growth rate that we've outlined today, as I really noted a little earlier, we would expect those smaller customers to be the ones who are migrating to a greater degree in the next -- in the balance of this fiscal year and in the next fiscal year. In fact, we show a graphic that gives you a sense for the shapes of those migration curves. We've broken out a number of small versus medium versus large-sized server customers and giving you a feel for that equation as well. So relatively modest migration effects in fiscal '21 and '22, the examples that we laid out in terms of pricing for these different sizes of customers, yes, there are certainly differences across different products, different tiers of user numbers across the products. But we very much feel that those are directionally helpful for you to get a sense. And as you've seen in the smaller customers, there are going to be circumstances where we would actually have a revenue headwind as someone moves to the cloud off the server. And the key point to really emphasize here is that we're moving from a tier -- user tier pricing structure in server over to much more of a per user pricing over on the cloud side of the business. So it really comes down, in part anyway, where you sat when you're a server customer within that user tier. So if you had been right up at the bottom or if you're at the bottom of the user tier on the server side of the house, you were paying for that full tier capability. But then, of course, over on the cloud side, you're only paying for the number of users that you're actually having utilized the product. That's what can really bring the economics down in the short run. We've talked about how our users grow 20% faster on that same product in the cloud. So we're very comfortable that, over time, those economics work for us very nicely. But in the short run, there will be more headwinds around the smaller customer end of the market, and then you see nicer benefits from our perspective in the middle size and then larger still for the larger customers, very much commensurate with the value that we're delivering for those different categories of customer. But nonetheless, because there'll be that smaller mix of customers migrating in the balance of this year and in fiscal '22, we'd expect relatively modest effects benefiting our subscription revenue line in that period. Now in terms of churn, the impact on the subscription revenue there, certainly we -- as we model out this, expect that there would be some portion of our customers for whom they're not able to move over to the cloud. Some of the points that Cameron was making is a little earlier, things we're still working on. And for some of those companies, the data center may be just too much of a pricing increase versus where they are behind the firewall on the server side of the house. So yes, I would expect some of that, but we're very comfortable that, net-net, that all works out very well for us economically. In fact, as we obviously see more and more of our customers migrating over to the cloud, we're very pleased with the reception that they continue to give us. And so we're very confident that this will work out very well for us over the next few years.

Just one additional comment on the cloud churn side, James, is the -- what we've been able to do is build a new [ model ] so over the last 6 to 12 months where we can very accurately, watching usage data within our cloud customer base, qualify whether a customer is potentially at risk for churn. This model was something we become getting much more mature and much more accurate. So if we see a customer flag into an at-risk category because their usage patterns don't look healthy, we can proactively reach out to those customers, either with our own support teams or our partners to basically remedy the situation of those customers and get them back to the healthy. This is -- a quintessential Atlassian thing is instead of just throwing a bunch of people at all the customers to make sure that they renew and continue to be successful, we're using data to make sure that where we engage with humans, we're being as efficiently as possible.

And just on one small -- back in James' answer there was some description of the difference between a server license and in the cloud equivalent license in terms of users. You can see from some of the sample customers and pricing that we've given you in the sixth page, that's why those numbers are different, just to tie those 2 threads together. So there's an example of a 50-user server maintenance that moves to a 30-user cloud equivalent. To tie James' point in there, they only had 30 users in the server, but they had a choice of paying for 25 or paying for 50. So they paid for 50, they had 20 empty seats, when you think about it. When that customer moved, they had 30 customers in cloud. So that's why when you're running all your models, we've given you a series of examples to show you some of that, that transaction that James was talking about there, just to tie that back to the actual document.

Great. Thanks, guys. Before we move on to the next section, I'm actually just going to step in and answer a couple of questions about cloud metrics, specifically, ARR and net expansion. So one question was, how often will investors be updated on cloud ARR growth and net expansion? Another one was how have those rates trended kind of pre- and post COVID? And do we have longer-term targets to consider? So that last one was from Derrick Wood at Cowen. I'll just hit these really quickly. So in terms of the frequency of updating, I think we're sharing these for the first time today, and it's something that we will probably share again. But on a relatively kind of infrequent basis, or kind of when it seems to make sense from an update, I think the larger direction that we're moving towards is being able to more transparently disclose to you kind of the state and evolution of cloud revenue -- cloud revenue growth. That's something that you'll expect to see more from. So more to come on that front. We're happy to be able to share them today. I think specifically on how net expansion rates have trended, I think the 121% net expansion rate certainly was impacted by COVID. They've trended in the kind of mid-120 range. So it's been pretty stable for the last 12 months or so. And we've seen a bit of an impact, but already started to see a rebound, and that's something we talked about in the Q1 earnings call as well. So it's nice to see that momentum, especially inside of the macro environment. Again, we're excited to be able to present those to you today, and we'll share updates on them in the future as well. With that, Martin, I'm going to give you the mic and to hand us off into the last section.

Right. So we're going to jump into our last section, investing in durable competitive advantages, how we're going to scale past $5 billion in revenue and beyond. We're going to start with a video featuring our Chief Administrative Officer and General Counsel. Erika Fisher; and our Head of Sustainability, Jess, who will touch on company culture and why it remains a top priority for us. We'll also hear from our CMO, Robert, who will talk about how our evolving model has always been customer value focused. With that, let's roll the video.

Here at Atlassian, we operate the business with a long-term mindset that is all about adaptability, scalability and impact. It means that we stand firm in our values. But that we also make trade-offs where, frankly, many other companies simply cannot and that we're smart about how we capture the massive market opportunities that we have as a company. This mindset is rooted in our business model, which is all about propelling more customers into an always-on flywheel, high-quality products, great marketing and fantastic customer service. Key to its sustained success is the thriving economy that's growing all around Atlassian. This is the model that we've been improving, adopting and scaling year after year. And it's one of our more incredible competitive advantages. The people and the products that propel our flywheel are critical to our present and our future. This means that we're going to work with our field partners, our solution partners, find new ways to acquire, engage and strategically expand with our customers, particularly those enterprise buyers. Now it also means that we're going to continue to invest in what has always made Atlassian very special, that consumer-grade scale and reach that is uniquely Atlassian. While we also do things like launch new initiatives to grow off that flywheel. A good example of this is when we launched free editions this year. Free, dramatically expanded the volume of top-of-funnel traffic that we get to Atlassian. This is why when given a choice at Atlassian, we will always go for long-term gain over short-term ROI.

We believe that our business can only be as strong as the culture supports it. Since the very beginning, we've built an open connected culture that's ready for pretty much anything. And over the last 2 decades, we've faced countless changes and challenges that have allowed us to test the resilience and commitment to that culture. We've been unafraid to make hard calls or take brave steps in the face of these changes. From going public as a company to shutting down products to building a future of work, our values allow us to do it together as a team, even when it would be easier to take a tops-down approach. For years, we've been working as a highly distributed global company. And we've long been experimenting with fully remote teams. Now today, how we work is becoming just as important as and maybe even more challenging than what you sell or what you build. The whole world is learning this lesson and shifting to remote work. Recently, we announced an employee initiative called Team Anywhere. This allows an employee the choice of working remotely, in an office or both. We made this decision with a long-term mindset because we thought it was the best thing for our business and for our customers. We didn't do it because it's trendy or because it made for a good headline. Rather, we did it because it allows us to create a structure where our teams can remain highly adaptable, scalable and impactful. As we look ahead, I'm deeply aware of the huge responsibility on our shoulders. Our customers are counting on us to tell them what teamwork should look and feel like, now and in the future and to give them products that help them get there. Ours is the culture that puts human being at the center. It's a culture that leads gracefully and it's a culture that empowers teams to truly shape the world for the better.

Being a company that's built for change, scale and impact means that we have to show up in tangible ways. This is why we're just as committed to sustainability as we are to our products. We think about it as embedding the goal of social and environmental progress in everything that we do. This is what it means to be a company that is truly focused on the long term. To combat global climate change, we started by looking inside our own walls and set an ambitious goal of being 100% powered by renewable energy by 2025. And you know what, we were able to achieve it in 2020. So our next big goal is to reach Net Zero emissions by 2050. And this work is far from done, in part because our sustainability vision goes further than most. We believe you can't fully solve for climate change without addressing the underlying racial, gender and socioeconomic inequalities in the world. Atlassian is for everyone. And integrating diversity, equity and inclusion across everything we do will help drive the structural shift needed to unleash the potential of our own teams. And in true Atlassian fashion, we're being open about our journey, including our missteps, to share the lessons learned with the global business community. For example, our first sustainability report, which was launched the first year of having a dedicated sustainability team, demonstrated this real authentic commitment to just being agile in our approach. Look, it was a far from perfect, but we were open and honest about our gaps and goals. We're really only at the beginning of our journey to being a good global citizen, while also helping teams all over the world do their best work.

Okay. Time for our last 6-pager. This last section focuses on how we invest in durable growth. The link is available for you in the Zoom chat and on our IR site. We're going to give you 20 minutes for this section, and then we'll come back once again for Q&A. Feel free to begin dropping your questions in the Zoom Q&A, and we'll see you back here in 20 minutes. [Break]

Hi, everyone. Welcome back. And moving into our last section here, we have got about 30 minutes for Q&A here. So it should provide for a nice rich discussion. I think what we're going to start with is sales and marketing as a topic. Generally, there's a lot of interest there. And we'll move on to R&D, kind of post that as a general game plan.

So the first one, Cameron, I'm going to put you on topic for this one, which is you've had great success with your direct sales model. And with your relatively low sales and marketing spend as a percentage of revenue. At the same time, I imagine the ratio between your customer lifetime value and customer acquisition cost is very wide. Why not invest more in the enterprise sales force or other initiatives, which might drive more net adds and generate a higher return on your investment? There's also a question just about kind of who are these 125 enterprise advocates that we have, that's grown a lot. Can you just provide a little bit more color on that as well?

Great. So the -- like Cameron is the new CRO. He's going to go huge on enterprise sales. And first, I want to reset everyone here is I've been at Atlassian since 2012. I've held roles in our advocates org, our marketing org, our growth organization, our R&D teams, I even had Corpdev for a little while, all along the while, I've continued to be amazed at how Atlassian goes to market. Like the reality is we are the most unique go-to-market machine and enterprise software. It's part of the most interesting and exciting part of my job. And that's -- and I came from more traditional enterprise software companies, where like revenue targets basically drove down to sales attainment, sales capacity, sales quota, and you basically tied your revenue growth in your business to how many reps you could hire next year. That's not how Atlassian operates or has ever operated. We are a much more efficient system than that. And where we bring humans into the sales process, we have an exceedingly high threshold of proof. We don't do it just to like drive sales capacity. We do it. So to make sure if we're going to add a person, a very expensive person into our funnel, we're going to make sure it drives revenue out the other side. So that said, when I started at Atlassian 2012, an unlimited license of Jira, the most expensive thing you could buy from Atlassian was $8,000. Like now 8 years later, we are regularly doing multimillion-dollar deals, okay? All -- and we've been able to do that and evolve because we built enterprise advocate teams, we've had more expensive products, and we've evolved our go-to-market to be able to do that. But once again, at a very high threshold. The enterprise advocate team, as you mentioned, the 125 people, we started that team right when we launched data center. If you remember that, was about 5 or 6 years ago because data center products, those ASPs became high enough where it made sense to actually call customers back and walk them through the pipeline. But we didn't just apply enterprise advocates to every enterprise customer. We started with a small subset of our customer base, our largest customers. And as we [ get proved ] that out and we did cohort analysis, we knew that every rep we added would add a significant portion of revenue to the overall business. And that how we scaled that investment. But once again, what I confidently know is that by continuing to keep sales and marketing as an overall lower expenses we have in our business model, it allows us to outinvest in R&D and outinvest our competitors. And I'm telling you like that is the #1 sales pitch we have is that for every dollar you spend with Atlassian customer, you're going to get more of that dollar in R&D and product back, right? You're not paying. And we can say that that's better than any competitor in the market. It's the #1 value prop that I love to use in our go-to-market model. Specifically for enterprise advocates, what they do today, we are on 4 motions. There's a portion of those enterprise advocates that reach out to our "largest" customers that we've defined, well segmented, and they are in charge of guiding those customers through migrations. Historically, that was getting our largest server customers today, data center. But over the last year, that's transitioned more to getting from a server to cloud experience. Once again, these are customers, many have standardized Atlassian products wall to wall. Many have technical account managers that they pay for from Atlassian. And our enterprise advocates are guiding them through the technical commercial financial decisions to migrate to our cloud. In addition to that, we also have dedicated enterprise advocates for specific motions like Jira Service management, where we are going to those adjacent departments or buyers through our enterprise customer base and introducing new solutions. We have a similar workflow for Trello, as we take our largest Trello customers who might be on a free plan or a business plan and upgrade them to our enterprise plan. And then of course, Jira Align, which I mentioned earlier. Jira Align is unique and that every single engagement has an enterprise advocate associated with it. Whereas everything else I mentioned there has -- those customers can purchase self-service. They can purchase through a partner, but we also apply enterprise advocates. So those are our 4 key motions today. We are continually -- whether we're going to invest more, like we will continue to invest as the company grows. Will we grow past that 15%? What I want to say is, listen, there -- we -- any place where we know we can drive revenue through increased go-to-market investments, whether that's marketing for performance, marketing and advertising or new salespeople or customer success people to reduce churn. We -- like I have great partnership with the executive team that we absolutely can make those investments. But like I said, we are -- that I'm very proud of the machine we built and anything that would change that current investment structure has to have a very, very high threshold of proof. And we have lots of data, and we make sure we do these decisions smart and over an extended period of time.

That's good. Go for it, Jim.

Just if [indiscernible] things to that, Cameron. It's interesting, I think, to note the multiples in our paper as to the resources that we've gradually added to go-to-market over recent years as Cameron has been talking about, while maintaining that 15% type percent of revenue invested in go-to-market resources. And the other thing I would really call out is, you may recall on the last earnings call, we talked about the big deal statistics and how we've been able to drive significant increases in the $1 million-plus accounts, 76% and a 56% growth in the 500,000 plus accounts. So those have been the fastest-growing statistics in terms of size of customer relationship, which I think is a great testament to the work of Cameron and his team.

That's great. Thanks for adding that, James. And actually, one -- I think that addresses a lot of the sales and marketing question that came up. There's one, which is a little more tactical, but I think important on this point, Cameron, [ maybe you could ] provide a little color. Long term, how should we think about the mix of both direct and indirect revenues across geographies, Americas, APAC and EMEA? To me, this just feels like help us understand better how we use our partner channel and how important they are, especially in migration, especially with larger customers. It's something that we talk about at a high level, but maybe you could provide a [ level click ] in terms of that importance to our model.

Yes. I absolutely love our solution partners that they provide scale in everything we do, and they provide a lot of that kind of last mile delivery for our customers across all stages of the funnel. So they're serving markets that we don't have presence. They're serving in languages we don't have a presence. They're transacting in currencies that we are not transacting in. More importantly, they're doing on-site demos, on-site implementations, training services, you name it, right? They just give us so much scale across everything we're doing indirectly. The -- how I view the solution partners? It's less about geographic. It's more about customer size, like we have some countries where we're probably heavier in partners than otherwise. But when you look broadly across all of our geographies, it's less direct, indirect. It's more customer size and where I believe the customers fit in. My belief here is our enterprise customers, especially the ones that are doing large migrations or large wall-to-wall deployments or doing massive digital transformation on the back of Atlassian, are going to require handholding. They're going to acquire technical services, business consulting services and change management. And that's something that will require services and solution partners to go deliver. So I largely believe with our enterprise customer base, almost all of our enterprise customers have some relationship with at least 1 or multiple of our solution partners or global system integrators that we have relationships with. And I'll continue to engage there. I also know that customers who do have a partner involved often use more products from us or more successful and have higher renewal rates. So it's nothing but an accelerator for our overall business. That said, we'll never force customers to go to a partner, like it's all about customer optionality here. If customers want to do it all themselves, and they want to take it all direct and go through the website and have their own internal teams, by all means, we're here to support them. But I do know that these complex -- all of these complex customers, they simply just -- who can we write a check to go do this work for us as quickly as possible. And we have a great set of solution partners that they can choose from to get the best value and the quickest transition for them.

Let me just add 1 stat because we've traditionally thought our partners have represented about 1/3 of our revenue. And we noted in today's paper that, that's now up to 37%, of course, on a higher base of revenue. So just an illustration of how partners continue to add to their importance to our go-to-market activity.

It's a great call out. I'm going to move us on to kind of the next big topic here, which is kind of R&D, efficiency, R&D, ROI, Cameron like how you said that every dollar that we essentially invest in the sales and marketing is also an investment into R&D from the dollars we get back in the business. So I think let me start, Michael, I'll have you answer this one, which is one of the areas which is less understood is how we spend on R&D, which is extremely high, but quite a lot of our new products over the last 5 years have been acquired. Can we better understand how R&D is being spent? And if it was on tooling of server to cloud migration, can we expect this to reduce over time? Maybe if I step back, a lot of that question is oriented around how we invested in the platform? And how will that platform investment continue in the future?

Sure. Look, it's a frequent topic of conversation for the last 5 years. And so I hope you got a lot from the document. We tried to go into a bit more detail and some depth that's easier to do in a textual format about where we spend our R&D dollars. Top of the page, I would say, firstly, we aim to be bigger and better than everybody else. So bigger doesn't mean we're wasteful. We have an absolutely world-class awesome R&D organization across the world now, and I couldn't be prouder of where we are. Our platform is I would say, the envy of the SaaS world. I talk to a lot of other SaaS CEOS, we're all good mates and our engineering platform that we've built underlying our cloud assets and everything else is just it's just awesome at the moment. It's really, really exciting to see where we've come in the last few years. Pulled some stats for you because I know you all like numbers. In the last 24 hours as of a 21 minutes ago during the pre read, we've had 5,217 deployments to our cloud platform, including all of the environments. Now given we have 5,300 employees, 5,200 deployments in 24 hours, count half of those roughly in R&D, something like this. It's 2 or 3 per person in 24 hours. 1,771 of those deployments have gone to production. So we've made almost 1,800 production deployments in the last 24 hours. In fact, we've made 924 total deployments since this Investor Day started. So if you want a weird indication of how far our cloud platform has come. During the IPO and in the early earnings calls, we used to freeze all deployments going on, while investors were talking, while other things are happening we've just powered through today, and we'll continue to do so. So we're in an absolutely awesome place. That platform broadly is based around why are we investing in it? I hope it's come clear from a few things here, and I'll get to some of the question points. Leverage and scale. We have very big goals. We're trying to go after 100 million now. We have a lot of different products in a lot of different markets. We believe that the connectivity of those markets and those products to each other is part of our core strength and unique differentiations. We've built a platform to handle that over the next 5 to 10 years with huge leverage and huge scale. So you can see that per engineer deployments even in the last 2.5 hours is phenomenal, and that is customer benefit that we're giving to customers all day and every day. That platform has not been cheap to build, and it's continued to be improved, as you can see from all of the things we've shipped around, new products like Access, the cloud additions in premium, enterprise, et cetera, and you'll continue to see us do that. We talked a little bit in the document around the new product framework and new products coming out. I think part of the question was around will we see more new products come out? And how has that worked? And is it going to be more about acquisitions? I would say on the new product side, look, the platform has taken a disproportionate amount to really build out the last few years, which has meant slightly less being invested in building new products, although with Access and Premium and other things, there's been plenty actually, I think, coming out. With our new product framework, et cetera, you'll start to see that shift back. We're pretty excited about some of the things we have in the pipeline coming up in terms of changing our customers' worlds. Those new products we're building today are all built on top of our cloud platform natively. So it gives us massive, again, leverage and scale advantages, deployment advantages, all of the cross-sell and other things we've talked about into new products is really, really exciting. So that's to come. At the same time, on the M&A side, which I think was part of the question. We continue to work really hard at integrating those acquisitions into that platform, both the platform improving to handle more acquisitions and the acquisitions migrating onto the platform. You've seen that in the last few years with Opsgenie increasingly moving onto the platform, Trello over its, what, 4-year journey now. Now Access support Trello, identity is all across Trello. Trello is increasingly moving into things like the AP switch and other things, some things we've given you some color on. So I've probably gone on too long. I hope you can sense my excitement by what we're doing in R&D. And we just world class at the moment. We're kicking goals, that's what im trying to say. So I'm really, really excited about that. And that will yield great results for our customers and eventually, our shareholders over the next few years as we continue to improve that and roll out improvements on top of it.

That's great. Thanks, Mike. I think we get this question a lot, which kind of dovetails with what you were just talking about. So maybe you can start answering here and James can tag on, which is kind of how do we think about R&D, efficiency and ROI? And how does that relate to kind of our longer term margin trajectory? So I'm just going to read 2 questions that play off of each other. The first is more focus on R&D. How would you evaluate your return on R&D spend? I've heard other companies who point out the revenue generated versus total R&D spend is actually low versus other top software models? Do you think it's possible? Or do you even try to measure R&D ROI? And then the other question is, how should we think of your long-term operating margin and free cash flow trajectory as we move more and more to the cloud? So Mike, why don't you start this off there and then we can go to James for more of the kind of specifics on the margin trajectory?

Sure. I would say one of our differences, again, one of the reasons that Cameron's team can operate so efficiently is because of that R&D spend. So you should make sure not to decouple those because some of the R&D spend allows us to operate our marketing and sales groups much more efficiently because of what we've built in the platform and in other places. So they're not decoupled, I would say, in that manner. Secondly, when we internally look at our ROI on R&D, it is notoriously very difficult. It's often very hard to draw an exact straight-line to $1 generated versus $1 invested. However, we tend to take a very Atlassian, both pragmatic long-term view. But also looking at leverage and scale. So again, part of the platform is continually rewriting and scaling pieces of our platform, pulling features, for example, out of Jira and Confluence into the platform. You see that with automation is a good example. Jira Automation was an acquisition out of the marketplace. It -- traditionally within Jira Software. We've now rolled that into the platform, so it's increasingly inter-service management. So you can automate a whole lot of your IT operations, obviously, Jira Core for business teams. And now that's rolling into the platform as a broad automation capability that you'll see come to confluence in Trello and other places across the board. So that is an example of where we can take that ROI and leverage it across the platform, which is our goal, again, with everything in Atlassian. We have big goals, 100 million MAU, targeting the Fortune 500,000, et cetera, leverage and scale comes through technology. And so we evaluate it on that basis. James, you can probably address more of the financial side.

In terms of margins, if you think about the operating and free cash flow type margin drivers. As we've spoken about on the recent earnings call, yes, we have some short term revenue headwinds that we think will add over the next 4 quarters. We've also talked earlier today about how the migration benefits, as illustrated by our pricing examples in the second paper. We'll be relatively modest in the balance of this year and then fiscal '22, but then building nicely in the years beyond that. And then layer on top of that, just the overall attractiveness of the cloud economics, we've talked a lot today about cross-sell, up selling through the additions. And we've illustrated that by beginning to talk to you about ARR net expansion rate and so forth. So we feel very good about the long-term opportunity net-net, saw some challenges in the short run. As we get past the next couple of years, we do believe that there's opportunity to drive leverage on the margin side based on these attractive cloud and data center economics. The other fact that I would just say specific to free cash flow margin. We've talked quite a bit about, historically, how 3 quarters of our current cloud customers select the monthly subscription. And going back to the rate and pace of migrations, we expect over the next 18 months or so for most of those migrating to be smaller customers. So I think it's quite plausible that, that mix of monthly versus annual subscription stays directionally about where it is. But arguably, in the subsequent years, fiscal '23, '24, when you see more of those larger customers migrating out to the cloud, we would expect more of those would choose the annual cloud subscription. And so that would tend to anticipate that particular current headwind to free cash flow and free cash flow margin. Now, of course, at the end of the day, the customers will decide. But that's how we see things playing out at this point.

That's great. Thanks, James. One other kind of just I think it's probably a shorter answer on an associated question from Jonathan Curtis, is just how much of our R&D spending is focused on server today? Where will this investment go in the year ahead? Presumably, there is leverage here. Scott, did you want to take that one?

Yes. I mean, as we've said publicly and to our customers, the vast majority of our engineering investments have been on to our cloud products, and it's obviously just going to continue to accelerate. We do have investment in our data center products, and that will continue. And so we don't imagine that there's any short-term kind of leverage of mass migrating of engineers from one side to the other. That has been a I guess, a steady change over a period of time that has not really changed that significantly from end of lighting our server products, like those who will support our data center products.

Great. I'd like to move us to kind of specific product questions that are -- that we think of them as benefits and outputs of having our cloud platform. So I think one, this is kind of like free and different additions that we have as well as Forge and how we continue to support the third-party ecosystem. So I'm going to start with this one. Scott, I think, will put you on queue to begin it from Adam Wood. Can you guys put some context on top of the funnel growth you cited and how that flows into the model over the next several years. Specifically, the free additions stat plus the web visitor growth, which looks like reacceleration? Does this sustain customer growth at a higher level in the next several years?

Yes. So taking that and there's a few other questions around top of the funnel side of things, and Cameron can correct me if I get something slightly miss. But if we go back, there's a couple of things that we've done. 10 years ago or more, we introduced [indiscernible] licenses, which we tend all versions of our product, and that opened the flight gates for customer acquisition. And then in the last really 2 years, we built a cloud platform to a state where we can support free users, right, where our COGs of supporting those users have gone down sufficiently that we can support huge numbers of these free users. And so taking all that in, we've now gone to free products, free versions almost all of our products, we've had some for quite online while in Trello and Bitbucket and some we've introduced recently. We're seeing a huge increase in the top of the funnel there. So as we said, since 300%. We're seeing usage significantly up so people are using those products continuing on as free users. And that's what we might talk earlier about monthly active usage. That's ultimately if people are using our product, either they're going to grow into a paid version or they're going to remain a small company, and we're happy to have them as a nonpaying kind of user of our products unless they use a competitor's product. So that's really good for us. In terms of like those customers converting to paid. Because we've changed our funnel in such a fundamentally different way, like we don't have at the longitudinal numbers to sort of give great external guidance around what that looks like. In some cases, we're seeing better upgrades. In some cases, we're seeing worse. And as you'd expect, when you change the entire funnel that you're moving there. And just show that still we're work in progress, we just recently introduced free versions when we go from 1 product to another in a cross-sell instance. So I've been the funnel the very tight, but like in cross selling, we were still doing evaluations and we've just changed that. So there's a lot of movement happening there. And we are fine-tuning and finding better ways to convert those free end users into paying customers, but we don't have the longitudinal data to sort of give you directionality there beyond that the month relative users are significantly up what we saw previously.

And if you do it have to add 2 quick things to that versus once again in the world of landing new customers is the #1 goal for the broader go-to-market organization. One thing that I've looked at consistently and always have is just organic traffic to our key landing products like Jira Software and Trello and so on. And whatever we do in the funnel, make it free, remove a form, lower price, raise price, you name it, all that depends of -- did someone come to the website to begin with. And what is interesting with our products is that organic traffic, not paid traffic, we're not paying to get more people in the door, but organic traffic, which is people naturally searching for things like Jira Software or being recommended is continuing to go up year-over-year at really rapid growth rates. So like that is just to tell you, there's healthy demand from the market for what we're doing, and we don't have to pay for those people to come to our site. Now we still add advertising to that because it can add more performance on the top end, but the overwhelming majority of that traffic is organic. The second part is why free so important here is what free opened up was that traffic to getting people on our products by having any -- and that was the triple as all of a sudden, we just got way more people off our website and into our product getting value much quicker. And regardless of whether they pay or not, that's more users, more companies using our products getting value and telling other people about it, which only gets that circular benefit of more organic traffic. So that alone has this massive accelerant in our go-to-market model. The last piece with free is before we did 7-day trials and at 10 users, you had to pay us $10 a month, which was great and like very stable, but we never made a ton of money off those 10-user customers, right? It was a fraction of our overall revenue. The majority of our revenue always came from the people was way more than 11 users and had multiple products. So was this something that was an easy trade-off when we give up that monetization of customers with less than 10 users to get a whole lot more of them in the door, and that will only increase the amount of 11 user and above customers down the road. And on top of that, with the organic growth of people telling other people about our products, who are they're paying or not, just drives that more and more people to our website. So overall, I've been super bullish around our free program.

And if I could just add also one thought to that from the revenue perspective, free is one of the short-term revenue headwinds that we talked about back on the earnings call 3 or so weeks ago, but we do expect that headwind to moderate in the next year or so. Net-net, as Scott and Cameron have been saying, we're very excited about the way in which free has so significantly expanded the top of the funnel for us.

Yes, free has been a real win from a cloud standpoint. The one other topic, I think, in a similar vein is the -- I think us launching our additions. And so I'm going to ask 2 questions. Scott, I think you can start and then maybe Cameron can follow-on, both are kind of related to additions. I appreciate that free additions have increased cloud type of funnel sign-ups how many of these then convert to paying customers? And then where do they convert into in terms of tiers, standard of premium. So that's one. Similarly, our most medium-sized customers between 100 to 500 seats, good candidates for cloud premium.

Great questions. Again, all possible because of the platform we spent that time investing in over the past few years that Mike talked about. And so we now have -- many of our products, we have 3 or 4 tiers. We have a free tier, standard, premium, and enterprise. And people choose those ones based on the number of seats they've got or feature gates in each of the different additions. We found that cloud premium actually has reasonably high uptick rates across all of our seats, like even sort of the 11 users and 15 users are picking up cloud premium. Obviously, it's a higher ratio at the higher tiers. But actually, it's been more spread across the different tiers than perhaps you would expect looking at our website. And so I feel really happy about premium, like it's exceeding our numbers that we put out internally. So really happy about that. Now Enterprise, we also launched, and Enterprise is relatively new, and that's still in the very early stages, and we are kind of at the stage where we're working with customers one-on-one, and they're obviously the largest of customers. And so I wouldn't expect enterprise to be as broad based as premium in the very near term. And it's worth reminding that all these investments just come and compound on top of each other. You've seen those cohort charts that we pioneered them in our IPO 5 years ago. They're now sort of SaaS standard. And you look at sort of how these things compound over time. We wanted access 2 years ago, and that's been a great growth engine for us and customers really valued it. We've launched premium about 1 year ago, and that's got a great uptick. Enterprise is only launched relatively recently. And so we just -- that's how you talk about sort of is compounding over time. We feel really comfortable about kind of the adoption of our customers, but it doesn't happen. It's not -- we don't put in a sales bag and tell sales people they need to sell it next quarter. If we did that, we'd have to have a much more expensive sales organization. And we might only bring those dollars in a quarter or 2 than what they would naturally do without us having to expand that effort. So our model has always been long-term focused and compounding growth. Cameron, do you have anything?

The biggest is just related to premium adoption. One thing I think that has been pretty exciting over the last year. And then more importantly, over the last 6 months, is how much premium adoption we've seen. Now I think you had a question that was asked of like, well, is it basically customers of this size that we see adopting premium, and that actually hasn't been the case. We've been seeing customers of all sizes, upgrading from the standard to premium plans largely because there's small teams that like the more advanced use cases that things like automation and our advanced road maps capabilities unlock. So kind of across the board, we've seen pretty new adoption, customers moving there and staying there at higher rates than we originally expected.

That's great. Okay. I'm going to move us to a kind of slightly different topic, which is acquisitions and M&A. I'm going to combine -- keep in mind, we've got about 8 minutes to the top of the hour, and I'm sure everybody across the world wants to move on from their evenings. So we'd be happy to answer questions all day, I suspect. On the first one from Keith Weiss at Morgan Stanley. The second 1 is from Arjin Batya, William Blair. I just kind of ask them both together. Mike, we'll have you take this one first. So from Keith. Great write-up on the benefits Atlassian has seen from long-term focus of management, well done. Any indications you can give us on the effectiveness of the acquisition strategy to date? What's the yield on that $1 billion spent? And with 90% of R&D dollars focused on the cloud and the cloud platforms, does this change the M&A strategy going forward? Similarly from Arjin, great to hear the investments you're making organically launching new products. Should we take this to mean M&A becomes smaller in scale and more infrequent in the future as you focus on new organic solutions? Mike, do you want to start there?

Yes, there's a lot there to get in under 8 minutes, man. Where would I start? Look, philosophically, we've long believed that not all the innovation is inside the building, and not all the innovation can be outside the building. So we try to do both. You've seen now with us talking about the new product framework and some of the things we're building on to the platform there as well as continuing to believe that acquisitions are a weapon that we can use that we can deploy well to growing the business. The platform at the core is continually being improved to not only build new products on top of, but also to integrate acquisitions with quicker, easier and cheaper. Every time we do that, we try to not just integrate the acquisition, but improve the platform such that the next acquisition will be cheaper and faster to integrate. Not simple. We're not naïve. Acquisitions are very hard. We are very selective, as I think you've seen. Our track record to the $1 billion spent hopefully speaks for itself. We constantly look at stats at the average value rate and M&A and wonder what we're doing wrong to not be so far wrong. But we work really hard on it. And we try to do a lot there. I don't think I would say changing the M&A strategy. Perhaps the missing ingredient in some of those questions. The implication is because of the platform being a central component, are you going to acquire less or only small things or whatever we continue to look at all sorts of opportunities for acquisition as we do as a part of a broad framework. I would point out we launched Atlassian Ventures in the last quarter and a bit. So we now have an option in between acquiring in terms of investing as well, that's worthwhile pointing out there. The platform being built to manage acquisitions and integrations faster is a key part of that. We doing that with Mindville as we speak. We've done that more and more with Opsgenie and other things over Trello over the last few years. One potential example that's really interesting to point out there is Durasert is management. If you think about what's in Jira Service management, it's a very integrated offering. It will feel like 1 product to customers. But part of that came from Opsgenie and part of it came from Mindville and asset management in capabilities. And part of that came from Jira Service Desk, which was an internally developed new products. So it's a good example of 1 customer offering across a broad swath of things, where you get some pieces from acquisitions and some pieces from internal creative R&D and innovation that are being combined together under the platform on top of the platform into a singular offering. So yes, I wouldn't -- I hope that gives an example of how we're thinking about that platform. It's not purely for building on top of new things. It has to be able to integrate outside things at relative rapidity. Obviously, when we're looking at acquisitions, we can look at their technology stacks and other things and look at how easy that's going to be, but we need to continue to get better at that with every deal, and that's what we aim to do. Matt, did that cover what you want to me to cover? Was there anything I missed?

No, I think that does it. I'm going to ask us, we're going to do 2 more questions. One, I'm just going to kind of throw to whoever wants to answer it, which is the first half of Jackie Glynn, this excellent question. We get together for Investor Day. When we surpassed $5 billion in revenue, what will be the area is years and products that have outsized contributions and the $3 billion in revenue growth from today. So I will throw that to the floor for whoever wants to take that. I suspect we'll have different dimensions on this answer.

I'll jump in quickly. But look, if you were a geography, we're already pretty highly geographically dispersed. So it's not like there's some new area of the world that we need to go into in order to make this happen. So I mean we'll get better at it, but we've been pretty good at it for a long time. So I wouldn't say that. The cloud migration, combination of just our existing customers moving across and are solving more problems for them and the fact that we can then expand them and give them more products and more users and so forth at a faster rate, I think that gets us -- that's a pretty big growth rate there over the next couple of years. And then some of the stuff we've already released, like if you look at the ITSM stuff, we're doing really all the adjacent stuff around development and workflows I think, you can get us through $5 billion. And then the work management for all like is just a huge opportunity as well. So I don't say there's like huge change we need to do it. Like I think you can look at a lot of stuff we've already talked about. And that gets a significant revenue growth, there's not, I think, some change we need to do in our model or anything like that in order to get there.

Well, I would just add on to that, that I think the 10 information that we laid out in the first paper is just very illustrative of what Scott was just referring to.

Back to where we started. All right. Last question, which is fun, something that we're all passionate about is, can you elaborate on your charitable mission and all throwing on top of that, how do you think how do we think about impact at Atlassian more broadly? Mike, maybe you can start us off kind of from a sustainability standpoint. Scott, I know the -- our charitable mission, in particular, important and a focus for you? And then anything else in terms of how we impact customers in a large way that anybody wants to add?

Sure. Look, I think Jess did an awesome job, if you watch the video, who runs our CSR team who are, I think, really world class. Again, the pillars of the CSR team, if you've read the sustainability report, almost go from the closeness of Atlassian out to the entire planet with obviously a smaller proportional impact that Atlassian has. We have 100% impact on ourselves and a relatively tiny proportional impact on the whole planet, but obviously affects way more people, if you want to think about 5,000 people at the Core and 8 billion at the outside. Those pillars are around the people that we have in building, the customers and all sorts of aspects around privacy, human rights, everything else that's in our customer sphere through to the communities we exist in and then out to the entire planet. And obviously, you get to sort of climate sustainability and other things. How does that tie to our long-term mines often a question we get from investors from the outside world, and that's totally valid. I don't believe you can be a long-term thinking company without thinking about sustainability at each aspect of those, right? We think a lot about the sustainability of our start especially in this COVID period around the world. That mental health well-being and sustainability of the pace that our staff are running at all around the world as they work from home, deal with kids that are at home or illnesses or close to them, et cetera, that sustainability is very important. Obviously, all the way out to the sustainability of the outside when we get to the planet. So we tend to think very holistically. We've made huge strides in the last few years on corporate social responsibility, and I think we're probably pretty good already and continue to invest there, looking at our team and broadly conscious of time if anyone else wants to chip in, but that's the way we think about it. It's about being a long-term thinking company and a patient company, but also ambitious to mature.

I was going to add on to Mike, but I don't think I could really improve on his answer. I do want to thank a few people today. I'd like to thank the Atlassian team, those who are on the call. You can see the faces and working hard to make sure that these 6 pages got delivered in a great format for you. I appreciate our team trying something new. It seems that we've got really good feedback already via chat and e-mail that you appreciate that. So I just want to thank our team for taking your risk and trying something new. And of course, for every person here on the call, there is a team of people behind us, like making sure that this all happens, looks good. And making sure that we all get to do our best in front of you. So I want to thank everyone Atlassian from home, behind the scenes and in front of the scenes. And I really want to thank all of you, our investors, you get a choice of where to invest your money every single day. There's plenty of opportunities in the public markets, and you choose to invest with Atlassian. We hope to continue to win your trust every single day. And hopefully, today is an example of how we can continue to do that. But thank you, many of the names I've seen he both on the sell-side analysts who've covered us for -- it's been public, and many of you who've held us since that day as well as some new names that I'm really appreciative of. So I just want to say thank you for all of that, and I hope to get to see you in person next time or on the next video call we can get together. Thanks a lot.