Atlassian Corporation (TEAM) Earnings Call Transcript & Summary

Everyone, please welcome to the stage, Head of Investor Relations, Martin Lam.

Welcome, everyone, and thank you for joining our FY '22 Investor Day. It's really good to see everyone here in person and for those of you joining virtually. It's good to have you, and thanks for joining. Before we begin, I'll share a brief legal disclosure. Today's session is being webcast and is available for viewing on the Investor Relations section of Atlassian's website. A recording of today's webcast will also be made available on the IR website, along with the materials from today's session. Statements made during today's session include forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. These 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 the company's 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. Here's the agenda for what we'll cover today. There will be 3 sections to today's event: Section 1, where we cover our 3 markets, the global secular trends driving the needs for our products and our competitive advantages; Section 2, where we cover the Atlassian platform and why it positions us in the long term to win; and Section 3, where we talk about building an iconic 100-year company. In each section, we'll issue a 6-page memo. This is a peek inside the culture here at Atlassian. We run our meetings at Atlassian with 6-pagers, which were made famous by Amazon. We believe writing helps us focus on what's the most important. As you heard yesterday, in the work management keynote, we run our company on Confluence and to stay connected and share our information. Sharing information in this format really helps the reader focused on what's most important and be an active participant in all the discussion. This is how we run all our meetings from business updates to strategy updates to our Board of Director meetings. And with that, we'll open with our first section covering our 3 markets. [Presentation]

Hope you enjoyed that video. So now we'll jump into our first pre-read of Section 1, our 3 markets. The document is now available on our Investor Relations website. You can also access it via the QR code shown on the screen. And so we'll give you 20 minutes to read this first document. Our Investor Day has a Q&A section that will follow this pre-read, and so you can start submitting questions online we'll come back for a live Q&A session right after this. All right. See back here in 20 minutes. [Break]

All right. Hope you enjoyed reading Section 1. So now joining us will be our co-founders, Scott Farquhar and Mike Cannon-Brookes. We also have our Chief Financial Officer, James Beer; our Chief Revenue Officer, Cameron Deatsch; and our Chief Product Officer, Joff Redfern. We'll take questions from people in the audience as well as people are watching virtually online. [Operator Instructions] We'll spend 25 minutes on Q&A in this section. We please ask that you keep your questions pertain to the topics of this particular section. We'll have plenty of time later to go over other topics, later sections. Why don't we go with you first, Keith?

Keith Bachman from Bank of Montreal. Thanks very much for hosting. I just wanted to ask a question on, strategic competitive question on Confluence in particular. And as we think about over the next 3 years, how do you see the overlap versus partnership with some of the Slacks of the world and Teams versus Confluence and how that might -- what behavior those competitors may emulate of the current advantages you have, but how do you see the frenemy versus competition versus partnership between Confluence in particular and some of the leaders in the chat field of Slack and Teams.

Actually, Mike, that might be a really good one for you to hand on and we can also test the tech support at the same time.

Sure. I can take that. Thanks, Scott. Hi, everyone. Sorry to not be there in person. The pandemic continues to rage on. But thank you to everyone for dealing with the virtual-ness, Keith, I'm not sure I quite understand the question, to be honest. I don't think we would consider the chat tools to be competition per se for Confluence. There's obviously lots of ways an organization can record text in a company. And Confluence is doing extremely well as a product it has done for 18-plus years now and continues to power along. It's had some of the best years over the last couple of years. But our broader strategy of integrating all of the products that you have together through, as we've talked about Smart Link and the platform and other stuff that we'll get to in the second section and you've seen in the keynotes. We're taking a very honest view with our customers that we understand you have lots of products. We understand you need to tie them together and throw them together better. Confluence is a fantastic aggregation surface for those customers. You often see Confluence documents that have spreadsheets embedded and designs embedded and other things, which is a uniqueness of Confluence. You can do all of that, I guess, in a chat channel. You can put documents into a chat channel, et cetera, but it's not quite the same as a reading experience for the communication. So we work extremely well with all of the chat and messaging tools and have done for a long time, but I don't think we would see them as competition or vice versa actually. It's not something that we're really considering that way.

I add to that, which is that If you think of the tools, a lot of what people do in collaboration inside companies, what we're doing today is get contacts from some person -- one person's head into other people's heads. And if you think about Slack, it's very much on a push mechanism, right? Like, hey, I'm deciding you need to get this information, I will push it to you. You never find something in Slack, like, unless someone has pushed it to you. Like you may have open channels that may be public. No one I've ever met and said, "Oh, yes, let me check a Slack -- maybe someone has written something in Slack once or some time about this thing, like, it is sort of a -- it doesn't do that. Whereas in Confluence, it is a knowledge repository. It is a store, you will actually find inside companies, people will actively go find stuff in that. And so yes, you do share information in both of them, very different in terms of the way they do it and Slack because you don't find anything it's very ephemeral, kind of it is one to one or one to many, but it is like, hey, if it's more than 24 hours like it goes -- and there's reason Slack can delete stuff that, beyond a certain message limit or a certain time period to go, is it could -- it's much more ephemeral. If you went through and deleted all the old documents in Confluence, you'd get uproar amongst our customers because it is much more timeless.

The only thing I would add to that is if you look at our product integration, some of the most popular apps that are in built Slack and Microsoft teams are Atlassian apps. So you're seeing us embrace that ecosystem and work pretty harmoniously with them. So we spend a lot of time with their product team and their partner development. Tamar, like the CPO over at Slack, I talked to Tamar all the time. So we have a good healthy relationship.

How about Alex.

Alex Zukin from Wolfe Research. I want to ask about -- if I think about Jira Service Manager (sic) [Jira Service Management] and I think about Jira Work Management, there's obviously a couple of other big companies in these spaces. And as we were talking to partners, it very much feels like there's -- you're starting to see some really, really strong adoption and attach rates on those products within your customer base. So maybe just talk through the -- both the -- how do you see the evolution of that competitively? Do you -- is there a way to think about the unit economics of a customer that's spending $1 today with you on the core JIRA products that, over time, a percentage of them that you believe are going to ultimately move to those products? And is it a replacement? Or is it a surround the opportunity? I apologize for the multipart question.

Let me take Jira Service Management first probably. And so we announced today at the conference we have 40,000 customers using that product. And it's been a big evolution as we've added more features over time. We find that market really attractive because there are both very long-term legacy players in that space. And then there are some newer players, but they operate at a much larger enterprise scale out there. And so we've done really well at much smaller scale bottoms up, growing our base there. And we're not at the enterprise, enterprise scale with hundreds of thousands of people. That's not where we're playing at the moment, but we've got a history of building a product that over time gets there as we build out the features and functionality. Now you're talking about expansion into adjacent products. And one of the environments we're moving our customers to the cloud is that you can much more easily sell them a second and third product. You can much more easily sell them a premium and an enterprise version of the products. It's easy to get the marketplace apps to run. So there's a lot more opportunities for us to do that there. And there's also products we haven't built yet that will sell in the future. And so it's hard for me to say, okay, a dollar in today of whatever customer gets me this in the future because all those vectors we're getting better at every single year, including cross-selling the stuff we've already got that we have. And so I'd hate to put it in some sort of number out there also because I think that we're kind of pretty early in what we -- what is possible in those areas. On Jira Work Management, like we have Trello and Jira Work Management, we have Confluence, lot of products we have in that space. And if I think about if I roll all the way out to when we started Atlassian, we originally thought we were helping software developers to work better. And then we rolled forward a couple of years, and we realized actually we don't help them write code. We don't help them in sort of software IDEs or anything like that. What we help is we help teams of people to collaborate. And those teams of people who collaborate, well, they want our products, that's what we do, we improve that. And it just turns out that software developers were the most highly collaborative, cross-functional heterogeneous teams like and so they were the ones that adopted our products first. But what we're seeing now is both software developers touching more of the organization, if you like, digital transformation. Every company is becoming a software company on and on. So HR teams, legal teams, marketing teams, support teams are all tied into software in ways they weren't before. And even teams that don't touch software have now realized that they're also heterogeneous teams like specialization, working in tighter time lines and deadlines. So they're now looking for solutions that solve that problem. And so kind of that's the reason why we get really excited about sort of that larger TAM opportunity there of helping collaboration well beyond sort of that.

Why don't we go with Ittai next?

Ittai from Oppenheimer. My question was with regards to Work Management. Really appreciate the number of customers on IT Service Management. Maybe we can get some more transparency on the Work Management side. How many customers you have on the Work Management side? And also, maybe you can parse it a little bit more. When I talk to investors about your Work Management business, there's a sense that the product is still very technical at least when it gets to Confluence and Jira Work Management, whereas companies like Asana and Monday feel like a better of match against a Trello one for one from a capability, but also from a user standpoint, much more marketing team, sales teams. And so I'm trying to gauge how much of your progress in that category overall is really a top-down driven because you have presence on the IT, on the technical side that influences the purchasing decision on the nontechnical side as well versus truly a bottoms up borne at a marketing team, borne in the sales team? Are you able to land there effectively? Are you able to compete effectively against Asana and Monday, specifically in those areas where you're not coming with a technical edge into the sale itself?

Why don't I start and then Mike might want to -- or Joff actually want to add on to that. In terms of like landing a new customer is a relatively expensive thing to do in the market? Some people need to put billboards on the 101 in San Francisco, some people -- if you look at many of our competitors and peers, they spend a lot more money on sales and marketing in order to get that new customer out there and we could do that, but we sort of -- we've historically looked at what are the most efficient ways to get people to use our products. And so the existing 225,000 customers we have today is a way more efficient way to touch other parts of an organization than it is to go and try and find that other part of the organization via a billboard. And so obviously, going from our existing customer base out is very, very efficient. If you look at Trello, one of its advantages has been that it's really spread by word of mouth rather than sort of any outbound advertising on Google and stuff like that. So we've actually built up a huge user base of Trello, an amazing brand, without having to spend that money on sales and marketing. So that's a background on the customer acquisition side. I pass to Joff then for the product.

Yes, I was going to double down on where Scott started to take that. If you look at our product portfolio, we've got multiple land vectors that are emerging in the Work Management front, and that's exactly where we want to be. You have Jira as a land machine, you go from Jira software, you start to move out inside of the organization. That's why 2 years ago, we made an investment in Jira Work Management to really make that the kinder and gentler version of Jira. So we've got that one land mechanism working. It works really well for companies already behind Jira or if they want more structured top-down governance, those kinds of -- that's the basics behind that. The Trello machine is another land vector. So we came out and we said yesterday that we have 95 million registered users there. So when you talk about some of these competitors that you're seeing, we're coming at that with multiple products, right? So we've got the Jira thing, you've got the Trello thing. And then as well, we have Confluence. Confluence when we made that free recently. What we started to see is that too is becoming a great land vector. So when I look at the competitive set, who have a single product and then you look at our positioning in that market where we have multiple products that are allowing us to land, that's one benefit. The other benefit is that -- these really are differentiated markets, right? Sometimes I use this example with folks on my team. You go into a Home Depot and you see a power drill and you're like, oh, a drill is a drill, but there's multiple lines, multiple product lines, and it winds up that those multiple product lines are predominantly owned by just a couple of companies. So one of the advantages that we have with the Jira Work Management and Trello is they're attracting different parts of the market. Trello as Scott said, is really that bottoms-up adoption. Our marketing team is out there. Someone on the team starts to use the product. And then it starts to balloon up and become a team product, whereas Jira Work Management, its strength is in the power of Jira. It's particularly strong where we have a Jira presence in organizations, which is a massive number of organizations. So we like the fact that we're coming at this market from multiple angles, and we think that's a feature of how we're approaching it.

So I'm going to switch it up and take one from the virtual audience. Michael Turrin from Wells Fargo. The materials discussed open DevOps framework not trying to be the end-to-end tool chain. Can you expand on what makes core products that central nervous system and how that creates opportunity for Atlassian to sell package additional products. Scott, do you want to take that one?

I just missed that because the microphone's hearing. You said DevOps?

About open DevOps and how that creates opportunity for Atlassian to sell additional products?

So there are some companies who try and be all things to their customers, right, solve every use case. And there are other companies who play a very small part of -- they're very specialized in what they solve for a customer, one very small piece of it. And what we have found, particularly in the dev market or what we're seeing it more broadly as well is that there's so many different tools needed to solve solutions now like you have even in security, supply chain security, you've got security scanning like there's a list of security products. And every couple of years, there's our newest of security start-ups out there. And at Atlassian, what we've always tried to solve is teamwork problems, not necessarily trying to solve the technical problems that are involved with anything out there. Maybe Jeff Bezos said like, "Work on the things that won't change rather than things that are going to change every couple of years, that's the way to build an enduring company." And so what we want to do is that still means to happen with that work still needs to be put together, but there's a coordination approach that needs to happen to bring those products together. So if I take source code, kind of maybe a more specific example, there's GitHub, there's GitLab, there's GitBucket. There has 3 players in that space. What we have done is built integrations with all of them and said, right, if you have source code, we're not going to care what you've got, how you use it. If you have source code, we can use that information to give you higher level reports, high-level kind of insight into how your source code is working with your deployment is working, with your builds are working with our security software. And so if we can be that coordination layer across all these different point products, I think we play a pretty valuable part in the ecosystem. And from a philosophical perspective, we partner really well. We have a history of doing that over a long period of time. And like we've -- we allow people to put higher value experiences in our products. And so when we say, well, we'll partner, well, actually you put your pixels in our product. And that makes a richer customer experience. It's a little harder to do. But many other companies are not willing to sort of allow a third-party to put things inside their products. And so we believe Open DevOps, we started that term and the movement, I don't know, a year or so ago. And we believe that that's the way these products are going to evolve. And we have -- don't have any desire to go into some of the small, specific niche verticals to try and solve them for our customers.

Thanks. Why don't we go with Arjun.

Arjun Bhatia from William Blair. So 3 years ago, I think you called out IT as a market that you're going to invest a lot in and double down in. As you look at the next 3 years and where you will allocate R&D resources across your 3 markets, does that change at all? And is Work Management the next phase of investment for Atlassian? Or is there still room in Agile DevOps and in your IT markets?

Joff or Mike, do you want to take that one?

Mike, do you want to start or you want me to start?

Sure. I can start. Look, we have a whole session on that coming up. So I don't want to give away too much of Session 3. Suffice to say, obviously, we believe all 3 of the markets we have at the moment are incredibly large opportunities for us. I'm glad you highlighted ITSM example. I hope a decade from now, people look back and say, "Man, Atlassian is a company that keeps telling us they're going to go do something and then they go do it. And it's even better when they did it than when we first heard it." I think in the public market arena, ITSM is probably the first example where we said 3-and-a-bit years ago, we were going to double down. I remember being on earnings calls and people like what exactly does that mean? And what are we going to see from that, et cetera? And 3 years on. I think from an investor point of view, you can see we've had huge success at delivering on that promise, and we'll continue to do so. I think we're as excited about IT today as we were 3 years ago in terms of its future possibilities for us and our ability to deliver unique and differentiated products at the price and -- in our model and continue to grow that way. I think what you're hearing from us is all 3 of our markets at the moment, we believe, have great opportunity to continue to grow and go forward.

Steve Koenig.

It's Steve Koenig with SMBC. I'm wondering, maybe just 2 questions that are kind of tied together. One is you've got a currently addressable opportunity of $29 billion, but the broader opportunity is so much bigger, $176 billion. What are the things that allow you to address the broader opportunity that aren't in the more narrow opportunity? And maybe just linked to that, I'll toss this out there as well. So is there an opportunity for you all to extend your product reach and your go-to-market from a sort of a bottom-up motion to like an enterprise-class sale? Does Atlas play into that? And does the Jira Align play into that or does that get surpassed by Atlas et cetera? So just some kind of random thoughts that maybe you guys can comment on.

Maybe we'll take the second one first. Cameron, do you want to take the second one?

Yes. Thanks for the question. As far as doing an enterprise class sale, we've been doing it for quite a few years now. We've still been able to do that as we've gotten closer to our largest customers over the last few years, we have invested more, but while keeping our go-to-market and that kind of leading efficient in the industry by partnering with our solution partners, but we also have invested in direct account teams, whether it's technical account managers, customer success managers, or strategic enterprise advocates. And our acquisition of AgileCraft and now Jira Align really upped our game because that was actually one of the first products in our portfolio that was only for our largest enterprise customers. And I'd tell you 4 or 5 years ago, I couldn't pick up the phone and call a CIO, we didn't know any right? And they're probably calling us and we weren't picking up the phone. Like it's just the nature of that bottoms-up adoption. Yesterday, we had a CIO Executive Advisory Board. We have CIOs of the largest companies in the world, meeting with us on a quarterly basis, reviewing our road maps, talking about strategy and largely to standardizing on our product. So we are -- plenty more to do there, but we are definitely -- and as far as our ability, like we have thousands of enterprise customers. We're still just starting to build these relationships with the biggest ones, but we've set a good foundation to customer base. And you'll see that continue to drive growth while preserving the SMB flywheel thing that feeds the beast, so to speak. So yes, we continue to do that. Jira Align, obviously, was a critical part of the story for most organizations that largely need the structure, the compliance, the requirements of their software development teams as they want to roll that all up to their company goals and objectives and have the ability or culture by nature to provide that type of structure. That is one way to attack the problem of tracking all work inside of an organization to your business outcomes. Not every organization has that culture or structure. Many organizations want much more autonomy and their teams, but still want to drive alignment in a different way, that's where Atlas comes up. Atlas isn't all about standardizing on one tool or one structure. It's about let everyone work in the tools they want and provide a layer on top of that, that is simple, easy to use, that can drive alignment on goals, dependencies and projects. So it's 2 different solutions to the same problem, but largely, there's different types of companies and different cultures, and we have -- we can answer either one.

On the TAM expansion side of things, sort of addressable versus title, there's no one thing, I think there we're going to get better at reaching as we add products, as we build more products as we do more marketplace. So there's no sort of one tipping point where I'd say, we need to acquire something to make a larger part of the market.

I just want to comment one thing on Atlas, if I can, because I think it's been picked up by a few people, but I think it's apparent. As you watch our longer journey over the decades, you see us starting to add as we get in IT relationships with different parts of the customers' company and different data objects that we can play with and deliver value on. Atlas is a teamwork directory. So at some point, it's the first time we've had their manager object in the Atlassian platform where you can see someone's manager, you can see the org chart. That doesn't mean we're necessarily going into HR-type directories. What we're trying to really do is take the HR information, the org chart and show it to you in the context of knowledge that we have about the work projects. And as Cameron mentioned, very importantly, goals that the organization is doing, that's a truly unique position. But yes, on the building block levels, we are continuing to add out high-level enterprise functionality like an org chart which exactly as you said, goes to the sort of things the CIO wants to see that now exists in the Atlassian platform so we can use that in other places, again, to further differentiate other products that we have, for example, in JSM, you can automate things based on the manager now that you couldn't beforehand, which very few of our competitors can do, et cetera. So it just goes to our long-term extension.

All right. We probably have time for just one more, how about Fatima.

Fatima Boolani from Citi. Maybe a question for Cameron. In the context of the accolades that the JSM product has been receiving within the context of the ITSM market, I'm curious what it is that the product needs or what you need to do from a go-to-market perspective to really start punching above your weight and maybe go head-to-head with some of the very larger gorillas in the ITSM proper space.

I like that. Thank you for not calling out said gorillas. Listen, the -- everything that we're doing at JSM I call is like it's just the heart of the Atlassian model right? High velocity, I mean we talked about 40,000 customers. We don't talk about the thousands of free JSM customers that only have 3 agents running, right? That time to value, overall cost of ownership, completeness of solution, and ability to innovate, you look at how much -- how quickly we've been delivering features over the last 2 years, like every quarter, there's something sizable or even if a customer, large enterprise. Maybe we don't hit all, we've got 80%. They just see that velocity and they go, okay, if we're not there now, we're going to be there, and we have teams that are meeting them. So from an R&D product perspective, 3 years ago, when we staked that claim, we've been driving on it. just you see us knock off those new capabilities. And more importantly, that new customer acquisition is largely expansion into our base, right? I'd say we -- why does JSM win? Like 2 big questions. One is do you believe dev teams and IT teams are going to come closer together in the future. Despite every CIO is going to be like, yes, like well, if you believe that they should be working on one platform. Atlassian is the only platform that can support both your development teams and IT teams' needs while keeping those teams aligned. The second question is, with every other vendor in the market, is there another vendor that can give you the time to value, the completeness of the feature set, the out-of-the-box integrations, the core integration with your development teams and overall total cost of ownership profile that Atlassian has, we haven't seen it. So that allows us to drive our absolute incredible fly flywheel motion. And then we also, of course, our enterprise advocates. We have dedicated enterprise advocate motions going in and talking to IT operations managers and CIOs about those expansions. Like I said, it's been working swimmingly.

The only thing I -- because I just came from a lunch and I was meeting with a bunch of CEOs. One of the things that you also find compared to some incumbents in that arena is that we really are an 'and' story. So while you have -- we won't name names, but this person was saying that, well, we have this very large investment with another company here. In order to get a marketing team on to that other installation, it was going to take us 8 months. And in addition to that 8 months, then they're going to be in this queue where it's a far more complicated product for them to actually implement. So what you see cropping up and a lot of these organizations JSM continues to be -- it has these outcroppings that are growing up, and we love that because it gives people familiarity with them and come renewal time, we hope that you understand just the power of all those teams getting on to JSM.

All right. Thanks, everyone, for your thoughtful questions. So that will close out the first Q&A, and so we'll jump into Section 2, where we talk about the Atlassian platform. How it benefits both our customers and Atlassian. So before we jump into the pre-read, we'll share a brief video about how Sprout Social is using our products to work differently together. [Presentation]

All right. I hope you enjoyed that video. So we'll go now into our pre-read for Section 2, the Atlassian platform. The link is now available on our site and as well, you can access it via the QR code on the screen. We'll give you 20 minutes to read through this document. If you'd like to start dropping questions into the Q&A, go ahead and do so. I'll see you back here in 20 minutes. [Break]

All right. So we're going to begin Section 2. And this time, we'll be joined by our Chief Operating Officer, Anu Bharadwaj. Again, we'll take 25 minutes for this Q&A session. Again, we ask that you keep your questions focused on the materials in this Section 2, and we'll have plenty of time in the next session to address any other questions. Again, we'll take questions from the audience here as well as questions virtually. Let's start with Anouk.

Anouk from Durable Capital. My question for you is, obviously, you guys have doubled down on cloud. You talked about 40% of your R&D going into cloud over the last few years. And just with the geopolitical environment changing, I'm wondering if it's changed your view philosophically about, in many ways, cloud is kind of synonymous with globalization and whether in a world in which there's potentially less globalization or forces against that, whether your philosophical approach to cloud versus data center server has changed?

I think we say 40% of it goes to platform, maybe not cloud, but your question still stands. I think it's too early to make any call on the geopolitical implications of the things we've seen recently and how they might affect global trade and globalization out there. We're in a fortunate situation that we have both cloud and on-premises deployments of our products. So we have the data center versions of our products that our customers can still purchase and buy. We told our customers that's not the long-term destination. They -- our customers want to go to cloud, overwhelmingly, they want to get there. And so I hope for everyone's sake that there's not a new world order that is anti-globalization. I fervently believe in the benefits for society for that, but I think it's way too early to make any call there.

We'll go with Jackie.

It's Jackie Glynn from Glynn Capital. You all spent a number of years really perfecting the platform and investing in the platform. And it's nice to see last year with Point A, you started to see a little bit more in R&D coming out. And I'd say my great takeaway from the keynotes yesterday was just a lot more features than a couple of new products. What do you think over the next couple of years is the right cadence for new products and new features. And how do you guys decide like this is how much feels right to you.

Mike, do you want to answer that?

Sure. Jackie. Look, I don't think there's a right cadence, right? It's not like we sit around and said we want to ship 3 products a year or 5 products a year or anything like that. I would say it depends on certainly where we see opportunities in talking to customers. If you look at Compass and Atlas has 2 new product examples, both are based on internal systems we've had for a decade. We have plenty of other internal systems and tools, but have taken not just the platform in terms of the underlying innovations to deliver it quickly, but also significant time with customers trying to understand is there a space here and you think to create. That makes it a little hard to predict because we're not trying to ship 3 things per year. We're trying to deliver customer value. It still goes, though, to the innovation the platform allows us to deliver, I would say. So having a great platform will allow us to take advantage of opportunities we see in the market and/or with customers faster, better and to deliver products that are more full-featured earlier on. So what you see with both Atlas and Compass is an example of our platform, delivering products that are at the 1.0 stage, far more full-featured than anything we've ever delivered at 1.0 stage beforehand because of all the platform capabilities, they kind of get for free, not quite free but almost free, which I think has really resonated with customers so far. So we don't have to deliver sort of very early on things that don't have all the capabilities our customers expect from a Enterprise perspective.

Yes, I'll just add on to that. Just on the customer demand side of it, I mean, just the -- in fact, we launched 3 new things yesterday, all part of the cloud platform. It's really just one of the advantages we have, we're a multiproduct company and usually our history when it was all on-prem customers go run to the website and download the bits and get a server going and run and then get a license key and 1.5 days later, they could try it. Now all these customers are on the cloud. I mean they can log in, while watching the keynote and it's already turned on in the app switcher. So our ability for -- our customers' ability to consume many more products from us is not limitless, but it's much broader than even the new products that we've launched today. So it's one of the advantages go-to-market and get it in their hands as quickly as possible, and they use it for free and once they hit a certain gates, they start paying.

Why don't we go with Gregg?

Gregg Moskowitz from Mizuho. Further on the platform side. So you showed a chart where, and I think many in the audience are well aware of this anyway, but chart where you showed your R&D expense as a percentage of revenue and how much larger it is than other companies. And so when I think about that alongside what the 6-pager really, I think, emphasized, which is the powerful benefits of your shared services architecture, is the combination of those 2 things, does that sort of act as a force multiplier in your opinion as it relates to your overall platform capabilities advantages versus peers? And then just a very quick clarification on the cloud net expansion rate over 130%, James. If I recall correctly, last year, small in -- sorry, medium and large customers were about 130%. I think your total net expansion rate in cloud was 121%. So I just wanted to confirm if it in fact, has risen from 121% to over 130% in the span of a little bit more than a year.

So why don't we start with actually Anu on the platform question, and then maybe Mike can follow-up after her.

Sure. Thanks. It's a good question. And a short answer, yes, it's definitely a virtuous loop, what you call the force multiplier, the combination of huge investment in R&D, coupled with where we are investing it. So on the very simple side, if we had 10 units of dollars to spend and we would spend that by splitting it across multiple products, that would just be a linear way of developing. Whereas now we are saying instead of 10, we spend more than that. We spent 40% of our revenue on R&D, and we choose to spend it in a way such that it gives us multiple returns. So all of the platform -- the different layers we have shown you on the page, effectively, all of those benefit existing products, but the kicker is that it also benefits any future new products. So to Mike's earlier point, all of the Point A products that inherent that. So you'll keep seeing us reap those benefits more and more over time such that they compound. So it's definitely a force multiplier for us.

And in terms of the net expansion rate, yes, your math is correct. So we're very happy with the 130% overall number. And then for the larger customers, 140%. And I think this is very much reflects a few of the different dynamics, the strength of our cloud business generally, but particularly our ability to continue to increase the user base as a customer. The impact of both the premium edition and the enterprise edition now increasingly as well. That's an important part of this overall picture, and we shouldn't forget cross-sell, which we've already been talking about this afternoon. And I think there's a lot of opportunity there, as we've all been discussing, there's a multiplier type effect here into the coming years. So we're pleased by that result.

All right. So we'll take a question from the virtual audience. Next is Keith Weiss from Morgan Stanley. When considering the 10% -- 10 points of growth in cloud coming from migration, how should we think about the reduction in data center revenues that drive that number? Or asked in another way, on average, $1 of revenue -- of server revenues translates into how much cloud revenue? Scott, do you want take that.

The way I think about it and there is so many puts and takes, and the great thing is that all of our pricing is available on our website. We give very limited discounts. We have given some discounts to encourage people to the cloud. They're also on our website. So if you want to go deep for a weekend, understand the exact puts and takes across moving someone from server or data center to cloud that is all available or public, crazy. My rule of thumb on this is that our small customer level, it's roughly a 1:1 dollar basis and like it's puts and takes underneath that. Some people consolidate licenses and kind of instead of buying 25 seats or 100-seat, they only buy 93 seats in the cloud because you can buy per user. But roughly the numbers are 1:1 basis in the small customer size. At the larger customer size, it's kind of a 2:3 ratio. So for every dollar we were getting for a sort of data center customer, we're getting $2 to $3 in the cloud. And that's more of a steady-state basis. It may -- we've given some discounts to get people across in the short term, so it may not be $2 to $3 this year but as some of those discounts roll off, that's kind of a rough rule of thumb.

Why don't we go with Alex.

So this is a follow-up to the question that Keith just asked, which is -- if you look at the growth rates you talked about in the letter, the 50% cloud growth in both fiscal '23 and fiscal '24, with only 10 points in those -- in both of those years coming from migration, what's the right way to think about both -- the balance that you assume goes to data center and the -- and then correspondingly, the growth of the data center piece in fiscal '23 and '24.

I can answer that question perfectly. But one thing I'm thinking about is that we set end of life for our server business. And so a lot of the focus has been migrating that server business to the cloud. Some of them aren't ready to go to the cloud yet, and so they've chosen to move to a data center product. And that's fine because long term, we've yet to find a customer who, long term, doesn't want to get to our cloud. It either we're not ready for them or they're not ready to make the migrations, but they want to get there. If I look at -- about 1/3 of our migrations to the cloud today are already coming from our data center products. And so I don't see these migrations as a thing that finishes in 3 years' time with our end of life of our server products. I view this as an ongoing going to happen over a long period of time. And so maybe people go directly from server to cloud maybe they go via data center, maybe they've really been on data center for 10 years, not quite 10 years, but almost 10 years since we've had that product and they'll move to cloud over the next 3 years. And so migrations will be a constant, I guess, feature of the Atlassian story for the coming years. Exactly what that looks like, again, migrations aren't something we can control directly. We can influence it by end-of-life-ing something or pricing power or discounts to move people across or making it easy to migrate like all these sort of carrots and sticks we can use. But at the end of the day, a customer has to say that they're going to move in this particular month, quarter or year. And overall, if I look at how well we forecast that migration, I feel really good about the forecast versus the actuals that we're getting internally, particularly given how much variability is outside of our control. So I don't have a great -- I can't give you all the puts and takes there, but well beyond the end of life of server, you will hear about us migrating customers.

Yes. Just to add on a little bit there. Obviously, this past few quarters, we've been talking about our expectation for subscription revenue growth for fiscal '22, so data center plus cloud. And so obviously, we'll have an update on that in 3 weeks' time when we do the earnings call. And current steer was 50%. So we've been pleased by that. We just thought it would be helpful to give you a look into our view of cloud for the coming 2 years, given all of the focus here that our customers have on the cloud and their intention to get over to the cloud.

Why don't we go with Ittai?

I want to talk about pricing still. A few years ago, you've always prided yourself of being the lowest priced product in the marketplace, and that was a great value proposition, especially for customers. With the transition to the cloud, clearly, your prices are, in some cases, especially as you go bigger and bigger customers doubling, tripling, quadrupling for customers. So help me understand in 2 years' time when this transition is over and when you kind of settle in, what is your pricing at that point relative to your competitors? How do you maintain that value when your pricing is going up substantially through that time frame? And then just a follow-up to the question before about the expansion rate going from 121% to 130. How much of that is truly seat driven versus price increase driven. I'm guessing -- I mean, every vendor right now is raising prices on everything because of inflation. I'm guessing you've done that as well along the way. So I'm trying to parse volume versus price in that equation.

I can start with a comment or two.

Yes. And Cameron, you can talk about the...

You can see what we've been doing with pricing for the last few years. It's all on the website. Most of our pricing mechanics has been getting the server and data center prices up incrementally every year to get up to match our cloud prices. So it's not a -- so people weren't choosing on-prem simply because it was the least expensive thing on the website. That said, when you look at our legacy historic prices on server and data center, which were quite inexpensive compared to our cloud prices, yes, customers were like, well, that's actually a big jump, but it's still $5 a user a month, $6 user a month. compare that to when I talk to CIOs or procurement teams, like we're still a fraction of what most mission-critical software applications charge. Like, so the value we deliver, even with our new cloud pricing is easily justifiable, requires a bigger conversation than we used to have, but we more than capable we having it. But the reality is we stand by it and compared to our competitors, we're still less expensive. That said, we also gave optionality with the additions. You want something cheap, great, use the free version. You can go to standard version and like now you have options to go up and get more capability for us. So if you are -- want to be financially conservative, you can stay on the standard option or you have options to get up the chain. It gives us more flexibility for our customers. But never do I hear customers go, "Oh, you priced us out." Really, when you look to the alternatives, we're still the best value in the market. And you see with our cloud prices, we did a small cloud price increase last year. You saw all of that, but nothing where it's changing the game. It's something not nearly sizable as our on-prem was as we've closed that gap between the 2. And I think you see that. I think the overwhelming growth continues to be not from price increases in cloud, but from organic user adoption, addition upgrades, cross-sell and actually and very high retention.

Yes. And just to emphasize that last point, in terms of the pricing effect in cloud, recall several months ago, it was about a 5% increase. So put that 5 points in the context of 130% and 140% that we were just talking about in terms of net expansion rate, I think that gives you a sense for the relative import.

I just wanted to comment one thing, James, if I could, on the philosophy behind Ittai's question, our philosophy in the cloud is no different than it has been in the past. Again, our philosophy is not to be cheap. Our philosophy is to be incredibly good value for what we deliver. So you could argue the enterprise prices are no longer cheap in the cloud. But I would say, hang on a sec, if you compare to a competitor that has FedRAMP, data residency, GDPR, BYOK coming, et cetera, all of that for the price that we deliver is incredibly good value compared to getting that level of enterprise service in a cloud offering from a competitor. So we still have the same philosophy of trying to be significantly more price-to-value ratio competitive than any other vendor.

Right. Why don't we go to Luv Sodha.

Luv Sodha from Jefferies. Just wanted to ask on the confidence that you have in giving the cloud growth targets for the upcoming 2 years, given the macroeconomic uncertainty that we are facing. And then maybe on a longer-term horizon, how do you think of what percentage of revenues could come from cloud, given that you've seen 1/3 of customer migrations coming from data center?

James, do you want to take that?

So in terms of percentage of cloud for total revenue, I would expect, given what we are hearing from our customers that they're very clearly saying that they want to be on the cloud as we continue to invest in the platform, the product capabilities of our cloud offerings. We're going to see an increasing percentage of cloud revenue as a proportion of the total. So the customers will decide that at the end of the day. But I would expect it will be a very clear upward trajectory of cloud as a percent of total revenue. The macro, do you want to...?

So there's a couple of things on the macro side. One is Russia, Ukraine, obviously, very topical at the moment. Russia makes about 1% of our global revenue. In our forecast, we've just taken it to 0. So that's a 1% headwind that we weren't facing previously. We'll just keep it at 0 until we do something vastly changed, but for all of our forecasts like so you don't have to sort of keep asking us every quarter what our exposure is, we're just going to take it kind of out. Broader Europe, we haven't seen anything from our discussions with customers, with partners that want to change our macro kind of view in Europe beyond, say, Belarus, Ukraine and Russia, those 3 areas that have been heavily impacted. Outside of those areas, you hear a project canceled here or there type of thing, but nothing that's probably in the normal run of business. And so that gives us some confidence there. And then lastly, Atlassian was a business that was founded in 2001 in the dot-com crash. We went through the '08, '09 financial crisis, lot of youthful people in the audience here, maybe like who didn't even have to go through that and some other people in the audience who will also weathered it like we did. We're seeing what that looks like. In those in '08, '09, we grew significantly. We wish we'd be faster, but we didn't go negative. And it was an opportunity for us to invest in staff. We picked up some of the best staff who are still with us today in that particular time. So and the reason I think we can do that is, a, we're very price competitive. B, we almost don't hit on any of the CIO's radar, right? So when you go top down and say, my expenses in a business last year to its mission-critical, like I talked to CFOs I talked about recently. They don't even know like what Atlassian -- what they spent with Atlassian, because it doesn't reach their budget. So from a trimming spend perspective, we don't hit that. And then lastly, though, we've got a lot of stuff, collaboration across the entire company, a lot of developers and all the software teams use us and software teams are not the first thing to get cold in a macro contraction. You often see that as discretionary marketing spend, sales and those types of areas. People are allowed to cut back on those sort of R&D investments that have taken so on to build up. And so all those areas give me confidence in a macro thing. Obviously, we've put out a 50% number for 2 years. If the world blows up, we'll have another conversation around that, but we would hate to be too tepid and sort of try and hem and haw around these things because you never know what's going to happen in the coming years. And look, we just had a pandemic. And I don't think we had particular tailwinds through that unlike some companies, but we didn't have headwinds through that either. And so all that gives us really good confidence coming years.

And Cameron, I know you've spoken to a lot of customers this week, actually, you might be able to add some color or 2.

We also want to call it the first thing that Scott goes to and you have to call something is sales and marketing. So -- but I'm still up here. I talked to a handful of our solution partners this week, what's the demand different market. Every single one of them as said, hey, our only problem is hiring skilled people to actually deliver upon our backlog of requests from customers, and they haven't seen anything slow down in that. Also the last quarter, I spoke to 20, 30 big European-based customers and every single one, largely is just the digital transformation wave, cultural transformation wave that they've been riding for a couple of years now. And many have many years of those products to keep going, and we're a critical component. So I have yet to see anything even remotely slowdown related to the macro environment.

All right. We probably have time for just one more question for this section. Why don't we go with Aaron.

Aaron from Ashler. Correct me if I'm wrong, but I think Atlas and Compass are the first products that you've launched that are cloud only, so they don't have server and data center versions. I'm curious kind of why you made that decision now and how you're thinking about kind of cloud-only products as, kind of, lever to drive an even faster pace of cloud migrations.

Anu, do you want to talk about the benefit of the platform there?

Yes, I can take that. Atlas and Compass are cloud-only, though I'm not sure they are the first products that are cloud only. Trello is cloud only. A number of our existing products are cloud only. But I guess the larger point is with Point A, we are really trying to make sure that the accelerator is built on top of the existing platform and the existing platform is all cloud platform. Of course, the obvious benefits of the cloud platform is much of what Cameron mentioned, easier go-to-market, available instantly. We are running all of the products for you. So be easier for customers to try and start from free easily evolve organically across our additions, et cetera. And the cloud platform provides pretty much all of the building blocks for these products. So pretty much everything we build and Point A is going to be cloud only, and that's intentional. We want it to be that way because we believe that the best experience and innovation is possible using cloud-only experience.

And just lead on that, I had a dinner with a Head of Engineering of a large health care company yesterday, and he was talking about Compass. And they're not on cloud yet, that is like, oh, we got to get the cloud sooner now because it's one of those they got really excited because they had built a largely homegrown, poorly used version of Compass and the fact that they saw, it's like exactly the use case he needs. It gives that extra, that initiative to move to our cloud.

All right. I think that's all the questions we can take for Section 2. So now we will move on to Section 3. Actually, before that, we'll take a short 10-minute break. [Break]

All right. Welcome back. So now we're moving on to Section 3, which is all about building an iconic 100-year company. And so now our third 6-pager document is available. You can find it on our site. Again, we'll give you 20 minutes and then will reconvene. [Break]

All right. Hope you enjoyed that last 6 pager. And so now we'll bring Scott, Mike, James and Cameron back up for the final Q&A session. So for this session, we have a little more time of about 40 minutes. I want to start with Keith.

Keith Bachman from Bank of Montreal. First, James, I hope you enjoy your last public analyst event going through the process. And I want to direct this to you on some of the margin comments made within this last... First on the gross margins, you said approximately 80% through FY '25. Your most recent quarter was 86%. Is that kind of a gradual trend towards '25. And then secondly, to the mid-teens number in '23, I think you're saying that sales and marketing will remain relatively consistent at 15%. But where do you see incremental deployments of dollars? You mentioned R&D, but is that -- if you could just flesh that out a little bit on how we should be thinking about that journey to mid-teens? And finally, is that kind of the bottom, so to speak, as you envision we look further out?

Yes. So starting off with the gross margin, you may want to have to ship out the operating margin as well. I would expect it would be a gradual pathway. Obviously, FY '25 is a long way away, but we felt it was helpful to give you a steer for what the unit economics of the business will look like as we become increasingly cloud first. And I think that will represent work that we'll continue to do, as we have in recent years, on improving the efficiency of the infrastructure of our cloud offerings and so forth. We've talked about putting some additional effort into support in this interim next 2, 3 years to help with some of the larger companies migration efforts and that sort of thing. But net-net, I would expect it to be a sort of a gradual slope as we become cloud revenue as a greater percent of the total revenue base. And in terms of OpEx, yes, it's R&D story, but do you want to talk more about that?

In certain investments, I think our ratio of sales and marketing to R&D will remain roughly the same, but both of them will float higher than where we are today. I don't see any drastic changes in what we're doing. We can just invest more in both that. Some of the migrations that we're moving across for customers is R&D efforts to tick off all the certifications. If you were the candidate yesterday, we said we've done some of them. That the faster we move to ticking them off, the faster we can bring customers on, and then quickly get the uplift of that revenue from people moving across. But there's also some handholding for some of those customers, as larger customers, to move them across like what is done by third parties, and our contract sort of channels partners that are out there that we'll need to help out more in that area. In terms of like kind of what does it look like over the long term. We're keen to sort of tell you, you know, if I go back, like Atlassian's track record of investing in things, we're pretty proud of like having a very strong capital allocation return philosophy in terms of how we do that. And the reason we want to bring you all on this journey like as investors is that we see kind of abundance of opportunity right now across all 3 markets, but particularly things like migrations, which have a relatively short-term return, like we said to get the dollars back the day they migrate. That's a pretty short-term return. ITSM, we're still adding features and gaining market share with everything we add to that market and touching customers. So they're very kind of the top of the list of the investments, but we have more well below that. And so what we're looking at and why now is a good question. A, those returns were particularly attractive. But b, we're now able to invest in terms of talent acquisition. So we've got our talent acquisition engine humming very well, so our ability to attract staff is great. As an aside, we're maybe a top 25 employer in the world, which when Mike and I started Atlassian 20 years ago, we never could have picked that. But we are known around the world as somewhere people want to come work. So that is working really well. And we're now seeing members of our team anywhere as well, that half of our staff are now hired outside of our office locations. And so we're now tapping into a whole new base. So we can get people in. We've got attractive opportunities to go target. And so what we want to do is invest over this next year to accelerate the way we can get those. Now long term, this is not a systemic thing. It's not like our cost of customer acquisition is going up or increased competition in the market and so we've had to really go hammer and tongs against it. And so long term, the margin profile should look like what you've seen historically. Now what is long term and which cell do I want to put that in my spreadsheet and so what I can't give you a guide on that. But I think sort of terminal value is like, "Hey, Atlassian is going to get back to the margins you've seen historically on a much larger basis as we grow faster." So when I think about it, we said 15% cloud growth in '23, '24, some of these investments, like we hope to then make sure we can continue growing in '25, '26, and '27. Like I said, that's sort of the long-term time frame we look at these investments over.

If I could just add 1 more thing in terms of the why now, if you will. Yes, we've got all these opportunities in front of us. We've talked about that. But I also think our competitive advantage today is stronger than it has ever been, and that's as a result of the work that's been done in recent years. A lot of this discussion we've had this afternoon around the platform, how that's developed, how that's allowing us to accelerate the pace of new product development, our core products, the way they have evolved, and their competitive positioning, we're in a strong position. So I think it's an excellent time to be going after these large market opportunities.

Why don't we go with Arjun up front here?

Thank you. On the path to $10 billion in revenue, I think you mentioned your go-to-market strategy is not really going to change, right? You'll still be reliant on partners and self-serve. What role do you see the larger SIs playing in that path to $10 billion, especially as cloud takes hold and you move upmarket in cloud with the larger enterprises?

I'll take that one. So the global SIs are always fun. I've worked with him for many, many years. And the reality of Atlassian, just about every single 1 of them, is a massive Atlassian customer. I mean most of those, when they're doing engagements and projects with their clients, they're using Atlassian tools to do that. So we've had that inherent relationship for them, where actually part of their actual core delivery has been using Atlassian products to help collaborate with their users. The next conversation comes down to, okay, what those global SIs can provide from a go-to-market perspective? . As you already know, like our Atlassian solution partner network, which has really grown with us, right? Like when I started here 10 years ago, it was like a 10% shop, and I'm talking to a couple of the CEOs this week and they have 300 people or 350 and it looks like they've all scaled. But even as that existing solution partner network has scaled, they still don't have the scale that a global SI does when it comes down to true business transformation for a large bank or a large telco for something we're delivering in Jira line or Jira Service Management. The amount of business transformation on top of the tech -- like the tech actually tends to be somewhat of the easy part. It's actually how do we build an agile culture? How do we change our practice? How do we run on these new playbooks that requires people to handle those broad challenges, and that's where the global SIs increasingly are adding value. So lots of great relationships with all of them, and we are increasingly turning that relationship from them as a customer to them as a partner. On top of that CIO relationship that we've increasingly fostered over the last few years. The global SIs obviously can only accelerate that more for us. So it's a place we're investing in. We have dedicated teams focused on global SI channel and places we'll continue to make investments.

Why don't we go back to Steve over here?

Just a question I've been curious about in your go-to-market and then maybe more broadly about the company. When we look at employee turnover across software companies, you guys have some of the lowest rates among dozens of software companies, right? What's interesting to me is there are some other very successful companies that run their sales organizations like very hot, so there's a high amount of force turnover with an easy selling model, so they can afford turnover. Seems to me you guys can afford turnover because you have a pretty straightforward selling model that the customers buy the product. So why the difference in philosophy with you? And then maybe just a near-term question to tack on to that. Are your hiring plans or trends may be changing as you've caught up from the pandemic and now there's maybe a little more global uncertainty as we're maybe seeing job postings level off a little bit across the industry?

I'll handle the go-to-market and then let Scott or James handle the broader hiring. But the go-to-market side -- so I hired Kevin Egan from North America Sales at Slack. He came in and runs all of our enterprise advocates and our channel today. And any time you bring in a new leader, you kind of expect a little bit of turnover in the organization. Like we made some moves and reorganized and like no one left, to the point where I was just like, wait a minute, are we being too friendly. Like maybe we should like get more aggressive. And the reality is, this is the sales side, but I'll talk about the marketing side, too, is, one, when you come to Atlassian go-to-market, and I've been in enterprise software companies before coming here, it's a unique beast. Like there's no -- we're not running another play that you've seen anywhere else. You come in and we do things differently, having that ability to do flywheel, growth experiments, analytics, performance marketing, big brand, multiple products, or go to this increasing enterprise motion. It's like you're never going to get bored of the go-to-market teams. And so it's always fun and we have this kind of great culture we've been able to foster. Personally, as we invested in our enterprise sales motions, I was exceedingly concerned that also that culture, that special quirky unique place that we have in the market was going to degrade. But the reality is, we brought in a great leader, reinforced some existing leaders who've been around and been building this with us for quite some time. And we have been able to maintain that incredible culture. Last piece is reps are going to go where there's the most value, where the easiest conversations are going to be, where they're delivered to having happy customers. And I think I always make the joke like 90% of the time when we actually reach out to these customers for the first time, the customers were in an Atlassian T-shirt, right? And as a sales rep, that's like the greatest thing you could possibly have. And our reps only really go after the existing customer base. We rely on the flywheel to curate and grow customers before we even put in the expensive sales resource on it. So they're largely expanding the existing customer base and bringing them to the better versions of what we already have. Hey, you've been on server data center for years, let's take it to cloud, you're going to lock new value. Hey, you've been using Jira software for years. Let's take you to Jira Service Management, you're going to lock more value. That's something we've been able to repeat over and over again. And you're absolutely right, for that reason, our employee retention has been very good.

Can you allow me to question around retention being able to foster culture?

Yes. Our employee retention has been fantastic. People talked about the great resignation, and we haven't seen that. There has been some hyper-acceleration in compensation inside the tech industry. Like over the last couple of years, there's been salaries and equity grants and all these things have gone up a lot. And I think we've been lucky to be ahead of that and sort of do it not trying to be chasing the employees. So I think we did some smart things during the pandemic there. It will be interesting to see what that looks like globally as some of the public markets come off and that makes its way through there. So we don't know how that's going to play out. But we're top 25 employer in the world, no great resignation, amazing retention. We can hire people all around the world in any time zone, and we've committed that employees don't need to come to the office. We're a very attractive place to work.

Why don't we go back to Fatima in the front.

James, for you, just with respect to the operating margin guidance for fiscal '23. Appreciate that there's a very specific mandate just around doubling down on ITSM and the cloud migration practice that you're scaling up with personnel to just get the customers over, but with respect to what Scott just mentioned around wage inflation, how should we contextualize that magnitude of incremental investment in operating expenses over the course of fiscal '23, and how much of the, I guess, optical output of operating margins being in the mid-teens is a function of some of your in-period revenue recognition sources diminishing over the course of the next 2 years.

Yes. I would start by saying I don't expect revenue recognition, say, to have a terribly material impact on things. It's very much driven by our focus on driving additional Atlassians to join us, so that we can get after these opportunities. Yes, we obviously will have a per person compensation item there, as Scott was just saying. We haven't tried to break that out. The significant majority of the increment will really be around bringing new people into -- additional people into the company, so that we can accelerate the rate and pace of our product and platform work.

I would also say that because of the global nature of our employee footprint, vis-a-vis many of our peers whose employees live between 280 and 101 in California, we have the ability to find people in lower cost locations like outside of these hyperinflation environments. And even in the U.S., like finding people in different states outside of this high cost of living locations that allows us to hire people and sort of sidestep some of that. Hoping globally that, that changes, but like I think we have unique advantages versus others.

And an illustration of that last point is our growth in India, which I've been very pleased by, over the last 3-plus years. Remarkably talented group that we've built there really from nothing, what, about 4.5 years ago?

Yes, nothing there. And even in India, which is interesting, we're in Bengaluru because what we found is there are a lot of people who went to America in their sort of 20s, 30s and now they're in their 40s and they have elderly parents, and more of less it's often the responsibility of the older son to take care of the parents. And so they've all moved back to India. And there was a tech center in Bengaluru. So they're all centered in Bengaluru. Even if the parents were in Chennai or Mumbai like, they all ended up there because that was the tech epicenter. As we've said to people that you don't need to work in the office in Bengaluru, you can work at, we've got 8 sites in India now. People are now going back to live with their parents, and we've seen that now and so we're now opening up a much bigger funnel in these environments. And of course, the tenure and so forth of those people is going to be much higher. We're not competing for talent in Bengaluru now. We've got people that are living with their parents or their friends or where they grew up all over India and the alternate choices they have are less than there would be.

Paul, why don't you take the question, over there?

This is Darren Baker from PRIMECAP. So I wanted to bring together a couple of the data points you guys highlighted in here. You emphasized the line of sight to $10 billion in annual revenue, and you pointed out on the third page, I guess, kind of just the trend of how the revenue split has gone between Jira and Confluence on the one hand and then all of the newer products over a long period of time. And even though, obviously, the newer products have added a lot, Jira and Confluence are still well over half of the revenue that you showed in FY '21. So then the last data point that I wanted to bring you around this is where the real question is, you mentioned in here, the longer term work management opportunity is the most significant one in front of us. So as we're thinking about kind of that path to $10 billion potential revenue or beyond it, and you're really thinking about that opportunity coming from work management, should we be thinking about Jira and Confluence still sort of carrying the banner, so to speak, to get to that point? Do they fall under your kind of rubric of work management in that sense? Or are you actually thinking that the newer products of Jira Work Management or Trello or things like that are actually going to be kind of the biggest drivers over a long period of time?

Mike, do you want to take that broadly, and I can add on anything else?

Sure. Look, firstly, just to highlight, that chart I believe is only Jira. Actually, for your information, Jira Software and Confluence is not Jira, so we need to be -- it's not the whole Jira family, so I don't think it includes Jira Work Management or Jira Service Management. But maybe someone can double confirm. Confluence, we put squarely in the work management market. It tends to be as a product. Again, it expands often from software and IT teams, which is a strength for their first documents. It has a far larger viral aspect than any of our other products, Jira software historical products have had in terms of it's a very approachable product by marketing teams, finance teams, HR teams, and there's far more need for them to read the text produced by our software team than the detailed project plan. So Confluence has always had a very high expansion rate, viral rate within customers, which is part of our secret source over many years. So I would expect that to continue. The work management market, obviously, Trello, as Jeff said earlier, it's passed 95 million users and continues to grow apace. The fact that there are 1 billion knowledge workers in the world as we go after 100 million monthly active users as our big goal. Clearly, of the 100 million, a significant portion are going to come from work management, right? They're -- 80% of every company is outside the technology team. That continues to be one of our biggest opportunities. It does not mean, as Scott said earlier, that we don't see significant opportunities in both the ITSM and the agile DevOps markets. So one of our challenges actually is being spoilt for opportunity and saying we're going to invest across all of these sets. Yes, we prioritize them. Yes, we're pretty ruthless capital allocators, I think, inside the business and have proven that for 20 years. But every one of the spaces that we have in front of us, we do see great opportunity.

I just want to add a couple of things to that. One is our platform powers all of this and we are starting to see building a platform is a painful long-term process, right? So my team here and many times we're like, I mean, is it worth it? And we're starting to see like the benefits we get in the collaboration, and I was using our point A product Atlas the other day. And I use it religiously every Monday, I get a report that shows me all the projects I'm watching, and one of them I was really excited about and actually linked to the Sigma design that's happening there, and I could actually add it and comment and netted it all in line and I was like, wow, this is the platform that we built out over the last decade, came to the fore. So for our ability to touch in work management for all, it's not a clearly defined market. It's not like source code or there's ITSM. This is how work gets done across organizations. And our heritage in helping collaborations with software teams and broader teams across the company stands us in very good stead here. But it's like there's not going to be a linear path to that. And I look at Atlas, that is project reporting and so forth and goal setting and teamwork directory across the entire organization. Is that work management for all? I'd like to think it is, but like no Gartner analysts is going to put it in sort of a category like that. But that really helps teams coordinate with other teams across an organization, regardless you are in marketing or you are in finance. That's everything. When I go to James' org inside Atlassian, they use Jira of all types religiously, because we do a financial close process and we have a very tight time in which to close our books and those tasks can be allocated to multiple different people. It's not sort of one person does it each quarter, it's whoever is available and what needs to get done. And so again, those teams use our products to coordinate work well outside of any engineering example. So when I think about markets like Agile and DevOps, it's a very defined market. We're the market leader in that space. I think we went over the long term by being the most integrated in that space and so Atlassian's products become a window into integrated experience, right? And I think we're head and shoulders above anyone else doing that. In the ITSM space, we have a clear market opportunity. We have a very distinct value proposition in a very defined market. We're the only one that can bring Dev and IT together. We have price benefits. We have ease of using, implementation speed benefits. We can coexist with existing large players like that's ours for the taking, work management for all. It's like it's not as defined as all the other spaces, but the opportunity there, and I look around the market landscape of who else has an opportunity like we do to take in that space, I don't see anyone else as well positioned as us. But I can't point to a Gartner Magic Quadrant that tells me like we're ticking 5 of the 17 boxes that we need to tick in that market. We're all working it out as we go.

Why don't we go back to Gregg here.

Gregg Moskowitz from Mizuho. So as a company, you have had an extraordinarily high batting average, but it's not a thousand. And when such failure that comes to mind was Atlassian Stack. And to me, it just seemed like it never got off the ground. And I think in 2019, it was discontinued. But when I think about your product portfolio today, how expansive it's become, Scott, as you just indicated, how tightly integrated all of the components are. Are we now at a point where you are or should be considering adding some bundling or suite-based options?

Yes. Let me talk about that. So we've got plenty of values like -- that we've made mistakes. I think that's the nature of innovation. And we're totally fine with that. I wonder once that a batting average of 300 is a pretty good batting average in baseball, if I recall. I don't play it, but I think it's a pretty good batting average. I think we're well above that. In terms of bundling, when I look at an individual that turns up, they have a need that they need to fulfill. If you want to do a bottoms-up model, you can't say all things to all people in your organization. If you do that, you need to start tops down an organization. You're on a golf course somewhere trying to explain the value proposition you have and it's a very long sales cycle. So to get into a company, we've been very declarative and kind of very clear about we need to solve a problem for a specific user and a specific team. That's got us 225,000 organizations out there. As we then go further afield inside those organizations, more use cases, more users, more seats, like we then find we are starting to have those conversations with the decision-makers in the organization who say, "well, I've got your stuff across 60% of my org, I should put it across 100%, because that would just be easier." And so they start having those conversations with us. We have, over the time, done ELAs across our product portfolio. Many companies that do ELAs are really the initial sale was topped down and there's so much discounting that goes into that particular thing. And you end up in a company where 90% of their sales are ELAs and I think that breeds bad behavior. Now at the same time, our ultimate goal over the long term is that our products should just be kind of free and easy to use inside organizations. That's why we have a cheap pricing policy to make it like a no-brainer to install these products. And so over time, as you got a product portfolio, as people adopt more of our products, we want to simplify the purchasing process. I don't say that is an imminent like thing that we do. We experiment with our biggest customers. We do a few of those. In 20 years' time, will we have a totally different bundling structure? Probably. But I can't tell you what that looks like at the moment. And it's not something that we are running towards because we have so many land opportunities.

I guess, Steve, going back.

Steve Enders with KeyBanc. I want to build on Darren's question earlier around how you're thinking about the opportunity with JWM. I know you just announced the design tab in Jira yesterday. But how do you think about targeting additional personas and expanding broader into this kind of general use cases within the organization?

Yes. Mike, do you want to take that, and I can add some things as well.

Sure. I guess. Look, the design tab, if I start from the inside out, designers and creative professionals, whether they're doing whiteboarding or photoshop style designs or whether they're doing just creative work of all types is a category that we continue to work hard with Jira Software and with all our agile DevOps tools to bring in. Again, I always say to people, the world doesn't start with a set of tasks. The world starts with a set of insights and ideas and those insights and ideas become more formal where eventually you have a road map of things that you're going to build and then you're adding some code and then you're deploying them and you're off. So everything before we have a road map of a set of tasks is ideas, insights, designs, mockups, sketches, whatever you want to call them. That creative world is certainly something that we want to help coordinate better and integrate and connect to. It's an example of the open Toolchain. Don't worry, we're not going to go build Photoshop. Lots of people do that work, right? But just like in the software world, where we say we solve people problems or technology problems, that creative world does not have great solutions for helping you manage that work over time. And that's what you're starting to see us explore with our customers in the design tab and Jira Product Discovery for looking at insights and ideas and those types of things. Jira Work Management is obviously a large investment of ours, and we think it's got a distinct advantage. It's very different than Trello, although it's ostensibly just doing "project management". The important difference is it's project management in a very modern way. Extremely happy with what the teams delivered there. It's a fantastic product from sort of day 1 due to the platform or the things we talked about. But it's a very structured form of project management. So in some projects, if you're doing a finance department's audit close in the quarter books, you have auditors involved, you have lots of rules and regulations and standards, so you must stick to a very strict workflow that's auditable and compliant. Trello, with its 3, 4 metrics, doesn't work for that sort of project and vice versa. So there are different offerings that I think appeal to customers. We want them all to be integrated into the flow, right? I think that's what we talk about in open DevOps and open Toolchain in the broader integration philosophy. We want our products to be as integrated as everybody else's. And I think that's where Atlassian wins is that openness with our customers about how all this work flows together.

I want to add to this is that if you looked at, as we chatted earlier, our open Toolchain, more and more people are getting involved in these highly complicated multidisciplinary projects. And as we add personnel, because we add design, we put a design tab in there; when we put code, we put a code tab in there. You'll see that happen more and more over time as more different things like security, AIML, those types of areas, that are also now getting brought into those development teams and you'll start to see us put those types of things in our product as well.

Let's go back to Alex here on the right.

So I want to ask a 2-parter about the topic right now, operating margins. I think, Scott, you talked about not necessarily giving us the time line to get back to that historical level of operating leverage, but you also put out the $10 billion target without necessarily a specific time line. So is it fair to say that those 2 things happen at a similar pace, meaning at $10 billion, you go back to that historical operating margin that we've seen. And then with respect to the operating margin philosophy, and kind of the incremental investment that you're articulating. Are you contemplating within that framework, larger strategic M&A? Or is that outside of that? And in general, your philosophy given the contraction and valuation multiples, particularly in the private markets?

So a couple of things out there. Obviously, if you want to do strategic M&A, like you want to use the stock as currency, you'd be saying, well, that's as much money to the bottom line and kind of what's used as our strategic currency to pick up large scale M&A. And if we look across the market, there's always things out there that are interesting to us. But we've considered kind of all those consequences in terms of deciding to invest internally over the next couple of years. And so we're super excited with our platform and Point A and our ability to innovate internally. We're excited about our ecosystem, and we talked about the economy briefly in terms of our ability to then bring third parties into Atlassian and the solutions that we're doing. And so we've definitely gone into this kind of with our eyes open about like we want to invest internally because we see so many opportunities there. There's always very exciting things out there in the market that would be good complements to us. And as all of you know, things are sold, not bought. Kind of when it's the right time for them to explore something, then it becomes the right time for us, not the other way around. So that's on the first part of your question -- or second part. On the first part around margin, it's hard. I wish I could look at things in the future and tell you we will and will not see enough opportunities to continue investing at the rate we want to invest. People talk about the worldwide numbers. Now you just need to add that many staff to keep up those things, and we're going to fight really hard against that, because if we see opportunities out there and our ability to hire staff becomes the constraining factor out there, that's not a good spot to be. Like we want to overcome that. And so I try to take that off the table. That sort of worldwide numbers or anything like that. If we see opportunities and we can go after them, let's hire, let's invest, and let's do that. So I can't tell you sort of in the spreadsheet where the terminal number comes down, unfortunately. I just want to give you an update sort of on the next year and our philosophy around that. And again, if you'll go to the track record of 20 years of investment, I think we've got good returns and we've been pretty transparent about where we can invest this money and you can evaluate what you believe the returns from those will be.

I just want to be clear on the first section of Scott's reply there. That $10 billion number that's in the paper, that's a number we have clear line of sight to, firstly. Secondly, that's entirely organic using the current products in the current markets. It's not dependent on entering any new markets. It's not dependent on any inorganic activities, that is organic line of sight with the current products. On the last question, I think one way to phrase this may be helpful. You don't want to invest in growth companies. You want to invest in companies that are growing their ambition. Atlassian has a 20-year track record of growing our ambition of what we're going after. And I think people will look back on this particular time as a time where we've greatly increased that ambition because of the opportunity that's in front of us, right? The ambition is going after the opportunity that we clearly see in our customers. And our ability to do that with the platform team anywhere, everything else we've put into this paper. But it's really important to note that our ambition is growing here for the current markets and opportunities that we have, and we're going to play out things to go after that, which is exactly what we tell roughly here.

It looks like there's a question that lies in the middle.

Just had a couple of questions for maybe Cameron. You've seen -- I want to ask about the top of the funnel. It sounds like the free additions have really paid off, and you've seen 70% conversion on those. Could you talk a little bit about the sustainability of that growth in top of funnel? And then the pathway from like standard or free to premium. It sounds like the premium additions have gotten a lot of adoption. So maybe just talk a little bit about that journey?

Yes, and they're all related to each other. Come sign up. Start with free, move to standard, move to premium, move to enterprise, and we've built that nice funnel. It's pretty sensible. It's actually almost exactly 2 years since we launched free. And when COVID hit, which is a great thing and timing, both of those. But what happened when we saw free happen is we tripled the amount of people signing up for our products. For a product like Jira Software that had been in the market for almost 20 years to triple the amount of sign-ups was pretty incredible. Obviously, you saw, after that, our customer numbers declined because we didn't force them to pay after a 7-day trial. And then you saw that kind of after 2 quarters or so, it started skyrocketing back. And also you see that new customer number being in the highest it's ever been. Yes, that fluctuates. That has never been a steady thing, largely due to the market trends and customers purchasing and so on. But the reality is there's more people coming in every day and clicking that try button than ever has been. That continues to go up, which means in general, we'll have more and more free instances, more and more free customers out there, and that will always end up turning down to more paying customers. And once again the story just continues to be people coming in the door. Increasingly, we've also been able to -- with free, another exciting thing was that actually increased Confluences land in our business. Like Confluence always had a little bit of land, but we expanded a lot from Jira to get to the Confluence. When Confluence went free, it actually got a ton more brand-new people, like never even used Jira, brand new land, and we've expanded and built on that. So that was -- one of the other great benefits of free is that it really opened up Confluence as a new land vector. And that's something we've continued to build on top of. Once we get to monetize, the other Aha! we actually had is, we kind of set the expectation of -- customers are going to go from free and we're going to hit the 11th user, and they'll pay for standard, and then maybe after a year, they're going to get something more advanced and they'll go to premium. And we've actually seen 2 things happen. We've seen people with less than 10 users buy the standard plan for the additional capabilities that standard loans, mostly storage, a couple of other administration features. But we see people with 6, 7 users buying the standard and that get to increase our overall net new customer. We also see, which I didn't expect at all, customers with 15 users, 20 users going straight to premium, mainly because the price is extremely highly valuable. The capabilities we put in the premium in addition are very attractive to many of those customers, even of the small size. So those were 2 of the exciting things. The other part that drives both the standard to premium or premium to enterprise growth has always been the stuff we put in the box. And over the last 2 years, you saw us put big capabilities that used to buy separate or we acquired in the premium box, and then we'd largely let the existing customers have both, have those periods of time where they didn't have to pay, and then they get to choose out where they go to premium. That's where we get the step changes in upgrades. Now it's actually, we continue to deliver new capabilities, and it's a very steady cohort of standard customers upgrading to premium. But the interesting part is it's not just based on the size. It's across all different customer cohorts, but it has been a steady growth part of our strategy.

I just want to correct 1 piece of language, I think, I heard in the question just for everyone listening. Free doesn't have a 70% conversion rate. So we have millions of free instances. Obviously, we only have 225,000 enterprise customers. I think that statistic was that 70% of people that pay us came from free, but which is different than 70% conversion rate of free to pay.

All right. It looks like we have time for one more question. Arjun in front.

Thank you. It seems like you've obviously accelerated the R&D capabilities that you have. You're launching new features, you're launching new products, and it's happening seemingly at a faster pace than it has in the past, can you just talk about your monetization philosophy as you think about Atlas and Compass and newer products and features that are going to be launched in the future? Is that a way to move upmarket to get larger customers? Or is that something you plan to monetize right off the bat?

Let me talk to that. So to Atlas and Compass and Jira Product Discovery, 3 products that we launched today, and they've got different monetization strategies. So Jira Product Discovery is a very clear add-on to our existing products. If you're using Jira and you've got product managers there, you should be using our product, there's some competitors in the market and because of the integration and the unique things we've done, we expect incredible growth there, and that's a very simple per user type pricing model. When I look at Atlas and Compass, we've always wanted people to be able to try our products before they buy them and try them successfully. And if you're using a Jira or Confluence or Trello, you can use them with 1 single team and get benefits from them. But if you look and say Atlas, Atlas is really a team's product. You don't have to have many teams, but like you get lots of benefit from having multiple teams using the product. And so a 10 user type of license is not necessarily the best way to have that fit that gate. And so on a product like that, we'll look at other gates. Maybe the 9 or 10 user gate might be a feature gate, it might be those types of areas. And so we're going to work that out like as we work with customers in terms of work out what those gates are. All of us, we've been patient for revenue. And so like it's not about right we want launched this and 3 months later, we need to have enterprise sales. People like -- if you talk with Kevin or Cameron or someone who has come from enterprise sales background. It's like product launched, it's in the bag, the salesperson now has comped on it, like even if the product is not ready and the customers aren't ready, kind of you end up in that situation. For us, it's like great, we've got products in the market, huge demand. Let's see what's in there and let's work out what the exact gates are for payment that make sense. And so that patience for revenue, I think, plays out well long term because you get market adoption, widespread market adoption, which makes it less attractive for new entrants to sort of compete with us. And again, we've always wanted great free versions of our product to make sure that we can help people that don't want to monetize, they may be small, they may -- for whatever reason. That's a very big sort of competitive note, I think, like is having those free versions out there. So does that give you any sort of a sense of like our pricing processing.

All right. So that wraps up our Q&A and concludes our FY '22 Investor Day. Thank you all for joining us. And Scott wants to say something.

It's so good to have you all here in person. I wish -- as you said at the start, like it's been 3 years since we've managed to all get you in a room, and it's great to see faces to many of the names I get to hear on earnings calls or questions we get. And I'm so happy. And those watching from home as well who couldn't make it, but you all cover lots of companies and you could invest your money in lots of companies and I'm so proud that you spend the time to understand our story. That's all I can ask for it. You'll determine how much -- whether to buy, sell, whatever, but like what I really want is investors and analysts that spend the time to understand who we are and what we do, and I'm just so thankful that you are all investing that time for us. And we're a long-term company, like we've been around for 20 years. We're going be around for well beyond Mike and I are not here anymore, like, and we really want long-term investors that kind of invest in the story and understand what we do. And so please give us feedback if there's anything we can ever improve, like, as a company, or how we interact with all of you. And just on behalf of Mike and myself, I just want to say huge thank you for your investment of time and coming all the way to Vegas to spend time with us. Thank you.