Hello, ladies and gentlemen. Thank you for joining Atlassian earnings conference call for the fourth quarter of fiscal 2016. As a reminder, this conference call is being recorded and will be available for replay from the investor relations section of atlassian.com following this call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. I will now turn the call over to Ian Lee, Atlassian's Head of Investor Relations.
Good afternoon and welcome to Atlassian's fourth quarter fiscal 2016 earnings conference call. On the call today, we have Atlassian's co-founders and CEOs, Scott Farquhar and Mike Cannon-Brookes, our Chief Financial Officer, Murray Demo, and our President, Jay Simons. Scott, Murray, and Jay are in San Francisco, while Mike is calling in from Sydney today. Scott and Mike will begin by recapping some of the highlights from the fourth quarter and full fiscal year 2016. Murray will then cover Atlassian's financial results for the fourth quarter and full fiscal year 2016 and provide our financial targets for the first quarter and full year fiscal 2017. Following our prepared remarks, we will have a brief question and answer session. Jay will be joining for Q&A.
The press release with our results for the fourth quarter and full fiscal year 2016 was issued early today and is posted on our investor relations website at investors.atlassian.com. There is also an accompanying presentation and data sheet available on our IR website. Statements made on this call include forward-looking statements. Forward-looking statements involve known and unknown risks, certainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management's beliefs and assumptions only as of the date such statements are made. In addition, during today's call, we will discuss non-IFRS financial measures.
These non-IFRS financial measures are in addition to, and not as a substitute for or superior to, measures of financial performance prepared in accordance with IFRS. There are a number of limitations related to the use of these non-IFRS financial measures versus their nearest IFRS equivalents. For example, other companies may calculate non-IFRS financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-IFRS financial measures as tools for comparison. A reconciliation between IFRS and non-IFRS financial measures is available in our earnings release and in our updated investor data sheet on the investor relations section of atlassian.com.
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 the company's Form F-1, previously filed with the SEC in connection with our IPO, and Form 6-K report that was filed on May 12th, 2016. I will now turn the call over to Scott.
Good afternoon. Our fourth quarter was another strong quarter, and I'm proud of both our results and the groundwork we laid for the future. For the fourth quarter of fiscal 2016, we achieved revenue growth of 39% year-over-year, non-IFRS operating margin of 12.2%, and over $17 million of free cash flow. When we look back to fiscal 2016, we grew to over $450 million of revenue, expanded to more than 60,000 customers, and generated over $95 million of free cash flow. Fiscal 2016 was also the year in which we made the transition to a public company. While the IPO this financial year was an important milestone, it's a very early one on our mission to unleash the potential in every team.
We really appreciate the support from our customers, employees, ecosystem partners, and the many investors and analysts we've met over the past few years, and to everyone who's listening in today. Our products provide the fundamental building blocks of great teamwork, specifically shared projects, content, and communications. We believe we're the only company to combine these essential capabilities, focused purely on teams, into an integrated collection of products. Our goal is to do for team productivity what Microsoft Office has done for personal productivity. That's a huge goal and remains an enormous opportunity. There are close to 900 million knowledge workers globally. The most important aspect of productivity is how well they all work together. Successful teamwork is hard, and many knowledge workers today are still stuck with tools from the past decades or inefficiently cobble together email and desktop tools for word processing and spreadsheets.
Atlassian provides a better way. Moving teams to a shared online system of collaborative projects, content, and communications is as significant to their productivity as the shift from fax machines to email. Atlassian helps answer the questions that have plagued teams for generations. What's the status of this project? Where is the latest version of this document? Who changed it and why? Where can I find information about X? Teams at the most innovative companies, from Tesla to Twilio to Warby Parker, have moved work from their inboxes to Atlassian. These teams rely on Atlassian. We plan to reach all teams. Our early focus on software teams helped shape our products to support some of the most complex teamwork in any organization and simultaneously provided an important beachhead to expand from.
We took an important step forward with our Jira product family in October 2015 with the launch of Jira 7, which introduced three purpose-built versions of Jira to serve the specific needs of software teams with Jira Software, IT and service teams with Jira Service Desk, and general business teams with Jira Core. This release was significant as it both increased our expansion opportunities within existing customers and created new land opportunities for IT and business teams. Subsequent to this release, we've seen strong growth across the Jira family and strong expansion within existing customers. Jira Service Desk is worth highlighting here. It's the fastest-growing product in our history, with more than 17,000 organizations using it actively, and now lands new customers through IT. Pretty remarkable for a product in its infancy.
To add even more value to software development and IT teams, we recently completed the acquisition of Statuspage, a fast-growing leader in the status and incident communication space. In a world where SaaS companies must run their products twenty-four seven, Statuspage lets these companies easily communicate the status of their services, much like signal bars communicate status on a cell phone. In a cloud-centric world where every company is a service company, providing this information to customers is critical. We expect Statuspage to be an immediate complement to Jira Service Desk. Teams managing IT operations can use Statuspage to save time and money by significantly reducing repetitive emails and phone calls when the service goes down while providing a better customer experience. Another highlight of the quarter was the momentum we continue to demonstrate with our developer ecosystem, where we saw two significant milestones.
First, our Marketplace, which provides add-ons for our core products, crossed a milestone with over $150 million of cumulative sales. We also hosted our fifth annual developer event, AtlasCamp, in Barcelona, where we hosted a record 500 developers from more than 40 countries, all united around extending and building on Atlassian's products. We also used the event to launch the beta of Bitbucket Pipelines, which combines a continuous delivery service with the cloud version of Bitbucket. Software developers can now build, test, and deploy code all within Bitbucket instead of having to switch between various tools to manage these tasks. This is relevant both to our ecosystem developers and to our customers' developers, and the beta saw tremendous interest, with more than 18,000 sign-ups within the first month after launch. Bitbucket continues to be the code management platform adopted by professional development teams.
In July, Bitbucket Cloud reached a significant milestone. It now supports more than 5 million developers and 900,000 teams across the world. These achievements underscore the powerful reach that Atlassian has with software teams. Alongside our strong business results for this quarter and financial year 2016, I'm also very proud of the social impact Atlassian continues to make through the Atlassian Foundation and our leadership of the Pledge 1% program. In June, we launched a new $1 million initiative to help expand access to technical education and coding and to support underrepresented minorities in technology. We've established partnerships with Coursera, Codecademy, Code2040, and Women Who Code to help expose technology to communities that have traditionally been less likely to pursue a career in our industry, whilst also introducing many new groups to Atlassian.
I'll now hand the call over to Mike, who will cover additional highlights from the fourth quarter.
As Scott mentioned, we had a strong quarter of revenue growth and positive free cash flow. We also added more than 3,500 net new customers during the fourth quarter of fiscal 2016, bringing our total customer base to 60,950 in over 170 countries. During the last year, we added more than 12,300 net new customers in total. Similar to prior quarters, about three-quarters of the new customers we added during the quarter were in the cloud. As a reminder, our definition of a customer is an organization that has at least one active and paid license or subscription for which they paid more than $10 per month. During the fourth quarter, we continued to add thousands of customers across industries and geographies.
A few of our 3,500 new customers that highlight the breadth of our customer base are IMS Health, Esurance, Dassault, online payments company Stripe, the Puerto Rico Electric Power Authority, Korean technology company KakaoBank, and financial institution Meriwest Credit Union. We are also serving a growing number of large enterprise customers. Our Data Center product family provides the scalability, reliability, security, and peace of mind that the largest enterprises demand and has helped us grow our presence in large accounts. Today, we count over 290 of the Fortune 500 as customers as of the end of fiscal 2016. Additionally, we had more than 1,200 customers spending over $50,000 with us annually at the end of fiscal 2016, up significantly from 865 at the end of fiscal 2015.
We've continued to achieve this customer growth with a go-to-market model that is built around an online, highly automated distribution platform that does not rely on a fleet of quota-carrying salespeople. Our low-touch model enables us to deliver our products at prices that appeal to a wide audience. This translates into our long-term objective of serving not only customers in the Fortune 500 but across the entire Fortune 500,000. Let me shift gears a little and provide a few customer examples that show the power of Atlassian and how we're helping different kinds of teams across enterprises. We continue to see strong adoption within our traditional beachhead of software teams, combined with rapid expansion to IT teams and broader business teams. I'll start with cloud communications company Twilio, which recently completed its IPO.
In the past three years, Twilio has grown from about 170 employees and 10 engineering teams to more than 500 employees and more than 50 engineering teams worldwide. As it has tripled in size, the company needed the right tools to scale the business in a cohesive, efficient way. Twilio has leveraged the flexibility of Atlassian's products to automate and streamline the work. Jira and Confluence are used to manage processes and communication across the organization. The Jira family is used extensively by the engineering team to build and manage projects. The engineering team tailors Jira Software to its specific needs, whilst also using plugins from the Atlassian Marketplace to shave days off their software development cycle. Confluence is also used as a single source of truth for Twilio's distributed engineering teams to find information, plans, workflows, and processes across their international offices.
Atlassian is not just for the engineering team at Twilio. Business teams, including HR, operations, finance, and marketing, are using Confluence as their information hub and Jira as their ticketing system. Whether it's onboarding a new employee, managing a travel request, or running a budget review, Twilio's teams are taking advantage of Atlassian's powerful family of products. At a large financial software and media company in New York, we've seen amazing expansion over the past few years. The customer originally adopted Confluence in 2008, spending about $8,000 initially. They've added many of our other products and many more users over the years, and today spend more than half a million dollars annually. As our tools are flexible and can be applied to nearly any business process, this customer has found a creative use for Jira Service Desk.
It employs hundreds of data analysts aggregating and publishing financial and news data through a subscription service they provide to their customers. Automated web crawlers and bots scan the web for relevant news and events and automatically create Jira Service Desk tickets assigned to their analysts to verify, fact check, and then publish into their systems. This makes Atlassian core to one of their central business processes. Another of our customers, one of the world's largest financial institutions, started with us in 2005 by purchasing a single Jira license, spending $2,400 in their first year as a customer. Since then, it's adopted most of our products, including Bitbucket, HipChat, Bamboo, Jira Core, Jira Software, and Jira Service Desk. Usage of Atlassian's products has spread rapidly across their organization.
The customer recently deployed the Data Center version of Bitbucket in order to scale from 9,000 engineers to an expected 14,000 engineers by the end of this calendar year. Confluence is used by over 50,000 users across their company, with one of its largest divisions running an instance that has more than 1 million pages. With regard to Jira, the company has created over 3 million issues since adopting it, with usage of the Jira family extending well beyond their development or IT teams. The customer's digital teams use Jira Software to stage and track news to be published on various marketing channels. Additionally, the company's HR team has its own dedicated instance of Jira Service Desk to manage and track human capital issues and tasks. Overall, in fiscal 2016, this customer spent more than $1.5 million annually on our products and services.
This is a prime example of how our products land within a team and then spread virally over a decade across an entire organization to many types of teams and across many disparate use cases. These are just a few of the many thousands of customer stories that illustrate how Atlassian becomes central to the daily activities of many kinds of teams. Our low-touch distribution model enables us to not only add large volumes of new customers, but also drive meaningful expansion within existing customers over time. When we look back at fiscal 2016, we can be proud of the continued evolution of our products, the growth of our customer base, and another step in the growth of the organization.
We've achieved a lot over the past year. There is still much to do as we move forward in our goal of unleashing the potential of all teams across the Fortune 500,000. In fiscal 2017, to take the next step towards this goal, you can expect us to continue our focus on building great products that become an indispensable part of how teams work together. None of our achievements in 2016 would have been possible without the commitment and efforts of more than 1,700 Atlassians that I'm proud to call colleagues. Scott and I would like to thank them, as well as the entire Atlassian ecosystem, for their passion and commitment to shaping the future of how teams work. With that, I'll turn the call over to Murray.
Thanks, Mike, and good afternoon. I'll cover Atlassian's financial performance for the fourth quarter and full year fiscal 2016. Our financial targets for the first quarter and full year fiscal 2017. I'll begin with our financials for the fourth quarter of 2016. Total revenue for the fiscal fourth quarter was $ 127.6 million, up 39% year-over-year. As we discussed over the past fiscal year, our revenue over the past few years has benefited from some pricing optimizations to Jira and Confluence that we initiated in calendar year 2012. Approximately eight of the 39 percentage points of the revenue growth in the fourth quarter of fiscal 2016 were attributable to these pricing optimizations. Turning to revenue by line item, I will provide a brief overview of each. First, subscription revenue primarily relates to fees earned from sales of our cloud products.
A small portion of this revenue also relates to sales of our Data Center products, which are server products sold to our largest enterprise customers on a subscription basis. We recognize subscription revenue ratably over the term of the contract. For the quarter, subscription revenue was $ 43.6 million, up 68% year-over-year. The growth in subscription revenue reflects more of our customers choosing the cloud, as well as strong growth in enterprise Data Center offerings during the quarter. Maintenance revenue represents fees earned from providing customer updates, upgrades, and technical product support for perpetual licensed products. Maintenance revenue is recognized ratably over the support period, which is typically 12 months. For the quarter, maintenance revenue was $ 58.8 million, up 28% year-over-year. Maintenance revenue has been the primary beneficiary of the prior pricing optimizations to Jira and Confluence.
Third, license revenue is related to fees earned from the sale of perpetual licenses for our server or behind-the-firewall products and is recognized at the time of sale. For the fourth quarter of fiscal 2016, license revenue was $17.9 million, up 17% year-over-year. While the majority of our revenue today is from sales and maintenance of server products, we are experiencing a transition to cloud as more customers choose that deployment option. Consequently, our license revenue growth rate this quarter is reflective of this transition. Finally, other revenue includes our portion of the fees received for sales of third-party add-ons and extensions in the Atlassian Marketplace and for training services. For the quarter, other revenue was $7.3 million, up 59% year-over-year. I'll next spend a few minutes reviewing our margins, operating expenses, and our results of operations.
Unless otherwise noted, all references to our expenses and operating results are on a non-IFRS basis and are reconciled to our IFRS results within the tables posted in our earnings press release in our investor relations website. All comparisons listed here are with the fourth quarter of fiscal 2015, unless otherwise noted. Gross margin in the fourth quarter of fiscal 2016 was 86.2%, consistent with our gross margin in the fourth quarter of 2015. Fourth quarter operating expenses were $94.4 million, up 39%, from $67.8 million last year. Looking at operating expenses, R&D expense for the fourth quarter was $48.3 million, or 37.8% of revenue, compared with $36.7 million, or 40% of revenue last year. Marketing and sales expense was $27.6 million, or 21.6% of revenue, compared with $17.2 million, or 18.8% of revenue last year.
Marketing expenses were higher in the quarter as we invested in additional advertising and sponsorship activities. G&A expense was $18.5 million, or 14.5% of revenue, compared with $13.9 million, or 15.1%, last year. Total employee headcount was 1,760 at the end of the fourth quarter. Headcount growth was across all expense categories, with the majority in R&D. Fourth quarter operating income was $15.6 million, or 12.2% of revenue, compared with $11.3 million, or 12.3% of revenue last year. Net income in the fourth quarter was $16.9 million, or $0.07 per diluted share, compared with $10.7 million or $0.07 per diluted share last year. Moving over to the balance sheet, Atlassian finished the quarter with $743.1 million in cash equivalents, and short-term investments. Free cash flow for the quarter of fiscal 2016 was $17.6 million, comprised of cash flow from operations of $35 million, less capital expenditures of $17.4 million.
Free cash flow margin, defined as free cash flow as a percentage of revenue, was 13.8% for the fourth quarter. Moving over to our full year fiscal 2016 results, total revenue was $457.1 million, up 43% year-over-year. Approximately 11 of the 43 percentage points of revenue growth for fiscal 2016 were attributable to our prior pricing optimizations. Fiscal 2016 gross margin was 86.2%, compared to 86.3% in fiscal 2015. Fiscal 2016 operating margin was 16.9%, compared to 15.6% in fiscal 2015. For fiscal 2016, net income was $71.3 million, or $0.35 per diluted share, compared with $45.5 million, or $0.28 per diluted share, in fiscal 2015. Free cash flow in fiscal 2016 was $95.3 million, or 20.9% of revenue, compared with $65.5 million, or 20.5% of revenue, in fiscal 2015. Now I'll provide our financial targets for the fiscal first quarter and full year fiscal 2017.
For the first quarter of fiscal 2017, our financial targets are as follows. For total revenue, we expect a range of approximately $132 million-$134 million, or approximate annual revenue growth of 30%-32%. The revenue target for the first quarter of fiscal 2017 includes the last full quarter of non-ongoing prior pricing optimization benefits, partially offset by expected lower revenue due to summer seasonality. For gross margin, we expect approximately 81% on an IFRS basis and approximately 84% on a non-IFRS basis. For operating margin, we expect approximately -10% on an IFRS basis and approximately 14% on a non-IFRS basis. For share count, we expect the weighted average share count to be in the range of 232 million-234 million shares on a fully diluted basis.
For net income per diluted share, we expect approximately -$0.04 on an IFRS basis and approximately $0.07 on a non-IFRS basis. For the full year fiscal 2017, our financial targets are as follows. For total revenue, we expect a range of approximately $592 million-$602 million, or approximate annual revenue growth of 30%-32%. For gross margin, we expect approximately 81% on an IFRS basis and approximately 84% on a non-IFRS basis. The gross margin is targeted to be lower than fiscal 2016, as we expect to incur accelerated depreciation expense as part of our transition from our internal Data Centers to third-party cloud providers during the year. For operating margin, we expect approximately -10% on an IFRS basis and approximately 15% on a non-IFRS basis.
For share count, we expect the weighted average share count to be in the range of 234 million-236 million shares on a fully diluted basis. For net income per diluted share for fiscal 2017, we expect approximately -$0.18--$0.16 on an IFRS basis and approximately $0.32-$0.34 on a non-IFRS basis. For free cash flow, we expect a range of $145 million-$155 million. Included in the free cash flow target, we are assuming a target of approximately $15 million of capital expenditures in fiscal 2017. This is lower than our approximately $34 million of capital expenditures in fiscal 2016. We have reassessed our capital expenditures for fiscal 2017 and now expect lower investment in facilities and also expect to shift more of our Data Center infrastructure to third-party cloud providers.
With regard to our financial targets, we do not expect our acquisition of Statuspage will have a material financial impact on our financial results in fiscal 2017. Any impact from Statuspage is included in our financial targets. Also, in fiscal 2017, we will begin to hedge a portion of our expenses denominated in Australian dollars. This will reduce the foreign exchange risk we are exposed to in the normal course of our business. As a reminder, we bill in US dollars, so our revenue is not materially affected by foreign currency movements. One final note to finish. Starting next quarter, we will shift to a new earnings call format. We will publish our prepared remarks, recapping the business and financial highlights of the quarter, as well as our financial targets prior to our earnings conference call.
We will then spend the majority of the earnings call answering Q&A, which we believe is more valuable to our investors and analysts. With that, I will turn the call back to the operator for Q&A.
Yes. Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. This time, we will pause momentarily to assemble the roster. The first question comes from Bhavan Suri with William Blair.
Hey, guys. Thanks for taking my question, I appreciate the time, and nice job there. You know, Murray, you didn't provide a lot of color there on the gross margin front. You talked about moving to third-party cloud providers. Just some color on sort of is that why the gross margin's coming down, or it's just because the cloud business is growing so fast? I'm going to start with that before we get into demand.
Yeah, Bhavan. In terms of the gross margin being a little bit lower in 2017 in terms of our target to 2016, it's related to depreciation expense on our internal Data Center equipment. It's not related precisely to going to third-party providers. It's more on our internal Data Center depreciation expense.
Great. Then one quick follow-up just on product. Obviously, just great set of numbers there, but something you guys have commented in the past is that most of the products are growing about the same rate, then clearly it feels like Jira Service Desk is growing much, much faster. I'd love to just get a little more color on sort of the scale of that business and sort of who you're winning against, sort of what does that look like from a size and growth perspective relative to Jira, Bitbucket, obviously Confluence and HipChat?
Hey, Bhavan. This is Jay. We did see good growth across products. As we mentioned in the call, we highlighted Jira Service Desk, which is still a relatively young product. I think we're proud of the 17,000 organizations it's collected in its infancy. For that particular product, we do see some competition around the traditional IT service desk use case, but a lot of the growth comes from greenfield collaborative service applications that we're seeing kind of across the organizations into business teams, where typically we're replacing Excel spreadsheets and a whole bunch of clunky email.
Great, guys. I'll take it from there, but I'll jump back in queue, but thank you for the color.
Thank you.
Thank you. The next question comes from Michael Tur with Raymond James.
Hey, guys. Thanks very much. Two questions. First of all, just back on the margin side, is there anything else you can tell us about expenditures and investments? I haven't worked through all the numbers, but is there anything higher on OpEx investments that you expected in terms of the guide for the fiscal 2017 margin? I had a follow-up question about go-to-market.
Yeah, Michael, we continue to invest in, obviously, R&D. It's the lifeblood of our company. We're a product company, and we'll continue to invest there and really across all the different organizations within Atlassian. Some of the things to keep in mind between 2016 and 2017 is in 2016, we did have, again, this pricing benefit. Looking particularly early in the year, we had higher operating margins because we just really couldn't hire as fast as the revenue growth. Also, there's probably an approximate 1% effect of the Aussie to US dollar exchange rate is higher in 2017 than 2016. We're losing approximately one point of margin related to FX. Now that we're hedging a portion of our operating expenses, we don't think we're going to have quite the volatility that we had in fiscal 2016.
Okay. Secondly, can you talk a little bit about if the go-to-market is changing in any way as larger enterprises begin to standardize and get more penetration there? Is everything still completely self-serve? Are there any push for direct reps? How are you doing with technical account managers and premium support in those areas?
Yeah, hey Michael, this is Jay. No material changes from what we've done in the past and what you've seen us do. I think this quarter especially is another good demonstration of the effectiveness of the high-velocity, low-touch approach to both reaching large volume of new customers, but also expanding and growing our biggest ones. As we've mentioned previously, we're always looking to evolve our model and approach in really smart ways, as you saw with the introduction of the Data Center offerings and the technical account management program that you've mentioned. We've seen, I think, good acceleration and adoption of both of those, that product and that level of service within our largest accounts as we reflected in the prepared remarks.
Great, Jay. Murray, and Mike and Scott, thanks very much.
Thank you.
Thanks.
Thank you. The next question comes from Heather Bellini with Goldman Sachs.
Great. Thank you. I just had a couple of quick ones. First, Murray, you might have said it, and maybe I missed it, but what the impact was from the pricing change, if you could just update us on that, what it was in the quarter. Then I had a question around Bitbucket, and I was just wondering how do you assess the competitive landscape in that part of the business that you're going after? Also, if you could share with us, I guess, have you seen a change in the competitive landscape, and why are you winning versus the competition? Where do you guys, I guess, have the better positioning versus them? Thank you.
Heather, in terms of the pricing benefit, we had 39% top-line growth in Q4. Approximately eight points came from this pricing benefit. It was a little higher in the quarter than we might have expected. We saw stronger sales of our server products to existing customers. In that case, they're paying a higher price than they would have, so we saw a little more benefit in the fourth quarter. That's the kind of pricing benefit that, of course, would continue on. It's an item anytime a customer is paying a higher price than they would have, really since inception to date as a company, we would continue to see. We're quite pleased with our server performance and overall results on top line of 39%.
It's Scott here on your second point, Heather, about the Bitbucket competitive landscape. Firstly, on the change of the landscape, as you know, we operate in huge markets, and we've had seen competitors come and go, and there's no material change in the competitive landscape that we've seen over the last few months. The reason why we win is the same reason why we've won historically, with the quality of the products and the investment we put in there. We're differentiated because we go up against a lot of point solutions, and we're the only company that provides the whole solution to our customers. Also many of these small teams don't apply to professional teams. We're much better for professional teams than businesses, whereas many of these are sort of targeted at very small or consumer-based endpoints.
Then Murray, just to clarify, the pricing benefit, does that go away in fiscal 2017? You said some of those people will be paying longer in perpetuity, which I understand, but do you expect that to still be a benefit in your upcoming fiscal year?
Yes. In terms of the pricing benefit that's lapping, it's not going to be material to fiscal 2017. We'll see a little bit in the first quarter that I mentioned in the prepared remarks that we're sort of seeing partially offset by some summer seasonality. The benefits that we saw in the past, those days are behind us.
Great. Thank you so much, guys.
Thank you.
Okay.
Thank you. The next question comes from Richard Davis with Canaccord.
Hey, great. Thank you very much. First off, thanks for moving to the worldwide interwebs, as we say, and not reading the press releases to us next quarter, so I appreciate that. One of the things I think about is you guys are seeing good progress in expanding the multiple different teams. One of the strengths and weaknesses of the model is you don't spend a lot of money on sales and marketing. You make great products, are there levers that you can push and pull to kind of make the expansion into other departments inside these firms that you're selling to more than organic? How do you think about the knobs and buttons that you would pull to do that? Thanks.
Hi, Richard. It's Mike here from Sydney. Great question.
Yeah.
Our traditional landing and software teams expanding into IT and then further into business teams as a model doesn't change. One of the levers you'd have to say there is being very strongly thought of in software teams and in the IT teams, because they take us into those other teams quite a lot. We have an example that came up. We talked previously about Sotheby's, and we have an example of one of the largest museums in New York, that moves multiple millions of pieces of art around their organization using Jira Service Desk. This is a replacement for paper and email-based systems that they had beforehand. It came in because we landed in their software team. They were using us for software processes within the museum, and they were the recommender to the business and facilities team to use this application.
To the point that we can keep telling those stories to our customer base, it really shows the power of the expansion model. Beyond that, obviously our automated model, the engine that we've built in terms of the engagement engine to talk to customers, to talk to end users, to illustrate other use cases and to help them spread throughout their organization. That's something we continue to invest in, both on the R&D side and on the go-to-market marketing side to reduce the friction of spreading across an organization.
Great. No, that's helpful. Thank you so much.
Thank you. The next question comes from Sanjit Singh with Morgan Stanley.
Congratulations on a successful fiscal year 2016. Murray, if you could just toggle back to the pricing change, one last question on that. As it was eight points this quarter, it sort of goes away beginning next quarter. It seems like a pretty steep drop-off, and I'm just trying to understand the dynamics of why you would go from eight to pretty immaterial that quickly.
It's a good question, Sanjit. Just a little complexity here. There's kind of two things that go into that eight points of growth. There's the pricing that's related to the higher price that a customer is paying now than they would have if we hadn't done it. I commented that earlier. Any kind of price change, whether a price increase or a decrease since inception of the company, that's flowing through our revenue today. That will sort of continue on, and there's a whole bucket of those kind of things, and we wouldn't necessarily break any of that out. That's just the normal course of the business. The piece that's been going away is the piece that really where it sort of ended November of 2015 and where someone renewed at a higher price.
We're getting that revenue coming from deferred revenue to the maintenance revenue over the 12 months. We'll see some of that in the first quarter of 2017, then we're done. Any kind of price benefit that we're getting is just really, again, lumped in with all the other pricing changes we've made since the inception of the company. As I said earlier, the targets provided in Q1, they factor in the last of that sort of pricing benefit that's going to be going away and is sort of being offset by some summer seasonality. Again, both of those are factored into the target of sort of 30%-32% or $132 million-$134 million of revenue in Q1.
That's really helpful. I appreciate that, Murray. On Hipchat, a little less commentary on Hipchat, at least in the prepared remarks. I just wanted to understand how you're feeling about that business as you come to the close of fiscal year 2016 and think about the prospects for Hipchat, going into next year, whether you need to make any changes to the products or it's sort of ready to continue to scale.
Yeah, sure, mate. I can take that one. It's Mike here in Sydney again. It's hard to give commentary on all our products given the size of the portfolio. We're big believers that there's a clear sort of secular shift in the way teams collaborate, where messaging is going to become a key piece of that overall portfolio of collaboration tools. We think it's still very early in the space, and we're very confident in Hipchat continue to expand and have great top-line growth across FY 2016. We're excited about the space and its ability to transform the way that teams collaborate.
Understood. The last one from me. I wanted to see if you want to take the chance to maybe update some of the metrics that you guys provided around the time of IPO, as it relates to maybe monthly active users. What has that reached? Maybe the percentage of Jira users outside of software. Any update on those two metrics?
Sanjit, it's Scott here. At the moment, we're not ready to comment on those metrics. We will, as you know, provide color and commentary on various metrics from time to time to give you a better understanding of the business. Those two aren't ones that we're prepared to talk about today. Apart from to say.
Understood
We're happy with the growth of both of them, I don't have them in a state to hand out today.
Fair enough. Congrats on a nice year.
Thank you.
Thank you. The next question comes from Brent Thill with UBS.
Hey guys, this is Michael Turrin for Brento. Thanks for taking our questions. Wanted to talk a little bit more about the decision to shift to third-party cloud service providers. Looking at the fiscal 2017 guidance versus Q4, it looks like a significant step down. I just want to talk about that decision process. Any more color you're willing to provide? Are you planning to use one or multiple providers? Anything else is greatly appreciated.
Thanks, Michael. Yeah, a good question. The way we think about it's been a progression for a long time. At Atlassian, we've had a hybrid model of using third-party data providers and our internal data centers, for where effectively the workloads make most economic sense. As third-party providers are getting better at providing for the types of workloads that we use, we're progressively moving more and more of those workloads into the cloud. That's sort of the philosophy is, to get other people to run that rather than us having that on our balance sheet and something we run ourselves. There's nothing specific that we're doing in terms of this change of strategy. It's really just the third-party providers have got to a level of sophistication and capability that we can use more of them.
I'd also add that, and I comment on accelerated depreciation. As part of that transition, we're incurring a little more depreciation expense than we otherwise would as part of that transition. That's why you see the gross margin coming down in our fiscal 2017 targets.
Great. That's helpful. You talked a little bit about during the quarter, the increase in sales and marketing. You referenced some additional advertising and sponsorship campaigns. Is there any more detail or color you can provide there? How should we think about that continuing into the next year as well?
Yeah, I'll just say that, first, that was variable spend. It was not fixed spend per se. It's something that we made a decision to do in the fourth quarter. As far as any other specifics, Jay, if you'd like to add anything more to it.
Nothing beyond. You see that variability from time to time as we kind of run different broad-based experiments around demand acquisition for various products and markets that we're approaching.
Great. Thanks for taking my questions, guys.
Thank you.
Thanks.
Thank you. The next question comes from John DiFucci with Jefferies.
Thanks for taking my question. I guess I have a question for Mike or Scott, and it has to do with the acquisition of Statuspage. Other acquisitions you've bought in the past have been products, and you've bought a product and you've sort of pushed that out through your vast distribution into your customer base. Can you explain a little bit, just I'm not quite sure, is this one going to be a product or is this going to be technology that will be added on to things like Jira Service Desk and others? How should we think about your M&A philosophy going forward?
John, yep, great question. It's Scott here. Just for those that aren't familiar with Statuspage, just to sort of go through again what they do. If you look at the way most companies are these days, most companies are software companies. As a SaaS company, you really become a service company where you have to provide a service 24/7 to your customers. When you provide that service, you need some way of communicating the status of that service to your customers. Statuspage is kind of like the cell phone signal bars on your cell phone, sort of explaining to you when something up or down and where to go for help. Now, this is a relatively new market, a greenfield opportunity for us, and Statuspage is the leader in this market. When we look at the customer base, they have a couple of thousand customers.
We're not sharing the specific number, but Atlassian has tens of thousands of customers. There's a huge opportunity because all of our Atlassian customers will need a Statuspage over time. In terms of how we will combine the products, there's a lot of product integrations we can do over time. For the moment, it's going to be a standalone product inside our portfolio, with a separate SKU and pricing, as it is today.
Okay, great. Great, Scott. It sounds like at least initially, it'll be similar to previous acquisitions. Is that the way we should be thinking, continue to think the same way going forward when you do make acquisitions?
Yes, John. We've got a long history of doing small acquisitions successfully. We've done a couple of dozen of them now. You'll continue to see us do small acquisitions where they fit our pricing model and our go-to-market approach, and they sell into our customer base or adjacent to that. Obviously due to our go-to-market model and our approach, it's very difficult for us to acquire something large. We'd have to give a lot of consideration to something like that. You can continue to see us to do small tuck-in acquisitions.
Great. Thanks a lot, Scott.
Thank you. The next question comes from Steve Ashley with Robert W. Baird.
Hi, thanks. This is Jason Velkavrh in for Steve. Thanks for taking my questions. First question, just wanted to ask about Europe. It looked like there was a slight deceleration there, although don't have a compare from last 4Q. Just curious how much of that is from seasonal summer slowness versus the macro issues there. Just generally, how sensitive is your spend to macro challenges?
Yeah, Jason. We haven't, in terms of Brexit or whatever, we haven't seen anything in our business that would say that Brexit's led to any softness in our business. What we have seen through looking through the data and just in at least all the other software companies I've worked in, a little bit of summer seasonality in Europe. We have some of that in our business, and that's been factored in. No sort of macro trends or Brexit are we seeing at this point, and that's certainly not factored into our targets. Just the normal summer seasonality is what's included.
Great. Thanks. That's helpful. Second question, about renewal rates and how that might vary by customer size. Curious how you expect renewal rates to trend as you may gain traction with larger enterprises, and that's it for me.
Yeah. Hey, Jason, this is Jay. Renewal rates have been trending favorably. I think naturally, we see a higher renewal rate at the larger institutions. Companies that deploy us to thousands of users, as we mentioned during the roadshow, tend to have a higher kind of renewal rate. We have a really high logo retention rate. I think we're happy, with retention kind of across the breadth of the customer base.
Great. Thanks, guys.
Thank you.
Thank you. The next question comes from Patrick Walravens with JMP Securities.
Oh, great. Thank you, and congratulations, you guys. I guess, Mike Cannon-Brookes and Scott Farquhar, I'm curious, does the self-service model for go-to-market work as well for legal and HR and finance as it does for IT and developers? Is that something you're sort of monitoring as your solutions appeal to broader and broader audiences?
I'll take that one. This is Jay Simons. As Mike Cannon-Brookes mentioned, remember kind of the go-to-market model, I think, is effective in landing inside of software and increasingly in IT. We use a lot of kind of engagement and growth tactics that you're probably familiar with as a consumer of Amazon, where three-quarters, I think, of Amazon's sales come from their in-store recommendation engine. We have the ability, kind of in our products, to recommend use cases of users that might be part of an IT project, that get exposed to how a service desk could help their legal team, in addition to the traditional ways we might market those use cases to champions of our products inside of the business. Really is, I think, increasingly kind of an expand opportunity outside of the businesses.
The businesses also look to IT for recommendations of tools and products to basically help them do their work. We see, I think, a lot of growth from strong recommenders outside to people like legal and HR and finance.
That's great. Thanks, Jay Simons.
Thank you. Once again, please press star and then 1 if you would like to ask a question. Our next question comes from George Iwanyc with Oppenheimer.
Thank you for taking my question. Just following up on those HR, finance, legal type of use cases. Right now with Jira Core, where are you seeing the strongest interest? Are you seeing any pressure to add new features to Core to specialize in certain verticals?
Thanks, mate. It's Mike here. George, Jira Core, as a reminder for those listening, we split Jira into 3 different offerings in October of last year, so about, what? 8 months ago, maybe 9 months ago, to build focused offerings for software teams, IT teams, and again, for business teams. It's been a very good growth story for us so far. It's performed extremely well, albeit off a very small base, obviously, compared to its software and service desk cousins. We think that the first thing we've done with Jira Core is to reduce down some of the software and IT-specific features, such that the business teams get a cleaner experience of tracking work that they're trying to achieve.
Then, after that, we're certainly listening to HR, finance, marketing, legal, facilities, all the teams that are using Core, in our traditional way that we listen to customers, and we'll continue to iterate the product and improve it over time. At the moment, there are no sort of glaring feature gaps for those teams in terms of getting their work done. We've been pretty happy with the reception so far, given it's still inside its first year.
Just one other question. How should we look at headcount additions as the year progresses?
Yeah, George Iwanyc, we'll continue to invest across all the different major expense categories inside the company. With obvious, the continued focus on investing in R&D. That will be the primary area. We'll be investing across the company as we scale.
All right. Thank you.
Thank you.
Thank you. As there are no more questions at this present time, I would like to return the call to management for any closing comments.
Great. It's Scott here. I just want to thank everyone for joining our call today. Really appreciate the time, and look forward to keeping you updated on our progress. Thanks a lot.
Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.