Hello, ladies and gentlemen. Thank you for joining Atlassian Earnings Conference Call for the Q4 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's website following this call. All participants will be in listen only mode. Will now turn the call over to Ian Lee, Atlassian's Head of Investor Relations.
Good afternoon and welcome to Atlassian's 4th 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 Diemer 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 Q4 and full fiscal year 2016. Murray will then cover Atlassian's financial results for the Q4 and full fiscal year 20 16 and provide our financial targets for the Q1 and full year fiscal 2017.
Following our prepared remarks, we will have a brief question and answer session. Jay will be joining for Q and A. The press release with our results for the Q4 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 tools for comparison. A reconciliation between IFRS and non IFRS financial measures is available in our earnings release and in our updated investor datasheet on the Investor Relations section of Atlassian's website. 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-one previously filed with SEC in connection with our IPO and Form 6 ks report that was filed on May 12, 2016.
I will now turn the call over to Scott.
Good afternoon. Our Q4 was another strong quarter and I'm proud of both our results and the groundwork we laid for the future. For the Q4 of fiscal 2016, we achieved revenue growth of 39% year over year, non IFRS operating margin of 12.2% and over $17,000,000 of free cash flow. When we look back to fiscal 2016, we grew to over $450,000,000 of revenue, expanded to more than 60,000 customers and generated over $95,000,000 of free cash flow. Fiscal 2016 was also the year in which we made the transition to a public company.
While the IPO of 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 900,000,000 knowledge workers globally and the most important aspect of productivity is how well they all work together. Successful teamwork is hard and many knowledge workers today are still stuck with tools from the past decades or inefficiently 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 of the most innovative companies from Tesla to Twilio to Warby Parker have moved work from their inboxes to Atlassian. And these teams are aligned Atlassian and we plan to reach all teams. Our early focus on software teams helped shape our products to support some of the complex teamwork in any organization and simultaneously provided an important beachhead to expand from. Took an important step forward with our Jira product family in October of 2015 with the launch of Jira 7, which introduced 3 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. CURA 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 20 fourseven, 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 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 2 significant milestones.
First, our marketplace, which provides add on for our core products, crossed a milestone with over $150,000,000 of cumulative sales. We also hosted our 5th annual developer event Atlas Camp 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 the beta saw tremendous interest with more than 18,000 sign ups within the 1st 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 5,000,000 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 in financial year 2016, I'm also very proud of the social impact to make through the Atlassian Foundation and our leadership of the PLEDGE 1% program.
In June, we launched a new $1,000,000 initiative to help expand access to technical education and coding and to support underrepresented minorities in technology. We've established partnerships with Coursera, Code Academy, Code 2,040 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 Q4.
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 Q4 of fiscal 2016, bringing our total customer base to 60,000 950 in over 170 countries. During the last year, we added more than 12,000 300 net new customers in total. Similar to prior quarters, about 3 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 Q4, we continue to add thousands of customers across industries and geographies. A few of our 3,500 new customers that highlight the breadth of our customer base are IMS Health, Esurance, Dassault, online payments company Stripe, the Puerto Rico Electric Power Authority, Korean technology company Kakao Bank, and Financial Institution, Mary West 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 1200 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 3 years, Twilio has grown from about 170 employees and 10 engineering teams to more than 500 employees and more than 50 engineering teams worldwide. As it has tripled in size, the company needed the right tools to scale the business in a cohesive efficient way. Twilio has leveraged the flexibility of Atlassian's products to automate and streamline the work.
Jira and Confluence are used to manage processes and communication across the organization. The Jira family is used extensively by the engineering team to build and manage projects. The engineering team tailors Jira Software to its specific needs, whilst also using plug ins from the Atlassian Marketplace to shave days of their software development cycle. Confluence is also used as a single source of truth for Twilio's distributed engineering teams to find information, plans, workflows and processes across their international offices. But Atlassian is not just for the engineering team at Twilio.
Business teams including HR, operations, finance and marketing are using Confluence as their information hub and Jira as their ticketing system. Whether it's 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 2,008, 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 $500,000 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 2,005 by purchasing a single JIRA license, spending $2,400 in their 1st year as a customer.
Since then, it's adopted most of our products, including Bitbucket, HitChat, Bamboo, JIRA Core, JIRA Software and JIRA Service Desk. Usage of Atlassian's products is 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 1,000,000 pages. With regard to Jira, the company has created over 3,000,000 issues since adopting it, with usage of the Jira family extending well beyond their development or IT teams.
The customers' 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 $1,500,000 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, but 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 1700 Atlassians that I'm proud to call colleagues.
Scott and I would like to thank them as well as the entire Atlassian ecosystem for their passion and commitment to shaping the future of how teams work. With that, I'll turn the call over to Murray.
Thanks, Mike, and good afternoon. I'll cover Atlassian's financial performance for the Q4 and full year fiscal 2016 and our financial targets for the first quarter and full year fiscal 2017. I'll begin with our financials for the Q4 of 2016. Total revenue for the fiscal Q4 was $127,600,000 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 8 of the 39 percentage points of the revenue growth in the Q4 of fiscal 2016 were attributable to these pricing optimizations. Turning to revenue by line item, I'll provide a brief overview of each. 1st, subscription revenue primarily relates to fees earned from sales of our cloud products. A small portion of this revenue also relates to sales of our data center projects, which are server products sold to our largest enterprise customers on a subscription basis. We recognize subscription revenue ratably over the term of the contract.
For the quarter, subscription revenue was $43,600,000 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. 2nd, maintenance revenue represents fees earned from providing customer updates, upgrades and technical product support for perpetual license products. Maintenance revenue is recognized ratably over the support period, which is typically 12 months. For the quarter, maintenance revenue was $58,800,000 up 28% year over year.
Maintenance revenue has been the primary beneficiary of the prior pricing optimizations to Jira and Confluence. 3rd, 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 Q4 of fiscal 2016, license revenue was $17,900,000 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.
And finally, other revenue includes our portion of the fees received for sales of third party add ons and extensions in the Atlassian marketplace and for training services. For the quarter, other revenue was 7,300,000 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 and our Investor Relations website. All comparisons listed here are with the Q4 of fiscal 2015 unless otherwise noted.
Gross margin in the Q4 of fiscal 2016 was 86.2 percent consistent with our gross margin in the Q4 of 2015. 4th quarter operating expenses were $94,400,000 up 39% from $67,800,000 last year. Looking at operating expenses, R and D expense for the Q4 was $48,300,000 or 37.8 percent of revenue compared with $36,700,000 or 40 percent of revenue last year. Marketing and sales expense was $27,600,000 or 21.6 percent of revenue compared with $17,200,000 or 18.8 percent of revenue last year. Marketing expenses were higher in the quarter as we invested in additional advertising and sponsorship activities.
G and A expense was $18,500,000 or 14.5 percent of revenue compared with $13,900,000 or 15.1 percent last year. Total employee headcount was 1760 at the end of the 4th quarter. Headcount growth was across all expense categories with the majority in R and D. 4th quarter operating income was $15,600,000 or 12.2 percent of revenue compared with $11,300,000 or 12.3 percent of revenue last year. Net income in the 4th quarter was $16,900,000 or $0.07 per diluted share compared with $10,700,000 dollars or $0.07 per diluted share last year.
Moving over to the balance sheet, Atlassian finished the quarter with $743,100,000 in cash, cash equivalents and short term investments. Free cash flow for the quarter of fiscal 2016 was $17,600,000 comprised of cash flow from operations of $35,000,000 less capital expenditures of $17,400,000 Free cash flow margin defined as free cash flow as a percentage of revenue was 13.8% for the 4th quarter. Moving over to our full year fiscal 2016 results, total revenue was $457,100,000 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 $71,300,000 or $0.35 per diluted share compared with $45,500,000 or $0.28 per diluted share in fiscal 2015. Free cash flow in fiscal 2016 was 95,300,000 dollars or 20.9 percent of revenue compared with $65,500,000 or 20.5 percent of revenue in fiscal 2015. Now I'll provide our financial targets for the fiscal Q1 and full year fiscal 2017. For the Q1 of fiscal 2017, our financial targets are as follows.
For total revenue, we expect a range of approximately $132,000,000 to $134,000,000 or approximately approximate annual revenue growth of 30% to 32%. The revenue target for the Q1 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 minus 10% on an IFRS basis and approximately 14% on a non IFRS basis. For share count, we expect the weighted average share count to be in the range of 232,000,000 to 234,000,000 shares on a fully diluted basis.
For net income per diluted share, we expect approximately minus $0.04 on an IFRS basis and approximately $0.07 on a non IFRS basis. For the full fiscal year for the full year fiscal 2017, our financial targets are as follows. For total revenue, we expect a range of approximately $592,000,000 to $602,000,000 or approximate annual revenue growth of 30% to 32%. For gross margin, we expect approximately 81% on an IFRS basis and approximately 84% on a non IFRS basis. The gross margin is targeted to be lower than fiscal 2016 as we expect to incur accelerated depreciation expense as part of our transition from our internal data centers to 3rd party cloud providers during the year.
For operating margin, we expect approximately minus 10% on an IFRS basis and approximately 15% on a non IFRS basis. For share count, we expect the weighted average share count to be in the range of 234,000,000 to 236,000,000 shares on a fully diluted basis. For net income per diluted share for fiscal 2017, we expect approximately minus $0.18 to minus $0.16 on an IFRS basis and approximately $0.32 to $0.34 on a non IFRS basis. For free cash flow, we expect a range of $145,000,000 to $155,000,000 Included in the free cash flow target, we are assuming a target of approximately $15,000,000 of capital expenditures in fiscal 2017. This is lower than our approximately $34,000,000 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 3rd party cloud providers. With regard to our financial targets, we do not expect our acquisition of Statuspage will have a material financial impact on our financial results in fiscal 2017. Any impact from Statuspage is included in our financial targets. Also in fiscal 2017, we will begin to hedge a portion of our expenses denominated in Australian dollars. This will reduce the foreign exchange risk we are exposed to in the normal course of our business.
As a reminder, we bill in U. S. Dollars, so our revenue 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 and A, which we believe is more valuable to our investors and analysts. And with that, I will turn the call back to the operator for Q and A.
Yes. Thank you. We will now begin the question and answer session. And the first question comes from Bhavan Suri with William Blair.
Hey, guys. Thanks for taking my question and I appreciate the time and nice job there. Murray, you didn't provide a lot of color there on the gross margin front. You talked about moving to 3rd party cloud providers. Just some color on sort of is that why the gross margin is 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.
Yes, Bhavan. Yes, in terms of the gross margin being a little bit lower in 2017 in terms of our target to 2016, it's related to depreciation expense on our internal data center equipment. It's not related precisely to going to 3rd party providers. It's more on our internal data center depreciation expense.
Great. And then one quick follow-up just on product. Obviously, just great set of numbers there, but some of you guys have commented in the past is that most of the products are growing about the same rate. And then clearly, it feels like Jira Service Desk is growing much, much faster. I'd love to just get a little more color on sort of the scale of that business and sort of who you're winning against?
What does that look like from a size and growth perspective relative to Jira, Bitbucket, obviously Confluence and HipChat?
Yes. 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 in the 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. And the next question comes from Michael Turits with Raymond James.
Hey, guys. Thanks very much. Two questions. First of all, just back on the margin side, is it 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?
And then I had a follow-up question about go to market.
Yes, Michael, we continue to invest in obviously R and D is 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 kind of keep in mind between 2016 2017 is in 2016, we did have again this pricing benefit. Looking particularly early in the year, we had higher operating margins because we just really couldn't hire as fast as the revenue growth. And also there's probably an approximate 1% effect of the Aussie to U.
S. Dollar exchange rate is higher in 2017 than 2016. So we're kind of losing approximately 1 point of margin related to FX. And 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. And then 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? And are there any push for direct reps and how are you doing with technical account managers and premium support in those areas?
Yes. Hey, Michael, this is Jay. No material changes from what we've done in the past and what you've seen us do. And I think this quarter, especially is another good demonstration of the effectiveness of the high velocity, low touch approach to both reaching large volume of new As we 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, and 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. And 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, maybe I missed it, but what the impact was from the pricing change? If you could just update us on that, what it was in the quarter?
And then I had a question around Bitbucket. And I was just wondering, how do you kind of assess the competitive landscape in that part of the business that you're going after? And also, if you could share with us kind of have you I guess, have you seen the change in the competitive landscape? And why do you why are you winning versus the competition? Where do you guys have the 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 8 points of the benefit came from this or 8 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. And in that case, they're paying a higher price than they would have. And so we saw a little more benefit in the Q4.
And that's the kind of pricing benefit that of course would continue on Infinitum anytime a customer is paying a higher price than they would have. Really since inception of data as a company, we would continue to see. But we are quite pleased with our server performance and overall results on top line of 39%.
And 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 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. And 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 sort of point solutions. We're the only company that provides the whole solution to our customers.
And also many of these small teams don't apply to professional teams. We're much better for professional teams and businesses, whereas many of these are sort of targeted at very small or consumer based endpoints.
And then Murray, just to clarify, is the pricing benefit, does that go away in fiscal 2017? I mean, you kind of 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. So in terms of the pricing benefit that's lapping, it's not going to be material to fiscal 2017. We'll see a little bit in the Q1 that I mentioned in the prepared remarks that we're sort of seeing kind of partially offset by some summer seasonality. But the benefits that we saw in the past, those days are behind us.
Great. Thank you so much, guys.
Thank you.
Thank you. And 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 kind of the multiple different teams.
But one of the strengths and weaknesses of the model is you don't spend a lot of money on sales and marketing. You make great products, but are there levers that you can push and pull to kind of make the expansion into other departments inside these firms that you're selling to more than organic or kind of 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. Look, I mean, our traditional landing and software teams expanding into IT and then further into business teams as a model doesn't change. So one of the levers you have to say there is being very strongly thought of in software teams and in the IT teams because they take us into those other teams quite a lot.
So we have an example that came up. We talked previously about Sotheby's and we have an example of one of the largest museums in New York that moves multiple millions of pieces of art around their organization using Jura Service Desk. Now this is a replacement for paper and email based systems that they had beforehand, but it came in because we landed in their software team. They were using us for software processes within the museum and they were the recommender to the business and facilities team to use this application. So to the point that we can keep telling those stories to our customer base, it really shows the power of the expansion model.
And then beyond that, obviously, our automated model, the engine that we've built in terms of the engagement engine to talk to customers, to talk to end users, to illustrate other use cases and to help them spread throughout their organization. That's something we continue to invest in both on the R and D side and on the go to market marketing side to reduce the friction of spreading across an organization.
Great. That's helpful. Thank you so much.
Thank you. And the next question comes from Sanjit Singh with Morgan Stanley.
Congratulations on a successful fiscal year 'sixteen. If I could just toggle back to the pricing change, one last question on that. It was 8 points this quarter and it sort of goes away beginning next quarter, it seems like a pretty steep drop off. And I'm just trying to understand the dynamics of why you would go from 8% to pretty immaterial that quickly?
So, it's a good question, Sanjeet. So just a little complexity here. There's kind of 2 things that go into that 8 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. And I commented on that earlier in those, any kind of price change, other price increase or decrease since inception, the company is flowing through our revenue today.
That will sort of continue on and there's a whole bucket of those kind of things and we wouldn't necessarily break any of that out. That's just the normal course of the business. The piece that's been going away is the piece that really where it sort of ended in November 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. So we'll see some of that in the Q1 of 2017 and then we're done. And then 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.
And I said earlier that the targets provided in Q1, they factor in the last of that pricing benefit that's going to be going away and it's being offset by some summer seasonality. So both of those are factored into the target of sort of 30% to 32% or $132,000,000 to $134,000,000 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.
So I just wanted to
understand how you're feeling about that business as you come to the close of fiscal year 2016 and think about the prospects for HipChat going into next year, whether you need to make any changes to the products or where it's sort of ready to continue to scale?
Yes, sure, Matt. I can take that one. It's Mike here in Sydney again. Look, I mean, it's hard to give commentary on all our 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 HIT chat, continue to expand and have great top line growth across FY 2016.
So we're excited about the space and its ability to transform the way that teams collaborate.
Understood. And the last one for me. 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 does that what has that reached and, maybe the percentage of Jira users outside of software, any update on those two metrics?
And it's Scott here. At the moment, we're not ready to comment on those metrics. And 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. But those 2 aren't ones that we are prepared to talk about today. Apart from just say, we're really happy with the growth of both of them, but I don't have them in a state to hand out today.
Fair enough. Congrats on a nice year.
Thank you.
Thank you. And the next question comes from Brent Thill with UBS.
Hey, guys. This is Michael Turrin on for Brent Thill. Thanks for taking our questions. I wanted to talk a little bit more about the decision to shift to 3rd party cloud service providers. Looking at the fiscal 2017 guidance versus Q4, it looks like 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 1 or multiple providers? Anything else is greatly appreciated.
Thanks, Michael. Yes, good question. The way we think about it, it's been a progression for a long time. At Atlassian, we've had a hybrid model of using 3rd party data providers and our internal data centers for where effectively the workloads made most economic into the cloud. That 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.
So there's nothing specific that we're doing in terms of this change of strategy. It's really just the 3rd party providers that's got to a level of sophistication capability that we can use more of them.
And I'd also add that, a comment on accelerated depreciation. So as part of that transition, we're incurring a little more depreciation expense than we otherwise would as part of that transition. And that's why you see the gross margin coming down in our fiscal 2017
targets. Great. That's helpful. And then you talked a little bit about during the quarter I
guess,
how should we think about that continuing into the next year as well?
Yes. I'll just say that, first, that was variable spend. It was not fixed spend per se. So it's something that we made a decision to do in the Q4. As far as any other specifics, Jay, if you'd like to add anything more to it.
Nothing beyond it. 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. And the next question comes from John DiFucci with Jefferies.
Thanks for taking my question. I guess a question for Mike or Scott. It has to do with the acquisition status page. Other acquisitions you bought in the past have been products and you bought a product and you've sort of pushed that out through your vast distribution into your customer base. Can you talk explain a little bit just I'm not quite sure is this one going to be a product or is this going to be technology that will be added on to things like Jira Service Desk and others?
And how should we think about your M and A philosophy going forward?
John, great question. It's Scott here. Just for those that aren't familiar with Statuspage, just sort of go through again what they do. If you look at the way most companies are these days, most companies are software companies. And as a SaaS company, you really become a service company where you have to provide a service 20 fourseven to your customers.
And when you provide that service, you need some way of communicating the status of that service to your customers. And Statuspage is kind of like the cell phone signal bars on your cell phone sort of explaining to you with something up or down and where to go for help. Now this is a relatively new market, a greenfield's opportunity for us and Statuspage is the leader in this market. When we look at the customer base, they have a couple of 1,000 customers. We're not showing a specific number, but Atlassian has tens of thousands of customers.
And so there's a huge opportunity because all of our Atlassian customers will need a status page over time. And in terms of how we will combine the products, there's a lot of product integrations we can do over time. For the moment, it's going to be a standalone product inside our portfolio with a separate SKU and pricing as it is today.
Okay, great. Great, Scott. And should we so it sounds like at least initially it would be similar to previous acquisitions. And is that the way we should be thinking continue to think the same way going forward when you do make acquisitions?
Yes, John. We've got a long history of doing small acquisitions successfully. We've done a couple of dozen of them now. And you'll continue to see us do small acquisitions where they fit our pricing model and our go to market approach and they sell into our customer base or adjacent to that. Obviously, due to our go to market model and our approach, it's very difficult for us to acquire something large.
We'd have to give a lot of consideration to something like that. So you can consider and you continue to see us to do small tuck in acquisitions.
Next question comes from Steve Ashley with Robert W. Baird.
Hi, thanks. This is Jason Valkabar on for Steve. Thanks for taking my questions. First question, just wanted to ask about Europe. It looked like there's a slight deceleration there, although don't have a compare from last 4Q.
Just curious how much of that is from kind of seasonal summer slowness versus the macro issues there? And just generally kind of how sensitive is kind of your spend to macro challenges?
Jason, so we haven't in terms of like Brexit or whatever, we haven't seen anything in our business. I would say that Brexit's led to any kind of softness in our business. What we have seen through looking through the data and just like in at least all the other software companies I've worked in, a little bit of summer seasonality in Europe, and we have some of that in our business and that's been factored in. But no sort of macro trends or Brexit are we seeing at this point and that's not certainly not factored into our targets. Just the normal summer seasonality is what's included.
Thanks. That's helpful. And then just second question, just sort of about renewal rates and how that might vary by customer size? Just kind of curious how you expect renewal rates to trend as you may gain traction with larger enterprises? And that's it for me.
Yes. 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 tend to, as we mentioned, during the roadshow, tend to have a higher kind of renewal rate and we have a really high logo retention rate. But I think we're happy with retention kind of across the breadth of the customer base.
Great. Thanks guys.
Thank you.
Thank you. And the next question comes from Patrick Walravens with JMP Securities.
Great. Thank you and congratulations you guys. I guess Mike and Scott, I'm curious, does the self-service model for go to market work as well for legal and HR and finance as it does for IT and developers? And 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. As Mike mentioned, remember the go to market model, I think it's effective in landing inside of software increasingly in IT. And then we use a lot of kind of engagement and growth tactics that you're probably familiar with as a consumer of Amazon, where 3 quarters I think of Amazon's sales come from their in store recommendation engine. And so we have the ability kind of in our products to recommend use cases of users that might be part of an IT project, that get exposed to how a service desk could help their legal team.
In addition to kind of the traditional ways we might market those use cases to champions of our products inside of the business. So 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. And so 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.
Thank you. And our next question comes from George Iwanyc with Oppenheimer.
Thank you for taking my question. So just following up on those HR, finance, legal type of use cases. Right now with Jira Core, where are you seeing the strongest interest? And are you seeing any pressure to add new features to core to specialize in certain verticals?
Yes. Thanks, Matt. It's Mike here. George, we're look, Jira Core, as a reminder for those listening, we split Jira into 3 different offerings in October of last year. So about 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 DuraCore is to reduce down some of the software and IT specific features such that the business teams get a cleaner experience of tracking work that they're trying to achieve. And then after that, we'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. But at the moment, there are no sort of glaring feature gaps for those teams in terms of getting their work done.
So we've been pretty happy with the reception so far, given it's still inside its 1st year.
All right. And just one other question, how should we look at headcount additions as the year progresses?
Yes, George, we'll continue to invest across all the different the major expense categories inside the company, but with OBA, the continued focus on investing in R and D, that will be the primary area. But we'll be investing across the company as we scale.
All right. Thank
you. Thank you.
Thank you. And as there are no more questions at this present time, I would like to return the call to management for closing comments.
It's Scott here. I just want to thank everyone for joining our call today. We really appreciate the time and look forward to keeping you updated on our progress. Thanks a lot.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.