Atlassian Corp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and the information contained in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended June 30, 2024, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on August 16, 2024. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995 . In some cases, you can identify these statements by forward-looking words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations, but these words are not the exclusive means for identifying such statements. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results and timing expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. Except as may be required by law, we assume no obligation to update these forward-looking statements or the reasons that results could differ from these forward-looking statements. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q. Company Overview Our mission is to unleash the potential of every team. The Atlassian System of Work is our philosophy of how technology-driven organizations should work, connecting technology and business teams to accelerate progress and maximize team impact. Through a portfolio of interconnected products with discrete value propositions that are powered by the Atlassian platform and data model, the Atlassian System of Work helps customers of any size align work to goals, plan and track work, and unleash their organization's collective knowledge. Our primary products include Jira for planning and project management, Confluence for content creation and sharing, and Jira Service Management for team service, management and support applications. Together, our connected portfolio of products form integrated solutions and, when deployed in the cloud, provide customers all the benefits of analytics, automation, and AI apps and agents with Rovo, along with integrations with thousands of third-party apps as a solution that is deeply entrenched in how teams collaborate and how organizations run. The Atlassian platform is the common technology foundation for our products that drives connection between teams, information, and workflows. It allows work to flow seamlessly across tools, automates the mundane so teams can focus on what matters, and enables better decision-making based on the data customers choose to put into our products. Our mission is possible with a deep investment in product development to create and refine innovative, high-value, and versatile products that users love. We make our products affordable for organizations of all sizes and transparently share our pricing online for most of our products. We aim to grow our customer base, targeting organizations of all sizes, in every industry, and in most geographies, and strategically expand our relationships with customers over time, including with our dedicated sales team. This product-led philosophy enables us to go to market in a unique and efficient way. To land new customers, we’ve engineered a low-friction flywheel with an emphasis on self-service, making it easy to try and get value first and foremost. This allows us to operate at an unusual scale for an enterprise software company, with customers across virtually every industry sector in approximately 200 countries and territories as of March 31, 2025. Our customers range from small organizations that have adopted one of our products for a small group of users, to over eighty percent of the Fortune 500, many of which use a combination of our products across thousands of users. By designing our products to be simple, powerful, affordable, and easy to adopt, we generate demand through word-of-mouth and viral expansion within organizations, allowing our sales force to focus primarily on expanding and deepening strategic relationships with existing customers, particularly in the enterprise. 25 Our high-velocity, low-friction distribution model is designed to drive exceptional customer scale by making products that are free to try and affordable to purchase online. W e prioritize product quality, automated distribution, transparent pricing, and customer service to land new customers and expand to new teams. We also have a sales team focused primarily on expanding and deepening strategic relationships with existing customers, particularly large enterprises. We primarily rely on word-of-mouth and low-touch demand generation to drive trial, adoption, and initial expansion of our products. A substantial majority of our sales are automated through our website, including sales of our products through our solution partners and resellers. Our solution partners and resellers primarily focus on customers in regions that require local language support and other customized needs. We plan to continue to invest in our partner programs to help us enter and grow in new markets, complementing our automated, low-touch approach. Our culture of innovation, transparency and dedication to customer service drives our success in implementing and refining this unique approach. We believe this approach creates a self-reinforcing effect that fosters innovation, quality, customer success, and scale. As part of this strategy, we invest significantly more in research and development activities than in traditional sales activities relative to other enterprise software companies. We generate revenues primarily in the form of subscription fees. Subscription revenues consist primarily of fees earned from subscription-based arrangements for providing customers the right to use our software in a cloud-based-infrastructure that we provide (“Cloud offerings”). We also sell on-premises term license agreements for our Data Center products (“Data Center offerings”), consisting of software licensed for a specified period and support and maintenance services that are bundled with the license for the term of the license period. Subscription revenues also include subscription-based agreements for our premier support services. From time to time, we make changes to our product offerings, prices, and pricing plans for our products w hich may impact the growth rate of our revenue, our deferred revenue balances, and customer retention. Subscription revenue, through our Cloud and Data Center offerings, results in a large recurring revenue base. Economic Conditions Our results of operations may vary based on the impact of changes in the global economy on us or our customers. Our business depends on demand for business software applications generally and for collaboration software solutions in particular. We are subject to risks and exposures from the evolving macroeconomic environment, inflationary pressures, interest rate policy, changes in trade policies, political instability, and geopolitical tensions. We monitor the direct and indirect impacts of these circumstances on our business and financial results. The extent to which these risks ultimately impact our business, results of operations, and financial position will depend on future developments, which are uncertain and cannot be predicted at this time. Key Business Metrics We utilize the following key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. Customer Base We have a history of successfully growing both our total customer base and the spend per customer through growth in users, higher average price per user and adoption of new products. We believe our ability to attract new customers is critical, and expanding within the existing customer base is the primary driver of our success as a business. Typically, new customers begin their journey with Atlassian products with a small footprint by either adopting our free editions or purchasing a single product for a limited number of users. We are focused on continuing to grow our total customer base, specifically the number of customers with more than $10,000 in annualized recurring revenue from our Cloud offerings (“Cloud ARR”), as it measures our ability to successfully expand within our existing customer base. We define the number of total customers at the end of any particular period as the number of organizations with unique domains with an active subscription for two or more seats. We define the number of customers with Cloud ARR greater than $10,000 using the same definition as total customers with the distinction of having an active Cloud subscription and greater than $10,000 in Cloud ARR . We define Cloud ARR as the annualized recurring revenue run-rate of Cloud subscription agreements at a point in time. We calculate Cloud ARR by taking the Cloud monthly recurring revenue (“Cloud MRR”) run-rate and multiplying it by 12. Cloud MRR for each month is calculated by aggregating monthly recurring revenue from committed contractual amounts at a point in time. Cloud ARR and Cloud MRR should be viewed independently of revenue and do not represent our revenue under U.S. generally accepted accounting principles (“GAAP”), as they are operational metrics that can be affected by contract start and 26 end dates and renewal rates. While a single customer may have distinct departments, operating segments, or subsidiaries with multiple active licenses or subscriptions of our products, if the product deployments share a unique domain name, we only include the customer once for purposes of calculating a customer. As of March 31, 2025, we had more than 300,000 customers. If we include single user accounts and organizations who have only adopted our free or starter products, the active use of our products extends well beyond our total customer base. Through the extensive use of our software, we are able to reach a vast number of users, gather insights to refine our offerings, and generate growing revenue by expanding within our total customer base. Customers with greater than $10,000 in Cloud ARR represent the majority of our Cloud revenue. The following table sets forth our number of customers with greater than $10,000 in Cloud ARR as of the dates presented: As of March 31, 2024 June 30, 2024 September 30, 2024 December 31, 2024 March 31, 2025 Number of customers with greater than $10,000 in Cloud ARR 44,336 45,842 46,844 49,449 50,715 Free Cash Flow Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by operating activities less net cash used in investing activities for capital expenditures. Management considers free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by our business that can be used to fund our commitments, repay our debt, and for strategic opportunities, such as reinvesting in our business, making strategic acquisitions, and strengthening our financial position. Free cash flow is not a measure calculated in accordance with GAAP and should not be considered in isolation from, or as a substitute for financial information prepared in accordance with GAAP, such as GAAP net cash provided by operating activities. In addition, free cash flow may not be comparable to similarly titled metrics of other companies due to differences among methods of calculation. The following table presents a reconciliation of net cash provided by operating activities to free cash flow for the periods presented (in thousands): Three Months Ended March 31, Nine Months Ended March 31, 2025 2024 2025 2024 Net cash provided by operating activities $ 652,681 $ 565,390 $ 1,085,078 $ 1,021,940 Less: Capital expenditures (14,366) (10,520) (29,853) (19,522) Free cash flow $ 638,315 $ 554,870 $ 1,055,225 $ 1,002,418 Free cash flow increased by $83.4 million and $52.8 million during the three months and nine months ended March 31, 2025 as compared to the three months and nine months ended March 31, 2024, respectively. In both periods the increase in free cash flow was primarily attributable to an increase in net cash provided by operating activities. The increase in net cash provided by operating activities was primarily attributable to an increase in cash received from customers, a decrease in cash paid for income taxes, partially offset by an increase in cash paid to employees and vendors. For more information about net cash provided by operating activities, please see “Liquidity and Capital Resources.” 27 Components of Results of Operations Sources of Revenues Subscription Revenues Subscription revenues consist primarily of fees earned from subscription-based arrangements for providing customers the right to use our software in a cloud-based-infrastructure that we provide. We also sell on-premises term license agreements for our Data Center offerings, which consist of software licensed for a specified period and include support and maintenance services that are bundled with the license for the term of the license period. Subscription revenues also include subscription-based agreements for our premier support services. Subscription revenues are driven primarily by the number and size of active licenses, the type of product and the price of the licenses. Our subscription-based arrangements generally have a contractual term of one to twelve months. For Cloud offerings, subscription revenue is recognized ratably as services are performed, commencing with the date the service is made available to customers. For Data Center offerings, we recognize revenue upfront for the portion that relates to the delivery of the term license, and the support and related revenue is recognized ratably as the services are delivered over the term of the arrangement. Premier support consists of subscription-based arrangements for a higher level of support across different deployment options, and revenue is recognized ratably as the services are delivered over the term of the arrangement. Other Revenues Other revenues primarily include fees received for sales of third-party apps in the Atlassian Marketplace. Advisory services and training services are also included in other revenues. Revenue from the sale of third-party apps via Atlassian Marketplace is recognized on the date of product delivery given that all of our obligations have been met at that time and on a net basis as we function as the agent in the relationship. Revenue from advisory services is recognized over the time period that the customer has access to the service. Revenue from consulting and training is recognized over time as the services are performed. We expect subscription revenue to increase and continue to be our primary driver of revenue growth. M aintenance revenue related to our Server offerings is immaterial after the Server end of support date and has been classified in other revenues within our condensed consolidated statements of operations for all periods presented. Cost of Revenues Cost of revenues primarily consists of expenses related to compensation expenses for our employees, including stock-based compensation, hosting our cloud infrastructure, which includes third-party hosting fees and depreciation associated with computer equipment and software, payment processing fees, consulting and contractors costs associated with our customer support and infrastructure service teams, amortization of acquired intangible assets, such as the amortization of the cost associated with an acquired company’s developed technology, certain IT program expenses, and facilities and related overhead costs. To support our cloud-based infrastructure, we utilize third-party managed hosting facilities. We allocate stock-based compensation based on the expense category in which the employee works. We allocate overhead, such as information technology costs, rent, and occupancy charges, in each expense category based on headcount in that category. As such, general overhead expenses are reflected in cost of revenues and operating expense categories. We expect cost of revenues to increase as we continue to invest in our cloud-based infrastructure to support migrations and our Cloud customers. Gross Profit and Gross Margin Gross profit is total revenues less total cost of revenues. Gross margin is gross profit expressed as a percentage of total revenues. Gross margin can fluctuate from period to period as a result of changes in product mix. We expect gross margin to modestly decrease due to the sales mix shift from Data Center offerings to Cloud offerings. This impact will be primarily driven by increased hosting costs and personnel costs to support our Cloud customers. 28 Operating Expenses Our operating expenses are classified as research and development, marketing and sales, and general and administrative. For each functional category, the largest component is compensation expenses, which include salaries and bonuses, stock-based compensation and employee benefit costs. We allocate overhead, such as information technology costs, rent, and occupancy charges, in each expense category based on headcount in that category. Research and Development Research and development expenses consist primarily of compensation expenses for our employees, including stock-based compensation, facilities and related overhead costs, consulting and contractor costs associated with our software development teams, and certain IT program expenses. We continue to focus our research and development efforts on building new products, adding new features and services, integrating acquired technologies, increasing functionality, enhancing our cloud infrastructure and developing our artificial intelligence capabilities. Marketing and Sales Marketing and sales expenses consist primarily of compensation expenses for our employees, including stock-based compensation, marketing and sales programs, consulting and contractor costs, facilities and related overhead costs, and certain IT program expenses. Marketing programs consist of advertising, promotional events, corporate communications, brand building and product marketing activities such as online lead generation. Sales programs consist of activities and teams focused on supporting our solution partners and resellers, tracking channel sales activity, supporting and servicing our customers by helping them optimize their experience and expand the use of our products across their organizations and helping product evaluators learn how they can use our tools most effectively. General and Administrative General and administrative expenses consist primarily of compensation expenses for our employees, including stock-based compensation, for finance, legal, human resources and information technology personnel, facilities and related overhead costs, consulting and contractor costs, certain IT program expenses, and other corporate expenses. Income Taxes Provision for income taxes consists primarily of income taxes related to federal, state, and foreign jurisdictions where we conduct business. Critical Accounting Estimates Our condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported revenues and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions and such differences could be material. There have been no significant changes to our critical accounting policies and estimates during the three and nine months ended March 31, 2025, as compared to the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Results of Operations included in our Annual Report on Form 10-K for fiscal year 2024. New Accounting Pronouncements Pending Adoption The impact of recently issued accounting standards is set forth in Note 2, “ Summary of Significant Accounting Policies , ” of the notes to our condensed consolidated financial statements. 29 Results of Operations The following table sets forth our results of operations for the periods indicated (in thousands, except for percentages of total revenues): Three Months Ended March 31, Nine Months Ended March 31, 2025 % of Total Revenues 2024 % of Total Revenues 2025 % of Total Revenues 2024 % of Total Revenues Revenues: Subscription $ 1,272,876 94 % $ 1,071,355 91 % $ 3,618,072 94 % $ 2,855,518 89 % Other 83,840 6 117,773 9 212,888 6 371,495 11 Total revenues 1,356,716 100 1,189,128 100 3,830,960 100 3,227,013 100 Cost of revenues 219,675 16 213,425 18 660,426 17 585,990 18 Gross profit 1,137,041 84 975,703 82 3,170,534 83 2,641,023 82 Operating expenses: Research and development 685,320 51 576,490 49 1,968,634 51 1,595,007 49 Marketing and sales 295,832 22 223,814 19 820,119 21 637,894 20 General and administrative 168,345 12 157,595 13 483,694 13 458,249 14 Total operating expenses 1,149,497 85 957,899 81 3,272,447 85 2,691,150 83 Operating income (loss) (12,456) (1) 17,804 1 (101,913) (2) (50,127) (1) Other expense, net (14,861) (1) (10,990) (1) (42,292) (1) (23,964) (1) Interest income 27,767 2 21,414 2 81,917 2 69,233 2 Interest expense (7,804) (1) (8,453) — (22,413) (1) (26,430) (1) Income (loss) before income taxes (7,354) (1) 19,775 2 (84,701) (2) (31,288) (1) Provision for income taxes (63,453) (4) (7,023) (1) (148,083) (4) (72,312) (2) Net income (loss) $ (70,807) (5) % $ 12,752 1 % $ (232,784) (6) % $ (103,600) (3) % 30 Three Months Ended March 31, 2025 and 2024 Revenues Three Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Subscription $ 1,272,876 $ 1,071,355 $ 201,521 19 % Other 83,840 117,773 (33,933) (29) Total revenues $ 1,356,716 $ 1,189,128 $ 167,588 14 % Total revenues increased $167.6 million, or 14%, in the three months ended March 31, 2025 compared to the three months ended March 31, 2024. Growth in total revenues was primarily attributable to increased demand for our products from existing customers. Of total revenues recognized in the three months ended March 31, 2025, over 90% were attributable to sales to customer accounts existing on or before December 31, 2024. Subscription revenues increased $201.5 million, or 19%, in the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The increase in subscription revenues was primarily attributable to paid seat expansion from our existing customers and price increases. Other revenues decreased $33.9 million, or 29%, in the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The decrease in other revenues was primarily attributable to a decrease of $27.8 million in maintenance revenue due to the end of support for our Server offerings. Total revenues by deployment options were as follows: Three Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Cloud $ 880,429 $ 703,036 $ 177,393 25 % Data Center 388,516 364,134 24,382 7 Server — 29,720 (29,720) (100) Marketplace and other 87,771 92,238 (4,467) (5) Total revenues $ 1,356,716 $ 1,189,128 $ 167,588 14 % Total revenues by geography were as follows: Three Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Americas $ 637,316 $ 564,387 $ 72,929 13 % EMEA 571,553 500,005 71,548 14 Asia Pacific 147,847 124,736 23,111 19 Total revenues $ 1,356,716 $ 1,189,128 $ 167,588 14 % Cost of Revenues Three Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Cost of revenues $ 219,675 $ 213,425 $ 6,250 3 % Gross margin 84 % 82 % Cost of revenues increased $6.3 million, or 3%, in the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The overall increase was primarily attributable to an increase of $6.0 million in compensation expense for employees (which includes an increase of $3.1 million in stock-based compensation). 31 Operating Expenses Research and Development Three Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Research and development $ 685,320 $ 576,490 $ 108,830 19 % Research and development expenses increased $108.8 million, or 19%, in the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The overall increase was primarily attributable to an increase of $112.8 million in compensation expenses for employees (which includes an increase of $50.5 million in stock-based compensation ). Marketing and Sales Three Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Marketing and sales $ 295,832 223,814 $ 72,018 32 % Marketing and sales expenses increased $72.0 million , or 32%, for the three months ended March 31, 2025 compared to the three months ended March 31, 2024 . The overall increase was primarily attributable to an increase of $45.4 million in compensation expenses for employees (which includes an increase of $9.7 million in stock-based compensation) , and an increase of $24.4 million in advertising and marketing event expenses. General and Administrative Three Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change General and administrative $ 168,345 157,595 $ 10,750 7 % General and administrative expenses increased $10.8 million, or 7%, in the three months ended March 31, 2025 compared to the three months ended March 31, 2024 . The overall increase was primarily attributable to an increase of $8.4 million in compensation expense for employees (which includes an increase of $1.0 million in stock-based compensation). Other Expense, net Three Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Other expense, net $ (14,861) $ (10,990) $ (3,871) 35 % Other expense, net increased $3.9 million, or 35%, in the three months ended March 31, 2025, compared to the three months ended March 31, 2024. The overall increase in other expense was primarily attributable to an increase of $1.9 million in net loss related to strategic investments and an increase of $1.8 million in contributions to the Atlassian Foundation. Interest Income Three Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Interest income 27,767 21,414 $ 6,353 30 % Interest income increased $6.4 million, or 30% in the three months ended March 31, 2025 compared to the three months ended March 31, 2024 . The increase was primarily attributable to an increase in investment income as a result of increased investment balances. 32 Interest Expense Three Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Interest expense $ (7,804) $ (8,453) $ 649 (8) % Interest expense decreased $0.6 million, or 8% in the three months ended March 31, 2025 compared to the three months ended March 31, 2024 . The decrease was primarily attributable to a decrease in interest expense on our outstanding debt as a result of the issuance of the Notes (as defined below) and repayment of the Term Loan (as defined below) in the fourth quarter of fiscal year 2024. Provision for Income Taxes Three Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Provision for income taxes $ (63,453) $ (7,023) $ (56,430) * Effective tax rate * * * Not meaningful Provision for income taxes increased $56.4 million for the three months ended March 31, 2025, as compared to the three months ended March 31, 2024. The increase was primarily attributable to the change in the mix of earnings and losses in foreign jurisdictions. See Note 14, “ Income Taxes ,” of the notes to our condensed consolidated financial statements for additional information. Our future effective annual tax rate may be materially impacted by the expense or benefit from tax amounts associated with our foreign earnings that are taxed at rates different from the federal statutory rate, level of profit before tax, accounting for uncertain tax positions, business combinations, changes in our valuation allowances to the extent sufficient positive evidence becomes available, closure of statute of limitations or settlement of tax audits, and changes in tax laws. A significant amount of our earnings is generated by our Australian subsidiaries. Our future effective tax rates may be adversely affected to the extent earnings are lower than anticipated in countries where we have lower statutory tax rates. Changes in our global operations could result in changes to our effective tax rates, future cash flows, and overall profitability of our operations. We recognize the tax benefit of an uncertain tax position only if we conclude it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than 50 percent likely to be realized upon settlement with the taxing authority. We believe we have provided adequate reserves for income tax uncertainties in all open tax years. Based on the information currently available, we do not anticipate a material change in unrecognized tax benefits in the next 12 months. The Organization for Economic Co-operation and Development introduced a framework for a global minimum corporate income tax of 15% known as the Global Anti-Base Erosion rules. This legislation has been enacted in certain jurisdictions where we operate and is effective for our fiscal year 2025. As of March 31, 2025, the global minimum tax does not have a significant impact on our financial statements. As additional jurisdictions enact legislation, transitional rules lapse, and other provisions of the global minimum tax legislation become effective, our effective tax rate and cash tax payments may increase in future years. 33 Nine Months Ended March 31, 2025 and 2024 Revenues Nine Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Subscription $ 3,618,072 $ 2,855,518 $ 762,554 27 % Other 212,888 371,495 (158,607) (43) Total revenues $ 3,830,960 $ 3,227,013 $ 603,947 19 % Total revenues increased $603.9 million, or 19%, in the nine months ended March 31, 2025 compared to the nine months ended March 31, 2024. Growth in total revenues was primarily attributable to increased demand for our products from existing customers. Of total revenues recognized in the nine months ended March 31, 2025, over 90% was attributable to sales to customer accounts existing on or before June 30, 2024. Subscription revenues increased $762.6 million, or 27%, in the nine months ended March 31, 2025 compared to the nine months ended March 31, 2024. The increase in subscription revenues was primarily attributable to paid seat expansion from our existing customers, price increases, and migrations. Other revenues decreased $158.6 million, or 43%, in the nine months ended March 31, 2025 compared to the nine months ended March 31, 2024. The decrease in other revenues was primarily attributable to a decrease of $169.5 million in maintenance revenue due to the end of support for our Server offerings. Total revenues by deployment options were as follows: Nine Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Cloud $ 2,519,697 $ 1,960,893 $ 558,804 28 % Data Center 1,086,391 881,835 204,556 23 Server — 177,645 (177,645) (100) Marketplace and other 224,872 206,640 18,232 9 Total revenues $ 3,830,960 $ 3,227,013 $ 603,947 19 % Total revenues by geography were as follows: Nine Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Americas $ 1,840,980 $ 1,568,349 $ 272,631 17 % EMEA 1,566,304 1,303,303 263,001 20 Asia Pacific 423,676 355,361 68,315 19 Total revenues $ 3,830,960 $ 3,227,013 $ 603,947 19 % Cost of Revenues Nine Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Cost of revenues $ 660,426 $ 585,990 $ 74,436 13 % Gross margin 83 % 82 % Cost of revenues increased $74.4 million, or 13%, in the nine months ended March 31, 2025 compared to the nine months ended March 31, 2024. The overall increase was primarily attributable to an increase of $31.5 million in hosting fees paid to third-party providers, an increase of $19.5 million in compensation expense for employees (which includes an increase of $8.4 million in stock-based compensation), and an increase of $11.6 million in software subscription costs. 34 Operating Expenses Research and Development Nine Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Research and development $ 1,968,634 $ 1,595,007 $ 373,627 23 % Research and development expenses increased $373.6 million, or 23%, in the nine months ended March 31, 2025 compared to the nine months ended March 31, 2024. The overall increase was primarily attributable to an increase of $351.8 million in compensation expenses for employees (which includes an increase of $166.0 million in stock-based compensation ). Marketing and Sales Nine Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Marketing and sales $ 820,119 $ 637,894 $ 182,225 29 % Marketing and sales expenses increased $182.2 million, or 29%, for the nine months ended March 31, 2025 , compared to the nine months ended March 31, 2024 . The overall increase was primarily attributable to an increase of $113.3 million in compensation expenses for employees (which includes an increase of $18.5 million in stock-based compensation), and an increase of $54.7 million in advertising and marketing event expenses. General and Administrative Nine Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change General and administrative $ 483,694 $ 458,249 $ 25,445 6 % General and administrative expenses increased $25.4 million, or 6%, in the nine months ended March 31, 2025 compared to the nine months ended March 31, 2024 . The overall increase was primarily attributable to an increase of $25.1 million in compensation expenses for employees (which includes an increase of $10.9 million in stock-based compensation). Other Expense, net Nine Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Other expense, net $ (42,292) $ (23,964) $ (18,328) 76 % Other expense, net increased $18.3 million, or 76% in the nine months ended March 31, 2025 compared to the nine months ended March 31, 2024. The overall increase was primarily attributable to an increase of $9.2 million in expense related to our share of loss from an equity method investment and an increase of $5.6 million in contributions to the Atlassian Foundation. Interest Income Nine Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Interest Income $ 81,917 $ 69,233 $ 12,684 18 % Interest income increased $12.7 million , or 18% in the nine months ended March 31, 2025 compared to the nine months ended March 31, 2024 . The increase was primarily attributable to an increase in investment income as a result of increased investment balances. 35 Interest Expense Nine Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Interest expense $ (22,413) $ (26,430) $ 4,017 (15) % Interest expense decreased $4.0 million, or 15%, in the nine months ended March 31, 2025 compared to the nine months ended March 31, 2024 . The decrease was primarily attributable to a decrease in interest expense on our outstanding debt as a result of the issuance of the Notes (as defined below), and repayment of the Term Loan (as defined below) in the fourth quarter of fiscal year 2024. Provision for Income Taxes Nine Months Ended March 31, (in thousands, except percentage data) 2025 2024 $ Change % Change Provision for income taxes $ (148,083) $ (72,312) $ (75,771) * Effective tax rate * * * Not meaningful Provision for income taxes increased $75.8 million for the nine months ended March 31, 2025, as compared to the nine months ended March 31, 2024. The increase was primarily attributable to the change in the mix of earnings and losses in foreign jurisdictions. See Note 14, “ Income Taxes ,” of the notes to our condensed consolidated financial statements for additional information. Our future effective annual tax rate may be materially impacted by the expense or benefit from tax amounts associated with our foreign earnings that are taxed at rates different from the federal statutory rate, level of profit before tax, accounting for uncertain tax positions, business combinations, changes in our valuation allowances to the extent sufficient positive evidence becomes available, closure of statute of limitations or settlement of tax audits, and changes in tax laws. A significant amount of our earnings is generated by our Australian subsidiaries. Our future effective tax rates may be adversely affected to the extent earnings are lower than anticipated in countries where we have lower statutory tax rates. Changes in our global operations could result in changes to our effective tax rates, future cash flows, and overall profitability of our operations. We recognize the tax benefit of an uncertain tax position only if we conclude it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than 50 percent likely to be realized upon settlement with the taxing authority. We believe we have provided adequate reserves for income tax uncertainties in all open tax years. Based on the information currently available, we do not anticipate a material change in unrecognized tax benefits in the next 12 months. The Organization for Economic Co-operation and Development introduced a framework for a global minimum corporate income tax of 15% known as the Global Anti-Base Erosion rules. This legislation has been enacted in certain jurisdictions where we operate and is effective for our fiscal year 2025. As of March 31, 2025, the global minimum tax does not have a significant impact on our financial statements. As additional jurisdictions enact legislation, transitional rules lapse, and other provisions of the global minimum tax legislation become effective, our effective tax rate and cash tax payments may increase in future years. Liquidity and Capital Resources As of March 31, 2025, we had cash and cash equivalents totaling $2.7 billion, marketable securities totaling $313.6 million and accounts receivables totaling $642.0 million. Since our inception, we have primarily financed our operations through cash flows generated by operations and corporate debt. 36 Our cash flows from operating activities, investing activities, and financing activities for the periods presented were as follows (in thousands): Nine Months Ended March 31, 2025 2024 Net cash provided by operating activities $ 1,085,078 $ 1,021,940 Net cash used in investing activities (207,364) (945,647) Net cash used in financing activities (390,299) (228,029) Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash (3,709) (1,986) Net increase (decrease) in cash, cash equivalents, and restricted cash $ 483,706 $ (153,722) Our primary source of cash is through collections from our customers. Our primary uses of cash from operating activities are general business expenses including employment expenses, cloud platform and other infrastructure services, income taxes, professional services fees, marketing expenses, software expenses, and facility expenses. Net cash provided by operating activities increased by $63.1 million for the nine months ended March 31, 2025, compared to the nine months ended March 31, 2024. The net increase was primarily attributable to an increase in cash received from customers, a decrease in cash paid for income taxes, partially offset by an increase in cash paid to employees and vendors. Net cash used in investing activities decreased by $738.3 million during the nine months ended March 31, 2025, compared to the nine months ended March 31, 2024. The net decrease was primarily attributable to a decrease in cash consideration paid for acquisitions, net of cash acquired of approximately $838.8 million, partially offset by an increase in net outflows of $90.2 million related to our strategic investment and marketable security activity. Net cash used in financing activities increased by $162.3 million for the nine months ended March 31, 2025, compared to the nine months ended March 31, 2024. The net increase was primarily attributable to an increase in repurchases of Class A Common Stock of $184.1 million, partially offset by a decrease in principal payments for the Term Loan (defined below) of $25.0 million. Material Cash Requirements Debt As of March 31, 2025 , we had $500.0 million aggregate principal amount of 5.250% senior notes due 2029 (the “2029 Notes”) and $500.0 million aggregate principal amount of 5.500% senior notes due 2034 (the “2034 Notes,” and together with the 2029 Notes, the “Notes”). The 2029 Notes and the 2034 Notes will mature on May 15, 2029 and May 15, 2034, respectively. Interest on the Notes will be paid semi-annually in arrears on May 15 and November 15 of each year, starting from November 15, 2024. In August 2024, our prior credit facility was amended and restated to provide for a $750 million senior unsecured revolving credit facility (the “2024 Credit Facility”). We may repay outstanding loans under the 2024 Credit Facility at any time, without premium or penalty, and we have an option to request an increase of $250 million in certain circumstances. The 2024 Credit Facility replaced our prior credit facility entered into in October 2020, which provided for a $1 billion senior unsecured delayed-draw term loan facility (the “Term Loan”) and a $500 million senior unsecured revolving credit facility. Refer to Note 9, “ Debt, ” to our condensed consolidated financial statements for additional information. Share Repurchase Programs 37 In January 2023, the Board of Directors authorized a program to repurchase up to $1.0 billion of our outstanding Class A Common Stock (the “2023 Repurchase Program”). In September 2024, the Board of Directors authorized a new program under which we may repurchase up to an additional $1.5 billion of our outstanding Class A Common Stock (the “2024 Repurchase Program” and, together with the 2023 Repurchase Program, the “Repurchase Programs”). The 2024 Repurchase Program will commence following completion of the 2023 Repurchase Program. The Share Repurchase Programs do not have a fixed expiration date, may be suspended or discontinued at any time, and do not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares. During the three and nine months ended March 31, 2025, we repurchased and subsequently retired approximately 0.6 million and 2.1 million shares of our Class A Common Stock for approximately $138.9 million and $391.2 million at an average price per share of $228.05 and $185.57, respectively. All repurchases were made in open market transactions. As of March 31, 2025, we were authorized to purchase a remaining $60.7 million and $1.5 billion of its Class A Common Stock under the 2023 Share Repurchase Program and 2024 Share Repurchase Program, respectively. Contractual Obligations Our principal commitments consist of contractual commitments for our cloud services platform and other infrastructure services, and obligations under leases for office space including obligations for leases that have not yet commenced. Refer to Note 10, “ Commitments and Contingencies,” to our condensed consolidated financial statements for additional information. Other Future Obligations We believe that our existing cash and cash equivalents, together with cash generated from operations, and borrowing capacity from the 2024 Credit Facility will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our other future cash requirements will depend on many factors including our growth rate, the timing and extent of spend on research and development efforts, employee headcount, marketing and sales activities, payments to tax authorities, acquisitions of additional businesses and technologies, the introduction of new software and services offerings, enhancements to our existing software and services offerings and the continued market acceptance of our products. As of March 31, 2025, we are not party to any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. Non-GAAP Financial Measures In addition to the measures presented in our condensed consolidated financial statements, we regularly review other measures that are not presented in accordance with GAAP, defined as non-GAAP financial measures by the SEC, to evaluate our business, measure our performance, identify trends, prepare financial forecasts and make strategic decisions. The key measures we consider are non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating income, non-GAAP operating margin, non-GAAP net income, non-GAAP net income per diluted share and free cash flow (collectively, the “Non-GAAP Financial Measures”). These Non-GAAP Financial Measures, which may be different from similarly titled non-GAAP measures used by other companies, provide supplemental information regarding our operating performance on a non-GAAP basis that excludes certain gains, losses and charges of a non-cash nature or that occur relatively infrequently and/or that management considers to be unrelated to our core operations. Management believes that tracking and presenting these Non-GAAP Financial Measures provides management, our board of directors, investors and the analyst community with the ability to better evaluate matters such as: our ongoing core operations, including comparisons between periods and against other companies in our industry; our ability to generate cash to service our debt and fund our operations; and the underlying business trends that are affecting our performance. Our Non-GAAP Financial Measures include: • Non-GAAP gross profit and non-GAAP gross margin . Excludes expenses related to stock-based compensation and amortization of acquired intangible assets. • Non-GAAP operating income and non-GAAP operating margin . Excludes expenses related to stock-based compensation and amortization of acquired intangible assets. 38 • Non-GAAP net income and non-GAAP net income per diluted share . Excludes expenses related to stock-based compensation, amortization of acquired intangible assets, gain on a non-cash sale of a controlling interest of a subsidiary and the related income tax adjustments. • Free cash flow . Free cash flow is defined as net cash provided by operating activities less capital expenditures, which consists of purchases of property and equipment. We understand that although these Non-GAAP Financial Measures are frequently used by investors and the analyst community in their evaluation of our financial performance, these measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. We compensate for such limitations by reconciling these Non-GAAP Financial Measures to the most comparable GAAP financial measures. 39 The following table presents a reconciliation of our Non-GAAP Financial Measures to the most comparable GAAP financial measure for the three and nine months ended March 31, 2025 and 2024 (in thousands, except percentage and per share data): Three Months Ended March 31, Nine Months Ended March 31, 2025 2024 2025 2024 Gross profit GAAP gross profit $ 1,137,041 $ 975,703 $ 3,170,534 $ 2,641,023 Plus: Stock-based compensation 20,980 17,840 62,225 53,874 Plus: Amortization of acquired intangible assets 10,131 12,454 30,377 25,282 Non-GAAP gross profit $ 1,168,152 $ 1,005,997 $ 3,263,136 $ 2,720,179 Gross margin GAAP gross margin 84% 82% 83% 82% Plus: Stock-based compensation 2 2 2 1 Plus: Amortization of acquired intangible assets — 1 — 1 Non-GAAP gross margin 86% 85% 85% 84% Operating income GAAP operating income (loss) $ (12,456) $ 17,804 $ (101,913) $ (50,127) Plus: Stock-based compensation 346,842 282,519 1,011,718 807,945 Plus: Amortization of acquired intangible assets 13,897 16,194 41,675 34,286 Non-GAAP operating income $ 348,283 $ 316,517 $ 951,480 $ 792,104 Operating margin GAAP operating margin (1)% 1% (3)% (2)% Plus: Stock-based compensation 26 25 27 26 Plus: Amortization of acquired intangible assets 1 1 1 1 Non-GAAP operating margin 26% 27% 25% 25% Net income GAAP net income (loss) $ (70,807) $ 12,752 $ (232,784) $ (103,600) Plus: Stock-based compensation 346,842 282,519 1,011,718 807,945 Plus: Amortization of acquired intangible assets 13,897 16,194 41,675 34,286 Less: Gain on a non-cash sale of a controlling interest of a subsidiary — — — (1,378) Adjustment for: Income tax (1) (28,427) (78,969) (103,777) (146,271) Non-GAAP net income $ 261,505 $ 232,496 $ 716,832 $ 590,982 Net income per share GAAP net income (loss) per share - diluted $ (0.27) $ 0.05 $ (0.89) $ (0.40) Plus: Stock-based compensation 1.29 1.08 3.82 3.11 Plus: Amortization of acquired intangible assets 0.05 0.06 0.16 0.13 Less: Gain on a non-cash sale of a controlling interest of a subsidiary — — — (0.01) Adjustment for: Income tax (1) (0.10) (0.30) (0.39) (0.56) Non-GAAP net income per share - diluted $ 0.97 $ 0.89 $ 2.70 $ 2.27 Weighted-average diluted shares outstanding Weighted-average shares used in computing diluted GAAP net income (loss) per share 262,671 261,778 261,423 258,738 Plus: Dilution from dilutive securities (2) 5,959 — 3,601 1,273 Weighted-average shares used in computing diluted non-GAAP net income per share 268,630 261,778 265,024 260,011 Free cash flow GAAP net cash provided by operating activities $ 652,681 $ 565,390 $ 1,085,078 $ 1,021,940 Less: Capital expenditures (14,366) (10,520) (29,853) (19,522) Free cash flow $ 638,315 $ 554,870 $ 1,055,225 $ 1,002,418 40 (1) We utilize a fixed long-term projected non-GAAP tax rate in our computation of the non-GAAP income tax adjustments in order to provide better consistency across interim reporting periods. In projecting this long-term non-GAAP tax rate, we utilized a three-year financial projection that excludes the direct and indirect income tax effects of the other non-GAAP adjustments reflected above. Additionally, we considered our current operating structure and other factors such as our existing tax positions in various jurisdictions and key legislation in major jurisdictions where we operate. For fiscal year 2025 and 2024, we determined the projected non-GAAP tax rate to be 26% and 27%, respectively. This fixed long-term projected non-GAAP tax rate eliminates the effects of non-recurring and period specific items which can vary in size and frequency. Examples of the non-recurring and period specific items include but are not limited to changes in the valuation allowance related to deferred tax assets, effects resulting from acquisitions, and unusual or infrequently occurring items. We will periodically re-evaluate this long-term rate, as necessary, for significant events. The rate could be subject to change for a variety of reasons, for example, significant changes in the geographic earnings mix or fundamental tax law changes in major jurisdictions where we operate. (2) The effects of these dilutive securities were not included in the GAAP calculation of diluted net loss per share for the three and nine months ended March 31, 2025 and nine months ended March 31, 2024 because the effect would have been anti-dilutive. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK There have been no material changes to our market risk from the information presented in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended June 30, 2024.