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spk07: Good afternoon. Thank you for joining Atlassian's earnings conference call for the second quarter of fiscal year 2021. 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. I will now hand the call over to Matt Sonnefeld, Atlassian's head of investor relations.
spk05: Good afternoon and welcome to Atlassian's second quarter of fiscal 2021 earnings call. Thank you for joining us today. On the call today, we have Atlassian's co-founders and co-CEOs, Scott Farquhar and Mike Cannon-Brooks, as well as our Chief Financial Officer, James Beer. Earlier today, we issued a press release and a shareholder letter with our financial results and commentary for our second quarter of fiscal 21. The shareholder letter was posted on our company blog, and all items have also been posted to the investor relations section of Atlassian's website. On our IR site, we have also posted a supplemental data sheet. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause 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 such statements are made and they assume no obligation to update or revise such statements should they change or cease to be current. Further information on these and other factors that could affect the company's financial results is included in filings we make with the Securities and Exchange Commission from time to time, including the section titled Risk Factors in our most recent Form 20F and Quarterly Form 6K. In addition, during today's call, we will discuss non-IFRS financial measures. These non-IFRS financial measures are in addition to and are not 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, and they may be different from non-IFRS measures and non-GAAP measures used by other companies. A reconciliation between IFRS and non-IFRS financial measures is available in our earnings release, our shareholder letter, and in our updated investor data sheet on the IR website. During Q&A, please ask your full question up front so that we can easily move through to the next speaker. Lastly, we've announced dates for Team 2021, our virtual annual customer conference, taking place April 28th and 29th. We hope to see you there. With that, I'll turn this call to Scott for opening remarks.
spk03: Thank you, everyone, for joining today. We hope you and your loved ones remain safe during these challenging times. We hope you've taken the time to read the shareholder letter. This quarter, we focused on three themes tied to Atlassian's long-term focus. First, that we're off to a strong start in our multi-year initiative to migrate our server customers to the cloud. Second, we continue to deliver mission-critical solutions for our customers across large TAMs through products like Jira Service Management, which launched in Q2. And third, that we will continue to use the cloud to deliver innovation to customers, small and large, in our ultimate goal to serve the Fortune 500,000. Our business results reflect steady execution against our goals. In Q2, we generated $501 million in revenue, up 23% year over year. We also achieved subscription revenue growth of 36%. During the quarter, we added a record 11,617 net new customers of all sizes, bringing our total count to over 194,000. While we're proud of these results, there's plenty of hard work that lies ahead. Before we move to Q&A, Mike and I want to thank our employees who continue to inspire us with their passion for customers and their adaptability. You make unleashing the potential of all teams possible. With that, I'll pass the call to the speaker. So I called in the speaker. They were waiting for me to say the word operator.
spk07: To ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Alex Kurtz with KeyBank Capital Markets. Your line is open.
spk01: Yeah, thanks for taking the question.
spk03: Just on the new customer ads and strength there, what drove that? Is there something changing with the SMB customer base? Is there certain verticals that stood out to you? Just a little bit of context around that. Yeah, great question. Look, if you've been around for a while, Alex, you'll know that the new customer number bounces around a lot. We had about 3,000 in Q4, 8,000 in Q1, and, of course, 11,000 to 11,500 now. And it's not a number we guide towards or we, you know, really manage inside Atlassian. And it's also always been a pretty small driver of immediate revenue being the smallest of our customers. What's the change this quarter is a lot of the final changes we've done around free in some of our products. Also in Trollo, we changed the monetization funnels. A lot of those areas, which we're really proud of, like they're kind of put us in the right place for very long-term growth. They did change sort of the mix of customer ratios, and we do have a larger mix of smaller customers. And so I'd say more than any other quarters, we probably have a greater ratio of smaller customers than we've had before. So we think it's great. I think it's, again, a great testament to how much demand there is for our products out there. But I'd hesitate to try and roll any of that into some sort of revenue forecast. And just looking at these new customer ads, were any of those potentially customers that turned in the first half of 2020 in their back? I don't know if you categorize them differently, if they did turn in their back. I don't have numbers around that at hand, unfortunately. We have seen improved churn in general across most of our product base. Some of that is things we've done and some of it could be macro trends as well. James, do you want to comment as well on that?
spk02: Yeah, just a couple of things to add to that, Scott. I would say that I was pleased with the customer count because it illustrates the mission-critical nature of the products that we serve our customers with of all sizes, all across the board from small, medium-sized businesses through to the largest corporations, governments, and so forth. So, pleased by that churn, as Scott was saying there, has increased, improved nicely as the recent quarters have gone by. Yes, you're right. We did see some challenges back in Q4 of fiscal 20. But as we've seen our churn improve, as we've seen our customer count go for this past Q2, we've really seen those improvements right across our vertical. and, again, right across the different sizes of customers that we serve. So we're pleased by all of those themes. Thank you.
spk07: Your next question comes from the line of Keith Weiss with Morgan Stanley. Your line is open. Excellent. Thank you guys for taking the question. And really nice quarter.
spk05: If I could kind of squeeze in two questions. One, just on the overall spending environment, if you have an idea kind of where we are on that road to recovery. You talked about improving renewal rates. That sounds like that's getting better. But just kind of your take on kind of where we are on that.
spk01: And two, in particular on the ITSM product, now that we've integrated Mindville and you have that, CMDB component of the equation. Is that enabling the solution to go further up market? Have you seen any evidence of that traction as of yet?
spk03: Okay. Let's Mike here. Let me take, let James take the question on the, on the, on the spending environment and the traffic, and then I can come back on the ITSM one.
spk02: uh on the spending environment uh you know obviously we're pleased by what we see as a nice gradual improvement uh now it's hard to pass that out because i feel as though our products really are serving so many of the critical needs of our customers there's an increasing movement to agile frameworks you know the work from home uh process is now becoming such a normal part of business life. And, of course, our tools help support that. So we've been pleased by the themes that we've seen in Atlassian in recent weeks and months. Mike?
spk03: Yeah, Matt, I can address the ITSM question there. Look, as you mentioned, Jira Service Management launched about a quarter ago now, and we've been – very pleased with the results so far, mostly obviously inside a quarter in our model, customer reaction, customer adoption, acceleration of purchasing and interest behavior. As you mentioned, you know, it is a great example of Atlassian's overall philosophy of both building and integrating smartly acquisitions, as you mentioned in the CMDB facilities. Again, those are released as a plug-in at the moment, but not fully integrated into Jira Service Management yet. So those will be coming in the coming quarters. So as a part of our long-term ITSM strategy, you see a constant drumbeat of improvements there. At a whole level, customers have resonated with us seeing the blurring of lines between IT and software development. as we are sort of the one company that can serve their needs from software development through ops, DevOps, and into their IT and technical teams on that end. So that's really resonating with customers, and we're very excited about that. And again, focusing on the Fortune 500,000 gives us a very broad customer adoption cycle all the way up to large customers, as you see from the ISS customer example in the shareholder letter. Some very, very big customers adopting our ITSM offerings as well. Excellent. That's great to hear. Thank you, guys.
spk07: Your next question comes from the line of Atai Kidron with Oppenheimer. Your line is open.
spk04: Thanks. Hey, guys. Congrats on a great quarter. I'd like to focus on the 30,000 server customers that you're trying to migrate to the cloud over the next two or three years. Can you give us some color on how much movement was there this quarter in that transition? How many of the small, medium, large have transitioned? And then second, how would you think about churn? In this group, I'm sure a lot of people or some customers are probably not that happy about, although while recognizing and appreciating the benefits of the cloud and the capabilities that come along with that, pricing could be materially different, especially for large customers. So help me think about how would you think about churn in this transition over the next couple of years?
spk03: thanks uh good question uh firstly just remind everyone we have 30 000 server customers and we're aiming to move them over a multi-year period with end-of-life server and they've our customers have three years to make a decision to move across before they hit our end of maintenance period so we've been very friendly to our customers and we have a pretty wide window for those customers to move across um in terms of our where we are like it's very early in that uh in that and uh When I look at all the numbers about our internal metrics, we're doing exactly what we said we were going to do. We've got customers moving across at higher levels than ever before. Our numbers internally that we measure for this quarter were a new high, as you would expect, as we go through this transition. And also a reminder that the majority of our new customers today choose cloud. So well over 95% of our customers choose cloud, our new customers choose cloud today. And so we're really happy with the leading indicators. That's great. In terms of churn, when I talk with our largest of customers, the companies you would all know and do business with, they all have plans to move to the cloud. They say that it saves them money, saves them the hassle of doing things, gets them higher reliability. And so they are all partnered up with us to move to the cloud. In most cases, it's in our court to ensure that we, you know, have the size and scale and that we can help them migrate across. And so it is, you know, hard to predict the term on that, like, because it is in our customers' hands for a period of time. But I'm pretty pleased with the indications of what we've got at the moment and sort of the customer response. James, do you want to add anything to that?
spk02: Just that back at Investor Day in November, we noted our expectation that around half of our 30,000 server customers would migrate in FY23 and beyond. And indeed, for our medium or larger size customers, we would expect that ratio to be about two-thirds migrating in FY23 and beyond. And nothing has changed in our perspective there.
spk04: Very good. Thanks. And then maybe just follow up on the perpetual license revenue, which clearly was still strong. And it's for obvious reasons. People want to do things before February. I guess next week kicks in the licensing ends. But we forgot to upgrade. You've talked about how this could last all the way through fiscal 3Q next year, fiscal next year. Do you suspect, though, that the upgrade activity is going to be robust in the same way that perpetual license sales in this quarter was robust just because we're kind of heading into a deadline of expiration? And, you know, as you said, relative to your expectations that most upgrades of medium-large customers are going to be fiscal 2020 thereafter, many are going likely to upgrade near-term in order to give them more time to complete the transition to the cloud?
spk02: Yeah, let me take that one. In terms of license revenue, yes, we either have new license activity booked in that line or upgraded license activity. And just to remind everyone, we'll be curtailing new license sales in a few days' time, February the 2nd. and will continue to allow customers to upgrade their licenses, expand the size, in essence, of their current licenses for another year or so. So in Q2, it is fair to say that we did see more of that upgrading and new activity than we were previously forecasting. And I would say, as we have now almost a month of Q3 behind us, that that type of activity has continued into Q3. And, of course, we would expect that to mean less activity downstream. I think there'll be upgrading activity playing out over the next year or so, but it does appear that some of that upgrade activity has been pulled in advance of the price increases that will play out next week as well. So, as you say, not surprising, hard to precisely determine the scale of this pull-forward activity on the upgrade side. And, of course, if you're interested in new licenses, you really have to act very quickly here before those new sales cease. Got it. Very good. Excellent. Thank you very much, guys.
spk04: Good luck.
spk07: Thank you. Your next question comes from the line of Michael Turin with Wells Fargo Securities. Your line is open.
spk05: Hey there. Thank you. First off, congrats to Mike and the Jazz on that 10-game win streak. Some impressive stuff there, too. James, maybe one on margin. You've consistently noted margins are expected to trend down in the second half of the year. We now have the Q3 guide. So just wondering if there's anything else from a seasonal perspective we should be cognizant of that could maybe make the shape of the second half look a little different than prior years. Just trying to make sure we don't over or under extrapolate what we're seeing into Q4 and beyond on the margin. Thank you.
spk02: Well, a couple of thoughts there. First of all, just to reiterate what we've been now saying for two or three quarters, that through this harder macroeconomic period, we've really been looking to invest purposefully. And that continues. You saw strong headcount growth in the last quarter, good execution by our people teams in that regard. We see very significant opportunities in front of us, and we want to get after those opportunities. And I think it's fair to say that Scott and Mike's experience back through the 08-09 type downturn macroeconomic downturn was such that it was the right thing to do to invest through that period, and we're doing exactly that again at this time. Also, recall I've spoken in the last call or two about some shorter-term revenue headwinds, things like the introduction of free editions, the fact that we're taking less marketplace revenue as we encourage our app system developers to emphasize putting new cloud apps on the marketplace. we've also taken the decision to execute fewer pricing actions, particularly on the cloud side of our business this year versus the past year. So while the impact of COVID that we were talking quite a bit about two quarters ago, that is decreasing nicely as an impact on our financials. Clearly, we will continue, as I said in an earlier answer, to expect the server business lines, the license line and the maintenance line, to continue to contract in terms of their rate of change and so forth. And recall also that we have in order to encourage our larger enterprise customers, those with over 1,000 users or so, to migrate to the cloud, we're offering them quite substantial loyalty discounts. So we have some revenue headwinds. I would describe them as transitory in nature. They're very much really favoring the long-term for a short-term headwind. So when you take those factors together, of course, we have seasonal factors like the payroll tax reset that happens at the start of every calendar year. A few different things to consider, but we've baked all of that into the Q3 margin guide. And as we've said elsewhere, we would expect second half margins to be down versus the first half margins.
spk07: I appreciate all the detail.
spk02: Thank you.
spk07: Your next question comes from the line of Arjan Bhatia with William Blair. Your line is open.
spk05: Hey, guys. Thanks for taking the questions. One of the things that stuck out to me in the shareholder letter was I think you pointed out that Cloud enterprise adoption is coming in ahead of expectations. I was hoping maybe you could just unpack that a little bit.
spk03: Is that migration that's driving that, or are customers naturally upgrading once they've started using your cloud solutions for Jira and Confluence and JSM? And then on the hiring side, Are there any specific areas within R&D that you're targeting in the second half that we should be on the lookout for? Thanks, Arjun. I can take both of those. Look, on the enterprise side, I have to say we have two phenomenons going on there, so I'm not sure which one you're asking about, but let me answer for both. On the general enterprise customer, so we call that the little e enterprise, big companies, You know, we're really pleased with our continued cloud adoption there across all the editions of cloud. And that goes from free all the way through standard premium and the enterprise edition, big E. You've seen us over the last three years through access, through scale, through performance and reliability improvements and continued investment in all manner of compliance projects. you know, standards, continuing to get better and better traction with large customers, with enterprise customers, sort of 1,000 seats and more, no matter what edition they buy. Secondly, we did GA, our enterprise edition, so big E, during the quarter. and have been very pleased with the reaction of the customers there. So we've had a lot of customers in the early access program for about the last six months testing out with us. Again, the Enterprise Edition has higher levels of compliance and security standards, data residency, and a whole lot of other features, as well as unlimited instances. So you get unlimited scale. So rather than buying one Jira software instance and a second Jira software instance, you get You pay obviously a higher price, but you get unlimited Jira software instances. So that allows you to create and segment your business as very large companies often need to do. You might have one for Europe and one for America, or you might have one for a certain department and one for a different department with different plugins, add-ons, exposition to other customers of your own as company, et cetera. So I'm very pleased with that adoption so far. Again, it's incredibly early days. It did only GA during the quarter. and obviously we're working with all of the early access program customers, companies, I should say, to turn them into enterprise edition customers. There is naturally a flow upwards from standard to premium to enterprise as customers grow and deepen their usage and adoption of Atlassian products, and that's part of the ladder that we're trying to build there. On your second question, no specific call-outs in R&D. We continue to invest in hiring across the board and R&D across product management, engineering, design, and all manner of operations and engineering functions and that's across largely all of our offices. I would remind you of our Team Anywhere program where we have announced six months ago and continue to announce to staff about hiring in lots more countries in the world and lots of parts of the world and that opens up our R&D pipeline to get that talent, hopefully, largely no matter where it sits in the world, to work for Atlassian. And it's been a very successful first six months, and we look to continue to deepen that in 2021. Perfect. Thank you very much.
spk07: Your next question comes from the line of Robert Magic with Raymond James. Your line is open.
spk05: Great. Thanks.
spk07: On the enterprise cloud front, you noted higher than expected initial demand for Jira software confluence and Jira service management. Can you start with some more color there on the customer feedback you're getting? And is this dynamic enough to potentially change the timetable for large customer migrations?
spk03: Thanks, Robert. It's Scott here. And I think just to echo sort of the things that were sort of said earlier, you know, we've seen the demand, you know, higher than we thought, but it's still very early days in terms of this both on demand for, you know, large customers, as Mike talked about, and also demand-specific enterprise product. And so at this stage, there's nothing to say different. Like, we think we're in pretty... um we're really happy with and I guess it's playing out as we expected in terms of the migrations like um so there's nothing there that I would change in our forecasts great thanks your next question comes from the line of Walter Pritchard with City your line is open hi thanks um two quick questions first just on the uh
spk01: On the data center side, I'm curious, you know, you obviously have these plans well outlined for the server customers. Has outlining those plans and implementing them caused any change in terms of how data center customers are thinking about moving to cloud? And then just a quick second question for James around the gross margin impacts on cloud or just gross margin impacts generally. You talked about migration expenses and also just hosting costs. Can you help us understand which of those are bigger and how long you expect the migration expenses to be ongoing in COGS?
spk03: Walter, Scott here. I'll take the first one and then James can get into the details on the second one. The migration to cloud, whether it's server or a DC customer, the majority of our customers have medium or long-term plans to move to cloud. And in areas where they're hesitant, the ball's in our court because there might be some particular compliance issues. uh requirements in that geography or something else that they're just waiting on us to do and so the overwhelming demand is there obviously with customers who had server licenses you know they've got three years to make a choice where they where they land whether they go to cloud or dc and you know the overwhelming majority we want to move to cloud and other discussions we're having of course the customers on dc are also looking at the benefits of cloud you know not having to manage their own upgrades and their hardware getting the latest um you know versions of our products the increased collaboration that they can have, the well maintenance costs, and they can put their staff on high value activities. Those things are the same whether you're coming from server or DC. James, do you want to add to that?
spk02: Yeah, sure. The first thing I note is that I am really pleased by how our gross margin has stayed at the level that it has as we've been able to build a business, 45% of which is revenue is coming from the cloud. So I think that speaks a lot to the execution of the teams involved there. But as we have indicated in prior calls, we would expect, particularly as the larger customers, the largest server and data center customers move over to the cloud, that we would see increased hosting costs. And we've spoken also about how we have added to our support capabilities so that we're ready to help those customers moving over to the cloud. In terms of the timeframe, For those support costs, I would expect those to be in place for the next few years, consistent with the timeframes that we've talked about for our larger customers moving over. uh to the cloud uh and so i would expect uh some downward pressure on gross margins but having said that i really do also want to emphasize how we're very focused on continuous cost improvement whether it's around our usage of compute and storage resources or whether it's related to helping our support resources people help our customers so that we can do that on a more cost-efficient basis. So that gives you a little window as to how we're thinking about and operating along the lines of the cost of goods sold part of our business. Thank you both.
spk07: Your next question comes from the line of Greg Moskowitz with Mizuho Securities. Your line is open.
spk06: Okay, thank you very much. First off, I'm just kind of wondering, James, how you would characterize the revenue and or deferred revenue benefit from pull forward this quarter as compared to what you saw one year prior. And then just secondly for Mike or Scott, just curious to hear how the demand was for data center subscriptions this quarter. Thank you.
spk02: I can take the first part of that question, Greg. So in terms of maintenance pull forward activity, I would describe that in Q2 as really quite modest. Now, remember last year, that was the primary pull forward quarter. And so it was a much larger effect in Q2 of fiscal 20. Now, What I would expect to play out in Q3, and as I indicated a little earlier, we're already seeing this in the month of January, is that we'd see more maintenance revenue pull forward activity in Q3 as well. And so what's a little different this time around? A couple of things, really. First of all, we've given our customers more time, more advance warning of the price increases. uh and uh second of course not only is there a price increase both for the server and the data center business uh scheduled to uh be put into place next week uh but this time we're also end of life uh the server business we've made that announcement and so really what played out more so in q2 is you can think of it as pull forward at some level. It's a different type of pull forward to that that we've seen in prior years because the pull forward has been customers adding to their license count, expanding the size of their current licenses ahead of the moves that we're making around server end of life. Data center, relatively modest pull forward there in Q2 as well. And again, I would expect there to be a pull forward activity ahead of the price increases that will apply to data center just as they will apply to server as of February 2nd.
spk06: Okay, that's great. And then just broadly speaking, not referring to any kind of pull forward, but just around kind of overall data center demand in the quarter, that would be helpful as well. Thanks.
spk02: Yeah, in terms of data center demand, overall, it was a relatively strong quarter. I think part of what we're seeing is some of our European partners encouraging some of their customers to move over to the data center ahead of these price increases. So that was a part of what was going on in the subscription revenue line. But as we talked about before, you recall that the cloud business is by far the largest part of our subscription revenue growth.
spk06: Right. Okay, great. Thanks, James. Thanks.
spk07: Your next question comes from the line of DJ Hines with Canaccord. Your line is open.
spk03: Hey, guys. Congrats on the results. James, one for you. So there was a comment in the prepared remarks that said, you know, you're growing increasingly confident in the economics of the free addition strategy. And look, clearly, the top of the funnel is really working, right? You already talked about that. But what is it that you're seeing that's giving you confidence in the economics of those customers, right? Is it just a lower CAC? Or, you know, are you seeing expansion activity that's outperforming your expectations? Again, any color there would be helpful.
spk02: Yeah, sure. So what we do is study very closely each cohort of free customers that join us each month. uh and and we track uh their progression uh whether it be as they add to their user accounts uh and then go beyond the 10 user free limit or whether their progression is before they get to 10 they decide that they really need and appreciate the functionality that our standard cloud offering or even our premium cloud offering contains. And so they make that switch from free to a paid edition in that way before they get to the 10-user level. So we watch this, as I say, very closely cohort by cohort. And so while I noted earlier that for fiscal 21, we would continue to see this as a net revenue headwind, But as we watch the cohorts, we see the trend lines are quite clear. And that gives us confidence about the future of this initiative. I think it's an excellent example of how we've taken a long-term view. We've made a decision to take a short-term headwind for the long-term benefit down the track. And, Mike, were you going to add something?
spk03: Yeah, thanks, James. DJ, I just wanted to add a couple of small points there, I suppose. We've had a lot of questions on free. Firstly, you know, I would think of free as much less thoroughbred and much more Clydesdale in terms of how it's going to give us a long-term kind of diesel engine like a pull-off to health, right? And the reason for that is... It builds a big base of customers and potential customers underneath our business that will mature into customers, small and large, over the next many, many years. It's a multi-year impact. It's a long-term investment that we're aiming at with free. Clearly, we track... extremely closely, active usage. And I would stress that is the most important metric for us. Are people using these free editions? We're giving away free things that people don't use them. So we spend a lot of time trying to track active usage and working out how we can make sure the customers are getting value out of those free editions. We firmly believe philosophically, if they're getting value, once they hit that 10 user stage, they will pay and continue to be our long-term Atlassian customers that marching up that edition hill. The second part that's really important for the free editions for us is the reduction of friction, specifically in cross-flow and cross-sell. So where you may have, for example, a Jira Software instance that has 50 or 100 people and someone discovers Confluence and its connections to Jira Software in that company, previously they would have to, if they weren't the administrator, get out a credit card and pay for a trial of the Confluence instance, if that makes sense. Now they can start a free trial of Confluence with any of those users. So their ability to discover new products that we have as an existing customer is also increased, right? And the more users we have in the first product, the more that we have a potential to start trials of second products or free editions alongside. with anyone in that company. So our ability to expand and go wall-to-wall is increased by free. Again, I would stress it's a pretty modest revenue impact, given these are all small customers, and we're aiming for that multi-year impact, part of our sort of long-term thinking. Yep, yep. That makes perfect sense, and I'm more like a cloud build than a thoroughbred, so I can get behind that analogy. Thank you.
spk07: Your next question comes from the line of Derek Wood with Callan & Company. Your line is open.
spk05: Great. Thanks for taking my questions.
spk03: My first one, I know it's early, but what have you seen in terms of the revenue implications when customers migrate from server to cloud? I think you talked about, you know, small customers may see a little bit of a downtick in revenue capture, mid-market maybe a little bit of an uptick.
spk02: any early read on revenue conversion and including the potential to upsell, cross-sell during the migration.
spk05: And then I'll just throw in my second one. Pretty interesting win with ThoughtWorks and the 8,000 users on Trello.
spk03: Is this one of the biggest customers you've had adopt Trello from a user account level? And just be curious to hear maybe kind of why they picked you over the competition and anything else you can share about how you won the deal.
spk02: I can take the first part of that. In terms of the revenue result that we've seen from the service cloud migrations, I would say it's very much tracking along to our expectations. As you pointed out, as you framed the question, we gave some, I think, helpful illustrations of how the economics work for small medium-sized customers and those are generally the ones that are migrating at this point in time so yeah that's that's tracking pretty consistently with our previous discussions of the topic so yes some headwinds on the smaller size at least initially some modest tailwinds on the medium size net, I wouldn't describe it as a material driver of the revenue in Q2.
spk03: And Matt, I can take the Trello question. Look, Trello continues to be early in its monetization journey, as we say all the time. Again, a year ago, I believe we released a stat it had past 50 million accounts. So from the point of view of size and scale, the 8,000 users mentioned at ThoughtWorks is relatively small, obviously in comparison to the 50 million users of Trello and the 10 million monthly active user number that we passed that we released, I believe, at Investor Day. That said, from Trello's point of view, obviously we're continuing to – To learn from the customer base and work on the monetization journeys there in Trello, working through its monetization ladder, if you think about its equivalent with free business class and Trello Enterprise, it's sort of equivalent to the free standard premium enterprise ladder of additions that we have in Jira Software and then Jira Service Management. 8,000 users is not a particularly large enterprise Trello customer, I would say. We certainly have some that are an order of magnitude or more larger than that. But it's a very good win for us. I think the reason you see companies like Trello using this is ultimately about Trello's flexibility and its capabilities and potential to handle all manner of different workloads with a very free-form model. inside an organization, right? So it's adaptability to lots and lots of different use cases and almost anyone in a large company gives Trello huge advantages to solve a whole manner of workflow problems for those larger organizations. And again, as we continue to do in business class and in Trello Enterprise, is give those organizations that control to manage their data, to manage their users and manage the boards whilst keeping that flexibility and freeform nature of Trello uh in the hands of the users i guess uh and you'll see a lot of uh exciting things coming up in trello again a small plug for team 21 uh if you go to that in a couple months time uh we continue to work on on really exciting things for trello and look forward to its future great helpful color thanks
spk07: Your next question comes from the line of Rob Oliver with Baird. Your line is open.
spk04: Great. Thanks, guys, for taking my question. Happy New Year to everybody. My question is on Jira Service Management, and then I have a quick follow-up.
spk02: As you see customers, and I know it's still early, migrate from Jira Service Desk up to Jira Service Management in the cloud. Obviously, that product's attacking more things within the IT department, Agile, DevOps, ITSM, work management. you know, any color around sort of the seat expansion you're seeing as that product, as people migrate.
spk04: And then just a question on the partner network, James, you had mentioned earlier, you know, some of the ways you're in incentivizing, you know, the partners with, you know, with cloud apps and others.
spk01: You know, you guys are obviously very used to selling with a very light touch, but many of your partners are not. Many of your partners are very active in physical events and stuff.
spk04: So I'm just curious as your partners, you know, 600 plus play a real important role here in this migration, how they're adapting to the current environment and whether you're satisfied with the progress that you see. Thank you guys very much.
spk03: Sure. Look, on JSM, I would say too early in the release of that particular product to see massive differences with JSD, having, again, not been in the market that long in terms of adoption and seat expansion. Obviously, being a broader feature offering and having embedded the Ops Genie functionality and some other things to serve a lot more purposes for JSM specifically, We are ambitious, I would say, that we see that seat expansion over time, whether that's a small customer going from 50 seats to 80 seats or a very large customer going from, you know, 10,000 seats to 15,000 seats. I think JSM gives us all of that possibility. And I would stress that we continue to invest very aggressively in that product set. We still have the CMDB functionality coming out and continuing to invest in automation, all the other things that we've put into the ITSM packages over the last little while. One thing I would broaden that though is when we talk about our connections to IT, it is broader than just ITSM. Think about ITSM as IT teams using JSM for IT. We gain great connection, trust, a partnership with those IT departments that we then have a lot of other offerings that they can take advantage of in terms of that IT department providing functionality to the rest of their organization. And that's where you see the strength of the broader Jira platform. So they start to bring in Jira Core, they start to bring other products to provide workflow applications and solve lots of different use cases and workflows for other parts of the organization. That's often the IT department creating that workflow for the legal department, the marketing department, the finance department, but all within that one Jira platform and all within the broader Atlassian platform. And that applies as much to Confluence as it does to Jira Core or indeed to Trello and Trello Enterprise. That's about our broader Atlassian seed expansion once we've really gained the trust and respect of that IT department and what we can do to help them. I'll let Scott answer on the partner network. Yeah, thanks, Mike. The partners, as many of you would know, it's been a big part of a lot. I think Scott's screen, you're up there. Oh, sorry. James, you've got a huge advantage for us in Europe to have a partner network. Our partner network spans the entire globe. And Atlassian does not have a services department. And so our services are really provided by our partner network around the world. And, you know, as we know, we incentivize them with margins, and we also, you know, spend a lot of time on training and so forth. And, of course, we're using, you know, training margins and other things to direct our partner network more towards our cloud offerings. This is, of course, where the demand from our customers is at the moment as well.
spk04: Thanks a lot, guys.
spk07: Your next question comes from the line of Rishi Jaluria with DA Davidson. Your line is open.
spk00: Hey, guys. Thanks so much for taking my questions. Nice to see you continuing and improving business momentum. Two quick ones. First, going back to the comment that's been made on the server customers and not expecting mid-to-large or two-thirds of mid-to-large customers to migrate until FR23 and beyond, I guess I'm a little surprised by that metric, just given the incentives that you have in place to push migrations. What has been the pushback from customers on migrating? Is it just the amount of investment that has to be made? Is it not enough incentive? Is it pricing? Is it inertia? And then follow up, I just wanted to ask about CloudNet expansion rates. At the analyst day, you talked about 121% CloudNet expansion rate and 130% for medium and large customers. How has that been trending, and is that a metric you plan to disclose maybe annually, or how should we be thinking about that? Thanks.
spk03: I'll take the first one, and James will chime in on the second one. For these server customers and the large ones migrating from server to cloud, One thing to realize is these instances are mission-critical in our organizations. We had the CIO of a large technology company talk to us recently and they said, there's three or four mission-critical applications at this particular company. One of them is our ERP, one of them is Salesforce automation and One of them is Atlassian products because we wish we'd stop when these products go down. And so when these mission-critical applications are there, these companies want to plan for it, plan the budget cycles for it. And so if they could click their fingers and move today, they appreciate all the benefits they would get. But it's a practical matter. It takes a while to plan and migrate these systems where they really want to minimize the amount of downtime for their employees. And so there's nothing specific there. I would say there's areas that Alaskan will continue to improve on around compliance and certification in certain geographies that takes us a while to get those. and customers are working with us to move as we hit those certifications. But there's nothing specific that I look at that makes them delay really just inertia and the mission criticality of our applications.
spk02: And then just on the second part of your question, obviously at Invest Today we wanted to dive a little deeper in terms of offering some cloud metrics given the importance of the cloud business to our company in the coming years. So, yes, we talked about ARR 35% growth year over year at that point. The net expansion rate, as you say, at 121%, and that being a larger figure, 130% for our medium and larger size customers. And so as we continue along our cloud migration journey, you can expect that we will periodically update those statistics.
spk07: Your next question comes from the line of Brent Till with Jefferies. Your line is open.
spk08: Hey, guys. This is Love Soda on for Brent Till. Congrats again on a nice quarter. Just a couple of real quick questions from me. One was digging a little bit deeper on the migration, the server-to-cloud migration. I guess, did that have any impact, any negative headwinds on billings or on revenue per se? And then the second question was on the momentum that you've seen with the free cloud versions. Last quarter, I think you noted that you saw an increase of 175%. Has that top of the funnel momentum continued in this quarter? Thank you.
spk02: So I can take the first part there. In terms of server-to-cloud migration impact on billings, no, I wouldn't describe it as a material item in Q2 for either our revenue results or for the deferred revenue. And in terms of the free versions, we're pleased with, obviously, our progress there, but I wouldn't speak to anything in addition to what we've already covered in earlier references. Anything to add to that, Scott or Mike? Okay.
spk00: Thank you.
spk07: Your next question comes from the line of Jack Andrews with Needle. Your line is open.
spk05: Good afternoon. Thanks for taking my question. I wanted to see if you could provide an update for us on Align. You previously talked about how Align is one of your fastest-growing revenue products, and so I was curious if there's any context you can share in terms of just where the growth is coming from and how it's going, whether it's through organic means or is cross-selling really kicking in there?
spk03: Thank you. It's Scott here. On the line, James, that is primarily sold to our existing customers. This is not something that where we go in with the sales team and have kind of long customer acquisition sales cycle. These are existing customers using our products, predominantly Jira. And they say, actually, I've got one or many Jiras across my organization. we are doing a agile transformation a digital transformation and we want better executive level understanding and we want to sort of scale up our agile from what was happening at the engineering level all the way through the organization and so what we get is a lot of our customers calling us up and saying how do we solve this problem and of course one is the exact solution they're looking for and so I I don't think there's anything in terms of, you know, it really is an upsell to our existing customer base. We're very happy with the acquisition and how it works with our customers. It is one of many things, you know, that helps us in customers' digital transformation, and that is something when we talk to customers, it used to be that software teams were – kind of you know did their own thing you know you know in a department these days software is mission critical to every company um we talk to companies across every sector and they're really saying that the thing they're struggling with is how they transform their organization and in most of these cases that transformation is coming from their software teams they're actually adopting practices in software and rolling them out across the entire organization benefiting not just here online, but that benefits Confluence, you know, as teams need to collaborate more closely across their entire organization. It's going to benefit some of the new products we've got coming out to address this need. And so that broad trend, I think, is ending up in a whole bunch of conversations at the C-level, you know, CIOs, CTOs, and even CEOs of organizations who are turning up to Atlassian asking how we can help them solve their digital transformation problem.
spk05: Thank you very much.
spk07: Your next question comes from the line of James Fish with Piper Sandler. Your line is open.
spk05: Hey, guys. This is Quinton for Jim. Thanks for taking our question. Really throughout the pandemic, we've seen employees adopting new ways of communicating with their teams. We're wondering if you've seen any acceleration in the adoption of Atlassian products from the non-technical users, maybe compared to more prior years. And how are you viewing the competition in the non-technical specific world? Thank you.
spk03: Good day, Quinton. Look, let me answer the pandemic question first. Obviously, as more people are working from home, working remotely, changing their work habits, as we like to say, they change where they work, but they keep how they work consistent in order to allow people to work from lots of different locations. As that has happened, you naturally see increased activity and usage in our products because Our products fundamentally help people working asynchronously, to help teams collaborate, to help you get on the same page. Where you might have used a whiteboard beforehand in an office, now you might use a Trello board. Or if you have a remote meeting, as I live on Zoom most days, we often start Zoom meetings with Confluence Pages as a pre-read, right? It's a very... a much more efficient asynchronous method. We will often start our meetings with a 10-minute pre-read where someone will send a link to a conference page. We will all read it and add comments for 10 minutes, and then we will start the meeting. So these sort of things are driving, I think, a difference in how people think about working and structuring their day in knowledge work in broader areas and leading to activity and usage in our products. Again, it's not a... sort of a hockey stick jump or a step change jump, I would say. It's a continued slow march of improvement for us as more companies that are already customers have more usage, more days of the week they might use our products, et cetera, and that will, I think, in the long term lead to expansion. But it's not going to be a step change as they all sort of run online and suddenly decide to buy Trello, I guess. In the broader work management for all space, look, we continue to be bullish. It's a very huge market. Obviously, we're very happy with the progress of Trello. Confluence continues to do well at helping us get wall-to-wall with inside customers, and we continue to work in our innovation areas on new products to target some of those customers. uh some of those trends i suppose uh one example of that is our acquisition we acquired a company called help which is a digital version of esn you might say focused on messaging platforms so slack and microsoft teams and providing service management within the messaging construct And connecting it back sometimes to something like a Jira service management in the back end and sometimes just processing all of that messaging within all of that service within the messaging products that, again, as you see adoption of things like Slack and Teams during this pandemic, people work from home. products like help will benefit from that because people are increasingly looking for ways to do work within those tools. And that's, you know, it's the leading service provision tool within the Slack ecosystem is now in the Atlassian stable and we continue to work on integrating that with the rest of our things.
spk07: Got it. Thank you. Your next question comes from the line of Pat Walravens with JMP Securities. Your line is open. Oh, great. Thank you. And I'll add my congratulations.
spk05: So I'll go to a little different topic here. So in August, you announced that the employees could work from home permanently even after the pandemic ends.
spk07: And obviously, your whole solution set really helps with that. But I don't know about you guys, but I find a full Zoom day so exhausting. And within our organization, I'm not sure it's the best thing for our employees. I'm just wondering, how is your thinking on that topic evolved over the last six months?
spk03: Scott here and others can chime in if they want to add anything we think of it we call it team anywhere is our way we've done this which is really that our employees can work anywhere they want and if they choose to come and work in one of our offices they can do that if they choose to work from home they can do that and that really opens up the talent pool for us and If we think one of the reasons why it's been successful, I think it's our heritage outside of Silicon Valley that's allowed us to tap into an amazingly diverse and very loyal talent pool, particularly in Australia. And so I think that's been a cause of success and we're really excited about being able to tap into that around the world. I know myself, yeah, the days for Zoom meetings aren't that great. But what we found is that the many employees value the lack of a commute, the ability to spend more time with friends and family, the reinvigoration of local communities around where they live. Many of our executive team have moved from the centre of cities to somewhere nearby to take advantage of those areas. So two hours back from a commute gives you a lot of freedom and flexibility to spend time with family or exercise or other things there. I'd remind our employees that We aren't really in a steady state there, but we are working from home in the middle of a pandemic. And that's different to what the world will look like, you know, when you can, your kids are back at school and you can travel into the office. And we are building our, you know, policies for that world. And, you know, God willing, like, you know, that will happen sooner this year, we'll see the vaccine roll out, and hopefully we can move into a more normal state. So it is something we spend a lot of time thinking about. I don't think we'll get it all right, but like everything at Atlassian, you know, we continually try and improve, you know, that Clydesdale spirit of continuing to, you know, it makes relentless improvement, and so you'll see that here as well. Great. Thanks for that perspective.
spk07: Your next question comes from the line of Fred Havemeyer with Macquarie. Your line is open. Thank you very much for taking my question. I'm really curious about your perspective on this.
spk03: Businesses are planning for their IT remote by work, sorry, remote work by design in this new kind of IT paradigm of hybrid or remote work. How are you seeing the evolution in your funnel and what are companies looking for in terms of software that can support more agile work cycles or team alignment within these remote work environments? Scott here. It's interesting in terms of remote work by design. There's a great quote, which is, the future's here, it's just unevenly distributed. And I think if I went back pre-pandemic, you would find that there were a large number of our customers already working in this fashion, heavily leaning on digital tools to share information across their organization. already reaping the benefits of, you know, less synchronous communication, more work that is tracked, you know, kind of in confluence rather than meetings. And so, you know, in many cases, what we've seen with the pandemic is the sort of whole world catching up. you know many people were already using zoom you know on a day-to-day basis and everyone else is now seeing it and we're seeing many customers are using jira and confluence and uh you know our agile products the trello are already being used in many places so i don't think there's been a huge change i guess we've always at elastium catered to the vanguard of people and how they're working and uh you know obviously there's you know some new things we're thinking about with this um but it hasn't been a sort of step change in sort of how products work Thank you.
spk07: Your next, again, if you would like to ask a question, press star one on your telephone. Your next question comes from the line of Ari Turjanian with Cleveland Research. Your line is open.
spk01: Hi, guys. Thanks for taking the question and congrats on the results.
spk03: At the analyst day a couple months ago, we talked about strength in large deals.
spk01: I was wondering if you could double-click on that and how recent performance is there in this quarter. And then second, just any more color around, you know, what would you say is the biggest surprise you've seen in terms of customer behavior since the October announcement of the server and the sale?
spk07: Thank you.
spk02: So in terms of large deals, we tend to update that statistic each year. I would say that, you know, we continue to execute in a way kind of consistent with the trends that were laid out in the last stance that we laid out at Analyst Day. And in terms of the second part of your question, surprises in terms of how customers have reacted post the server EOL announcement, I would really say that I think our team prepared just fabulously for that announcement. And That planning, the thought that went into that announcement has paid off because I would say that customers are obviously thinking hard about their options and so forth, the right timing for them to make a move and so forth. But really, that's very consistent with how we had analyzed and planned for this announcement. Scott or Mike, would you add anything to that?
spk03: no i think you said it really well james like you know um we're thoughtful long-term focused and uh you know you've seen from atlassian whether it's free or migration to cloud or you know the product portfolio we build like we really just take a long-term focus with all of it and there'll be volatility you know month to month quarter to quarter but uh you know most of the time mike and i you know don't spend really much time on pull forward or anything like that we're spending our time thinking about the future of our companies and customers in the cloud. So, yeah, I think it's the last question. I want to say thank you to all of you for being on with the journey and I appreciate it. And I think that's our last question.
spk07: Yes, there are no further questions at this time. I'll turn the call back to Mike for closing remarks.
spk03: Bye, everyone. Thank you very much for attending the call and for all of the thoughtful questions and write-ups. I hope you and your families stay safe in this challenging time around the world, and we look forward to talking to you next quarter. And a reminder that Team 21, our annual conference, is on just before the next earnings call, I believe. So attend that, and thank you very much for being here. Hope you have a kick-ass weekend.
spk07: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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