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spk03: Good afternoon. Thank you for joining Atlassian's earnings conference call for the third quarter 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 Martin Lamb, Atlassian's head of investor relations.
spk02: Good afternoon, and welcome to Atlassian's third quarter of fiscal year 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, and our Chief Financial Officer, James Beer. Earlier today, we issued a shareholder letter and press release with our financial results and commentary for our third quarter of fiscal year 2021. The shareholder letter is available on Atlassian's work-life blog and the investor relations section of our website, where you will also find other earnings-related materials, including the earnings press release and supplemental investor data sheet. During the call today, 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 of the date such statements are made. and we 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. During today's call, we will also 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. Reconciliation between IFRS and non-IFRS financial measures is available in a shareholder letter, earnings release, and investor data sheet on the IR website. During Q&A, please ask your full question up front so that we can be fair and easily move through to the next speaker. We also invite you to check out sessions from Team 21, our annual virtual customer conference, which runs through tomorrow, April 30th. We've included a link to Team 21 in our shareholder letter and our earnings release. Lastly, I want to thank Mike and Scott, James and Matt, and all of Atlassian for the opportunity to lead investor relations at this incredible long-term and customer-focused company. With that, I'll turn the call over to Mike for opening remarks.
spk06: Thanks, Martin, and thank you for joining today from wherever you are in the world. As I sit in Australia, I'm reminded that our national coat of arms displays the kangaroo and the emu. Why those two specific animals, you might ask? Because they are unable to walk backwards. They can only move forwards. Australia as a nation must continue to move forward. True to our Australian heritage, Atlassian only moves forward. And we continue to do so at great pace through a strong Q3. We hope that you've read the shareholder letter where we describe our long-term focus on delivering that innovation to customers. Our investment in our world-class cloud platform makes it possible to develop and deploy this innovation at an ever faster pace. Highlights from the quarter include doubling customer cloud migrations versus last year, right in line with our expectations, launching Point A, our new product development program. Yesterday, we announced five initial products from Point A for technical and non-technical teams of all sizes. and continuing continuous investment in leading edge innovation we announced amazing updates for the jira family of products we're extremely excited about initiatives like open devops and the whole new trello that shift during the quarter as well as acquisitions of think tilt and chart io we also posted strong results in q3 we saw significant short-term demand for on-premises products as a result of customers purchasing ahead of both the discontinuation of new server license sales and price changes to on-premises products that went into effect during the quarter. More importantly, we made continued progress to our long-term goal of becoming a cloud-first company. During the quarter, cloud revenue grew 35% year-over-year, and overall subscription revenue grew by 43% year-over-year. Before we move to Q&A, Scott and I want to thank the more than 6,000 Atlassians whose resilience, passion and commitment to drive that innovation that we deliver to our customers and who continue to move forward every day. Check out our sessions from Team 21 to see how we're building a future of modern teamwork to unleash the potential of every team. With that, I'll pass the call over to the operator for your questions.
spk03: Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by as we compile the Q&A roster. Your first question comes from the line of Michael Turin from Wells Fargo. Your line is open.
spk04: Hey there. Thanks for taking the question. Busy week for everyone, it seems like, with the team conference, which looked like a good showcase for some of the innovation on the product side that cloud in particular opens up. So I was hoping you could maybe first touch on that, what you're enabling for customers with things like the Point A program and Jira Work Management. And then maybe, James, you could also comment on whether some of those recent innovations as well as things like cloud enterprise and the data center strength you're showing here at all alter your view on the mid-30s subscription growth target you've laid out, given it looks like you'll come in above there this year at the very least. Thank you.
spk06: Yeah, hey, Michael. Good to hear from you again. Look, I can talk to Point A if you've seen all the announcements in the news. You know, Point A itself is a program that we've launched to co-develop some of our new products alongside our customers. There's a period in early product innovation where we know what we want to build, but the... The progress, if you like, the shape-shifting of the product in its early days is very rapid, and so we need to notify customers that in the first year or two of a product's life, it's likely to change form very quickly, not in a volatile way, but in a really sort of forward-moving way. That is done alongside customers, and we are true to our philosophy of being open. We're doing that alongside our customers, and we're trying to be very clear with them about that. Point A, as we mentioned in the shareholder letter, all of the products build very strongly on the Atlassian cloud platform. So all of the things that we've talked about from machine learning and automation capabilities to the compliance requirements and enterprise structures that we have through the collaborative capabilities and editors and reactions and all sorts of other things, they all appear in all of those point A products. So not only will they solve a series of new challenges that our customers have and deliver unique value to them, from product managers in Jira product discovery through to broad-scale organisational goals and large-scale sort of user directories in Team Central, obviously through to Jira work management, bringing business teams, marketing, finance and HR into the Jira family and all of the Jira capabilities that arise for those business teams in a business-friendly environment. Not only do all of those things... arrive in point a all the capabilities that we continue to bring to the cloud platform will arrive in those products as well so we thought it was a very good example of the innovation we've been building the platform that's not just for our existing customers and existing products but it's as much for the new things that we can continue to build, and the advantages of moving into the cloud, both for us in terms of creating things and for our customers in terms of the value that they can get once they have moved there, or if they are already there, if they are in obviously very large numbers today. I can talk more if anyone has any other questions, but let me hand off to James to talk about the subscription growth part of your question. Yeah, sure. Thanks, Mike. Certainly, we were very pleased with the ongoing momentum building right across our cloud business. You mentioned in the question enterprise very early days for that addition. We're very pleased that it's off to a good start, but early for that to be a material revenue contributor.
spk05: But I would certainly point to our premium edition. So it's continuing there. Very nice momentum. And I'm also really pleased by how our partners as a group are really developing their business practices around our cloud business. That's very encouraging for our future.
spk06: And then you mentioned the event-driven data center platform. volume of activity that we discussed in our pre-announcement press release a few weeks ago. So given all that, yes, we are projecting that we would beat the FY21 previous target of subscription revenue growth in the mid-30s percent year over year. And then FY22, the subscription revenue growth target, we'll address that in 90 days' time.
spk03: Your next question comes from the line of Arjun Patel from William Blair. Your line is open.
spk09: Perfect. Thank you for taking my questions. I wanted to touch on some of the new product announcements you made specifically around JIRA work management, and it sounds like you made some changes to Trello as well. But as you're going after this business user market, I think we're all aware that there's a lot of incumbents in that space and a lot of fast-growing companies. But I would love to hear how you think that space evolves over time. Do you think there's consolidation in the number of tools that business users are using for work management? And then how position itself in this market as something unique and compelling to offer compared to some of the other players that are in the space.
spk06: Sure. Sorry, Arjun, I can take that. Look, let me start with the lab part of your question first. A huge number of business teams already use Jira software and or the formerly owned Jira Core to manage their work. So this is not a new area for us. This is about us doing what is classic Atlassian innovation, listening to our customers, seeing what those business teams that use Jira software already are doing and how we can deliver further capabilities to improve what they're already doing in a new and better offering that's tailored to their needs. we're very confident there are a lot of other business teams in our customers that could therefore benefit from that if we can deliver a really good and compelling experience for them. So you can see that in some of the features, things like calendars and timeline views, more sort of business-friendly ways of looking at things, a lot of the new Jira family templates that shipped as a part of Team 21. So this is sort of project setup templates in very specific ways for lots of different circumstances. You can obviously think about those for software teams. There's lots of different methodologies and ways that software teams want to set up their project. We can do that for them up front. But we shipped 20 different business templates for different HR and finance and marketing use cases that take advantage of the features of Jira Work Management to deliver for those particular customers. There, you know... Jira is a very structured system for work management, so it has a huge amount of power, a huge amount of capability built into the Jira platform and the broader Atlassian platform. For customers that have chosen Jira in a deep way across their business, this is a very logical choice to continue to expand that to business teams, specifically where those business teams have to work, as they increasingly do, with teams in the technology parts of the organization. So when you're working with software teams, when you're working with IT teams or operations teams, you can see a lot of things around legal and compliance, for example, or finance and AWS billing, which can be quite challenging. There are marketing teams shipping software and have to understand how to work with designers and software teams and when things are going to arrive and what they're going to look like and how that's going to go together. So the fact that it's all inside the Jira platform provides a lot of very deep integration capabilities, not least things like automation, machine learning, the smarts as Jira itself gets smarter as a family of products. We can do a lot of things in terms of cross-linking between. So I hope that shows a little reasons why we think a lot of business teams will be excited by chair work management. I would point out, you know, it's very early days, right? Again, part of point A is co-developing this with customers, and we will continue to do that. I think the space in general, as you asked at the start of your question, is very, very large. As we pointed out, there's close to a billion knowledge workers out there As we look at continual knowledge worker productivity improvements over the next decades to come, there's going to be a lot of work around how do we take things like machine learning and automation and all sorts of data resources as we have in the Atlassian platform and bring them to knowledge worker productivity in terms of project management, task management, and the flows. How do we coordinate groups of people, which we call teams, across large organizations in different functions We obviously think with the broader Atlassian platform and the different offerings in the Jira family, we are very well positioned to take advantage of those trends.
spk03: Your next question comes from the line of Rob Oliver from Baird. Your line is open.
spk04: Great. Good evening, guys. Thank you very much for taking my question. I wanted to just ask about the enterprise conversions. You guys mentioned Splunk in your letter and a particularly, I think, compelling example. When you look at a company like a Splunk, I think you guys mentioned maybe Northwest Mutual as well, Are there patterns or markers that you see for companies like that that are leaping at the opportunity to migrate early?
spk06: I know you guys have said that it would be mostly SMBs early and enterprises later.
spk04: But clearly there are some enterprises, you know, multi-product platform type users that would leap at that opportunity. And with, you know, the use of data that you guys are famous for, I'm sure there's some patterns you're identifying there, whether it be, you know, JSM users or whatever, how you're approaching that.
spk05: Thanks.
spk06: Robert, Scott here. I appreciate the question. As we've mentioned before, it's migrating the tens of thousands of customers we have from our server and data center offerings across the cloud. It's a multi-year process, and we still expect the majority of our largest customers to move in subsequent years. And so we're really excited by some early movement of customers, but it doesn't represent any, I guess, great change in the uh the estimates that we put out previously um when i look at the customers that move across in general um without speaking to those specific examples uh you know large companies can be large and small all agree that the cloud is the future for them they don't want to be in the business of managing infrastructure they look at the features that we're offering in the cloud um whether it's you know the security features we can offer them or it's the management features or the end user facing features and they're all um They all want to be there, and so it comes down to a discussion of when are we ready? You know, in some cases, for highly regulated industries, you know, we haven't yet got the certification required. Or when are they ready? Which it might be down to... the time frame of which they can schedule that project alongside other projects that they have going on internally. And so we're really happy with the momentum that we're seeing with customers large and small. It doesn't represent any change, I guess, in our forecast. It is a multi-year process.
spk03: Your next question comes from the line of Keith Weiss from Morgan Stanley. Your line is open.
spk08: Excellent. Thank you guys for taking the question and a very nice quarter. The number in particular that really stuck out to me was that new customer ad number. And I know some of it's related to kind of single-use Trello, but even when we take that, it's well ahead of what you guys have added historically. I'm sure some of it's related to sort of end of new server licensing, but that only makes some sense because the customers didn't realize they needed to Jira before and then all of a sudden because the pricing changes that they do, that doesn't make a ton of sense. Can you help us understand what caused that? What caused such a big spike in customer ads? Are these customers, are they of the same ilk as historical customer ads? Do they have the same growth potential as what you've seen historically?
spk06: Keith, it's Scott here. I'll take that question. You've been around long enough to know that at Atlassian, we don't spend a lot of time looking at our customer numbers on a quarter-to-quarter basis just because a customer in a quarter brings very little revenue at the start, and there's just so much variation in quarter-to-quarter. It's not something we manage to internally manage. um you mentioned the trailer single users um if i think about you know kind of that fits in the broader trend we've done a lot of changes to our funnel um over the last year um you know we've introduced free versions of their products um you know and uh and so that's changed our funnel um we've done more optimization around trello which has led to more single users also more small teams um there And, you know, while customer numbers are a huge indicator of our long-term potential, we don't kind of really, I guess, get excited by large numbers or small numbers in any particular quarter. And so I think it's too early to say, you know, what these customers look like over the long term as we've made these changes to our funnel. We do want to pull out the Trello single users because, you know, we – um you know we believe we're around a teamwork platform and you know a single user isn't yet a team they they may turn into a team pretty quickly but uh they're not at this stage and so we wanted to give you some indication of that um but yeah i think it would be fair to say that there is um you know changes in uh our customer numbers as we've made changes to these funnels and it's too early to say what the long-term potential of those look like at the same as previous ones again you know our model of life in is land and expand so you know obviously landing
spk00: way more companies across the world it gives us a huge opportunity for us to you know expand into those customers over time your next question comes from line of greg moskowitz from mizuho your line is open okay uh thank you very much for taking the question um curious to hear what you're seeing with respect to demand for jira service management including the premium option that has the cmdb technology And then for point A, apologies in advance for throwing out a baseball analogy to an Australian and British management team, but what inning of a product's development are you engaging your customers, and how broad of a level of input are you going to be soliciting from your customers?
spk06: Yeah, hey, Greg, I can take both of those. Look, on the ITSM space, we continue to be extremely excited. As we've demonstrated, you know, two years ago, we told you in our shareholder letter, which I know you will read sort of word for word, that we were doubling down on IT. And I think you can see over the last two years that we've really done that. The CMDB capabilities you referred to are just the latest of a series of additions that you've seen us make, both from internally generated things and external acquisitions, you know, outstanding for the, you know, world-leading sort of world real-time rostering and capabilities, because a lot of things in IT nowadays come down to milliseconds and it matters, all the way through to, you know, this quarter adding ProForma from ThinkTilt to continue to drive our automation and low-code, no-code in a really native, Jira way. overall you know the the the traction amongst the customer base is uh really phenomenal in the itsm space we're really excited about where we're going we do believe we're very uniquely positioned we're the only company that gives you a single pane of glass across software operations and it staff for for modern enterprises that are moving at modern speed as we like to call it high velocity that that's a very unique position right um the elastin cloud platform continues to deepen its capabilities which we bring to all of those ipsm customers um and no matter whether you're a small company or a large company we continue to see really great traction for those offerings so i don't think um you know the name continues to be strong um the cndb capabilities that went uh ga during the quarter in the cloud Obviously, we'll continue to get customers excited as we move through that. I would point out the low-code, no-code additions that we've added and will continue to do so. It's not new. Automation has been a focus for us for a long while now, and I think in the quarter you've just seen us bring that, and as we continue to add new all of these capabilities together, so you can take the machine learning, the automation, the forms, and the CMDB that you mentioned, and it's just an amazing offering for IT teams, so we continue to be really excited about the space. In terms of baseball analogies, I've sat through many baseball games, so I think I understand it at least well enough. It's very similar to cricket in terms of drinking beer and watching for a long period of time. I would say that generally we're sort of in maybe the first or second inning, maybe bottom of the first, top of the second when we start revealing products to customers. I'm very confident of the direction that we're moving in. We have enough of the product built such that we are clear on the boundaries and what problem we are solving for customers. There's a lot of customer research that happens before that. Once it then gets out, there are a lot of tailoring to their needs, integrations that they need, and how the user experience is going to impact. Things like Compass, for example, are very new ways of looking at the sprawl of one's modern software architecture. and customers are saying, yes, this is a huge problem, but I don't know how to solve it because we don't have any tools to solve that. And so we're trying to build a tool to solve something that is a problem they clearly have in a very, very new area. We hope that by the third or fourth inning, it's very clear to customers that the boundaries get very well defined, and that's when you start seeing, you know, attraction and monetization. In the early days, it's really just about finding that problem fit with the customer base.
spk03: Your next question comes from the line of Fred Hasmeyer from Matt Corey. Your line is open.
spk06: So I'm also interested in JIRA work management, and I'm wondering about how you're helping generally less technical users do work, especially in these more modern remote work or hybrid work models. Understanding that it's early days, do you think that Jira Work Management is a product that non-technical teams will pick up on a self-serve basis, or do you anticipate it needing an assist from either your direct sales force or more of your channel partners? Yeah, good day, Fred. Look, I think like all Atlassian products, there will be a large amount of self-serve involved. I think one of the things that's interesting about Jira Work Management, especially when combined with our um land expand model um and obviously the free program we've talked about a lot over time that has great potential not just to land new customers but to land new parts of existing customers so a jira software customer that's broad can easily start a new uh free jira work management account alongside that um you know product offering alongside that jira software for you know the first team or the second team to really get started That said, I have no doubt that because of all the capabilities of the broader Atlassian platform, automation, a lot of things we're investing in the data and insight space that we haven't talked about as much, but there's a lot there for partners to both explain to larger customers, map to their organizations, which is often a challenge. facility that they bring or understanding those larger customers' challenges and business problems and then say, hey, Jira Work Management could be a piece of the solution to that problem and obviously bring it along to them. So I would imagine that the channel split, that the self-serve motions, et cetera, for Jira Work Management aren't basically different to our other products in size and scale. Obviously, you know, We think it's an incredibly large market and we continue to invest against that. I would point out, as we've talked about before, probably call it 50% of the broader Jira family audience is technical, which means about 50% of the audience today is non-technical. As Jira work management continues to grow, you could see that blend getting even further apart. It's usually surprising to people when they hear it's 50-50 at the moment. And, you know, obviously this has the potential to continue to grow that. We've made no bones that our mission is to unleash the potential of every team, and every team means we're going to have to work out how to help solve problems for, you know, marketing, HR, finance, sales, lots of other teams that need to manage projects around the building. And that's what Jira Work Management is aiming at inside the capabilities and structure and power of Jira.
spk03: Your next question comes from the line of Akai Kidron from Oppenheimer. Your line is open.
spk05: Thanks. Nice quarter, guys. I guess I want to just make sure I double down and understand the transition to the cloud. Clearly, you had a massive quarter where customers kind of pulled in purchases. I guess the question is going back to that 30,000 server customers you talked about that should transition over time. Did that number actually increase then in this past quarter rather than decrease, and perhaps you can talk about churn that you've seen in the conversion, how that shaped. And then lastly, given the magnitude of this pull-in effect, do you get a sense that perhaps customers are really unhappy with your cloud pricing? You know, does this magnitude of pulling make you feel more comfortable about your transition to the cloud or makes you question the pricing that you've set up for it relative to the historical products?
spk06: Great question. I appreciate you asking it. There's been nothing about this last quarter that has changed our belief or our timeframe internally for our customers moving over. And that may again, it may seem weird. So hang on, we've had a huge amount of pull forward on the service side of things. How does that affect our cloud transitions? All of our internal cloud transition numbers are looking, you know, on track as what we had forecast before this. What you've really seen is people take advantage of, you know, okay, inertia. Oh, I might be here for a year or two. I want to buy that now and get ahead of any price increases that are happening. And so it hasn't really changed their forecast timeframe. They really just decided to transact ahead of certain events. So we haven't seen that. You asked about churn new customers and cloud pricing. Look, on churn, our numbers are actually, I think we've talked about this before, our churn numbers across our cloud and across our entire base are better than we expected. had forecasted through this transition. So that is going really well. And there will be some customers who will turn through this process, but we believe that it's better for us and those customers over the long term. So that's all going on track. And on the cloud pricing, um we have discussions with our customers you know obviously the sticker prices is larger in cloud for many of our customers but when you look at the um both of the features and benefits they get from that the reduction in the number of head counts that they require um to uh to move across like um you know our clouds our customers are super excited about the cloud offering and are very happy with the price that we're providing that at. And so I guess the numbers on our website, sometimes they require a bit of explaining to customers. But once we've done that, they are all signing up. And it really just comes down to the time frame that they want to move across in.
spk03: Your next question comes from the line of Brentsville from Jefferies. Your line is open.
spk01: On for Brentsville. Thank you again for the time and taking my question. Want to ask one quick one on, you know, dig a little bit deeper on that last question around the cloud migration. Could you talk a little bit about the enterprise cloud, you know, the Atlassian enterprise cloud and how that might give some comfort to maybe the larger customers who are maybe waiting to make their decision as to whether or not they commit to the transition early on? And then a second question around the acquisitions of Chartio. I wanted to ask, like, you know, are you planning to get into the BI space, or is this just giving you some basic reporting functionality within the Jira family? Thank you.
spk06: Great. Scotty, I'll do the first one, and Mike can chime in on the Chartio one. look if you look at our migrations um we said that um you know small customers can move faster and we've seen that and the larger customers just have more inertia and so it takes some more time to move across and the larger customers have done a lot for them um over you know the last I mean, since we started our cloud, but it's accelerated over the last period of time. You know, we've improved scalability requirements, and we continue to tick down the size and scale of the instances that we can support in cloud. We are working on compliance and certifications, and we're, again, ticking off the compliance requirements for heavily regulated industries. We are... Data residency is another one, you know, particularly for customers in Europe. And you saw, I think we talked about a tintering on our shareholder at a devolved bank, who's the fourth largest bank in the Netherlands, who have chosen to move across, you know, and their, you know, European customer and data residency, obviously something that they consider over there. You looked at data isolation that our enterprise offerings allow people who want to make sure that the data is not intermingled with other customers. Security, we've improved and continue to improve our access product that allows integration with security providers and the higher level of security and access control. I could go on for a very long time here, but we are continuing to improve all our enterprise offerings, whether it's in the base product, We chose to put data residency in a base product for every single customer. Then we have our premium offerings that provide more. And then for the largest companies in the world, we have enterprise versions of our product that cater to those specific needs. So all those are improving at a very, very rapid clip. And so, yeah, we're really happy with the progress of our R&D teams on those ones. Mike, do you want to talk about Chartier? Sure. Thanks for the question, Brent. Look, there's no doubt that data is incredibly important to our customers, and we have an amazing depth and richness of data that is incredibly important to them. The more customers consume Atlassian products across the family, the more data about their history, project and task speeds, um how that connects into to documentation who's collaborating with who we have a phenomenal um data set when we put it all together across our products we are exposing that to customers in various different ways um firstly this quarter you've seen well first i would argue is i would start with in the platform infrastructurally we continue to build um a large data lake where we are cross-referencing and connecting all of the different data points that we have across multiple products and across third-party products, I would say, in the various different markets and workflows that we're involved in. So in software, in IT and operations, and through to broader knowledge management and work management. That data lake obeys all of the principles that Scott just talked about, so this is not a trivial engineering exercise across billions and billions of data points, but to do it with data residency in mind and to do it with all of the different enterprise compliance in mind is a non-trivial exercise that's a part of what the Atlassian platform does in terms of the data and insights features keeping compliance and privacy in mind at all times. We then take that data lake. We can expose it to customers in a direct way. We have an early access program going on to expose that directly to customers to put into their broad scale BI tool and mix and match with whatever data that they have. That's one potential way that that is emerging for customers. The second way is we're increasingly shipping data and insights features. So usually that's where we take that data lake. and we combine it with some sort of machine learning capabilities and try to provide insights in a particular customer or user's workflow to help them manage what they are doing at that particular time. So we shipped a series of features inside Jira Software this quarter where that emerged inside the software board. So, for example, we can look at your organization's general task completion rate in terms of how you do agile software. We can look at a particular team's task completion rate, how much work they tend to get through in a given sprint, say, two weeks. And then as they're doing sprint planning, we provide real-time insights to them Rather than having to go look at some sort of reporting tool to work out the insights, in real time we say, hey, you might be trying to do too much this next two weeks based on our analysis of your last, however long they've been using it, last two years worth of work, this particular team, this piece of software, this code base, we know a lot about what's going on. So that is starting to emerge inside the product itself. And then lastly, you get to, as you mentioned, reporting in other areas. Chart.io's strength is in its reporting and dashboards capabilities. You'll see this start to emerge, I imagine, in the Atlassian platform as a broad-scale capability, much alongside automation and machine learning and other things where we look platform-wide across multiple products, and also potentially seeing those reports and dashboards appearing inside singular products, where that makes sense. It's a fantastic team with a huge amount of experience in this area of dealing with large-scale data sets and presenting them. It also has a lot of capabilities to continue to look at third-party data. Often it's not your Jira software data alone that helps with sprint planning. We need to look at source code data and data from other other providers as well so i'm really excited about the space and the team that's joined us there in chaleo and lots of potential huge amount of work that we're already doing there but future looks good your next question comes from the line of tyler radke from city your line is open
spk05: Hey, guys. Thanks for taking my question.
spk04: Could you help us understand how you're thinking about just data center strength kind of continuing into Q4? Obviously, really strong number in Q3. And obviously, with the end of life of server, you would expect that customers weren't ready to go to the cloud when we have data centers, they're only non-cloud options.
spk05: Maybe just help us understand how you're thinking about that growth heading into Q4 and just overall subscription growth into Q4.
spk04: Thank you.
spk06: Yeah, this is James. I'll address that one. clearly in q3 we could see this outsized event driven data center volumes and of course a part of that was customers stepping in front of the price increases that we implemented in q3 so you won't have that sort of a dynamic uh playing out in q4 as i mentioned a little earlier though uh When we look at our subscription revenue growth target now for fiscal 21, we had previously said mid-30s percent growth year over year, and we are confident that we're going to beat that now. We're very much encouraged, as we've been discussing on this call, by the momentum that we're seeing on the cloud business. And then, as you say, the data center business remains strong as well.
spk03: And the next question comes to the line of Robert Magic from Raymond James. Your line is open.
spk04: In my checks, I picked up that some customers are planning to convert to cloud last minute in June while they're still able to lock in the 55% discount level. Is that something that you've heard or expect more broadly across the base?
spk08: And if so, should we expect some new cloud wins to get pulled forward into Q4?
spk06: Well, this is James again. You're right. We do have the loyalty discount that we've been offering to enterprise scale, so 1,000-plus users, server customers looking to migrate over to the cloud. So there could be some additional volume there ahead of that reduction in the discount rate. But we're certainly not of the mind that that would drive the sort of scale of event-driven activity that we saw in Q3. I think Q3 was a really historic for Atlassian, unusual event in terms of us ceasing the sale of new server licenses, and then also raising prices on both the server and data center side of the business. So, yes, there will be examples like the one you're framing in the question there where we'll continue to fine-tune our various business incentives to further drive our cloud migration timeline. But I'm not of the view that it would drive the same sort of outsized level of activity that we saw in Q3.
spk03: Your next question comes from the line of Jack Andrews from Needham. Your line is open.
spk08: Good afternoon and congratulations on the announcements this week. I want to ask a couple of questions about point A. I guess I was curious, you know, given the launch, does this change your framework at all in terms of how you think about building new functionality organically versus maybe making potential acquisitions?
spk02: And then, you know, I was also wondering if you could provide some color on just in terms of how we should be thinking about
spk08: what type what is the portfolio of new products that may come out of uh point a look like and how far afield do you think that you might go from your core mission of improving work management under this new initiative yeah good day jack um look on on the first part of your question we've always maintained
spk06: I think we've been very, very consistent in our philosophical stance. I was going to say since we've been public, but actually we were consistent well before that in terms of we don't believe all the innovation exists inside the building. We don't believe all the innovation exists outside the building. And so we try to be extremely pragmatic and thoughtful about whether we build or buy new capabilities that we need or new products or teams. in terms of groups of people. And it's always been a strength of ours, I think, to be pragmatic about both of those equations. Point A is a particular example of internal innovation and programs that are starting to hit the outside world, which is always a very exciting time. Part of that is driven from the cloud platform investments that we've made over the last five years or more so those investments have taken um a large amount of that that r d spend line item that you're always so excited to find out about as a group and building on those platforms that that platform itself would enable us to create new products faster and with less resource spend than they would have otherwise done in past eras that's why all of those products are in the cloud We believe all of those products will be also a carrot or an advantage to customers who are considering moving their existing products to cloud. A lot of the new products that they can work with exist in the cloud only because they're natively built on top of that cloud platform. That lets each of those products benefit from all of the... all of the capabilities that we've already put into that cloud platform. So we've had a lot of feedback on Team Central from customers that are already using it at the amazing breadth that it already has. Well, a lot of that has come from, you know, three, four years of investment in an absolutely world-class editing experience and a linking experience to tie all of your fast objects and data together into various forms. That's being repackaged into a very different method of looking at goals, status updates and you know and company directories inside team central but it comes with all of that power sort of from from day one so it's it's an incredibly full featured capability set similarly if you look at compass in terms of looking at the the sprawl of the the massive amount of software assets that have been created by software teams so the output of all of your software teams be that websites or microservices or apps, libraries, whatever it is, that is very natively tied into the services you have in Jira Service Management and all of the capabilities we know about your deployments, your source code, your rosters, your real-time, you know, it sort of arrives as part of the platform in Compass. So although it's sometimes a repackaging of functionality, there can be very full features from the start. So no change in summary in our approach to building organically versus M&A. We think we have strength in both areas and continue to look on both sides of the house. In terms of moving further afield from our mission, I think you've seen that we're, besides being, I think, really good stewards of capital, as the founders and the leadership team have been over... heading towards two decades now we're also incredibly focused on our mission and focused on the long term i don't see point a as being any any departure from that if you look across the offerings that we've announced in last uh a week or two they're all directly in the um the hitting zone uh there you go i'm using a baseball analogy directly in the hitting zone of um the mission that we've talked about for a long time and exciting to us to be moving forward continually, like the EMU, moving forward towards that mission.
spk03: Your next question comes from the line of Ari Tajanian from Cleveland Research. Your line is open.
spk08: Good afternoon, good evening, good morning. Thank you for taking the question. Just want to see if there's any change in thoughts or philosophies around how you're thinking about cloud versus data center and any feedback from customers. Is data center something, given the recent strength, you plan to maybe increase R&D or investment around maybe versus previous thoughts, or do you continue to intend to invest a disproportionate amount focused towards cloud longer term? Thank you.
spk06: How are you discussing our cloud here? We're clear with our customers that The cloud is the future and the long-term future for our customers to get the best experience of Atlassian. And it will take some time for our customers to move across, but they will understand that that is the best place to get the best experience from Atlassian. Obviously, we're continuing to invest in data center. So there are a small number of customers that aren't ready to go to cloud or who aren't yet ready to go to cloud. And so we're continuing our investments there. But long term, both our customers and us know that the best experience that we'll get will be in the cloud.
spk03: Your next question comes from the line of Jim Fish from Piper Sandler. Your line is open.
spk08: Hey, guys, this is Quinton on for Jim. You touched on it briefly already, but on the data residency capabilities, I think you mentioned during yesterday's Team 21 event that those capabilities for paid customers would focus on just a few areas or geos to start. Are there plans to roll that capability out to the larger global scale, or is that planned to follow based on customer demand? Thank you.
spk06: Yeah, Quinton, I can take that. Look, we support a series of geographies at the moment for data residency. The plan is to continue to roll that out, I would say, yes, with customer demand. We have strong demand, as we've talked about in the Team 21 keynote, from various more specific regions in Europe. Australia, Canada, those are all in some sort of engineering or testing today and will be rolled out by the end of the calendar year at least. I think it's some of them are even by mid-year. as customers continue to go into different regions. Given our platform, it's relatively easy for us to roll out new geographies if we see demand or we see legal, privacy, compliance reasons why we need to roll that out in a particular area for customers. So it's both driven by market forces, if you like, in terms of the governance and regulatory regimes. and also by customer demand in those areas. But what we've invested in is in the platform being able to do that relatively rapidly and economically for all of our customers. We continue to believe that broad scale compliance laws in different parts of the world around data, privacy, you know, regulated industries in terms of finance or healthcare or whatever it may be, will continue to evolve over the next five to 10 years. We need our R&D and our engineering to be prepared for that and our platform to be prepared for that because I think it will be a competitive advantage and will be increasingly difficult for SaaS companies to be able to keep pace with that for their customers. We are prepared and investing in that future. You see that in our recent announcement in the last quarter that data residency will be available for all customers that are on paid additions, so standard, premium, and enterprise. We don't believe that data residency is a large-scale sort of capital E requirement. It is a small customer requirement as well. for smaller German organisations that need their data to be in Germany. It's not just large German banks, for example, that have that requirement. That is a... Kudos to our engineering and infrastructure team. That's a non-trivial thing to do in a very large-scale SaaS platform and SaaS application. But that is the future that we are building to be able to have those capabilities for customers that may only have 11, 12, or 13 users and to be able to do that economically for both them and for us.
spk03: Your next question comes from the line of Pat Walravens from JMP. Your line is open.
spk08: Thank you so much, team. This is Joey Marincic on for Pat. Appreciate the question. So first, I wanted to dig in on IT and ITSM, and maybe just from a high level, you know, why those make sense as a focus area. And then secondly, you know, what have you learned in the early days of your premium and enterprise SKU strategy? Thank you.
spk06: Okay, Matt, I can take those. In terms of why IT and ITSM make sense, look, we obviously have a long-term, you know, multi-decade now core strength in software teams, software and engineering teams, and expanding out to, you know, designers and product managers and the people around the software creation process. Increasingly, that has both in terms of our movement as a company, but also the larger industry-scale trends, IT and software are increasingly blurring the lines between those two. Development and IT, those lines are increasingly blurring as they come together. It used to be that software teams built something and IT teams ran it. Now you have software teams that are running services for themselves and you have IT teams that are building new capabilities as the world becomes ever more digital and software driven. We think it's an incredible strength of our company to be the only company that spans development IT and the operations that exist either between those two or across all of those groups as they come together. You see that in Jira Service Management and all of the changes that we've made there and increasingly driving the more rapid pace of IT as modern IT organisations move, as we like to say, you know, at high velocity. There are different speeds and cadence to modern IT operations that we're really hoping to drive that a lot of the legacy and old school vendors don't seem to understand. The strength of having the software team there shouldn't be underestimated because all of this is coming together into a single spot. So that hopefully explains why we think it's a large and transformative area and why we have some strength to play there. It goes without saying, I hope that the digitalization of everything, you know, software and technology is the core competitive advantage for every single business nowadays. We've seen that never more than in the last 12 months through the pandemic, right, where we had vaccines created digitally, huge logistical operations, lots of businesses in all parts of the world either becoming more digital or using the digital transformation to adapt in an incredibly fluid and challenging environment as we've had in the last 12 to 18 months. So you don't need to look any further than that to see why digitization and software as an advantage for any business in any industry. And I think that puts us in a really, really core and strong position and we continue to lead in that area. I can take the premium part of the question as well. Look, premium is obviously for our more advanced customers in whichever product line or SKU they're in or in all of them, continues to have good traction in terms of there's a clear strategy as to why customers want more capabilities as their usage becomes more advanced. And again, it's part of our additions strategy that we've talked about, both on the free end we should remember that that free is part of the addition strategy to continue to make it easier for customers to land into a new product or with alassian for the first time and you know we have then the the um the journey that they can go on as they stay with us for hopefully a very long period of time through standard and premium and then up to enterprise if that's what their company needs again enterprise went
spk07: ga last quarter and and continues to get um very early but very encouraging traction in the largest organizations in the cloud your next question comes from line of keith bachman from bmo your line is open hey guys this is dan for keith thanks for taking my question i wanted to ask quickly about the marketplace business obviously this quarter benefited from the server and data center dynamics But next quarter, it sounds like it will continue to be impacted by some lower take rates. So how do you think about marketplace growth in a more normalized environment? Thank you.
spk06: James is just unmuting himself for a moment. Let me just jump in. Yeah, James can chime. Clearly this quarter we had... The pull forward effect, you know, when we marketplace revenue is recognized 100% at the point in time when it is sold, whereas other revenue is, you know, spread rateably across different time periods, depending on if it's server, data center or cloud. But because you don't have ongoing obligations for a marketplace revenue, it's recognized up front. So what you do see is more variability around marketplace, you know, sort of swings in the revenue line item that we have. uh you know than you would see in other areas um look in terms of marketplace growth um we have a amazing marketplace in our behind the firewall on-premises uh products and we have an amazing marketplace in our cloud products as well we've seen a huge number of our vendors you know move from i guess their um behind the firewall business to cloud along with our customer transition so they are being laid by our customers as well who are moving across and As you mentioned, we've reduced the take rates for our marketplace to incentivize some of our vendors to move across, and that has worked. And we've seen vendors both transition their business across, and we're seeing a whole bunch of new vendors who are building only for our cloud platform. So your marketplace continues to be a huge source of strategic strength for us at Atlassian. We know that customers who use our marketplace products are stickier. than ones that don't um we uh benefit of the ecosystem that is built around it we know that we can't build everything our products get used so widely you know 200 000 companies around the world uh you know and we can't build every use case for them and so the marketplace managed to fill in areas that uh that we can't do and so again that the customers benefit from that so i fit the marketplace to be you know just as uh important and it is just important in our cloud business um as it has been historically in our behind the firewall business
spk03: And there are no further questions at this time. I turn the call back over to Scott Farquhar for closing remarks.
spk06: Just a huge thank you to everyone for joining our call today. We appreciate your ongoing support. I'll be on holiday with my family next earnings call, maybe cracking some emus across Australia. And so Mike and James will be holding down the fort for the Q4 call. I hope you and your loved ones remain safe and healthy.
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