Good afternoon. Thank you for joining Atlassian's Earnings Conference Call for the Q2 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 Sonnefeldt, Atlassian's Head of Investor Relations. Good afternoon, and welcome to Atlassian's 2nd 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 Marquardt and Mike Cannon Brookes as well as our Chief Financial Officer, James Deere. Earlier today, we issued a press release and a shareholding letter with our financial results and commentary for our Q2 of fiscal 2021. 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 During the call, we'll make brief opening remarks and then spend the remainder of time on Q and 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, 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 Further information on these and other factors that could affect the company's financial results is included in filings we make with the Securities In addition, during today's call, we will discuss non IFRS financial measures. These non IFRS financial measures are in addition to and I'm 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 A reconciliation between IFRS and non IFRS financial measures is available in our earnings release, a shareholder letter and in our updated investor data sheet on the IR website. During Q and A, please ask your full question upfront 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 28 29th. We hope to see you there. With that, I'll turn this call over to Scott for opening remarks.
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 3 themes tied to Atlassian's long term focus. First, But we're off to a strong start in our multi year initiatives to migrate our server customers to the cloud.
2nd, 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, 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 $501,000,000 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 over 194,000. While we're proud of these results, there's plenty of hard work that lies ahead. Before we move to Q and 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.
Please stand by while we compile the Q and A roster. Your first question comes from the line of Alex Kurtz with KeyBanc Capital Markets. Your line is open. Yes. Thanks for taking the question.
Just on the new customer adds 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.
Yes, great question. Look, as 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 or 8,000 and a bit in Q1 and of It's 11,500 now and it's not a number we guide towards or we really manage into total ASEAN. 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 with a lot of the funnel changes we've done around free inside our products.
Also controller, we changed some 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 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'm hesitant to try and roll any of that into some sort of revenue forecast.
And just looking at these new customer adds, Were any of those potentially customers that turned in the first half of twenty twenty in their back?
I don't know if you categorize them differently if
they did turn 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?
Yes. 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 It's improved nicely as the recent quarters have gone by. Yes, you're right.
We did see some challenges back In Q4 of fiscal 2020. 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 verticals and again right across the Different sizes of customers that we serve. So we're pleased by all of those themes. Thank you.
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. If I could kind of squeeze in 2 questions.
One, just on the overall spending environment. If you give an idea kind of where we are on that Roach recovery. You talked about improving renewal rates. It sounds like that's getting better, but just kind of your take on kind of where we are on that? And 2, in particular on the ITSM product, Now that we've integrated Mineville and you have that CMDB component of the equation, Is that enabling the solution to go further upmarket?
Have you seen any evidence of that traction as of yet?
Good day, Keith. It's Mike here.
Let me take let James take the question On the spending environment and the trough and then I can come back on the ITSM one. On the spending environment, obviously, we're pleased by what we see as a nice gradual improvement. 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 Increasing movements to agile frameworks, the work from home processes is now becoming such a normal part of 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
months. Mike?
Yes. Mate, 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 the quarter in our model, customer reaction, customer adoption, Acceleration of Purchasing and Interest Behavior. As you mentioned, 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 development through ops, dev ops 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 Your next question comes from the line of Ittai Kidron with Oppenheimer.
Your line is open.
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 2, 3 years. Can you give us some color on how much Movement was there this quarter in that transition, only if 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 is it 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. Thanks. Good question.
Firstly, just remind everyone, we have 30,000 server customers and we're aiming to move them over a multiyear period with end of life server and Customers have 3 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 In terms of where we are, like it's very early in that. And when I look at all the numbers about our internal metrics, we're doing What we said we were going to do. We've got customers moving across at higher levels than ever before. Our numbers Internally, we measure it for this quarter, we're a new high as you would expect as we go through this transition.
And also a reminder that the majority of our new 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 leader 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 They say that it saves them money, saves them the hassle of doing things, gets them higher reliability. And so they are all partnered With us to move to the cloud. In most cases, it's in our court to ensure that we have the size and scale and that we can help them migrate across. And so It is hard to predict the churn on that like because it is in our customers' hands over 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?
Just that Back at Investor Day in November, we noted our expectation that around half of our 30,000 server Customers would migrate in FY2023 and beyond. And indeed for our medium or larger sized We would expect that ratio to be about 2 thirds migrating in FY2023 and beyond Nothing has changed in our perspective there.
Very good. Thanks. And then maybe just one follow-up on the perpetual license revenue, which But we forgot to upgrade you've talked about how this collapse 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 exploration. And as you said relative to your expectations that Most upgrades of medium and 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?
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 2nd. And we'll 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 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 Got it.
Very good. Excellent. Thank you very much guys. Good luck.
Your next question comes from the line of Michael Thiran with Wells Fargo Securities, your line is open.
Hey, there. Thank you. First off, congrats to Mike and the Jazz on that 10 game win streak, 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 Seeing into Q4 and beyond on the margin. Thank you.
Well, a couple of thoughts there. First of all, just to reiterate what we've been now saying for 2 or 3 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 2008, 2009 type downturn, macroeconomic downturn was such 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 2 about some shorter term revenue headwinds, things like The introduction of 3 additions, the fact that we are taking less marketplace revenue as we encourage our App system developers to emphasize putting new cloud apps on the marketplace. And 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 2 quarters ago that is Decreasing nicely is an impact on our financials. Clearly, we will continue, as I said in an earlier answer, We 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 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. 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.
Appreciate all the detail. Thank you.
Your next question comes from the
line of Arjun Bhatia with William Blair. Your line is open. 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. Is that migration that's driving that or are customers naturally upgrading Once they started using your cloud solutions for Jira and Confluence and JSM. And then on the hiring side, Are there any specific areas within R and D that you're targeting in the second half that we should be on the lookout for?
Thanks, Adrienne. I can take both
of those. Look, on the enterprise side, I have to So we have 2 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 call that the Little E Enterprise, big companies. We're really pleased with our continued cloud adoption there across all the additions 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 3 years through Access through scale, through performance and reliability improvements and continued investment in all manner of compliance Standards are 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 addition, so big E, during the quarter And I've 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 6 months Testing that with us. Again, the Enterprise Edition has high 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 1 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 The different plug ins, add ons, exposition to other customers of your own as company, etcetera. So, we're 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 the last seen products. And that's part of the ladder that we're trying to build there. On your second question, no specific callouts in R and D. We continue to invest in hiring across the board And R and 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 TIM Anywhere program, where we have announced 6 months ago and continue to announce the staff about Hiring in lots more countries in the world and lots of parts of the world. And that opens up our R and 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 6 months and we look to continue to deepen that in 2021. Perfect. Thank you very much.
Your next question comes from the line of Robert Majic with Raymond James. Your line is open. Great. Thanks. 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?
Thanks, Robert. It's Les Scott here. And I think just to echo sort of the things that we've I said earlier, we've seen the demand higher than we thought, but it's still very early days in terms of this both on demand Large customers, as Mike talked about, and also demand specific enterprise product. And so at this stage, there's nothing to say different. Like think we're pretty we're really happy with it.
And I guess it's playing out as we expected in terms of the migrations like 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 Citi. Your line is open. Hi, thanks. Two quick questions. First just on the data center side, I'm curious 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?
Walter, it's 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. It's the ball's in our court because there might be some particular compliance requirement 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, they've got 3 years to make a choice where they land, whether they Go to cloud.dc and the overwhelming majority we want to move to cloud and they're the discussions we're having. Of course, the customers on DC are also The benefits of cloud not having to manage their own upgrades and their hardware, getting the latest 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 DTE. And James, do you want to add to that?
Yes. Sure. The first thing I'd 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 time frame for those Support costs, I would expect those to be in place for the next few years consistent with the Time frames that we've talked about for our larger customers moving over
to the
cloud. And so I would expect some downward pressure on gross margins. But having said that, I really do also want to 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 I hope 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.
Your next question comes from the line of Gregg Moskowitz with Mizuho Securities. Your line is open. Okay. Thank you very much. I guess, 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 1 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. I can take the first part of that question, Greg. So in terms of Maisons 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 In Q2 of fiscal 2020. 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 see more maintenance revenue pull forward activity in Q3 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 advanced warning of the price increases. And 2nd, of course, not only is there a price increase both for the server and the data center business Scheduled to be put into place next week.
But this time, we're also end of life, 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
Data center, relatively modest pull forward there in Q2 as well. And again, I would expect there to be pull forward Tivity ahead of the price increases that will apply to data center just as they will apply to server as of February 2nd. Okay. That's great. And then just broadly speaking, not referring to any kind of pull forward, but just around kind of overall data 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've talked about before, you'll recall that the cloud business is by far the largest part of Our subscription revenue growth. Right. Okay, great.
Thanks, James. Thanks. Your next question comes from the line of D. J. Hynes with Canaccord.
Your line is open. Hey, guys. Congrats on the results. James, one for you. So there was a comment in the prepared remarks that said 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 are you seeing expansion activity That's outperforming your expectations. Again, any color there would be helpful.
Yes, sure. So What we do is study very closely each cohort of 3 customers that join us each month And we track their progression, whether it be as they add to their user accounts And then go beyond the 10 user free limits or whether their progression is Or even our premium cloud offering contains. And so they make that switch From free to a paid addition 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 2021, 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 Michael, are you going to add something?
Yes. Thanks, James. D. J, I just wanted to add a couple of small points there, I suppose. We've had a lot of questions on free.
Firstly, I would think of free as much less thoroughbred and much more Clydesdale in terms of how it's 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, right? It's a multi year impact. It's a long term investment that we're aiming With free, right? Clearly, we track extremely closely active usage. And I would stress that it's the most important metric for us.
Are people using these free additions? They're not giving away free things
if people don't use them.
So we spend a lot of time trying to track active usage and working on how we can make sure the customers are getting value out of those 3 additions. 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 marching up that addition hill. The second part that's really important for the 3 additions 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 as any of those users. So their ability to new products that we have as an existing customer is also increased, right? And the more users we have in products, the first product, the more that we have the potential to start Trials of second products or free additions alongside with anyone in that company. So our ability to expand and go wall to wall is increased by 3. Again, I would stress it's pretty modest revenue impact given these are all small customers And we're aiming for that multiyear impact part of our sort of long term thinking.
Yes. Yes. That makes perfect sense and I'm built more like a Clyde built, not a thoroughbred, so I can get behind that analogy. Thank you. Your next question comes from the line of Derrick Wood with Cowen and Company.
Your line is open. Great. Thanks for taking my questions. 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 small customers may see a little bit of a downtick in revenue capture mid market, maybe a little bit of an uptick. Any early read on revenue conversion and including the potential to upsell cross sell during the migration?
And then I'll just throw in my second one. Pretty interesting win with Thoughtworks and the 8,000 users on Trello. 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 about how you want to deal. I can take the first part of that.
In terms of the revenue result that we've seen from the service to cloud migrations, I would say that's very much of how the economics work for small, medium sized customers and those are generally the ones that Mike, raising at this point in time. So, yes, 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 sized net net, I wouldn't describe it as a material driver of the revenue in Q2. 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 that had passed 50,000,000 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 50,000,000 users of Trello And the 10,000,000 monthly active user number that we passed that we released on I believe at Investor Day. That said, from Trello's point of view, obviously, we're continuing to learn from the capital base and work on the monetization Journeys there in Trello, working through its monetization ladder. If you think about it, it's equivalent with free business class And Trello Enterprise, it's sort of equivalent to the free standard premium enterprise ladder of additions that In interior software and interior 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 We are now talking 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, Brian.
So it's adaptability to lots and lots of different use cases and almost anyone 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 free form nature of Trello in the hands of the users, I guess. And you'll see a lot of exciting things coming up in Cello. Again, Small plug for Team 21, if you go to that in a couple of months' time, we continue to work on really exciting things for Trello and look forward to Your next question comes from the line of Rob Oliver with Baird. Your line is open.
Great. Thanks guys for taking my question. Happy New Year to everybody. My question is on Gajira Service Management and then I have a quick follow-up. 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 is attacking more things within the IT department, agile DevOps, ITSM, work management.
Any color around sort of the seat expansion you're seeing as That product as people migrate. And then just a question on The partner network, James, you had mentioned earlier, some of the ways you're incentivizing the partners with cloud apps and others. 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 Active in physical events and stuff. So I'm just curious as your partners, 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.
Sure, Rob. Look on JSM, I would say too early in the release of that particular product See massive differences with JSD having not again not being in the market that long in terms of adoption and seat expansion. Obviously, being a broader feature offering and having embedded the Opsgenie 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 10,000 seats to 15,000 seats, I think JSN gives us all of that possibility. And I would stress that we continue to invest very aggressively in that product We still have the CMDB functionality coming out and continue 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, Well, I 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 on the 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 Juricor or indeed to Trello and Trello Enterprise. That's About our broader Atlassian fleet 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.
Thanks, Mike. The partners,
I think Scott
Sorry. James, you're coming out there. Yes, there is 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 as We know that we incentivize them with margins and we also spend a lot of time on training and so forth.
And of course, we're using training margins and other To direct our partner network more towards our cloud offerings, as that misses course where the demand from our customers is at the moment as well.
Thanks a lot guys.
Your next question comes from
the line of Rishi Jaluria with D. A. Davidson. Nice to see 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 2 thirds of mid to large customers to migrate until FY 'twenty three and beyond. I guess I'm a little surprised by that metric, given the Incentives that you have in place to push migrations, what has been the pushback from customers on migrating? Is it 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 cloud net expansion rates. At the Analyst Day, you talked about 121% cloud net 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.
Scott here. I'll take the first one and James may either 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 organization. We had the CIO of a large technology company talk to us recently and they said, oh, there's 3 or 4 mission critical At Atlassian sorry, this is a good company.
One of them is our ERP, one of them is kind of our sales force 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 I could click the fingers and move today, they appreciate all the benefits that they would get. But it's a practical matter. It takes a while to plan And migrate these sort of 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 things and customers are working with us to move as we hit those certifications. But there's nothing Specific that I look at that makes some delay really just inertia and the mission criticality of our applications.
And then just on the second part of your question. Obviously, at the Investor Day, 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 Right. As you say at 121 percent and that being a larger figure 130% for our medium and larger So as we continue along our cloud migration journey, you can expect that we will periodically update those statistics.
Your next question comes from
the line of Brent Thill with Jefferies. Your line is open. Hey, guys. This is Lux Coda on for Brent Thill. 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 Cloud migration. I guess, did that have any impact, any negative headwinds On billings or unearned 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 So I can take the first part there. In terms of server to cloud migration impact on billings, no, I wouldn't And in terms of the free versions, we're pleased with obviously our progress But I wouldn't speak to anything in addition to what we've already covered in earlier performances. Anything to add to that Scott or Mike? Okay. Thank you.
Your next question comes from the line of Jack Andrews with Needham. Your line is open. 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 it just Was curious if there's any context you can share in terms of just how where the growth is coming from and
Thank you. It's Scott here. On the line, James, that is primarily sold to our existing 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 1 or many Jiras across my organization. We are doing an 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, Align is the exact solution they're looking for. And so I Don't think there's anything in terms of 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 that helps us within our customers' digital transformation. And that is something we when we talk with It used to be that software teams were kind of did their own thing in a department. These days software is Mission critical to every company. 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 Most of these phases that transformation is coming from their software teams.
They're actually adopting practices in software and rolling them out across the entire organization, That's benefiting not just Euroline, but that benefits Confluence. 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 it's in the up in a whole bunch of conversations at the sea level, CIOs, CTOs and even CEOs of organizations who are Turning after last year and asking how we can help them solve their digital transformation problem.
Thank you very much.
Your next question comes from
the line of James Fish with Piper Sandler. Your line is open. Hey, guys. This is Quentin on for Jim. Thanks for taking our question.
Really throughout the pandemic, we've seen employees adopting new ways of 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. Good day, Quintin. Look, from the 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, right, they 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, etcetera. And that will, I think, in the long term, lead to expansion, but it's not going to be a step change if they all sort of run online and suddenly decide to buy solo, 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 trends, I suppose.
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 in the back end and sometimes just processing all of that messaging within all 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 Health will benefit from that because people are increasingly looking for ways to do work within those tools. And that's the leading Service provision tool within the Slack ecosystem is now in the Atlassian stable and we continue to work on integrating that
Your next question comes from
the line of Pat Walravens with JMP Securities. Your line is open. Great. Thank you. And I'll add my congratulations.
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 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
Scott here and others can join in if I wanted to add anything. We think of it, we call it Team Anywhere as 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 the license has been successful, I think, is our heritage 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 able to tap into that around the world. I know myself, yes, 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 and many of our executive team have moved from the center of cities To somewhere nearby to take advantage of kind of those areas. And so 2 hours back from a commute gives you a lot of freedom and I'd remind our employees that we aren't really in a steady state there, that we are Working from home in the middle of a pandemic, and that's different to what the world will look like when you can, your Back at school and you can travel into the office and we are building our policies for that world and God willing, like that will happen this year.
We'll see the vaccine rollout 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, we continually try and improve. The Clyde, sales spirit is continuing to it might get you relentless improvement and so you'll see that here as well.
Great. Thanks for that perspective. Your next question comes from the line of Fred Hadmeyer with Macquarie. Your line is open. Hi.
Thank you very much for taking my question. I'm really curious about your perspective on this. Businesses are planning for their IT remote by work sorry remote work by design and this new kind of like 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
Scott here. It's interesting in terms of your remote work by design, There's a great quote, which is the future is here. It's just unevenly distributed. And I think if I went back pre pandemic, You would find that like there were a large number of our customers already working in this fashion, heavily winning on digital tools to share information across their organization, Already reaping the benefits of less synchronous communication, more work that is tracked kind of in confluence rather than meetings. And so in many cases, what we've seen with the pandemic is the sort of whole world catching up.
Many people were already using Zoom on a day to day basis and everyone else is now seeing it. We're seeing many customers who are using Jira and Confluence and our agile products, Trello, already been used in many places. So I don't think there's been a huge I guess we've always at elacium catered to the vanguard of people and how they're working. And obviously, there's some new things we're thinking about with this, But it hasn't been a sort of step change in sort of how products work.
Thank
Your next question comes from the
line of Ari Tirjanian with Cleveland Research. Your line is open. Hi, guys. Thanks for taking the question and congrats on
the results. At the Analyst Day a couple
of months ago, you guys talked about Strength in March deals. Just 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 what would you say is the biggest surprise you've seen in terms of customer behavior since the So in terms of large deals, we tend to update that statistic each year. I would say that We continue to execute in a way kind of consistent with the trends that were laid out in the last stats 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, like 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?
No, I think you said it really well, James. Like, we're thoughtful, long term focused and you've seen from Atlassian, Whether it's free or migration to cloud or the product portfolio we build, like we really just take a long term focus with all of it. And there'll be volatility month to month, quarter to quarter, but Most of the time, Mike and I 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 Yes.
Again, I think it's the last question. I want to say thank you to all of you for being along with the journey and I appreciate it. And I think that's the last question.
Yes, there are no further questions at this time. I'll turn the call back to Mike for closing remarks. Hi, 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.