Good afternoon, ladies and gentlemen. Thank you for joining Atlassian's Earnings Conference Call for the Q2 of Fiscal 2016. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Atlassian's website following the call. I'll now hand the call over to Ian Lee, Atlassian's Head of Investor Relations. Please go ahead, sir.
Thank you. Good afternoon, and welcome to Atlassian's 2nd quarter fiscal 2016 earnings conference call. On the call today, we have Atlassian's Co Founders and CEOs, Scott Farkler and Mike Kennenbrooke our Chief Financial Officer, Murray Dimo and our President, Jay Simons. As this is the first earnings call since our IPO in December, Scott and Mike will begin by providing an overview of Atlassian's business strategies in addition to recapping some of the highlights from the Q2. Murray will then cover Atlassian's financial results for the Q2 and provide our financial targets for the Q3 and full year fiscal 2016.
Following our prepared remarks, we'll have a brief question and answer session. Jay will also be joining for Q and A. The press release of our results for the Q2 was issued earlier today and is posted on our Investor Relations website at investors. Atlassian.com. There's also an accompanying presentation and data sheet available on our IR website.
Statements made on this call include forward looking statements. Forward looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward looking statements. You should not rely upon forward looking statements as predictions of future events. Forward looking statements represent our management's beliefs and assumptions only as of the date such statements are made. In addition, during today's call, we will discuss non IFRS financial measures.
These non IFRS financial measures are in addition to and not as a substitute for us or superior to measures of financial performance prepared in accordance with IFRS. There are a number of limitations related to the use of these non IFRS financial measures versus the nearest IFRS equivalents. For example, other companies may calculate non IFRS financial measures differently or may use other measures to evaluate the performance, all of which could reduce the usefulness of our non IFRS financial measures as tools for comparison. A reconciliation between IFRS and non IFRS financial measures is available on our earnings release and in our updated investor data sheet on the Investor Relations section of Atlassian's website. Further information on these and other factors that could affect the company's financial results is included in filings we make with the Securities and Exchange Commission from time to time, including the section titled Risk Factors in the company's Form F-one previously filed with the SEC in connection with our IPO and Form 6 ks report that we filed with the SEC.
I will now turn the call over to Scott.
Good afternoon. We're excited to be here today on our first earnings call as a public company. We met many of you on our IPO roadshow, but for those that we didn't, we'll begin with a brief introduction to Atlassian and what makes us unique. Atlassian's mission is to unleash the potential in every team. Our software helps teams organize, discuss and complete their work.
Of our product categories are focused on teams and the work teams do together. We have 5 product categories: Jira for planning and project management Confluence for content creation and sharing HipChat for messaging and communications Bitbucket for code sharing and management and finally Jira Service Desk for service and support applications. Our products do for team productivity what Microsoft Office did for personal productivity. Beyond our products, Atlassian stands apart from traditional enterprise software companies through our unique combination of product strategy, distribution model and company culture. It's this combination that has propelled our innovation and growth over the past 13 years and we believe it is core to our future growth and success.
Our product strategy is founded on the simple belief that the best products win. We believe software should be bought and not sold. We invest heavily in R and D substantially more than our traditional enterprise software company peers to build great products that customers can easily adopt and love to use. Our unique automated distribution model gives us the ability to pursue the largest possible market we reach customers in every corner of the globe. Now unlike many enterprise software companies, we sell our products online rather through a costly human powered sales infrastructure.
And our model removes friction at every point for the customer and allows us to target not only the Fortune 500, but the Fortune 500,000. This high scale model has resulted in a base of over 54,000 active customers using our products. We added more than 5,600 net new customers so far in fiscal 2016, and these numbers are in order of magnitude higher than the customer counts of many of our enterprise peers. As a reminder, our definition of a customer is an organization that has at least one active and paid license or subscription for which they pay us more than $10 a month. Finally, our strong culture of innovation serves as a long term advantage in running our business.
Our 5 core values drive a company wide approach that is open, innovative, dedicated to our customers, team driven and long term focused. We continue to be recognized as a great place to work, and I'm really proud of that. The company is with less than 1,000 employees. We're recognized as the number 2 best place to work in all of the United States. And in Australia, across companies of all sizes, we were awarded the number one best place to work for 2 years in a row, the first for any company.
Our unique business has led to our strong financial model, and we have a track record of consistent revenue growth combined with over 10 years of profitability and free cash flow. Murray will touch more on our financials momentarily. And now I'll hand the call over to Mike, who will cover our growth opportunities and the highlights from the Q2.
Thanks, Scott. Let me echo how excited we are about being a public company. Once again, I'd like to thank our employees, customers and partners who've helped us grow to a company that is transforming how teams work around the world. Atlassian's early success was founded in serving software teams, helping developers collaborate with other non developer teams. As more non developer teams are exposed to our products, they adopt and extend them to new use cases within their organizations.
Today, our products serve teams in virtually every industry and business function, from software and technical teams to IT and service teams, from sales and marketing teams to HR, legal and finance teams. For instance, leading job site indeed uses Atlassian's products for HR, finance, legal and customer support. And direct response marketing company, Guthy Renka uses our products across this entire organization, including teams in engineering, product management, HR, legal, IT and even marketing itself. As Scott mentioned, we've already achieved great scale. We believe we're just getting started.
When you consider the teams within every company and across every industry are seeking better ways to work together, we're truly just scratching the surface. There are 2 main growth drivers we focus on as a business. The first driver is our ability to land within an organization through a variety of key entry points. Our large investments in R and D allow us to build great products that customers want to use. We make it easy for customers to find, try and buy our products via our online distribution platform without the need to haggle over pricing or complex documentation with a salesperson.
This enables us to target a large volume of customers and also a wide variety of entry points within any organization. The second driver is our ability to expand from each initial land opportunity, offering additional products to existing teams and reaching a variety of other teams within an organization. Building great products that work well builds loyal customers. These are customers who not only love our products and want to buy more, but who also want to share them with other parts of their organization. And this leads to viral adoption within an organization, across teams and across functions.
With momentum across these growth drivers, the Q2 was another strong quarter for Atlassian. We recorded revenue of $109,700,000 up 45% year over year. And we achieved a non IFRS operating margin of 18.5% and a free cash flow margin of 26.2%. We added more than 2,600 net new customers, bringing our new our customer count to more than 54,000 from over 160 countries. In terms of the breakdown of customers by deployment, over half our existing customers are cloud based and approximately 3 quarters of the new customers in fiscal Q2 were from the cloud.
Our new customers span everything from small startups like digital commerce agency Pulsar 4 to the Fortune 1 100 like Dow Corning. Our focus on the Fortune 500,000 gives us a customer volume not typically seen anywhere in enterprise software. In addition to new customer growth, we continue to see great cross sell and expansion within existing customers. Historically, on average, a customer who spends $1 to make an initial purchase will spend another $7 with us over the next 5 years. During the Q2, we enhanced the land and expand opportunity for our flagship product JIRA through the launch of 3 distinct JIRA offerings: JIRA Software for software teams JIRA Service Desk for IT and service teams and Jira Core for business teams.
In a 2014 survey of our customers, over 1 third of teams identified the use of Jira beyond their software teams, validating the expansive opportunity for Jira within and beyond our existing customer base. We also saw strong momentum in our Atlassian marketplace, which is one of the largest enterprise marketplaces behind Salesforce and Amazon. We continue to invest in this vibrant ecosystem with the launch of which enables 3rd party developers to create apps directly within HitChat that integrate with their existing applications and systems. We've continued our investment in R and D across both our products and our online distribution platform. In fact, we just announced the hiring of a Chief Technology Officer, Sri Viswanath, who joins us from Groupon.
Sri's experience in developing large scale technology platforms will allow us to continue to scale our products as our customer volume scales. He will add even more strength to our world class engineering organization and ensure we take full advantage of trends such as the growth of our cloud business. We've also expanded our Board during the Q2, adding 3 new Board members with experience well matched for our stage of growth. The new board members are Steve Cerdello, the CFO at LinkedIn Shona Brown, a former executive of the Google team and Heather Fernandez, the CEO and Co Founder of a startup in the digital health space and a former senior executive at Trulia. Together, they bring an impressive background in reaching large customer audiences, scaling fast moving businesses and building lasting cultures.
To close with Scott again, our combination of unique product strategy, distribution model and culture has allowed us to deliver great products for customers and is a huge competitive advantage for the company. We will continue to leverage that model by focusing on R and D, innovation and delivering great products that sell themselves. We'd again like to thank our customers, our employees and our partners for their commitment to fundamentally changing how teams work. And with that, I'll turn the call over to Murray, our CFO. Thanks, Mike, and
good afternoon. I'll cover Atlassian's fiscal Q2 twenty sixteen financial performance and our financial targets for the Q3 and full year fiscal 2016. Total revenue for the fiscal second quarter was $109,700,000 up 45% year over year. As many of you are aware, our revenue over the past couple of years has benefited from some pricing optimizations to Jira and Confluence that we initiated in calendar year 2012. Approximately 12 of the 45 percentage points of the revenue growth in the Q2 of fiscal 2016 were attributable to these pricing optimizations.
By comparison, in the Q1 of fiscal 2016 and in the last two fiscal years, revenue growth excluding the impact of these pricing optimizations was in the mid-30s percentage range. Turning to revenue by line item. I'll provide a brief overview of each. 1st, subscription revenue primarily relates to fees earned from sales of our cloud products. A small portion of subscription revenue also relates to the sales of our data center subscription products.
We recognize subscription revenue ratably over the term of the contract. For the quarter, subscription revenue was $33,900,000 up 69% year over year. The growth in subscription revenue reflects the transition of more of our customers to cloud as well as strong growth in data center offerings during the quarter. 2nd, maintenance revenue represents fees earned from providing customer updates, upgrades and technical product support for our perpetual license products. The 1st year of maintenance is purchased concurrently with the purchase of our perpetual licenses and subsequent renewals extend for an additional year in most cases.
For example, an initial $1 purchase of a server product would represent $0.50 of license revenue and $0.50 of maintenance revenue, with the $0.50 maintenance portion continuing beyond the 1st year if renewed. Maintenance revenue is recognized ratably over the term of the support period, which is typically 12 months. For the quarter, maintenance revenue was $53,500,000 up 39% year over year. Maintenance revenue has been the primary beneficiary of the prior pricing optimizations to Jira and Confluence. 3rd, license revenue is related to fees earned from the sale of perpetual licenses for our server or behind the firewall products and is recognized at the time of sale.
For the Q2 of fiscal 2016, license revenue was 15.6 $1,000,000 up 9% year over year. While the majority of our revenue today is from sales and maintenance of server products, we are experiencing a transition to cloud as more customers choose that deployment option. Consequently, our license revenue growth rate this quarter is reflective of this transition. And finally, other revenue includes our portion of the fees received for sales of 3rd party add ons and extensions in the Atlassian marketplace and for training services. For the quarter, other revenue was $6,600,000 up 124% year over year.
Strong performance of the Atlassian marketplace was a key contributor to the growth of other revenue in the 2nd quarter. I'll next spend a few minutes reviewing our margins, operating expenses and our results of operations. Unless otherwise noted, all references to our expenses and operating results are on a non IFRS basis and are reconciled to our IFRS results within the tables posted in our earnings press release and on our Investor Relations website. All comparisons listed here are with the Q2 of fiscal 2015 unless otherwise noted. Gross margin in the Q2 of fiscal 2016 was 86% compared to 86.7% last year.
2nd quarter operating expenses were $74,100,000 up 46.9 percent from $50,400,000 last year. Now looking at operating expenses in more detail. R and D expenses for the Q2 was $40,100,000 or 36.5 percent of revenue compared to 25,400,000 dollars or 33.4 percent of revenue last year. Marketing and sales expense was $18,600,000 or 17 percent of revenue compared to $15,200,000 or 20 percent of revenue last year. And G and A expense was $15,400,000 or 14 percent of revenue compared to $9,900,000 or 13% last year.
Total employee headcount was 1514 at the end of the second quarter. The increase was across all operating expense categories with the largest increase in R and D. 2nd quarter operating income was $20,300,000 or 18.5 percent of revenue compared with $15,300,000 or 20.2 percent of revenue last year. Non IFRS net income was $19,100,000 or $0.11 per diluted share compared to $14,300,000 or $0.09 per diluted share for the Q2 of fiscal 2015. Moving over to the balance sheet, Atlassian finished the quarter with 6 $82,000,000 in cash, cash equivalents and short term investments.
This includes $431,400,000 of net proceeds after expenses from our IPO in December. Free cash flow for the Q2 of fiscal 2016 was $28,800,000 comprised of cash flow from operations of $31,900,000 less capital expenditures of 3,100,000 dollars Free cash flow margin defined as free cash flow as a percentage of revenue was 26.2% for the 2nd quarter. With regard to capital expenditures, the timing of some investments in facilities and our data centers that we planned in Q2 is now anticipated to occur in the second half of fiscal twenty sixteen. This shift of capital expenditures from Q2 is included in the full year free cash flow target I will discuss shortly. Now I'll provide our financial targets for the fiscal Q3 and full year fiscal 2016.
For the Q3 of fiscal 2016, our financial targets are as follows. For total revenue, we expect a range of approximately $113,000,000 to $115,000,000 For gross profit margin, we expect approximately 82% on an IFRS basis and approximately 86% on a non IFRS basis. For operating income margin, we expect approximately minus 9% to minus 8% on an IFRS basis and approximately 11% to 12% on a non IFRS basis. For share count, we expect the weighted average share count to be in the range of 231 to 233,000,000 shares on a fully diluted basis. For net income per diluted share, we expect approximately minus $0.05 on an IFRS basis and $0.05 to 0 point 06 dollars on a non IFRS basis.
For the full year fiscal 2016, our financial targets are as follows. For total revenue, we expect a range of approximately $443,000,000 to $447,000,000 For gross profit margin, we expect approximately 83% on an IFRS basis and approximately 86% on a non IFRS basis. For operating income margin, we expect approximately minus 4% on an IFRS basis and approximately 15% on a non IFRS basis. For share count, we expect the weighted average share count to be in the range of 202,000,000 to 204,000,000 shares on a fully diluted basis. For net income per diluted share for fiscal 2016, we expect a range of minus $0.11 to minus $0.10 on an IFRS basis and $0.30 to $0.31 on a non IFRS basis.
We are also providing an annual target for free cash flow. For fiscal 2016, we expect free cash flow to be in the range of $80,000,000 to $83,000,000 And with that, I will turn the call back to Scott before we move to Q and A.
Thanks, Murray. As we discussed today, Atlassian is a unique company with a special mission to unleash the potential in every team. We do that through software products that help all teams across virtually all industries organize, discuss and complete their work more effectively and efficiently. Our unique company is centered around 3 pillars: our focus on R and D and innovation that centers on our belief that everything starts with building great products a high velocity, highly automated distribution model and a transparent customer focused company culture. Together, this focus has enabled us to create a sustainable competitive advantage and build a financial model that has delivered consistent revenue growth and profitability.
With that, operator, we'll turn the call over to Q and A.
Thank you. We will now begin the question and answer session.
I wanted to ask you a little bit about the success that the company has been having expanding outside of the developer customer base that I think people most typically think that you're going after. Can you share with us maybe some examples of how you've been able to increase the penetration outside that core market to talk a little bit about how broad your products have become? Thank you.
Yes. Hey, Heather, this is Jay. So in part, as we mentioned, I think previously, in a 2014 survey of Jira customers, over a third had indicated that they had usage of Jira beyond software teams and a lot of that kind of drove the direction of Jira with the Jira 7 launch where we packaged Jira purpose built for software teams, IT and Jira Core. I think we're really happy with the response that we've seen in the launch. And I think that's also reflected in the revenue growth that you saw in Q2 that we're really excited about.
I think reflects a lot of kind of broad expansion within the base of 54,000 customers where more and more teams are seeking better ways to work with our products.
And then is there any way you could just follow-up a little bit on the service desk opportunity? I know that's been one of the fastest ramping products that you've had to date. Can you share with us kind of where you see those incremental where those opportunities are coming from? And is there is this a competitive are these competitive deals or are these deals that just didn't have solutions in place before?
Sure, Heather. It's Mike. Look, Service Desk is the fastest growing product we've had in company history. So we're very excited about the progress that
it's had obviously over the last 2 and
a bit years that it's been in the market. It does land largely within IT and service teams in an organization, but certainly expands out well beyond there. Again, we've got Twitter and Sotheby's and lots of other examples where it's gone to many, many teams around the organization. So I think it just shows our example of being able to do both. Some of those are certainly rip and replace type deals, some of those are displacing systems that processes that were done with spreadsheets or email or something else.
Okay, great. Thank you so much, gentlemen. Okay.
And our next question comes from Sanjit Singh of Morgan Stanley. Please go ahead.
Congrats from you guys as well on a very nice start as a public company. I wanted to ask about the Jira Core, Jira Software Insurance Service Desk. Since you rolled that out in the last couple of months, any sort of patterns that you're seeing in terms of sales cycles, eval cycles? And also, do you see your core Geo software customers, how are they sort of looking at these various options and deciding which one's the best use case for them?
Yes, great question. And to follow on, this is Scott Farkwat here. To follow on from Mike, the reason we did it is that people were using our products in all sorts of manners well beyond software. And so this change was really driven by customer demand. And what we've seen is that the response from our customers in terms of the feedback they've given us, top of the funnel, all those things have been really positive in the change.
Service Desk previously was an add on top of Jira. We've now seen that as we separated that out people can just buy Service Desk and it's a much clearer evaluation part. And so that's been really successful for us. On the flip side, there is with any change, there is some customers that take a little bit longer in their evaluation cycles as well. So we're seeing really positive numbers and I'm really excited about the opportunity we have across the entire business, particularly for the sort of general business user where our products may we have been more tailored for software and technical teams.
This process has enabled us to make a simpler version of Jira and that's been really well received by sort of more general business users in HR and other areas.
Great. I appreciate the answer. And Murray, we're seeing sustained revenue growth in the mid-thirty percent range for a very long time and the margins continue to come through. I wonder if you could just walk us through in terms of the areas of investment over the next couple of quarters or through the rest of fiscal year 2016. How should we think about investments?
Where are you what areas, whether it's a product roadmap that investors should be thinking about?
Yes. So just in terms of the expenses, we're going to continue to invest in our business. Obviously, we've got a great opportunity over the long term here. And so we'll continue to invest in all of the areas, R and D, sales and marketing and G and A, but the primary focus is going to be in R and D. That's the lifeblood of the company is our products.
And we've got customers in a growing market that we want to serve.
And would that be to is that ahead of a new product roadmap? Or is it more investments back into your existing products?
Scotty, again, the way we think about it is our existing products have incredible market opportunity. And so we continue to invest in improving those products even as you saw from Jira 7, but well beyond that in all of our products to make them more attractive to potential customers. So that's a lion's share of our R and D. And obviously, new product introductions is not something that we talk about publicly.
Great. Thanks guys.
And our next question comes from Richard Davis of Canaccord. Please go ahead.
Hey, thanks very much. Maybe on that same theme,
just I mean
spending a lot of money on development is a best path I think to creating a moat. But when you think about it at scale, as you scale, you'll be putting a lot of bodies against a handful of products. Can you kind of talk about how you think about optimizing your dev teams? Because you can't just throw thousands of people to write like one line of code as you're developing software. And then how do you kind of break off teams to pursue new products and modules?
Just more kind of strategy wise on that, that would be awesome. Thanks.
Yes. Richard, great question. And the way we think about it is that we have huge opportunity in our products. And so we don't anticipate aiming to slow down in our investment because of the size of the markets and the opportunity we have ahead of us. Obviously, as you get larger, it's harder to scale R and D.
That was key for us bringing in 3 has run multi 1,000 person organization engineering teams at Groupon directly before he came to Atlassian. And so I think he's going to be key to ensuring that we continue to be able to invest effectively in R and D like we have over the last 13 years, a track record of getting great returns on the R and D investments we've had.
Perfect. Thank you so much.
Thank you.
And our next question comes from Brent Thill of UBS. Please go ahead.
Thanks. I didn't realize I changed my last name. But just as it relates to the distribution model, you've made a very conscious decision to be unconventional to many of the software companies that we've all grown up with. And one of the questions I get a lot from your investors is when you launch a service desk or some of the other products, the awareness, the build process of getting those solutions out? How are you feeling about that push?
And maybe just give us a sense of how you think that uptake has gone with some of these new releases?
Yes. Hey, Brent, this is Jay. As we mentioned earlier, Service Desk is we're really excited about the growth, fastest growth fastest growing product in the company. And I think part of that is just the pent up demand that exists in the base of 54,000 customers that we've acquired and we continue to add a lot of volume to. And so wherever we're entering a new market or creating a new product, I think we're measuring the demand that already exists for that product.
In this case, Service Desk was easy adjacency to Jira. We had 40% of Jira customers that had already configured it to support the Service Desk use case. So building kind of a purposeful product in the way we did, I think we already had kind of a market to grow into. What we did now with Jira 7 is, I think we packaged it independently where we can start to build more reputation, brand and awareness in the Service Desk market for new customers that we want to acquire. And we feel like that's going really well too.
Okay, great. And to ask for Murray, just in the quarter, I think the customer add was just a little shy what you added in Q1. Can you talk about it wasn't far off and anything you saw there you thought was unusual? And maybe just talk a little bit about the price increase, it seems like that becomes less of an impact in the back half. Can you just walk through that dynamic?
I'll ask Jay to comment on the number of customers, and I'll follow-up on the price optimization.
Yes, short answer is we feel great about the 2,600 that we added in the quarter. Quarter was in line with what we've expected. You see historically, we've sort of added between 2,503,000. And again, that 2,600 joins a base of 5,300 customers, 5,200 customers that shows both the new market demand that we're capturing with the 2,600, but also just the significant sized expansion opportunity we continue to add to with the 50,000 plus. So nothing out of line, I think, and we're happy with the add.
And Brad, just a follow-up then on your second part of your question was on the pricing benefit in the quarter.
Yes. Just if you could just walk through the dynamic for Q2 and then the back half of this year?
Yes. Yes. So we grew 45% in the quarter, 12% approximately related to this price benefit. That's coming down from where we were in the Q1 where we had 15% price benefit approximately related to these pricing optimizations on Jira and Confluence that we initiated in 2012. As we look at the remainder of the year, we do see that there will be some ongoing benefit, additional benefit related to these pricing optimizations.
The grandfather that we spoke about earlier, it all ended in Q2, so that's happened. But we are seeing some tail into Q3 and into Q4. It's coming down like a steady slope. It's coming down relatively quickly, but it is factored into our guidance for Q3 and the full year.
Great. Thank you.
And our next question comes from Bhavan Suri of William Blair and Company. Please go ahead.
Thanks. Hey guys, thanks for taking my question. Can you hear me okay?
Yes. Great.
Just turning first to the marketplace, obviously, just substantial growth there and that was great to see. Outside of that HipChat application you guys called out, are there any other third party applications that are seeing significant sort of growth in usage there?
3rd party applications in terms of In the marketplace. Yes. Yes. Mike, you want to talk through
that? Sure, Bhavan. I mean, we don't break out individual applications that are growing strongly in the marketplace, but we have well over, I think it's 200 different vendors now, all building businesses on top of our platform inside that marketplace. So we're pretty happy about how it's going, both the
addition of new vendors and
the growth of existing vendors. Again, the main point of our marketplace for us is not necessarily about the revenue accretion as much as it is about customer value and stickiness. So we know that the more marketplace add ons the customer has, the more happy they are with the value the products deliver as a collection. And then obviously, the greater their stickiness is over time because of that value delivered. So that's really what we focus the marketplace team on doing.
Sure, sure. Do you ever consider using that as a test bed? So people have taken Jira and customized Jira to do service desk and then obviously you guys saw the huge opportunity there and brought that in. Do you look at the marketplace at all as a place for idea generation for new offerings?
Sure. I mean, we certainly look at what's in there. I mean, one of the things the marketplace does really well is solve problems that we don't want to or don't have to. So we can sort of solve the core collaboration problem and it's really around the edges. We certainly innovate ourselves internally and have a big culture of doing that on a regular basis, but we absolutely look for ideas everywhere.
Yes. And then a quick one, just you touched on the collaborative environment, just the competitive environment in that space. Obviously, some of the private guys, Slack, etcetera, have been sort of putting up some interesting user growth numbers. Has that environment changed? Are there any new entrants?
Any change in win rates in that in the collaborative space?
In the collaborative space or in the messaging space?
Well, let's put them together because eventually collaborating and messaging I think sort of end up probably converting at some point, but say both, sure.
Sure. I mean, look, we think we're at the early stages of a very big wave. We think we're putting up great numbers in the messaging space, and we're really happy with the progress of HipChat there. And especially our HipChat works with Confluence and works with Jira to provide a it's a really sort of comprehensive solution across the portfolio. And we continue to work really hard on that.
Super, super. That's really helpful guys. Thanks for taking my questions.
Thanks, John.
And our next question comes from John DiFucci of Jefferies. Please go ahead.
Hey, guys. This is Zach Louns for John. So just to touch on the pricing question again. You've been pretty clear about the impact there between the F1 and again on the call. With that kind of winding down the grandfathering, could you talk a little bit about what gives you confidence in implied accelerating growth for the year?
I think normalized last year was about mid-30s and this year midpoint is high-30s. Any color there?
So in terms of this year, if you look at the first two quarters, we grew 50% in Q1, 15 points approximately related to this pricing benefit. And if you look at Q2, 45% top line, 12% approximate price benefit. So that's kind of in the mid-30s. If you look at the guidance for Q3, it's right now it's in the sort of a 34% to 37% range and we're expecting to see some continued pricing benefit in the Q3 and then diminishing again into the Q4, but a little there. So think if you look at that, we've been sort of in the sort of mid-30s and it's kind of coming down when you kind of adjust for things as you look in Q3 and Q4 and that's reflected in our full year target.
So that's kind of how we're seeing it. In terms of how we're looking at setting our targets, we are targeting them where a great quarter is a 2% to 3% beat. That is how we're thinking about it. We know that we had a strong Q2. We recognize that, but as now we're providing formal guidance.
And as we go forward, we're looking at 2% to 3% is a great quarter for us in terms of a beat.
And then if I could just follow-up quick. You guys released the data center product line in 2014, I believe, larger deployments, turn based license. Could you talk about how those are doing? And maybe just general trends within larger enterprise adoption of Atlassian products?
Yes. Hey, Zach, this is Jay. The short answer going really well. I think you saw that reflected in kind of the growth of the subscription line even though we don't break it out. The data center product is a subscription based licensing, term based licensing, and it's also a product that targets the largest of our customer base.
And so it's going to contribute to subscription. We're seeing nice growth in demand, not just of adoption of the data center products. And 2 quarters ago, we released kind of the final data center product for the family. So now we have data center products for Bitbucket, Jira Confluence and Jira Service Desk. And we see pretty even adoption of all those at the upper end of the market.
In addition to data center, we also see nice adoption of Premier Support, which is kind of an enterprise grade support service for our largest customers and the technical camp management program. So overall, really positive signals and positive endorsement of what the investments that we made in enterprise.
Great. Thanks again, guys. Excellent quarter.
Thank you.
And our next question comes from Michael Turits of Raymond James. Please go ahead.
Hey, guys. Michael Turits. Two questions, I guess, one for Murray, one for Jay. So for Murray, can you talk a little bit about the leverage that you seem to be getting, which looks particularly strong both on the income side as well as on the free cash flow side? And for Jay, can you drill down a little bit more, if you would, on both the premium support and TAM adoption?
Is it picking up? And how is that balance working between those customers that want to pay extra for those who are happy with that essentially self serve?
Yes. We had strong op margins in the 1st two quarters, and we part of that is coming from the pricing optimization benefits that we've got. Also, we were a little under on OpEx in Q2 for a number of reasons, including FX and some expenses shifted from our plan in Q2 have shifted to Q3. So we did see very good profitability in the first half of the year as we're targeting the 11% to 12% in Q3. It's coming down with this pricing benefit phasing out, But we continue to see that we've got a good model here that has the potential to grow margins over time, to achieve our long term model targets of 20% to 30% in 5 years for op margin.
In terms of free cash flow, yes, we saw that we had a terrific quarter in free cash flow at $28,800,000 That really was a contribution of some good strong top line, lower expenses and quite low capital expenditures in the quarter. Some of that has now shifted to the second half. But we're targeting $80,000,000 to $83,000,000 for free cash flow for the year. And we continue to focus on that as a management team is an important metric in terms of our overall performance.
And hey Michael, this is Jay. Good question. One One clarification is that there is really no self-service support. Even free and starter customers, even evaluators get full service support through Atlassian support channels. What Premier Support is, is for our largest customers at scale where they've got thousands of active users and we become incredibly mission critical to just how a broad a very broad set of teams work.
We offer Premier Support, which gives them a different channel into kind of enterprise grade support services, and that's an additional 4 fee service. And then the TAM program is kind of an embedded strategic technical advisor to kind of help them understand kind of growth and scale and how they think about deploying our products more broadly. Adoption of those two things is going well. One of the measures that we look at is just the NPS, the Net Promoter Score, which is kind of an indication of satisfaction across the not just the account, but the end users within those accounts where we ask their end users, how are you feeling about the products that your company has chosen to use for you? And we see that that's going up, which I think is a good reflection of the investments we've made, not just in Premier Sport and TAM, but also data center.
Great. Thanks guys.
And our next question comes from Patrick Walravens of JMP Securities. Please go ahead.
Hi, this is actually Matt on for Pat. Thanks for taking my question and congrats on a great quarter out of the box. Could you guys maybe just remind us why a customer might have left to deploy the solution on premise versus leveraging your cloud based infrastructure? And also pretty much what types of companies are you seeing go on premise these days? Thanks.
Good question, Matt. Why we think about it and I think it's unique advantage of the legacy model is that we allow our customers to choose the deployment type, whether that is cloud or server and a large part of that is driven by their existing infrastructure that they use. Some companies have made significant investments in their own internal infrastructure and that's the way they prefer to deploy their products. And some companies are moving the other way and trying to move out of their own internal infrastructure. And so again for Alacin, we really are agnostic to that change.
We get the same dollars from them. We have the same customer satisfaction across both of them. When we look at the way it's going, we do have smaller companies in the more of our newer customers are adopting cloud. So I think that's the as you'd imagine, the way the general industry works, but it's still a huge advantage of us to be able to deploy in both places.
Pat, I guess the only other thing I'd add, it's Mike, is the cloud is also chosen obviously by people who want to collaborate with external people outside their organization. So that's often a driver for some of the cloud usage as well, right? If you want to work with a marketing agency or you have an HR consultant or something outside the business, that's the reason you go to cloud to get out of your data center and work with other companies, which is a strength of our product line. Almost each of our products allows you to work with teams in other companies, not just the teams in your own organization.
Great. Very helpful. Thanks, guys, and congrats again.
Thanks, Matt.
And this concludes our question and answer session. We would like to thank the management for their time, but the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.