Q2 2021 Atlassian Corporation PLC Earnings Call

And then.

And then.

Moving on.

[music].

Good day.

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Please.

Good afternoon. Thank you for joining Atlassian and earnings conference call for the second quarter of fiscal year 2021.

As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Atlassian and website. Following this call.

I'll now hand, the call over to Matt Sonnenfeldt, Atlassian and <unk> head of Investor Relations.

Good afternoon, and welcome to Atlassian and second quarter of fiscal 2021 earnings call. Thank you for joining us today on the call today, we have atlassian co founders and co Ceos, Scott Farquhar and Mike Cannon Brookes as well as our Chief Financial Officer James Beer.

Earlier today, we issued a press release and a shareholder letter and with our financial results and commentary for our second quarter of fiscal 'twenty one.

And the shareholder letter it was posted on our company blog and all items have also been posted to the Investor Relations section of Atlassian website on our on our IR site. We have also posted a supplemental data sheet. During the call. We'll make brief opening remarks, and then spend the remainder of time on Q&A.

This call will include forward looking statements forward looking statements involve known and unknown risks uncertainties and other factors that may cause actual results performance or achievements to be materially different from any future results performance or achievements expressed or implied by the forward looking statements you should not rely upon forward looking statements as predictions of future events forward looking.

Statements represent our management's beliefs and assumptions only as of the date such statements are made and we assume no obligation to update or revise such statements should they change or cease to be current.

Further information on these and other factors that could affect the Companys financial results.

We did and filings we make with the Securities and Exchange Commission from time to time, including the section titled Risk factors.

Recent form 20-F and quarterly form 6K.

In addition, during today's call we will discuss non-GAAP financial measures. These non <unk> financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with and for us.

A number of limitations related to the use of these non <unk> financial measures versus their nearest <unk> equivalents and maybe different from that IRS measures and non-GAAP measures used by other companies a reconciliation between <unk> and non <unk> financial measures is available on our earnings release, our shareholder letter and on our updated investor data sheet on the IR website.

During Q&A. Please ask your full question upfront so that we can easily move through to the next speaker Lastly, we've announced dates for Keane and 2021 virtual annual customer conference taking place April 28, and 29, and we hope to see you there with that I'll turn this call to Scott for opening remarks.

Thank you everyone for joining us today, we hope you and your loved ones remain safe during these challenging times.

And we hope you have taken the time to read the shareholder letter this quarter, we focused on three things tied to Atlassian and long term focus.

First, but we're off to a strong start and our multi year initiatives to migrate our server customers to the cloud.

Second we continue to deliver mission critical solutions for our customers across large temps through products like <unk> service management, which launched in Q2.

And third and we will continue to use the cloud to deliver innovation day customers small and large and our ultimate goal to serve the fortune 500000.

Our business results reflects steady execution against our goals.

And Q2, we generated $501 million and revenue up 23% year over year.

We also achieved subscription revenue growth was 36%.

During the quarter and we added a record 11617 net new customers of all sizes and bringing our total count to over 194000.

While we're proud of these results there's plenty of hard work that lies ahead.

Before we move to Q&A, Mark and I want to thank our employees, who continue to inspire us with their passion for customers and their adaptability.

You mentioned on leasing the potential of all teams possible.

With that I'll pass the call to the speaker.

So I called the mistake there waiting for me to February and operator.

To ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key please standby, while we compile the Q&A roster.

Your first question comes from the line of Alex Kurtz with Keybanc capital markets. Your line is open.

Yeah. Thanks, Thanks for taking the question just on the new customer adds and the strength there.

What drove that is there something changing with the F&B.

Customer base is there certain verticals that stood out to you just a little bit.

Little bit of context around that.

Yes, great question.

Because if you've been around for a while Alex you'll know that.

<unk> cost and the number bounces around a lot, but you had about 3000, and Q4 and a bit and.

Q1 and of course Lebanon.

And I'll hop out and now and it's not a number we guide towards OE.

And really managing to and sort of entitled vaccine and its also always been a pretty small driver of immediate revenue being the smallest of our customers.

What's the change this quarter is.

What are the final changes we've done around free and so on a products also controller and returned to the monetization and funnels on what are those areas, which we're really proud of what they are kind of put us in the right place a very long term growth on.

But it did change sort of the mix of custom.

Customer and ratios and we do have a larger mix and smaller customers and I'm sorry, Okay and.

More than any other quarters.

We have a greater ratio of smaller customers and when type before.

And so we think it's great and I think it's again, a great Testament to how much demand there is for our products out there Doug.

And to try and roll that into some sort of revenue forecast.

And just looking at these new customer adds were any of those potentially customers that churned and.

The first half of 2020, and they are back and I don't know if you categorized differently if they did it.

Turning her back.

And I don't have numbers around that.

And unfortunately, we have seen improved churn and.

General across most of our product base.

On some of that is.

And things, we've done and some of it could be macro trends as well.

James you want to comment as well on that.

Just a couple of things to add to that Scott and I would say that I was pleased with the customer accounts because it illustrates the mission critical nature of the products.

And that we serve our customers with.

All sizes.

All across the board from small and medium size businesses through to the largest corporations governments and so forth.

So pleased by that churn as Scott was saying that has increased and improved nicely.

As the recent quarters have gone by yes, Youre right. We did see some challenges back in Q4 of fiscal 'twenty.

But as we've seen on churn improve because we've seen our customer accounts.

For this past Q2, we've really seen those improvements right across all 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 just kind of squeeze and two questions one.

Just on on the overall spending environment and if he has an idea of kind of where we are on that road to recovery and you talked about improving renewal rates that sounds like that's getting better, but just kind of your take on kind of where we are on that and two in particular on the Ics and product now and that we've integrated mine zone and you have debt.

And <unk> component of the equation.

Thus, enabling the solution and go further up market have you seen any evidence of that traction and as of yet.

Okay.

What's market.

Let me take that.

Take the question on the.

On the on the spending environment and the trucks and then I can come back on the answer is I'm on.

On the spending environment.

Obviously, we're pleased by what we see as a nice gradual improvement.

It's hard to parse that out because I feel as though our products really certain.

Serving so many of the critical needs of our customers there is increasing movements to agile frameworks and the work from home.

The process is now becoming such a normal part of business life and.

And of course, our tools help support that.

So we've been pleased by the themes that we've seen them atlassian and in recent weeks and months.

Mike.

Yes, I can address the Rts and Christian and I look.

As you mentioned zero service management launched.

And a quarter ago now and we've been.

Very pleased with the results so far mostly obviously and tried a quarter and a model customer reaction and customer.

Adoption and acceleration of.

Purchasing and interest behavior.

On.

As you mentioned it is.

A great example of Atlassian and overall philosophy of both building and integrating smaller acquisitions, as you mentioned and Missy and DB.

Facilities.

Those are released as a plug and at the moment, but not fully integrated into jury service interest yet so those will be coming in the coming quarters.

As a part of our long term.

TSN strategy, you see a constant drumbeat of of improvements there.

At a whole level customers have resonated with.

Us.

Seeing the blurring of lines between <unk> and software development.

As we are sort of the the one company that can serve their needs from software development through ops day.

And to have ups and into their it.

And technical teams on that and so that's really resonating with customers and we're very excited about debt.

And again focusing on that.

Fortune 500000, and gives us a very broad customer adoption cycle.

All the way up to large customers as you see from the <unk>.

<unk> customer example, and the shareholder letter on some very very big customers adopting our HSM offerings as well.

Excellent that's great to hear and thank you guys.

Sure.

Your next.

Question comes from the line of Italian Kid Rock with Oppenheimer. Your line is open.

Thanks, Hey, guys, congrats on great quarter, and I'd like to focus on the 30000 and server customers that youre trying to migrate to the cloud over the next two or three years.

Can you give us some color on how much movement was there this quarter and that transition how many of the small and medium large have transition and.

And then second.

How would you think about churn.

In this group.

Sure a lot of people or some customers are probably not that happy about.

Although while recognizing and appreciating the benefits from the cloud and the capabilities that come along with debt pricing is it could be materially different especially for large customers. So help me think about.

How would you think about churn and.

This transition over the next couple of years.

Thanks Good question.

Firstly, just remind everyone. We have 30000 server customers and we're aiming to move them over a multiyear period and Overwatch silver and how customers are three used can.

And to move across the whole day peak hour and a maintenance periods and so we've been very friendly to our customers and we have a pretty wide window from those customers to move across.

In terms of our where we are like it's very early in that and that.

And.

When I look at all the numbers about our internal metrics, we're doing exactly what we said we were going to do.

We've got customers moving across that higher and higher.

Levels and even before our numbers internally that we measure it for this quarter were a new high as you would expect as we go through this transition.

And also reminded the majority of and new customers today and choose crowd, so well over 95% of our customers choose cloud and new customer choose cloud today, and so we're really happy with the leading indicators.

Growth.

In terms of.

Ken.

When I talk with our largest customers.

The.

The company's euro neuro and do business with and daily.

And <unk> all have plans to move to the cloud.

And sorry that it saves them money. So it's on the hassle of doing things get some high reliability.

And so <unk> partnered up with us to move to the cloud and more.

Most cases, it's in Alcoa to ensure that we have the size and scale and we can help them migrate across and so on.

It is hard to predict the time.

On that line because it is in our customers' hands over a period of time, but I'm pretty pleased with the indications of what we got.

And at the moment and.

And sort of the customer response from Janssen on add anything to that.

Just.

<unk> Investor day in November.

Noted our expectation.

Around half of our 2000 and server customers.

Customers would migrate in FY, 'twenty, three and beyond and indeed for our medium or larger sized customers. We would expect that ratio to be about <unk> <unk>.

Racing in FY, 'twenty, three and beyond and and nothing has changed and all perspective.

Very good thanks, and then maybe just one follow up on the perpetual license revenue, which clearly were still strong and it's.

And for obvious reasons people want to do things before February I guess next week kicks and licensing and.

But with regards to upgrades you've talked about how it gets collapsed all the way through fiscal <unk> next year fiscal next year.

Do you suspect you'll debt debt upgrade activity is going to be robust.

And we've got perpetual license sales and this quarter was robust just because we're kind of heading into a deadline of exploration and.

As you said relative to your expectations debt most upgrades of mid and large customers are going to be fiscal 'twenty three and thereafter.

And many are likely to upgrade and near term in order to give them more time to complete the transition to the cloud.

Yes, let me take that one.

In terms of license revenue.

Yes, we either have new license activity.

And the line.

Our upgraded licensing and Kielbasy.

And just to remind everyone will be curtailing new license sales and a few days' time February and the second.

And we will continue to allow customers to upgrade their licenses and expand the size and 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 activities and we were previously forecasting.

And I would say as we have now almost a month of Q3 behind us that that type of activity has continued.

And into Q3.

And.

Of course.

We would expect that to mean less activity downstream.

Uh huh.

I think there'll be upgrading activity playing out over the next year or so but it does appear the.

Some of that upgrade activity has been pulled in advance of the price increases.

And 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 and new licenses you really have to act very quickly here before those new sales six got.

Got it very good excellent. Thank you very much guys. Good luck.

Thank you.

Your next question comes from the line of Michael <unk> 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.

Assistant we noted margins are expected to trend down and 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 and the second half will look a little different and prior years.

Trying to make sure we don't over or under extrapolate what we're seeing into into Q4 and beyond on the margin. Thank you.

Well.

Couple of thoughts.

First of all just to reiterate what we'd be now, saying for two or three quarters.

Through this harder macro economic period, we've really been looking to invest purposefully.

And that continues and you saw.

Strong head count growth in the last quarter on good execution.

And 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 <unk> type downtown.

Macroeconomic downturn.

And with such that it was the right thing to do to invest through that period, and we're doing exactly that again this time.

Also recall I've spoken in the last call or two about some.

Sure Tom.

Revenue headwinds and.

Things like the introduction of free editions and the fact that we are taking less marketplace revenue as we encourage.

Perhaps system developers.

Two.

Emphasize putting new cloud apps on the marketplace.

And.

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 two quarters ago.

That is.

And as decreasing nicely as on impact on our financials.

Clearly, we will continue as I said and an earlier answer to expect the server business lines. The license line and the maintenance line to continue to.

Contract and such.

Of their rates of change and so forth and recall also.

That we have in order to encourage our larger enterprise customers those with over 1000 users to migrate to the cloud.

We're offering them quite substantial loyalty discounts. So we have some revenue headwinds I would describe them as transitory in nature very much.

Really favoring the long term.

For a short term.

Headwind.

So when you take those factors together of course, we have.

Seasonal factors like the payroll tax reset that happens at the start of every calendar year.

A few different things to consider but we've baked all of that into the Q3 margin guide and as.

As we've said elsewhere, we would expect second half margins to be down versus the first half margins.

I appreciate all the detail thank you.

Your next question comes from the line of Orange on body with William Blair. Your line is open.

Hey, guys. Thanks for taking the questions.

One of the things that stuck out to me and the shareholder letter was.

I think you pointed out the cloud enterprise adoption is coming in ahead of expectations. I was hoping maybe you could just unpack that a little bit and think that migration, that's driving that or our customers naturally upgrading once they've.

Once they started using your cloud solutions for tier on Powerpoints and.

J S.

And then.

On the hiring side.

Are there any specific areas within within R&D that you're targeting and the second half.

On debt that we should be on the lookout for.

Thanks, Jim and I can I can take both of those book.

On the enterprise side I have to say, we have two two phenomenons going on there so I'm not sure, which one you're asking about but let me answer per boat.

On the general enterprise customers and so we call that day literally enterprise Big 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.

You've seen us over the last three years through access through scale through performance and reliability improvements and continued investment in and all manner of compliance.

And.

And standards.

Continuing to get better and better traction with large customers with enterprise customers sort of a 1000 seats and more no matter. What addition day bye.

Secondly, we did.

Hey.

Sure Enterprise edition so IBP.

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 six months.

Testing out with US again, the enterprise edition has high levels of compliance and security standards.

And their data residency and a whole lot of other features as well as unlimited instance, and so you get unlimited scale, so rather than buying one zero software instance, and a second yourself for instance, you get.

And you pay a obviously a higher price, but you get unlimited Euro software instances. So that allows you to create and segment youll business as very large companies up and need to do that you might have one for Europe and one for America or you might have one floor set and department and one for a different department different plug ins add ons and exposition to other customers of your own this company et cetera.

So I'm very pleased with that adoption. So far again, it's incredibly early days it did on <unk> during the quarter.

And obviously, we're working with all of the early access program customers.

The company and so I should say to turn them into enterprise edition customers.

There is naturally a flow upwards from standard to premium to enterprise.

As customers grow and deepen their usage and adoption of Atlassian products.

And that's part of the the latter that we're trying to build debt.

On your second question no no specific call outs and R&D.

We continue to invest.

And hiring across the board and.

And our R&D product management engineering design, and all manner of operations and engineering functions and.

That's across largely all of our offices and I would remind you of our team anywhere program, where we have announced six months ago and continue to announce the staff about hiring.

In and lots more countries and the world and multi parts of the world and.

That opens up our R&D pipeline to get that.

At Cowen and hopefully largely no matter, where it sits in the world.

To work for Atlassian and Thats been.

<unk> been very.

So for six months and we look to continue the data on that and 2021.

Perfect. Thank you very much.

Your next question comes from the line of Robert Magic with Raymond James Your line is open.

Great. Thanks on the enterprise cloud front and you noted higher than expected initial demand for <unk> software confluence and <unk> service management can you start on some more color there on the customer feedback were getting and as this dynamic enough to potentially change the timetable for large customer migrations.

Thanks, Robert and close Scott here and.

I think just to echo what are the things that we sort of said earlier.

And we've seen the demand.

And we thought but it's still very early data from terms of this product on demand for large customers as Mike talked about and also demand specific enterprise product and.

And so at this stage, there's nothing to say different like we think there and pretty.

We're really happy with and and I guess, it's playing out as we expected in terms of the migrations like.

So theres nothing that I would change and now forecast.

Okay.

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 on.

On the datacenter side I'm curious you've obviously you have these plans will outline for the server customers has.

As outlined on those plans and implementing and cause any change in terms of how data center customers are thinking about moving to cloud and then just a quick second question for games around the gross margin impacts on on cloud or just gross margin and patch generally you talked about migration expenses and also just hosting cost can you help us understand which of those are bigger and how long you expect the migration expense.

And as to be.

On an ongoing and Cogs.

Walter Scott here I'll take the first one on them and James can get into the details on the second one.

And the migration to cloud, whether it's server or a day see customer.

Majority of our customers have made them a long term plans to move to crowds.

And in areas where.

Hesitant, it's the bowls and Alcoa Corp.

It might be from particular compliance requirement and that geography or somebody else, but theyre just waiting on us to do and so the overwhelming demand is there obviously with customers who had several licenses they've got.

Three used to make a choice weighted where they went in with a go to crowd of D. C and the overwhelming majority and we want to move to cloud and the discussions we're having.

And the customers on basically Youre also looking at the benefits and crowd and not having to manage their on upgrades and their hardware getting the lightest.

And with our products.

And increased collaboration that they can have the wall and maintenance cost and.

And put their staff on high value activities like those things are the same whether you are coming from silver or day to day.

And gentlemen.

And to that.

Yes, sure the first thing.

It is.

And 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.

But as we have indicated in prior calls.

We would expect the particularly as the larger customers the largest server and data center customers move over to the cloud.

And we would see.

Increased hosting costs and.

We spoke of and also about how we have added to our.

Support capabilities, so that we're ready to help those those customers moving over to the cloud in terms of the timeframe.

For those support costs.

And I would expect those to be in place for the next few years consistent with the Timeframes that we've talked about four and 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 emphasize how we're very focused on.

On continuous cost improvement.

Whether it's around usage of compute and storage resources or whether it's related to helping our support.

Losses and.

People help our customers. So that we can do that on a more cost efficient basis. So.

That gives you a little window as to how we're thinking about and operating along the lines of the cost of goods sold part of our business.

Thank you both.

Your next question comes from the line of Gregg Moskowitz with Mizuho Securities. Your line is open.

Okay. Thank you very much.

First off I'm, just kind of wondering games, how you would characterize the revenue and or deferred revenue benefit from pull forward this quarter as compared to what you saw one year. Prior and then just secondly for micro Scott just curious to hear the demand how the demand for data center subscription this quarter. Thank you.

I can take the first part of that question Greg.

So in terms of maintenance and pull forward activity I would describe that in Q2 as really quite modest now.

And now I remember last year.

That was the primary pull forward corsa and.

And so it was a much larger effect in Q2 of fiscal 'twenty.

Now.

What I would expect.

Play out in Q3, and as I indicated a little earlier, we're already seeing this in the month of January is that we'd see more maintenance revenue pull forward.

And <unk> in that in Q3 as well.

And so.

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 <unk>.

And second of course, not only is there a price increase both for the server and data center business.

Schedule two.

To be put into place next week, but at this time, we're also end of life and <unk>.

The server business, we made that announcement and so really what played out more so in Q2.

As you can think of it as pull forward at some level it's at.

Different type of pull forward to that that we've seen in prior years because of the pull forward has been customers, adding to their license accounts expanding the size of their current licenses are ahead of the moves that we're making.

Around server end of life.

Data center.

Relatively modest pull forward there in Q2, as well and again I would expect there to be pull forward activity ahead of the price increases that will apply to data center just as they will apply to server.

As of February 2nd.

Okay. That's great and then just broadly speaking not referring to any kind of pull forward because that just around kind of overall data center demand and the quarter that would be helpful as well. Thanks.

Yes in terms of data center demand overall.

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 and the subscription revenue line.

But as we've talked about before.

You'll recall that the <unk>.

<unk> business is by far the largest part of our subscription.

Revenue growth.

Right, Okay, great. Thank you.

Thanks.

Your next question comes from the line of DJ Hynes with Canaccord. Your line is open.

Hey, guys congrats on the results James.

James One for you. So there was a comment in the prepared remarks and said.

You know you are growing increasingly confident and the economics of the free edition and strategy and clearly the top of the funnel is really working right you already talked about that but but what is it that you're seeing that's giving you confidence and the economics of those customers right is it just a lower CAC.

Or are you seeing expansion activity, that's outperforming your expectations and any color there would be helpful.

Yes sure.

So what we do is study very closely each cohort of free.

Customers join us each month.

And and we track their progression.

Whether it be because they add today use accounts and.

And then go beyond the 10 net use of free limit or.

Whether that progression is before they get to 10 and they decide that they.

Really need and appreciate the functionality that our standard cloud offering.

Or even a premium cloud offering contains and so they make that switch from free to paid addition.

And that way before they get from the 10 user level.

So we watch this.

As I say very closely cohort by cohort and.

So while I noted earlier for fiscal 'twenty, one we would continue to see this as a as a net revenue headwind.

But as we watched the cohorts.

And we see the trend lines are quite clear.

And that gives us confidence about the future of this initiative I think it is an excellent example.

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 you're going to add something.

Yeah. Thanks, James J J I, just wanted to add a couple of small.

Small points, there I suppose what kind of a lot of questions on free.

And.

Firstly, I would think a free as well.

Much less.

Sarah bread and much more cloud style in terms of how it's going to give us a long term kind of.

Diesel engine like to pull up the hill right.

<unk>.

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.

And many many years, Brian It is it's a multi year impact its a long term investment that we're ending up with free but clearly we track.

Extremely closely.

Active usage and I would stress that the most important metrics for us are people using these free there's different giving away free things that 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 and getting value out of those free editions. We firmly believe philosophically if theyre getting value once they hit that 10 years the states they will pay and <unk>.

And to be a long term.

Sure.

And customers had marching up that debt addition hill.

The second part that's really important for for the free editions for US is the reduction of friction, specifically and cross flow and cross sell.

So where you might have for example at your software instance, it has 50 or 100 people.

And someone discovers confluence and its connections to <unk> software and in that company.

So they would have to if they werent the administrator and get out of credit card and pay for a trial of the confluence instance, if that makes sense.

Now they can start a free trial of confluence of any of those uses so their ability to discover new products that we have as and existing customer is also and trade strength and a more users we have and product. The first product the more that we have a potential to start.

Trials of second products are free editions, alongside with anyone and that company. So our ability to expand and go wall to wall is increased by.

By free again, I would stress it's.

On a pretty modest revenue impact given these are all small customers and we're aiming for that multiyear multiyear.

And multiyear impact.

And talking about sort of lumped and thinking.

Makes perfect sense and.

And built more like a cloud building and 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 are you seeing in terms of the revenue and applications when customers migrate from server to cloud.

You've talked about small customers may see a little bit of a downtick in revenue capture and mid market, maybe a little bit but uptick any early read on revenue conversion and including the potential to up sell cross sell during the migration.

And then I'll just throw on my second one pretty interesting and win with thought thought works and the 8000 users on <unk>.

Is this one of the biggest customers you you've had about <unk> from a user count level and just be curious to hear maybe kind of why they picked you over the competition and anything else you can share about how you on the deal.

I can take the first part of that and so.

Dozens of the revenue result that we've seen from the service and cloud migrations.

I would say, it's very much tracking along to our expectations as you pointed out as you framed the question.

Gave some I think.

Helpful illustrations of <unk>.

And how the economics work for small medium sized customers on those are generally the ones that are migrating at this point in time. So yeah, that's that's tracking pretty consistently with.

Our previous discussions of the topic. So yes, some headwinds on the smaller size at least initially.

Modest tailwind on the medium sized net net I wouldn't describe it as a material driver of the of the revenue in Q2.

And Murdoch and take the controller question.

On.

Book Cello continues to be early and its monetization journey and as we settled the time and again a year ago. I believe we released a standard had passed 50 million accounts. So from the point of view on size and scale.

The 8000 used as mentioned at the Luxe is relatively small obviously and comparison to the $50 million.

Uses of trailer.

And the 10 million monthly monthly active user number that we possibly released.

And I believe at Investor Day.

That said from Charlie's point of view, obviously, we're continuing to.

To learn from the customer base and work on the monetization and journeys they're in trailer.

Working through its monetization ladder, if you think about its equivalents with free business class.

And trouble enterprise, it's sort of equivalent to the free standard premium enterprise ladder of additions that we have in and.

Your software and then interest as management.

8000 users is not a particularly large enterprise trailer customer I would say, we certainly have some debt.

And order of magnitude on more larger than that.

It's a very good win for US I think the reason you see companies on patrol use and this is ultimately about trellis flexibility and it's.

Its capabilities and potential to handle all manner of different workloads with various free form model inside an organization of clients. So its adaptability to lots and lots of different use cases, and almost anyone and are in a large company.

Trial on a huge advantages to solve the whole mantra of workflow and problems for those larger organizations and again as we continue to do in business class and and Chiller enterprise. It gave those organizations that control to manage their data to manage their users and manage the bullets, whilst keeping that flexibility.

And faithful and nature of Charles.

And.

And in the hands of the users I guess.

And Youll see a lot of.

Exciting things coming up and trailer again small plug for team 21, if you go to that and a couple of months time, we continue to work on really exciting things controller and look forward to its future.

Great and helpful color. Thanks.

Okay.

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 your service management.

And then I have a quick follow up.

As you see customers and I know, it's still early migrate.

And from Jarrett service desktop the Gyro service management and the cloud.

We see that debt products attacking more things within the it department and casual Dev ops TSM work management.

And any color around that.

And 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 on the ways Youre and net devising the partners.

With with cloud apps and others you guys are obviously very used to selling.

And it very light touch.

But many of your partners or not but he referred to as a very active and physical events and stuff. So I'm just curious as your partners 600, plus play a real important role here and 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.

Look on J S M a.

I would say too early and the release of that particular product to see massive differences with J S day, having having again not paying and the market that long in terms of adoption.

And <unk> expansion.

<unk> being a broader feature offering and having embedded the upstream and functionality and some other things to sort of a lot more purposes and <unk> specifically.

We are.

Ambitious I would say that debt, we would we say that that state expansion over time, whether that's a small customer going from 50 to 80 seats or very large customer going from the United and 10000 sites to 15000 and sites I think J S and gives us all of that possibility and I would stress that we continue to invest very aggressively in that product set.

We still have the same day be functionality coming out.

And to continue investing in automation and all the other things that we've put into the <unk> and packages over the last and while.

One thing I would broaden that though is when we talk about our connections to <unk>. It is broader than just <unk> and so I think about <unk> using J S and four I think.

We gained great conviction trust our partnership with those departments that we then have a lot of other offerings that they can take advantage of in terms of that I see department, providing functionality to the rest of their organization and Thats why you see the strength of the broader <unk> platform. So they start to bring in coal.

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 all from the IC Department and creating that workflow for the legal department and the marketing Department Finance Department, but all within that Juan Jarrah platform, and OLED and the broader atlassian platform and <unk>.

That applies as much to confluence of divestiture of core or indeed.

<unk> and travel and enterprise.

And that's about a broader atlassian sales expansion once we really gained.

The trust and respect of that of that I'd say department and what they can do to help them.

I'll, let Scott answer on the prominent with.

Thanks, Michael the partners.

And if you would note and a b.

<unk> kind of a lot.

I think Scott's screened and Youre out there.

And I'm sorry.

James.

Okay.

And so you've got a huge huge advantage for us and.

In Europe to have a partner network apart and member experience and the entire globe and Atlassian does not have.

Our services Department and so our services are really provided by our partner network around the world and we.

No.

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 things to direct our partner network more towards our cloud offerings.

This is of course, where the demand from our customers is at the moment as well.

Thanks, a lot guys.

Your next question comes from the line of <unk> <unk> with D. A Davidson your line is open.

Hey, guys. Thanks, so much for taking my questions nice to see a continuing and improving business momentum two quick ones.

Going back from a comment that's been made on.

The server customers and not expecting mid to large cut or two thirds of mid to large customers to migrate until FY 'twenty, two and beyond I guess I'm, a little surprised by that much from sort of given the incentives that you have in place to push migration. What is then the pushback from from customers on migrating as it just.

The amount of investment that has to be made and not.

And not enough incentive is it pricing is it and nurse share and.

And then follow up I, just wanted to ask about cloud net expansion rates, while at the analyst day, you talked about 121 for some cloud net expansion rate and 130% for medium and large customers how is up and trending in that metric and plan to disclose maybe annually or how should we be thinking about that thanks.

And Scott I'll take the first one and try and kind of chomping.

And on the spectrum on <unk>.

These are serving customers and the large ones migrating from server to cloud.

One thing to realize is this these instances on mission critical and our organizations. We had the CIO of a large technology company talked to US recently and they said it was three or four mission critical applications and Atlassian I'm, sorry that this would be for a company.

And one of the news already I'll tell you one of them is kind of sales force automation and one of them and as a raccoon products because we wish we stopped when these products go down and so when these mission critical applications are there and these companies want to plan for it and trying to budget cycles for it and I'm, sorry, if I could sit there and click the fingers and move to date and I appreciate all the benefits they would get.

But as a practical matter it takes a while to plan and migrate day sort of the systems, where they really want to minimize the amount of downtime for.

And for their employees and so there is nothing specific.

There I would say those areas and will continue to improve on around compliance and certification and certain geographies that takes us and Walter to get those things and customers are working with us to move as we hit those certifications.

Nothing specific that I look at the nice thing do I really just a shot and then mission criticality of their applications.

And then just on the second part of your question, obviously on the Investor Day, we wanted to dive a little deeper in terms of.

And from cloud metrics, given the importance of the cloud business.

To our company and the coming years, so, yes, we talked about 35% growth year over year at that point.

The net expansion rate as you say.

At 121% and that.

And.

And a large figure 130 per cent for our medium and larger sized customers and 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 love soda on for Brent Thill, Congrats again on a nice quarter.

And just a couple of real quick questions from me one was digging a little bit deeper on the migration the server to cloud migration.

I guess did that have any impact any negative headwinds.

And 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 on you saw an increase of 175%.

And as that top of funnel and momentum continued and then.

And this quarter.

Okay.

So I can take the.

The first part there in terms of server to cloud migration impact on billings.

Wouldn't.

Describe it as a material item in Q2, but either our revenue results on the deferred revenue.

And.

And.

In terms of.

The free versions.

Pleased with obviously, our progress there, but I wouldn't speak to anything and in addition to what we've already covered.

And earlier fibrosis and.

And the thing to add to that Scott and Mike.

Okay.

Thank you.

Your next question comes from the line of Jack Andrews with Needham Your line is open.

Well good afternoon, and thanks for taking my question I wanted to see if you could provide an update for us on a line you previously talked about how align as one of your fastest growing revenue products and so it just was curious if there's any cause.

Context, you can share in terms of just how.

Where the growth is coming from and how it is growing whether it's through organic means or is cross selling really kicking in there.

Alright, Thank you Scott hit on on James.

And is primarily sold to our existing customers on it because this is not something that where we go in with the sales team and have kind of long customer acquisition sales cycles. These existing customers using our products predominantly jarrod and I say actually I've got one on many years or across my organs.

And so I shouldn't.

We are doing.

Adult transformation and digital transformation, and we want better executive level understanding and we wanted to sort of scale up our agile from what was happening at the engineering level bold way through the organization and so what we get is orders on.

Are customers going to free up and saying how do we solve this problem and of course. So on is the exact solution that working for and so.

So I think there is anything in terms of.

And it really is an uphill right as we speak.

And on a base.

Very happy with the acquisition and how it works and our customers. It is one of many things.

Helps us with.

And our customers' digital transformation and that is something we can when we talked with customers and used to be that software teams were kind of do their own thing.

And and Department. They cited software is mission critical to every company.

Book to accompany that growth every sector and they are really saying that I think they're struggling weighted it sounds like transform their organization and and most of these cases that transformation is coming from their software teams. They are actually adopting practices and software and rolling them out across the entire organization.

Benefiting not just here on but that benefits confluence and his teams need to collaborate more closely across their entire organization.

It is going to benefit some of the new products, we've got coming out to address this need and so that broad trend I think is.

And a whole bunch of your conversations at the sea level.

<unk> and even Ceos of organizations, who are turning up to Atlassian asking how we can help them solve their digital transformation program.

Thank you very much.

Yeah.

Your next question comes from the line of James Fish with Piper Sandler Your line is open.

Hey, guys. This is quintin on on for Jim Thanks for taking my question.

And I'm really thrilled appointment and pandemic, we've seen employees adopting new ways of communicating with their teams. We were wondering if you've seen any acceleration and the adoption of that loss and products from the non technical users maybe compared to more prior years and how are you viewing the competition and the non technical specific world. Thank you.

Good day Quintin.

Look from the let me answer depends on my question first.

Really as more people.

Working from home working remotely.

Changing the work habits.

As we like to say that change.

Where they work.

But the Cape how they work consistent in order to allow people to work from from lots of different locations.

As that has happened.

<unk>.

Naturally see increased activity and usage in our products.

Because.

Our products fundamentally help people booking I synchronicity to help teams collaborate to help you get on the same page, where you might have used the whiteboard beforehand, and and office now you might use the trailer board or if you have a remote meeting is a live on zoom most days.

We often start zoom meetings with confluence pages as a pretty range right. It's a very.

On.

And much more efficient asynchronous method, we go off and start on meetings with a 10 minute three weighted where someone will send a link to accomplish sites moving all rated and and comments attendance and then we will start the meeting. So these sort of things are driving.

I think a difference and how people think about working and structuring that day and knowledge work and brought on areas and leading to a you know.

Activity and usage and our products again, it's not a.

It's sort of a hockey stick and jump or 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.

And more days of the week them on use of our products et cetera, and that will I think.

And the long term way too.

And to expansion, but it's not going to be a step.

It changes and they all sort of run on line and suddenly decided to buy trouble I guess.

And it brought up work management for all space look we continue to be bullish it's a very huge market.

Obviously, we were very happy with the progress of truckload confluence continues to do well.

At helping us get wall to wall within with inside customers and we continue to work you know.

Innovation areas on and then.

New products to target some of those.

Some of those trends I suppose.

One example of that is on acquisition, we acquired a company called <unk>, which is a.

Digital version of ASM, and you might say focused on messaging platforms, So slack and Microsoft teams and providing service management within the messaging construct.

And connecting it back sometimes too.

And I can share service management, and the back end and sometimes just processing all of that messaging within.

On a service within the messaging products.

Again as.

As you say adoption of things like slack and teams during and.

And this pandemic is moving away from home products like health will benefit from that because people are increasingly looking for ways to do work with and those tools and.

It's the leading.

Service per being totally and method and this like ecosystem is is now and the Atlassian stable and we continue to work on integrating that.

The restaurant.

Got it thank you.

Your next question comes from the line and Pat Walraven with JMP Securities. Your line is open.

Oh, great. Thank you and I'll add my congratulations so I'll go to that.

A little different topic here. So in August you announced that the employees can work from home.

Permanently even after the pandemic and and and obviously your whole solutions that really helps with that with that but on.

And what about you guys, but I find a full zoom day, so exhausting and.

Within our organization and I'm not sure it's the best and current employees and I'm. Just wondering how is your thinking on that topic.

You know evolved over the last six months.

And Scott here and I'll.

And this contaminant and I wanted to add anything.

When you think of it we call attained anywhere or is there on why we've done this which was really that al and employees can work anywhere they want and.

Curious to come and work in one of our offices.

And 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.

And can we think one of the reasons why I think been successful I think you've got heritage outside of Silicon Valley.

And it off to tap into.

Amazingly diverse and very loyal talent pool, particularly in Australia, and so I think that's been closed except for me really excited about.

Able to tap into that around the world.

I know myself, yes, doubtful zoom meetings on.

That growth.

Thoughts and what we found is that the many employees value the.

Lack of a commute.

And the ability to spend more time with our friends and family.

And the reinvigoration of local communities around where they live and.

And what many of our executive team has moved from the center and cities.

Because somewhere nearby and to take advantages and kind of those areas and.

For two hours back from a commute gives you a lot of freedom and flexibility and spend time with family and are exercised or other things there.

I'd remind our employees that we aren't really and a steady state their debt.

We are working from home and in the middle of a pandemic.

And that's different to what the World will look like when you can go back at school and you can't travel into the into the office and we are building our policies so that world and.

God willing like EBITDA that will happen this year, and we will see the vaccine and rollout and hopefully we can move into a more normal state.

And do something we spend a lot of time thinking about I don't think we will get it all right, but like everything atlassian.

And we.

And we continually try and improve that.

The card sales period of continuing to.

And it might erode weighted with improvement and.

And so you'll see that here as well.

Great Thanks for that perspective.

Your next question comes from the line and Fred have Meyer with Macquarie. Your line is open.

Thank you very much for taking my question.

I'm really curious about your perspective on this.

This is a quantum per items remote.

And most of that work I'm, sorry from the work by the zone and this new kind of both Alex and paradigm of hybrid and remote work.

How are you seeing the evolution and the funnel and what are pumping and looking for in terms of software that can support more agile work cycles with team alignment with them and with remote working on it.

And Scott here.

It's interesting.

And because of your ear and remote work by design.

And quite which is the futures here is just on evenly distributed.

And I think if I went back pre pandemic.

You would find it like there were a large number of our customers are already working in this fashion heavily weighted on digital tools to share information across their organization.

And reaping the benefits of lift synchronous communication more work that is tracked and kind of in confluence and rather than meetings and so in many cases.

And it would depend downtick is there sort of a whole world catching up.

Many people, where do you think there and on a day to day.

Advisors and everyone else is now, saying it and we're seeing many customers are using <unk> and confluence and <unk>.

And our agile product so trailer already being used and then anybody.

And so I don't think theres been a huge change I guess, we've always at Atlassian catered to the vanguard of people and how they are working and.

Obviously, there's some new things, we're thinking about with this deal.

It hasnt been a sort of step change and sort of how products work.

Thank you.

Your next again, if he would like to ask a question press star one on your telephone.

Your next question comes from the line of Orange true, Johnny and with Cleveland Research. Your line is open.

Hi, guys. Thanks for taking the question and congrats on the results.

And at the Analyst day, a couple months ago, you talked about strength and margin deals I was wondering if you could double click on that and how recent performance there and this quarter and and second just.

Any more color around what would you say is the biggest surprises we've seen in terms of customer behavior.

October announcement on the server and the sale. Thank you.

Yeah.

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 the true.

Trends that will lay it out and.

And the last stats that we laid out at analyst day.

And in terms of the second part of your question.

Surprises.

And in terms and how customers have reacted post the survey.

Announcements.

I would really say that I think our team prepared just fabulously.

For that and announcements.

And.

And that that planning the thought that went into that announcement.

Paid off because I would say that customers are.

And obviously thinking hard about their options and so forth the right timing for them to make a move so far.

But really that's very consistent with how we had analyzed and.

<unk> planned for this announcements.

Scott or Mike would you add and the thing to do that.

No I think you said, it really well try and spark.

And so long term focused and we are.

And from Atlassian, but it's free of migration to cloud or the product portfolio and build like we really just take a long term focus with all of them and we volatility month to month quarter to quarter book.

Most of the time, Mark and I don't spend.

And I am on pull forward or anything like that with thing alpine and thinking about the future of our company and customers and the crowd. So.

And again.

I think the last question on and say thank you to all of you for being on the journey and.

Appreciate it and I think that's how our cash.

Sure.

Yes, there are no further questions at this time I'll turn the call back to Mike for closing remarks.

Hello, everyone. Thank you very much for attending the call and for the thoughtful questions and write ups and I Hope you and your families.

Stay safe and this challenging time around the world and we look forward to talking to you next quarter.

And a reminder, that teen 21 now.

On annual conferences on just before the next earnings call I believe so.

And that and thank you very much for things and hope you haven't kicked out and weekend.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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