Atlassian Corporation (TEAM) Q2 2021 Earnings Report, Transcript and Summary

Good afternoon. Thank you for joining Atlassian's Earnings Conference Call for the Second Quarter of Fiscal Year 2021. As a reminder, this conference call is being recorded and will be available for replay on the Investor Relations section of Atlassian's website following this call. I will now hand the call over to Matt Sonefeldt, Atlassian's Head of Investor Relations.

Good afternoon, and welcome to Atlassian second quarter of fiscal 2021 earnings call. Thank you for joining us today. On the call today, we have Atlassian's Co-Founders and Co-CEOs, Scott Farquhar and Mike Cannon-Brookes, as well as our Chief Financial Officer, James Beer. Earlier today, we issued a press release and a shareholder letter with our financial results and commentary for our second quarter of fiscal 2021. The shareholder letter was posted on our company blog and all items have also been posted to the Investor Relation section of Atlassian website. On our IR site, we have also posted a supplemental data sheet. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management's beliefs and assumptions only as of the date such statements are made. And we assume no obligation to update or revise such statements should they change or cease to be current. Further information on these and other factors that could affect the company's financial results is included in filings we make with the Securities and Exchange Commission from time to time, including the section titled Risk Factors in our most recent Form 20-F and quarterly 6-K. In addition, during today's call, we will discuss non-IFRS financial measures. These non-IFRS financial measures are in addition to, and not a substitute for or superior to measures of financial performance prepared in accordance with IFRS. There are a number of limitations related to the use of these non-IFRS financial measures versus their nearest IFRS equivalents, and they may be different from non-IFRS and non-GAAP measures used by other companies. A reconciliation between IFRS and non-IFRS financial measures is available in our earnings release, our shareholder letter and in our updated investor 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 Team 2021, a virtual annual customer conference taking place April 28th and 29th. We hope to see you there. With that, I'll turn this call to Scott for opening remarks.

Thank you everyone for joining today. We hope you and your loved ones remain safe during these challenging times. We hope you taken the time to read the shareholder letter. This quarter, we focused on three themes tied to Atlassian's long-term focus. First, that we're off to a strong start in our multi-year initiatives to migrate our server customers to the cloud. Second, we continue to deliver mission-critical solutions for our customers across the large TAMs through products like Jira Service Management, which launched in Q2. And third, that we will continue to use the cloud to deliver innovation to customers small and large in our ultimate goal to serve the Fortune 500,000. Our business results reflect steady execution against our goals. In Q2, we generated $501 million in revenue, up 23% year-over-year. We also achieved subscription revenue growth of 36%. During the quarter, we added a record 11,617 net new customers of all sizes, bringing out total count to over 194,000. While we are proud of these results, there's plenty of hard work that lies ahead. Before we move to Q&A, Mike and I want to thank our employees who continue to inspire us with their passion for customers and their adaptability. You make unleashing the potential of all teams possible. With that, I'll pass the call to the speaker. So I called him the speaker. They were waiting for me to say the word operator.

[Operator Instructions] 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, the strength there. What drove that? Is there something changing with the SMB customer base? Is there a certain verticals that stood out key? Just a little bit of context around that?

Yeah. Great question. Well, because if you've been around for a while, Alex, you'll know that the new customer number bounces around a lot. We had about 30,000 in Q4, 8,000 and a bit in Q1 and, of course, 11,500 now, and it's not a number we guide towards, or we really managing into Atlassian. And it's also always been a pretty small driver of immediate revenue being the smallest of our customers. What's the change this quarter is, a lot of the funnel changes we've done around free. It's all other product. Also -- and truly we changed the monetization funnels, a lot of those areas, which they're really proud of what they're kind of put us in the right place very long-term growth. They did change sort of the mix of customer ratios and we do have a larger mix with smaller customers. And so, I'd say more than any other quarters, we probably have a greater ratio with smaller customers than we've had before. So we think it's great. I think it's, again, a great testament to how much demand there is for our products out there. But I heisted to try and roll any of that into some sort of revenue forecast.

And just looking at these new customer adds, were any of those potentially customers that turned in the first half of 2020, and they're back. I don't know if you categorize them differently, if they didn't turn their back.

I don't have numbers around that at hand, unfortunately. We have seen improved churn in general across most of our product base. Some of that is things we've done and some of it could be macro trends as well. James, do you want to comment as well on that?

Yeah. Just a couple of things to add to that, Scott. I would say that I was pleased with the customer count because it illustrates the mission-critical nature of the products that we serve our customers with of all sizes, all across the board from small, medium sized businesses through to the largest corporations, governments, and so forth. So, please by that churn, as Scott was saying that, has increased, improved nicely, as the recent quarters have gone by. You are right. We did see some challenges back in Q4 of fiscal 2020. But as we've seen our churn improve, as we've seen our custom account go 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 kind of squeeze in two questions. One, just on the overall spending environment, if you have an idea kind of where we are on that, that really true recovery. You talked about improving renewal rates. That sounds like that's getting better, but just kind of your take on kind of where we are on that. And two, in particular on the ITSM product, now that we've integrated Mindville and you have that, CMDB component of the equation, is that enabling the solution to go further up market? Have you seen any evidence of that traction as of yet?

Okay. Keith, it's Mike here. Let me take -- let James take the question on the spending environment and Scott and then I can come back on the ITSM one.

On the spending environment, obviously, we are pleased by what we see is a nice gradual improvements. Now, it's hard to parse that out because I feel as though our products really are serving so many of the critical needs of our customers. There's a increasing movements to agile frameworks. The work-from-home process is now becoming such a normal part of business life. And, of course, our tools help support that. So, we've been pleased by the themes that we've seen in that last year and recent weeks and months. Mike?

Yeah. Mate, I can address the ITSM question there. Look, as you mentioned, Jira Service Management launched about a quarter ago now, and we've been very pleased with the results so far. Mostly obviously inside a quarter and our model customer reaction, customer adoption, acceleration of purchasing an interest behavior. As you mentioned, it is a great example of Atlassian's overall philosophy of both building and integrating smiley acquisitions, as you mentioned in this CMDB facilities. Again, those are released as a plug-in at the moment, but not fully integrated into Jira Service Management yet. So, those will be coming in the coming quarters. So, as a part of our long-term ITSM strategy, you see a constant drum beat of improvements there. At a whole level, customers have resonated with us, seeing the blurring of lines between IT and software development, as we are sort of the one company that considered their needs from software development through ops -- DevOps and into their IT and technical teams on that end. So, that's really resonating with customers, and we're very excited about that. And again, focusing on the Fortune 500,000 gives us a very broad customer adoption cycle all the way up to large customers, as you see from the ISS customer example in the shareholder letter, some very, very big customers adopting our ITSM offerings as well.

Excellent. That's great to hear. Thank you, guys.

Your next question comes from the line of Ittai Kidron with Oppenheimer. Your line is open.

Thanks. Hey, guys. Congrats on a great quarter. I'd like to focus on the 30,000 server customers that you're trying to migrate to the cloud over the next two to three years. Can you give us some color on how much movement was there this quarter in that transition? How many of the small, medium, large have transitioned? And then second, how would you think about churn in this group? I'm sure a lot of people, or some customers are probably not that happy about, although, while recognizing and appreciating the benefits of the cloud and the capabilities that come along with that pricing is -- could be materially different, especially for a large customer. So, help me think about -- how would you think about churn in this transition over the next couple of years?

Thanks. Good question. Firstly, just to remind everyone we have 30,000 server customers and I mean, they move an over a multi-year period with end-of-life of server and our customers have three years to make decision to move across before they hit our end of maintenance period. So we've been very friendly to our customers and we have a pretty wide window for those customers to move across. In terms of our -- where we are, like it's very early in that. And when overall 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 -- a little bit higher levels than ever before. Our numbers internally that we measure for this quarter were -- a new high as you would expect as we go through this transition. And also reminded that the majority of our new customers today choose cloud. So, we'll have a 95% of our customers choose cloud. Now, new customers choose cloud today. And so, we're really happy with the leading indicators. That's great. In terms of churn, when I talk with our largest customers, but the companies you would all know and do business with, they all have plans to move to the cloud. Like I say, it saves them money, saves the hassle of doing things, get some higher reliability. And so they are all partnered up with us to move to the cloud. In most cases, it's in our court to ensure that we had the size and scale and that we can help them migrate across. And so, it is hard to predict the churn on that like, because it is now in customers' hands or a period of time, but I'm pretty pleased with the indications of what we've got at the moment. And sort of the customer response. James, do you want to add anything to that?

Just that like at Investor Day in November, we noted our expectation that around half of our 30,000 server customers would migrate in FY 2023 and beyond. And indeed for our medium or larger size customers, we would expect that ratio to be about two-thirds migrating in FY 2023 and beyond, and nothing has changed in our perspective there.

Very good. Thanks. And then maybe just to follow-up on the perpetual license revenue, which clearly was still strong and it's -- for obvious reasons people want to do things before February, I guess, next week kicks. And -- but we forgot to upgrades. You've talked about how it gets collapsed all the way through fiscal 3Q next year, fiscal next year. Do you suspect though, that upgrade activity is going to be robust in the same way that perpetual license sales in this quarter was robust just because we're kind of heading into a deadline of expiration? And as you said relative to your expectations that most upgrades of medium, large customers are going to be fiscal 2020 and after many are going likely to upgrade near term in order to give them more time to complete the transition to the cloud?

Yeah. Let me take that one. In terms of license revenue, yes, we either have new licensing activity both in that line or upgraded licensing activity. And just to remind everyone, we'll be curtailing new license sales in a few days time, February the 2nd. And we'll continue to allow customers to upgrade their licenses, expand the size in essence of their current licenses for another year or so. So, in Q2, it is fair to say that we did see more of that upgrading and new activity than we were previously forecasting. And I would say, as we have now almost a month of Q3 behind us, that type of activity has continued into Q3. And, of course, we would expect that to mean less activity downstream. I think there'll be upgrading activity playing out over the next year or so, but it does appear that some of that upgrade activity has been pulled in advance of the pricing increases that will play out next week as well. So as you said, not surprising, hard to precisely determine the scale of this pull forward activity on the upgrade side. And, of course, if you are interested in new licenses, you really have to act very quickly here before those new sales cease.

Got it. Very good. Excellent. Thank you very much, guys. Good luck.

Thank you.

Your next question comes from the line of Michael Turrin with Wells Fargo Securities. Your mind is open.

Hey, there. Thank you. First off, congrats to Mike and Jazz on that 10 game win streak. It's impressive stuff there too. James, maybe one on margin. You've consistently noted margins are expected to trend down in the second half of the year. We now have the Q3 guide. So just wondering if there's anything else from a seasonal perspective we should be cognizant of that could maybe make the shape of the second half look a little different than prior years. Just trying to make sure we don't over or under extrapolate what we're seeing into Q4 and beyond on the margin. Thank you.

Well, a couple of thoughts. First of all, just to reiterate what we've been now saying for two or three quarters that through this harder macro economic period, we've really been looking to invest purposely and that continues. You saw strong headcount growth in the last quarter, good execution by our people teams in that regard. We see very significant opportunities in front of us and we wanted to get off to those opportunities. And I think it's fair to say that Scott and Mike's experience back through 2008, 2009 tied down to macro economic downtown was 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 shorter term revenue headwinds, things like the introduction of free additions. The fact that we're taking less marketplace revenue as we encourage our patent system developers to emphasize putting new cloud apps on the marketplace. And we've also taken the decision to execute fewer pricing actions, particularly on the cloud side of our business this year versus the past year. So while the impact of COVID that we were talking quite a bit about two quarters ago, that is decreasing nicely as an impact on our financials. Clearly, we will continue, as I said in an earlier answer to expect the server business lines, the license line and the maintenance line to continue to contract in terms of their rates of change and so forth. And recall also that we have in order to encourage our larger enterprise customers, those with over a thousand users or so, to migrate to the cloud, we're offering them quite substantial loyalty discounts. So, we have some revenue headwinds. I would describe them as transitory in nature. They're very much really favoring the long-term for -- a short-term headwind. So, when you take those factors together, of course, we have seasonal factors like the payroll tax reset that happens at the start of every calendar year, few different things to consider. But we've baked all of that into the Q3 margin guide. And as we've said elsewhere, we would expect second half margins to be down versus the first half margins.

I appreciate all the detail. Thank you.

You're next question comes from the line of Arjun Bhatia with William Blair. Your line is open.

Hey, guys. Thanks for taking the questions. One of the things that stuck out to me in the shareholder letter was, I think you pointed out that cloud enterprise adoption is coming in ahead of expectations. I was hoping maybe because unpack that a little bit. Is that migration that's driving that, or are customers naturally upgrading once they've -- once they started using your class solutions for Jira and Confluence and JSM? And then, on the hiring side, are there any specific areas within R&D that you're targeting in the second half that we should be on the lookout for?

Thanks, Arjun. I can take both of those. Look, on the enterprise side, I have to say we have two phenomenons going on there, so I'm not sure which one you're asking about, but let me answer to both. On the general enterprise customer, so we call that the literally enterprise big, big companies. We really pleased with our continued cloud adoption there across all the editions of cloud and that goes from free all the way through standard, premium and the enterprise edition Big E. You've seen us over the last three years through access through scale, through performance and reliability improvements and continued investment in old manners of compliance standards, continuing to get better and better traction with large customers, with enterprise customers, sort of a thousand seats and more, no matter what edition they buy. Secondly, we did GA our enterprise edition, so Big E during the quarter, and I've been very pleased with the reaction of the customers there. So, we've had a lot of customers in the early access program for about the last six months, testing that with us. Again, the enterprise edition has five levels of compliance and security standards, data residency and a whole lot of other features as well unlimited instances. So you get unlimited scale. So rather than buying one Jira software instance in a second Jira software instance, you get -- you pay obviously a higher price, but you get unlimited Jira software instances. So that allows you to create and segment your business as very large companies often need to do. You might have one for Europe and one for America, or you might have one for a certain department and one for different departments with different plug-ins, add-ons, exposition to other customers of your own as company, et cetera. So very pleased with that adoption so far. Again, it's incredibly early days. It did only GA during the quarter. And obviously, we're working with all of the early access program customers -- the company, 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 latter that we're trying to build there. On your second question, no specific call outs in R&D. We continue to invest in hiring across the board and R&D across product management, engineering, design, and all manner of operations and engineering functions. And that's across Atlassian all of our offices that would remind you about our Team Anyway program, where we have announced six months ago and continue to announce to stop about hiring in lots more countries in the world and multi-path of the world. And that opens up R&D pipeline to get that talent, hopefully logically, no matter where it sits in the world to work for Atlassian and it's been very successful for six months and we look to continue to dig that in 2021.

Perfect. Thank you very much.

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

Great. Thanks on the enterprise cloud, Scott, you noted higher than expected initial demand for Jira software, Confluence and Jira Service Management. Can you still put some more color there on the customer feedback they're getting? And is this dynamic enough to potentially change the timetable for large customer migrations?

Thanks Robert. Scott here. I think just to echo sort of the things that we've sort of said earlier, we have seen demand higher than we thought, but it's still very early days in terms of these parts on demand for -- lots customers as Mike talked about and also demand specific enterprise product. And so at this stage, there is nothing to say different. Like we think we've been pretty -- we're really happy with, and I guess, it's playing out as we expected in terms of the migrations. Like, -- so there's nothing there that would change now in our forecast.

Great. Thanks.

Your next question comes from the line of Walter Pritchard with Citi. Your line is open.

Hi. Thanks. Two quick questions. First, just on the data center side, I'm curious, you've obviously have these plans well outlined for the server customers. Has outlining those plans and implementing them cause any change in terms of how data center customers are thinking about moving to cloud? And then just quick second question for James around the gross margin impacts on cloud or just gross margin impact generally. You talked about migration expenses and also just hosting costs. Can you help us understand which of those are bigger and how long you expect the migration expenses to beyond ongoing in COGS?

Walter, Scott here. I'll take the first one and then James can get into the details on the second one. The migration to clouds, whether it's server or DC customer, the majority of our customers have made long-term plans to move to cloud. And in areas where they're hesitant, it's the bolt-on and echo, because there might be some particular compliance requirement in that geography or something else that they're just waiting on us to do. And so, the overwhelming demand is there obviously with customers who had server licenses. They've got three years to make a choice. Whether they wait, whether they go to cloud or DC and the overwhelming majority, we want to move to cloud and early discussions we're having. Of course, the customers on DC are also looking at the benefits of cloud, not having to manage their own upgrades in their hardware, getting the latest versions of our products the increased collaboration that they can have, the well maintenance costs and that can put that stuff on high value activities. Like those things are the same, whether you're coming from server or DC. James, do you want to add to that?

Yeah. Sure. The first thing I note is that I am really pleased by how our gross margin has stayed at the level that it has as we've been able to build a business 45% of which -- revenue is coming from the cloud. So I think that speaks a lot to the execution of the teams involved there. But as we have indicated in prior calls, we would expect, particularly as the larger customers, the largest server and data center customers move over to the cloud, that we would see increased hosting costs. And we've spoken also about how we have added to our support capabilities so that we're ready to help those customers moving over to the cloud. In terms of the timeframe for those support costs, I would expect those to be in place for the next few years, consistent with the timeframes that we've talked about for our larger customers moving over 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 continuous cost improvement, whether it's around our usage of compute and storage resources or whether it's related to helping off support resources people help our customers, so that we can do that on a more cost efficient basis. So, that hope gives you a little window as to how we're thinking about and operating along the lines of the cost of goods sold part of our business.

Thank you both.

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

Okay. Thank you very much. I guess, first off, I'm just kind of wondering James how you would characterize the revenue and/or deferred revenue benefit from pull forward this quarter as compared to what you sell when you're prior. And then just secondly for micro Scott, just curious to hear the -- how the demand was for data center subscription this quarter? Thank you.

I can take the first part of that question, Gregg. So, in terms of maintenance pull forward activity, I would describe that in Q2 as really quite modest. Now remember last year that was the primary pull forward quarter. And so it was a much larger effect in Q2 of fiscal 2020. Now, what I would expect to play out in Q3 -- and as I indicated little earlier, we're already seeing this in the month of January, is that we'd see more maintenance revenue pull forward activity in Q3 as well. And so what's a little different this time around. A couple of things, really. First of all, we've given our customers more time, more advance warning of the price increases. And second, of course, not only is there a price increase, both for the server and the data center business, schedule to be put into place next week. But at this time we were also in the license, the sort of a business we've made that announcement. And so really what played out more so in Q2 is you can think of it as pull forward at some level. It's a different type of pull forward to that that we've seen in prior years, because the pull forward has been customers adding to their license count, expanding the size of the current licenses ahead of the moves that we're making around sever end-of-life. Data center, relatively modest pull forward there in Q2 as well. And again, I would expect there to be a pull forward activity ahead of the price increases that will apply to data center just as they will apply to server as of February 2nd.

Okay. That's great. And then just broadly speaking, not referring to any kind of pull forward, but just around kind of overall data tender demand in the quarter, that would be helpful as well. Thanks.

Yeah. In terms of data centers demand, overall, it was a relatively strong quarter. I think part of what we're seeing is some of our European partners encouraging some of their customers to move over to the data center ahead of these price increases. So that was a part of what was going on in the subscription revenue line. But as we talked about before, recall that the cloud 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, one for you. So there was a comment in the prepared remarks that said, you're growing the free edition strategy. And look, clearly the top of the funnel is really working, right? You already talked about that, but what is it that you're seeing that's given you competence in the economics of those customers, right? Is it just a lower tack or are you seeing expansion activity that's outperforming your expectations again? Any color there would be helpful.

Yeah. Sure. So what we do is study very closely each cohort of free customers they join us each month and we track their progression, whether it be because they add to the user accounts and then go beyond the 10 user free limit or whether the progression is before they get to 10, they decide that they really need and appreciate the functionality that our standard cloud offering or even our premium cloud offering contains. And so they make that switch from a free to a paid edition in that way before they get for the 10 years level. So we watched this, as I say very closely cohort by cohort. And so while, I noted earlier that for fiscal 2021, we would continue to see this as a net revenue headwind. But as we watched the cohorts, we see the trend lines are quite clear, and that gives us confidence about the future of this initiative. I think it's an excellent example of how we've taken a long-term view. We've made a decision to take a short-term headwind for the long-term benefit down the track. Mike, are going to add something?

Yeah. Thanks, James. DJ, I just want to add a couple of small points there I suppose. We've had a lot of questions on free. Firstly, I would think of free as much less thoroughbred and much more cloud self style in terms of how it's going to give us a long-term kind of diesel engine, like pull up the hill, right? And the reason for that is, it builds a big base of customers and potential customers underneath our business that will mature into customers small and large over the next many, many years, right? It's a multi-year impact. It's a long-term investment that we're aiming at with free, but clearly we track extremely closely active usage. And I would stress that is the most important metric for us. Our people using these free additions that we're giving away free things that people don't use them. So we spend a lot of time trying to track active usage and we're looking at how we can make sure the customers are getting value out of those free additions. We firmly believe philosophically if they're getting value, once they hit that 10 years of stage, they will pay and continue to be a long-term Atlassian customer said marching up that edition hill. The second part that's really important for the free editions for us is the reduction of friction specifically in cross flow and cross sell. So where you may have -- for example, a Jira software instance that has 50 or 100 people, and someone discovers Confluence and its connections to Jira software in that company, previously they would have to -- if they weren't the administrator get out a credit card and pay for a trial of the Confluence instance, if that makes sense. Now they can start a free trial of Confluence as any of those users. So their ability to discover new products that we have as an existing customer is also increased, right? And the more users we have in product, the first product, the more that we have a potential to start trials of second products or free editions alongside with anyone in that company. So our ability to expand and go wall-to-wall is increased by free. Again, I would stress it's a pretty modest revenue impact, given these are all small customers and we are aiming for that multi-year impact, part of our sort of long-term thinking.

Yeah. No, that makes perfect sense. And I'm 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 have you seen in terms of the revenue applications when customers migrate from server to cloud? I think you talked about small customers may see a little bit of a downtick in revenue capture mid-market, maybe a little bit of uptick. Any early read on revenue conversion and including the potential to upsell, cross sell during the migration. And then I'll just throw in my second one. Pretty interesting when with thought works and the 8,000 users on Trello. Is this one of the biggest customers? You've had adopt Trello 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 won the deal.

I can take the first part of that. In terms of the revenue result that we've seen from the service cloud migrations, I would say that's very much tracking along to our expectations. As you pointed out, as you framed the question, we gave some, I think, helpful illustrations of how the economics work for small, medium sized customers on those generally the ones that are migrating at this point in time. So, yeah, that's tracking pretty consistently with our previous discussions of the topic. So yes, some headwinds on the smaller size, at least initially modest tailwinds on the medium-sized. Net-net, I wouldn't describe it as a material driver of the revenue in Q2.

And Matt, I can take the Trello question. Look, Trello continues to be early in its monetization journey. As we settled the time again, a year ago, I believe we released a stat, it had passed 50 million accounts. So from the point of view of size and scale, the 8,000 thousand uses mentioned that the whole looks is relatively small, obviously in comparison to the 50 million uses of Trello, and that 10 million monthly active use a number that we possibly released at our Investor Day. That's it from Trello's point of view. Obviously, we're continuing to learn from the customer base and work on demonetization journeys there in Trello, working through it's monetization ladder, if you think about it's equivalent, but free business class and Trello Enterprise, it's sort of equivalent to the free standard premium enterprise ladder of editions that we have in Jira software and then Jira Service Management. 8,000 users is not a particularly large enterprise Trello customer I would say. We certainly have some that are in order of magnitude or more larger than that. But it's a very good win for us. I think the reason you see companies like Trello using this is ultimately about Trello's flexibility and its capabilities and potential to handle all manner of different workloads with a very freeform model inside an organization clients. So, it's adaptability to lots and lots of different use cases and almost anyone in a large company, gives Trello huge advantages to solve a whole manner of workflow problems for those larger organizations. And again, as we continue to do in business class and in Trello Enterprise is give those organizations that control to manage their data, to manage their users and manage the boards whilst keeping that flexibility and freeform nature of Trello in the hands of the users, I guess. And you'll see a lot of exciting things coming up in Trello. Again, a small plug for Team 21 if you go to that in a couple months time. We continue to work on really exciting things to Trello and look forward to its future.

Great. Helpful color. Thanks.

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 Jira Service Management and then I have a quick follow-up. As you see customers, and I know it's still early migrate from Jira service desk up to Jira Service Management in the cloud. Obviously, that product attacking more things within the IT department, Agile, DevOps, ITSM work management. Any color around sort of the expansion you're seeing, as that product -- as people migrate. And then, just a question on the partner network games had mentioned earlier, come the ways you're incentivizing the partners with cloud apps and others. You guys are obviously very used to selling with a very light touch. But many of your partners are not, but even partners are very active in physical events and stuff. So, I'm just curious as your partners, 600 plus play a real important role here in this migration, how they're adapting to the current environment and whether you're satisfied with the progress that you see. Thank you guys very much.

Sure. Look on ITSM, I would say too early in the release of that particular product to see massive differences with JSD having -- again, not being in the market that long in terms of adoption and seek expansion. Obviously being a broader feature offering and having embedded the opportunity functionality and some other things to serve a lot more purposes full JSM specifically, we are ambitious, I would say, that we say that seat expansion of the time, whether that's a small customer going from 50 seats to 80 seats or a very large customer going from 10,000 seats to 15,000 seats. I think JSM gives us all of that possibility. And I would stress that we continue to invest very aggressively in that product set. We still have the CMDB functionality coming out and continue to invest in automation, all the other things that we've put into the ITSM packages over the last than a while. One thing I would broaden that though, is when we talk about our connections to IT, it is broader than just ITSM. I think about ITSM as IT teams using JSM for IT. We gain great connection trust, a partnership with those IT departments that we then have a lot of other offerings that they can take advantage of in terms of that IT department providing functionality to the rest of their organization. And that's why you say the strength of the broader Jira platform. So they start to bring in Jira Core. They start to bring on the products to provide workflow applications and solve lots of different use cases and workflows for other parts of the organization. That's often the IT department creating that workflow for the legal department, the marketing department, the finance department, but all within that one Jira platform and all within a broader Atlassian platform. And that applies as much to Confluence as it does to Jira Core or indeed to Trello in Trello Enterprise. That's about our broader Atlassian seat expansion once we really gained the trust and respect of that IT department and what we can do to help them. I'll let Scott answer on the partner network.

Thanks Mike. The partners, as many of you would know it's been a peak part of align …

I think Scott's screen blurring out there [ph].

Sorry. It is a huge advantage for us in Europe to have a partner network. We have partner network extends the entire globe. And Atlassian does not have a services department. And so our services are really provided by our partner network around the world. And as we know, we incentivize them with margins. And we also spend a lot of time on training and so forth. And, of course, we are using training, margins and other things to direct our partners network more towards our cloud offerings, that this is course where the demand from our customers is at the moment as well.

Thanks a lot, guys.

Your next question comes from the line of Rishi Jaluria with D.A. Davidson. Your line is open.

Hey, guys. Thanks so much for taking my questions. Nice to see continuing and improving business momentum. Two quick ones. First, going back to the comment that's been made on the server customers and not expecting mid to large -- or two-thirds of mid to large customers to migrate until FY 2023 and beyond. I guess I'm a little surprised by that metric given the incentives that you have in place to push migration. What has been the pushback from customers on migrating? Is it just the amount of investment that has to be made? Is it not enough incentive? Is it pricing? Is it inertia? And then follow-up, I just wanted to ask about cloud net expansion rates. At the Analyst Day, you talked about 121% cloud net expansion rate and 130% for medium and large customers. How has that been trending? And is that a metric you plan to disclose maybe annually or how should we be thinking about that? Thanks.

Scott, I will take the first one and James chime in on the second one. For these server customers and the large ones migrating from server to cloud, one thing to realize is, these instances are mission-critical in our organizations. We've had the CIO of a large technology company talk to us recently, and they said, well, there's three to four mission-critical applications at Atlassian -- sorry -- this is a good company. One of them is our ERP. One of them is kind of a Salesforce automation, and one of them is Atlassian products because we usually stopped when these products go down. And so when these mission-critical applications are there, these companies want to plan for it, find the budget cycles for it insight. If that gets -- the thing is a move today, they appreciate all the benefits that I would get, that is a practical matter. It takes a while to plan and migrate the sort of the systems where they really want to minimize the amount of downtime for their employees. And so there's nothing specific. There -- I would say there's no areas that Atlassian will continue to improve on around compliance and certification in certain geographies that takes us a while to get those things and customers are working with us to move as we hit those certifications. But there's nothing specific that I look at that makes them a delight really just inertia and the mission criticality of our applications.

And then just on the second part of your question, obviously at the Investor Day, we wanted to dive a little deeper in terms of our offering and cloud metrics, given the importance of the cloud business to our company in the coming years. So yes, we talked about our 35% growth year-over-year at that point the net expansion rate you say at 121% and that being a larger 130% 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 Luv Sodha on for Brent Thill. Congrats again on the nice quarter. Just a couple of real quick questions from me. One was, digging a little bit deeper on the migration, the server to cloud migration. I guess, did that have any impact, any negative headlines on billings or revenue per se? And then the second question was on the momentum that you've seen that the free cloud versions last quarter, I think, that -- you saw an increase of 175%, has that top of the funnel momentum continued in this quarter? Thank you.

So I can take the first part there. In terms of server to cloud migration impact on billings. No, I wouldn't describe it as a material item in Q2, either our revenue results off of the deferred revenue. And in terms of the free versions, we're pleased with obviously our progress there, but I wouldn't speak to anything in addition to what we've already covered in earlier balances. Anything to add to that Scott or Mike? Okay.

Thank you.

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

Good afternoon and thanks for taking my question. I wanted to see if you could provide an update for us on Align. You previously talked about how Align is one of your fastest growing revenue products. And so, it’s just -- was curious if there’s any context you can share in terms of just how -- where the growth is coming from and how it’s growing whether it’s through organic means or is cross selling really kicking in there?

Hi. Thank you. It’s Scott here. On Align, again, that is primarily sold to our existing customers, right? So, this is not something that where we go in with the sales team and have kind of long customer acquisition sale cycle. These are existing customers using our products, predominantly Jira. And I’d say actually I’ve got one on many Jiras across my organization. We are doing a ideal transformation and digital transformation and we want better executive level understanding and we want to sort of scale up our Agile from what was happening at the engineering level all the way through the organization. And so, what we get is a lot of our customers going up and saying how do we solve this problem. And, of course, Align is the exact solution they’re looking for. And so, I don’t think there’s anything in terms of -- it really is an upsell, so existing customer base. We're very happy with the acquisition and how it works with our customers. It is one of many things that helps us within our customers' digital transformation. And that is something we can talk with customers. It used to be that software teams were kind of do their own thing in the department, they say the software is mission-critical to every company. When you talk to companies that goes every sector and that really saying that the thing they’re struggling with is how they’re transforming their organization. And in most of these cases that transformation is coming from the software teams. They are actually adopting practices in software and rolling them out across the entire organization. And benefiting, not just here Align, but that benefits Confluence as teams need to collaborate more closely across their entire organization. It’s going to benefit some of the new products we’ve got coming out to address this may even. So that broad trend, I think, is news in the up and whole bunch of conversations at the C level, CIOs, CTOs and even CEOs of organizations who are turning up to Atlassian asking how we can help them solve their digital transformation problem.

Thank you very much.

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

Hey, guys. This is Quinton on for Jim. Thanks for taking our question. Really throughout the pandemic, we’ve seen employees adopting new ways of communicating with their teams. We're wondering if you’ve seen any acceleration in the adoption of Atlassian products from the non-technical users maybe compared to more prior years. And how are you viewing the competition in the non-technical specific world? Thank you.

Good day, Quinton. Look, let me answer the pandemic question first. Obviously, as more people are working from home, working remotely, changing their work habits, as we like to say they change where they work, but they keep how they work consistent in order to allow people to work from multi different locations. As that has happened, you naturally see increased activity in usage in our products, because our products fundamentally help people working asynchronously, like they help teams collaborate to help you get on the same page where you might have used a whiteboard beforehand and in an office now you might use a Trello board or if you have a remote meetings. I live on Zoom most days. We often start meetings with Confluence pages as a pre rate, right? It’s a very -- much more efficient asynchronous method we will often start our meetings with a 10-minute pre rate where someone will send the link to a Confluence page, we will read it and then comments to attend it, and then we will start the meeting. So, these sort of things are driving, I think, a difference in how people think about working and structuring their day in knowledge work in broader areas and leading to activity and usage in our products. Again, it’s not a sort of a hockey stick jump or a step change jump. I would say, it’s a continued slow march of improvement for us as more companies that are already customers have more usage, more days of the week, they might use our products, et cetera and that will, I think, in the long-term lead to expansion, but it’s not going to be a step change. They all sort of run online and suddenly decide to buy Trello, I guess. In the broader work management for all space, look, we continue to be bullish. It’s a very huge market. Obviously, we’re very happy with the progress of Trello. Confluence continues to do well at helping us get wall-to-wall with inside customers. And we continue to work in innovation areas on new products to target some of those trends that suppose. One example of that is our acquisition, we acquired a company called Halp, which is a digital version of ASN, you might say, focused on messaging platforms. So, Slack and Microsoft Teams and providing service management within the messaging construct and connecting it back sometimes to something like a Jira Service Management in the back end and sometimes just processing all that messaging within -- all that service within the messaging products. That again, as you see adoption of things like the Slack and Teams during this pandemic, people work-from-home, products like Halp will benefit from that because people are increasingly looking for ways to do work within those tools. And that’s the leading service provision tool, I think, in the Slack ecosystem is now in the Atlassian stable. And we continue to work on integrating that in the rest of the things.

Got it. Thank you.

Your next question comes from the line of Pat Walravens with JMP Securities. Your line is open.

Great. Thank you. And I’ll add my congratulations. So, I’ll go to a little different topic here. So, in August, you announced that the employees could work-from-home permanently even after the pandemic ends and obviously your whole solutions that really helps with that. But I know about you guys, but I find a full Zoom day is so exhausting. And within our organization, I’m not sure it’s the best thing for our employees. I’m just wondering, how has your thinking on that topic evolved over the last six months?

Scott here. Obviously, others can chime in if I want to add anything. We think of it -- we call it Team Anywhere is our why we’ve done this, which is really that our employees can work anywhere they want. And if they choose to come and work in one of our offices, they can do that. If they choose to work-from-home, they can do that. And that really opens up the talent pool for us. And if we think one of the reasons why Atlassian has been successful, I think is our heritage outside of Silicon Valley. It’s allowed us to tap into an amazingly diverse and very loyal talent pool, particularly in Australia. And so, I think that’s been echoes our success and we’re really excited about and able to tap into that around the world. I know myself -- yeah, the day full of Zoom meetings aren’t that great. But what we found is that the many employees value the lack of a community, the ability to spend more time with friends and family, the reinvigoration of local communities around where they live. I know many of our executive team has moved from the center of cities to somewhere nearby to take advantage of kind of those areas. And so, two hours back from a commute gives you a lot of freedom and flexibility to spend time with family or exercise or other things there. I’d remind our employees that we aren’t really in a steady state there that we are working from home in the middle of a pandemic. And that’s different to what the world will look like when you can -- your kids are back at school, and you can travel into the office. And we are building our policies so that world and God willing like that will happen this year. We will see the vaccine rollout and hopefully we can move into a more normal state. So, it is something we spend a lot of time thinking about. I don’t think we’ll get it all right like everything Atlassian. We continually try and improve that cloud self spirit is continuing to make relentless improvement and so, you’ll see that here as well.

Great. Thanks for that perspective.

Your next question comes from the line of Fred Havemeyer with Macquarie. Your line is open.

Hey. Thank you very much for taking my question. I'm really curious about your perspective on this. Our business is a planning for their IT remote based work -- sorry -- remote work, the design in this new kind of IT paradigm of hybrid of remote work. How are you seeing the evolution in the funnel? And what are companies looking for in terms of software that can support more Agile work cycles or team alignment within these remote work environments?

Scott here. It’s interesting in terms of your remote work by design, the great quote, which is the future is here, it’s just unevenly distributed. And I think, if I went back pre-pandemic, you would find it like they were a large number of our customers already working in this fashion, heavily weighting on digital tools to share information across their organization, already reaping the benefits of asynchronous communication more work that is tracked kind of in Confluence rather than meetings. And so, in many cases, what we’ve seen in the pandemic is that sort of whole world catching up. Many people who are already using Zoom on a day-to-day basis and everyone else is now saying it. We’re seeing many customers using Jira and Confluence and our Agile products, with Trello already being used in many places. So, I don’t think there has been a huge change. I guess, we’ve always, at Atlassian, cater to the vanguard of people and how they’re working. And obviously, there’s some new things we’re thinking about with this. But it hasn’t been a sort of step change in sort of how products work.

Thank you.

[Operator Instructions] Your next question comes from the line of Ari Terjanian with Cleveland Research. Your line is open.

Hi, guys. Thanks for taking the question and congrats on the results. At the Analyst Day couple months ago, you guys talked of about the strength in large deals. I was wondering if you could double click on that and how recent performance is there in this quarter. And second, just -- yeah, any more color around -- what would you say is the biggest surprise you’ve seen in terms of customer behavior since the October announcement of the server end-of-sale? Thank you.

So, in terms of large deals, we tend to update that’s just the each year. I would say that we continue to execute in a way kind of consistent with the trends that were laid out in the last stats that we laid out at Analyst Day. And in terms of the second part of your question, surprises in terms of how customers have reacted post the server EOL announcement, I would really say that I think our team prepared just fabulously for that announcement. And that planning, the thought that went into that announcement has paid off. Because I would say that customers are, obviously, thinking hard about their options and so forth, the right timing for them to make a move and so for. But really that’s very consistent with how we had analyzed and planned for this announcement. Scott or Mike, would you add anything to that?

No. I think you said it really well, James. Like, we’re thoughtful long-term focused and we’ve seen from Atlassian whether it’s free or migration to cloud or the product portfolio we build like we really just take a long-term focus with all of it. And with volatility month-to-month, quarter-to-quarter, but most of time, Mike and I don’t spend -- really as much time on pull forward or anything like that. We’re spending our time thinking about the future of our companies and customers in the cloud. So, yeah, we can -- I mean, it’s a last question, I’d say thank you to all of you for being on with the journey and I appreciate it and I think -- that’s our last question?

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. I hope you and your families stay safe in this challenging time around the world. And we look forward to talking to you next quarter. And a reminder that Team 21, our annual conference is on just before the next earnings call, I believe, so attend that. And thank you very much for being here. Hope you have a kick-ass weekend.

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