Atlassian Corporation (TEAM) Q2 2022 Earnings Report, Transcript and Summary

Good afternoon. Thank you for joining Atlassian's Earnings Conference Call for the Second Quarter of Fiscal Year 2022. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Atlassian's website following this call. I will now hand the call over to Martin Lam, Atlassian's Head of Investor Relations.

Welcome to Atlassian's second quarter of fiscal year 2022 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, our Chief Financial Officer, James Beer; and our Chief Revenue Officer, Cameron Deatsch. Earlier today, we published a shareholder letter and press release with our financial results and commentary for our second quarter of fiscal year 2022. The shareholder letter is available on the Atlassian's Work Life blog and the Investor Relations section of our website. Where you will also find our other earnings-related materials, including the earnings press release and supplemental investor data sheet. As always, our shareholder letter contains management's insight and commentary for the quarter. So during the call today, we'll have brief opening remarks and then focus our time on Q&A. This call will include forward-looking statements. Forward-looking statements include 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 included in the 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 Form 6-K. During today's call, we will also discuss non-IFRS financial measures. These non-IFRS financial measures are in addition to and not a substitute for or superior to measures or financial performance prepared in accordance with IFRS. The reconciliation between IFRS and non-IFRS financial measures is available in our shareholder letter, earnings release and investor data sheet on the IR website. [Operator Instructions]. With that, I'll turn the call over to Scott for opening remarks.

Thank you for joining us today. Happy New Year to everyone. Q2 was another strong quarter as we continue to see great momentum. It's extremely encouraging to see many of our past long-term investments reflected in our Q2 results. The Atlassian Marketplace, which we started in 2012 recently surpassed $2 billion in lifetime sales. Cloud apps now make up nearly half of all marketplace apps. And the rate at which customers are adopting cloud apps is outpacing our own cloud products. It's exciting to see our ecosystem grow at such a rapid pace. And for us to be able to expand the economy around Alaska. IT was an area we were committed to doubling down on three years ago. Recently, Jura service management was recognized as a leader in the Forrester enterprise service management wave, with our strategy for ASM receiving the highest possible score. We also recently added Percept.AI to bring AI powered virtual agent technology to expand Jason's frontline support capabilities. Our continued investment and innovation at cloud platform are driving great results. This quarter, we added more than 10,000 net new customers, we all landing in clouds and quarterly cloud revenue grew 58% year-over-year. As you've already read in our shareholder letter, we're looking forward and laser focused on investing in the future. Hiring is our top priority. We deeply believe in a massive market opportunity in front of us and investing in people is our path to seize these opportunities. Lastly, we hope you can join us for Team '22 in April. We are cautiously optimistic to be back in person with our customers and partners. We hope to see many of you there. But we're thrilled to also be able to host viewing parties around the globe and offer virtual options as well. With that, I'll pass the call to the operator for Q&A.

Thank you. [Operator Instructions]. Our first question comes from the line of Alex Zukin from Wolf Research. Sir your line is open.

Hey, guys, congratulations on another just wonderful quarter. I guess, maybe for me, how should we think about the results relative to your internal plan? And what were the two biggest areas that that outperformed your expectations? And if you can any bottlenecks to growth at the moment? And how are those different than maybe this time a year ago?

Well, thanks for the question. I start off by saying I was really pleased with the performance against our plans really, right across the board. Even you see very strong performance in both the cloud and data center businesses. If I were to pick out one product, it would be JSM. I think that's just really hitting the mark with customers a big opportunity for us going forward. That has, of course, given us the confidence to raise our full-year subscription revenue guidance to around 50%. That's up from the mid-40s percent that we were talking about 90 days ago. And the other thing I would really highlight is I feel we're very much on track with our migrations timeline. So please buy that. In terms of the last part of your question. IT demand continuing to be strong for both the cloud and data center businesses. I don't see bottlenecks there in the future. One of the other things I'm sure we'll talk more about this is the continual progress we have with in increasing the capabilities of our cloud quarter-by-quarter. And as we do that, obviously, more and more of our, currently behind the firewall customers are able to move over to the cloud. It's clear that they want to go in that direction. And increasingly, each quarter, we're making that possible. So we feel good about the opportunities in front of us.

Thank you. The next question comes from the line of Nikolay Beliov from Goldman Sachs. Sir, your line is open.

Hi, thanks for taking my question. James, one for you, when we will start seeing the migration impact from server and data center to cloud in the numbers. And the loyalty discounts unwind over time. Are we talking maybe a year from now, two years from now. And as a follow-up to the team in general, as you move to the cloud, your pricing really is changing. And you started the company probably 20 plus years ago with a business model oriented around very low price compared to the competitors. And now for example, Jira premium is 15 bucks and enterprise probably that it was higher approaching the pricing of competitors. So I would think that's a major shift in strategy here. And how is that reflecting in the business model and the size of the company going forward in light of that context? Thank you.

Well, Nikolay, let me start the answer there. In terms of the impact from migrations, what we're saying is that for fiscal '22, so for the full-year, we would expect migrations to be driving mid-to-high single-digit growth in our revenue year-over-year. So you can contrast that, of course, to what I was just pointing out there in terms of our expectation of around 50% growth for subscription revenue in fiscal '22. And then I would add that in the quarter just past Q2, it was a very similar sort of figure, mid-to-high single-digit type contribution to the growth rate that we recorded in Q2. So that 64% subscription revenue growth of Q2, about mid-to-high single-digits coming from a migrations. Just a couple of other things, I would add. You referenced in your question, their loyalty discounts. So today, and until the end of June, somebody moving over to the cloud from either server or data center, they would receive a 40% discount. Now, once we get into July, in a few months' time here that discount will have down to 20%. So that's important to remember. The other thing I say is that when a customer migrates over to the cloud. Of course, in the period that they made that migration, that's a very modest impact on our revenue. Obviously, the cloud businesses recognized reasonably in terms of the accounting. So those are the three points to keep in mind.

I'll add just on the back of claims around sort of our price philosophy that we've talked about, and there's no change to our pricing philosophy hasn't really over the 20 years have been running Atlassian, we've always priced the volume. And we've talked about reaching the Fortune 500,000 and reaching millions of people around the world. And that's what we've always priced for. And so what you've seen sort of in terms of how that's manifested in our current list prices over the years, we've made it cheaper for well consistently, by making it more free over time. And we've also captured more value at the higher end where we are providing more and more value for our largest customers. And of course, as you know, the cloud provides more value for customers, we take a lot of the management overhead away from customers by providing the hardware and so our customers are happy for to give us those responsibilities. And so I don't see there being any real change to our pricing philosophy, and I'd continue to see us do more free to low end and more optimization at the high end as we deliver more value over time.

Thank you. The next question comes from the line of Michael Turrin from Wells Fargo. You're your line is open.

Hey there. Thanks and congrats for me as well. And an impressive set of results here. Some of the commentary around ITSM and Jira Service Management stands out in the shareholder materials, even out Cameron picking the favorite, which I'm sure isn't easy. Maybe you could speak to what's driving the momentum there, how that's impacting the model, where that might be showing up and maybe what makes your service management, the right product at the right time as you referenced in the customer section. Thank you.

Yes, it's Scott here. I'll take that one. We'll go to Jira Service Management is like uniquely positioned to handle the convergence of developers and IT. And we're seeing in the market these days that IT is no longer an island over by themselves, it's no longer upgrading things that were handed on a CD over a weekend and taking people down. Developers in IT are working hand in hand to transform their organizations. And there's no other vendor out there that has that sort of unique position of bringing data and IT together. And the second aspect is they're the only company that allows us to, they can handle the Fortune 500 all the way to the Fortune 500,000, as we've talked about that and that comes from a deep focus on the end-user experience, like which is we've delivered on across our product range for multi decades at the moment and bringing that to IT has seen a lot of value there. And you've seen us say, we're going to invest in ITSM, three years ago, when you have seen a consistent drumbeat of innovation. We've done some acquisitions to add functionality, but most of it's been in house innovation and building out the feature set across our entire product range. And so we're super excited that that's been recognized by analysts out there, which is great, but more importantly, being recognized by our customers who are adopting it in it. And so pleasantly surprised, I mean it was our plan three years ago to do this. And because we've got a great platform, we've been able to move relatively quickly and delivering all the value to our customers. And so we expect ITSM to continue to grow into the future.

Thank you. The next question comes from the line of Keith Weiss with Morgan Stanley. Sir, your line is open.

Excellent, thank you guys for taking the questions. And congratulations on another really, really nice quarter. I wanted to ask about two probably in a quarter full a lot of eye popping numbers, two the numbers that really stood out to me. One was data center, seeing another acceleration in growth to 83%. Anything kind of one-time in nature, we should be aware of in that number. I know there's a tough comp coming in Q3. So we're seeing that growth. But actually think about what drove that acceleration. And two, there was a comment about channel partner revenue growth accelerating, I think it was 130% growth year-on-year, anything in particular changing in that program that caused that acceleration. And if you can give us some type of sense that become more material channel that is starting to move the needle a little bit more for the broader Atlassian distribution strategy?

Good question, it is Cameron here and as far as the data center demand, the best way to look at that is it's just showing further commitment from our customer base into the Atlassian ecosystem, and also the highlights the mission criticality of our applications, as we continue to say that migration to cloud is a multi-year journey, different customers are on different stages of that journey. And that's half the data center for many of them is a step towards the cloud. All of them are well aware that cloud, our investments in cloud, our strategy on cloud and that cloud is in their future. But they're at all different levels of maturity at one end, they're able to move over. But the reality is, if you look to last quarter, one-third of our cloud migrations came from data center customers. So we have proven that we can take the data center customer base to the cloud. The second one is around our solution partners in our channel, which are just absolutely critical to our overall efficient go-to-market model that we have everything we do directly with my teams, and marketing and sales and customer success is amplified with our hundreds of solution partners out there in the market. And obviously, as you see in the numbers, the solution partners have been increasingly critical to our cloud migration process. The reality is that we provide a variety of incredible self-serve migration tooling for customers to move to the cloud. But many of our customers want help from planning out their migration to manage the migration stuff and partnering with Atlassian. And that has allowed for us to continue to show great growth. In general for large customers when I'm talking to them, the first thing I'd say is, hey, which partners are you're working with? Who can we partner with to build this plan out hand in hand going forward.

And let me just add on to the first part of Cameron's answer there. In terms of data center growth, a couple of things also to remember in terms of Keith, you referred to something like a one-time nature. I think about the rev rec, remember the portion of the data center activities that we would contract with a customer is taken upfront, that's quite different to our cloud revenue accounting, which is fully reusable. And then the other thing I just pointed out, recall, we raised prices, around this time last year, on the data center, the full effect of that is now flowing through. And so both those things give a little extra fuel to the inherent demand that Cameron is referring to for data center.

Thank you, your next question comes from the line of Fred Havemeyer with Macquarie. Sir, your line is open.

Hi, thank you very much, and congratulations on another really impressive quarter here. I wanted to ask, from your perspective, how does the hiring landscape for top tier talent? How is that evolving at this point? You mentioned throughout your investor letter, that your hybrid work policies have been a strategic differentiator for your hiring practices. In addition to just offering hybrid of remote work options, are you seeing anything out there to suggest that top talent is now weighing either compensation packages or stock comp packages any differently in this more volatile environment, potentially favoring companies like Atlassian?

Thanks, Fred. It's Scott here. We will go -- we've been really happy with our team anyway a policy like that, to allow people to work wherever they want with that in an office, that's great, although it's been a little harder through the pandemic, and wherever we have the legal right to employ them. So we have seen a lot of our employees, and new employees working remote from existing offices, and we've seen existing employees move as well. So that's really great. We think that's going to be a long-term differentiator for Atlassian. And I think that's going to be difficult for companies that don't have similar policies to attract and retain the best talent. In terms of compensation, we have seen some minor up ticks in compensation, we were early to that, I guess ahead of many sort of peer companies who are anticipated to see attrition take off before they address thing and also we're really proud with, we've worked on that with our employees. And now there's been talk with the great resignation across particularly North America, but we haven't seen an uptick in similar ways that our peers have seen an uptick around that. Now, on the back of all that, we are setting aggressive goals for hiring into the future like we think and see we have such great opportunities across all three of the markets that we have talked to QA that linked about and the way of going about that is building out our largely R&D functions to build out the products. So I needed to go after these large markets. And so we're -- you'll see an uptick in our investment over the coming quarter and years. And we think that's, going to pay off really well for us.

Thank you. Your next question comes from the line of the Steve Enders with KeyBanc. You may ask your question.

Okay, great. Thanks for taking the question here. I just want to ask about three exiting of CTO. Want to get a bit of sense for what the kind of plans are to manage his responsibility as going forward and how the company is thinking about that at this point?

Yes, Steve it's Mike. I can take that one. Look, she's obviously been an absolutely fantastic leader in technology over the last six years. He's taken us into the cloud and then continue to build a truly world class cloud platform. So we couldn't be happier with what he said. I've also his superpower has been building high performance teams, building a great leadership team. So we're in an incredibly good situation in terms of engineering. Broadly, obviously, we'll be very sad to lose him as he moves on to another phase in his life, which is understandable, but we will -- I have no doubt, we'll be able to find more talent internally, externally, we're in an incredibly good position. We've, over the long-term had a clear philosophy on culture and building a sustainable company. And a part of that is about leadership, transition and continuing to move forward in all of our departments. And I feel incredibly confident about where we are in our technology and engineering functions.

It's perfect. Thanks for taking the question.

Your next question comes from the line of Keith Bachman with Bank of Montreal. Sir your line is open.

Many thanks. James, I wanted to put this one to you if I could. You announced pricing changes, that would be effective on Feb 15th for data center and server. And I wonder if you could characterize what you think the impact has been or will be prior to the 15. For those pricing changes, see some pull in of demand and/or any characterization of posts of those two particular areas and data center and server? Thank you.

Yes, sure Keith. At the end of the day, it is obviously the customer that makes the decision as to whether or not they're going to early renew, answer their investment was at last year and the head of these price changes. So you -- we really can't predict given the volume of customers that potentially had this offer available to them. So when you look at the price changes themselves that we announced a few weeks back, they vary by product by user tier, which is very normal for U.S. I would though generally think of those as approximately mid-teens percent type growth in price across server and data center. And so, I would expect that to begin flowing into our P&L in the fourth quarter in a more meaningful way. So there may well be some event driven customer purchasing ahead of those price increases, as we saw in Q3 of the last fiscal year. But again, at the end of the day, the customer really decides. And so this is why we've been talking for some time now about a certain amount of variability in our financial model, as our customers go on this journey from service Cloud.

Thank you. The next question comes from the line of Fatima Boolani with Citi. Your line is open.

Thank you. Good afternoon, and thank you for taking my questions and get to telephonically meet you again the question for you with respect to the concurrent acceleration that we seen in the cloud and data center business. Now, I was hoping you could put into context how both those businesses can sort of enjoy this degree of concurrent acceleration, especially considering you had mentioned that about a third of the cloud performance being attributable to data center migration. So I'm just curious as to, if you can walk through some of the dynamics there, and if you can also give us a frame of reference for how much of that cloud performance in the prior quarters. How much of that was driven by migrations from data center, just we have the frame of that context? Thank you.

Sure, I'd use to take that one. Let's start with migrations. I mentioned a little earlier that what we would expect, and in fact, what we saw in Q2 was about a mid-to-high single-digit impact on our subscription revenue growth from migrations. Now, important though to note that when we think about cloud migrations, then about a third of that activity is coming from data center. So again, but in context, when you think about the growth rate of the businesses that we're recording both cloud and data center, migrations are important, but relatively small part of the overall picture. So let's take a step back and really think about what are the key drivers for the cloud. And I've really point to a handful of items beyond migrations. First of all, I think most importantly, we continue to do an excellent job of expanding our user accounts at our current cloud customers. You saw are also in the data, we brought 10,000 new customers to the company, they're all effectively going to clouds, we talked about the percentage. And once they're at the cloud, we're doing a very nice job of expanding user count. The second thing, I've really also highlight the growing impacts that we're making with our customers on premium and enterprise editions. This really goes to our overall editions strategy that starts with free standard, then premium, then enterprise. And we've really got those four additions now, pretty much right across our portfolio, broad portfolio of products. And I think that's a tremendously important driver, we're seeing customers really get incremental value as they step up that that ladder, if you will of additions. And then we've spoken now for several quarters about how pleased we've been had the royalty that type of activity. So that's working nicely. And of course, you saw us rollout a mid single-digit pricing increase. A few months ago now and so that relatively quickly, layers into the P&L when you think that the majority of our customers are on a monthly subscription. So those are really the important drivers that that in context.

Thank you. The next question comes from the line of James Fish with Piper Sandler. Sir, your line is open.

Hey, guys, this is Quinton on for Jim, thanks for taking our questions. You know, customer additions this quarter were really strong again, is this kind of 10,000 that adds the right level moving forward? Or do we back to more fiscal '20, fiscal '21 levels? And then just as a quick follow-up, what would you say that the education of channel partners is at with selling the cloud products? Are we at the bottom of the ninth inning with one or two legacy partners to go or is there significant education left within the channel? Thank you.

Cameron, do you want to start off with that one?

Sure. Yes, as far as the -- I can speak to about the new customer [Technical Difficulty] numbers as well as the names of the channel partners. As far as new customers, like, I have to call out just how incredible this machine that we built and go-to-market that we can routinely get 10,000 plus net new customers in the business, while maintaining our efficient go-to-market span. But in addition to that, I got a call two years ago, we made that change to the free model. So in addition to $10,000 and paying customers coming in with more than two users. We've also have 1000s of more teams and companies choosing us and using us in market for free. And that just shows like how much demand there is, and why people are choosing us. Sort of the number itself, like it fluctuates quarter-to-quarter, for a variety of reasons changes in the funnel, seasonality, you name it. So let's be focused on the individual quarter numbers and look at the longer-term trend. We've added over 51,000 customers over the last 12 months, which when I started with this company, like many years ago, it was a fraction of that of our overall customer base. So we just been able to continue to evolve and make that efficient, go-to-market model work. As far as it means being an Australian company, most of our Aussie friends don't understand what any of the means. I'd hate to say, which I mean there in. The reality is we continue to train certify partner with and engage our partners in these migrations, it's multi-year journey. Some of the partners are well ahead and leaving all immigrations, many of the other partners are going through these trainings and bringing people in. So plenty more to do there. But I'll tell you that they are critical to our migration story and our execution there. James?

No, I think you covered it. Thank you.

Thank you. The next question comes from the line of Arjun Bhatia with William Blair. Sir, your line is open.

Thank you. Mike congrats on the quarter. Mike certainly, again in the shareholder letter, it seems like hiring was a key area of focus. And I think you stated that, building new products in the R&D or it would be a priority as you scale. When you scale your developer talent. I'm curious, if you can share any particular areas of focus that you have out in the market from a product perspective, that maybe is not addressed by the product portfolio today?

I can take that Arjun it's a market model and maturity level. Let's look at you with the three markets that we're operating in, like we were lucky to operate in markets that are very, very large. And we have different levels of maturity in each of those markets. And underpinning, our ability to go after these markets is the Atlassian platform that we've spent over a decade building out. And so when I look at the investments we're making, like you'd have to say they're in the areas of the three different markets, we talked about those investments required to help our customers make those migrations across the cloud and continued investments in the platform that were that we've built out over those years and continue to build out. And the benefits you're seeing come through, obviously, you've got migration numbers, but they're also benefits in our ability to launch new products, as you've seen with point A, that we can bring and launch new products to the market pretty quickly. And so I wouldn't see that being, huge changes in that, like, I think as the platform continues to mature their ability across to work across given IT I guess it'll be like chips and guacamole [Technical Difficulty] and, so that's like a unique ability that we have to do that. And of course, work management for all built on a great platform for work [Technical Difficulty] really unifies work across the entire organization. Again, that we're uniquely positioned to do so. Mike can you add anything to.

Yes, I mean, I just wanted the question started in hiring, I guess and ended in markets. So I'm not sure, which angle you're trying to go on. I think Scott's point about the platform is really key. Our platform, we believe is one of our strengths in executing against the large opportunities that we believe we have in all of our markets and around the business and in the Latin economy. Building that platform takes a world class engineering team and a world class engineering team at very large scale. So you see us making continued improvements and things like came anywhere in our culture and pressing our long-term thinking as a business, and also executing against those opportunities. Rather than being clear that we are going to invest and we believe in those opportunities. At the core of that platform is a truly world-class engineering organization. So if it's about where we hiring? Look, we have a deep long-term belief that building a world-class technology company without engineering and R&D at the core is skills to steal Scott's analogies that are like making guacamole without putting avocados ethical, it just doesn't work. And you'll see that from some other companies. But we have a deep belief in engineering and R&D, at the core of executing into the huge opportunities that we have in front of us. And so that's why I try and tie those two together in question.

Your next question comes from the line of Ittai Kidron with Oppenheimer. Please ask your question.

Thanks, guys and great, great numbers, I have a couple of questions. One on work management, you haven't talked too much about that maybe you can give us a little bit more color on the progress there. Maybe number of customers so you mentioned that on service management, maybe there you can mentioned that our work management? And then the second question more of a general one, regarding the customers that have transitioned to the cloud. Can you talk about the how the expansion activity of customers that migrate to the cloud is different? Then expansion activity of customers who remain on premise?

Hi, Ittai. Look, I can take both of those. Firstly on work management flow. The first thing I would say is the fact that we get this deep into the call. And we talked about our huge opportunities in IT. We haven't mentioned Agile DevOps and software teams or work management, I think that's an example of just spend an hour plus talking about any about there. I would say we continue to be incredibly bullish on the work management space. We're doing an incredibly good job with Trello. And continuing to make that part of our platform, part of our set of offerings, whilst having a standalone flavor to it. Do your work management continues to power along it's very new out of point A program innovation, but adding a different flavor on project management. And we incredibly bullish on things like 10 Central and other things coming at point A as well at the same time. So I feel very comfortable with where we stand, we believe there'll be lots of different ways of attacking the broad work management problem. And that's all. Before we even mentioned something like confluence. So really excited about how that happens, and how that continues to evolve. I will say, we talk a lot about digital transformation, changing software teams and IT teams. A big part of that is also a cultural transformation and how the software and IT teams work with the rest of the business. So yes, we have three different markets, we believe in all of them very deeply. They are tied together at the core of how every company is changing as a software technology base, but also changing culturally to be more dynamic and more agile. And that's why we're in those three markets. In terms of cloud expansion, it's a pretty simple story, actually. The ease of adopting a second product in the cloud, our ability to understand what customers are using, and hence, recommend other alternatives for them, either, you should get more people in your team on board, or you should try this other product is we can just do it a lot faster and easier. But it's a single click in the cloud, nothing to install, nothing to try. With free, you can quickly get 10 users started. So our ability to help customers expand is just much higher in the cloud. And you see that in greater and quicker expansion numbers of customers. We have to have the product to deliver that value. But our ability to help customers and guide them less friction in the cloud is just high.

Our next question comes from the line of Rob Oliver with Baird. Please ask your question.

Great. Thank you. Good evening, guys. Thanks for taking my question. Cameron you alluded to this earlier in your remarks. And Scott, Mike, I'd love to hear your view. But you guys continue to knock down a lot of the global compliance standards that are out there that really are I assume are inhibitors to many large enterprises and governments really going wholesale into the cloud. So I'd love to hear a little bit about some of what you've seen in terms of as you knock those down, how that backlog has been converting and then maybe some of the other global standards out there that you're excited about that you guys hinted in the letter that there's more to come imminently? Appreciate it, thank you very much.

Look for sure, it is part of our continued momentum, right one of the bolts seen overtime that last season's just continued momentum and improvement, incremental improvement every single quarter. It's something we've done for just shy of 20 years now. And we'll continue to do. The area you've asked about in terms of cloud standards and compliance and governance and the whole sort of equity suite that comes with that in every different geography in the world. We do believe that that will continue to be a challenge for every SaaS company going forward as there are more companies, more geographies, more legal conditions. And so we have to build a world class engineering organization, and a platform underneath that cloud products that allows us to quickly adapt to that market as it changes that areas changes. And also continue to add the standards that our customers need and ask us to support. We've done that over time, and you continue to see us improving that every single quarter, whether it's data residency in Australia for financial companies, or whether it's BaFin in Germany, we've continued to do that. And we'll continue to do that. We've seen a lot of examples of every time we add support for a different geography or standard, we unlock a portion of our customer base to move to the cloud. It's not a singular unlock. It's a whole series of ingredients, but it just increases the overall momentum of customers to the cloud. But for sure, we continue to work on performance and scale for the larger customers in the cloud. We continue to work on compliance and regulations and standards. And we also continue to work on extensibility, which is equally important. The reason I mentioned that last one is Forge sort of future extensibility standard and technical framework builds things like these compliance and regulatory standards at the core, which is incredibly difficult to do. But we believe in extensibility, for our customers going forward, it's long been a hallmark of Atlassian and I think in a higher compliance environment, that's going to be incredibly important for us going forward in the cloud. And we're seeing that in the adoption of Forge via those enterprise customers in the cloud, where it handles the regulatory standards for them.

Thank you. The next question comes from the line of DJ Hynes with Canaccord. Please ask your question.

Hey, guys, congrats on the continued success here. I have a product question for Mike or Scott, I presume. So there are a handful of visual collaboration tools in the market that are seeing really strong growth. I know you guys recently invested in Miro, what is it about visual collaboration that makes it hard for you to replicate? Like why invest or partner in that space versus doing it on your own?

Yes, I can take that DJ. Look, we believe in having a broad spectrum of opportunities in that, with Atlassian Ventures, we're trying to make sure that we are investing and partnering in high quality enterprise SaaS companies that are partners of Atlassian. You've seen us do that in the past with Zoom and Slack and others, and more recently with Miro across our markets, as well as a whole host of smaller up and coming names. Visual collaboration in general look, it's a very busy category, I would say because it's such a broad option. It used to be called whiteboards, but it's not really a whiteboard. It's a whole series of different things that you can do there. It's a bit like saying as one way to do project management. If you're a five person marketing team, you do project management utterly differently than if you're 5000. Engineers building a bridge. So project management is a very broad term, I would say the same thing for visual collaboration. It's a broad term. I think there are a lot of fantastic products in there. And obviously, we believe in the ones that we use and the ones that we've invested in. But in general, our customer philosophy is being partnered and integrated with all of the best of breed SaaS products that are out there, and allowing our customers to make those choices and just making sure that all the data they have in any Atlassian product is easily connected and integrated with all the data they have in any other product.

Next question comes from the line of Brent Thill with Jefferies. Please go ahead.

Thanks. On Trello, you've been pretty clear over $50 million on the platform yet I think monetization is still low. Can you walk through, how you expect to potentially change that over the next year or maybe not. And for James, Americas at least in our model look like the best quarter in 13 quarters, I know that the comp was little easier but and then stand out there in the Americas that perhaps you haven't seen in past quarters? Thanks.

Brent, I can take the first part on Trello monetization. And so I don't have much new news for you. But I can repeat our stance here. I mean, Trello, we focus first on continuing to grow, demonstrate the size of Trello going after the Fortune 500,000 we think of that very, very large scale. And there's a billion knowledge workers out there trying to do all sorts of different things that Trello is very, very useful for. You've seen us continue to improve the product with views, smartcards to integrate third-party data, as we just talked about, and a whole series of continued product improvements. That said, we've gotten better at monetizing Trello almost every year that we've had it on the platform and continue to do so. But I will say that we put usage before monetization, when it comes to Trello. You see it getting closer to the Atlassian platform in various different ways in terms of the Atlassian account and identity and all sorts of different things. So we are very patient in doing those things correctly. And continue to make Trello a huge product that's beloved by its users. And we put that first. But it's pretty nice business for us and continue investment. James, I will leave you there.

Yes, just follow-up on that. One of the things we've done around Trello pricing has been recently bring in a standard position. And again, this is an example we talked about price increases at different points on this call. So a good example of whether many indication where we are actually lower. Again to stimulate the sort of demand that Mike is referring to. In terms of the Americas result, yes, it was a strong year-over-year growth rate for the Americas. I just point back to one of my earlier comments about obviously data center had very strong growth in the quarter. And we do have this portion of the customer commitment that is taken upfront, in terms of rev rec in the quarter in which the customer signs with us. And of course, the U.S., the Americas, particularly the U.S. is home to a good number of our largest customers. So the certain amount of timing effect there that makes for a very strong Americas year-over-year growth rate.

Thank you. And the next question comes from the line of Gregg Moskowitz of Mizuho. Your line is open.

Okay, thank you. I remember when you launched Atlassian Marketplace that was less than a decade ago, and here we are a $2 billion lifetime sales. It's incredible. My question here is with cloud now comprising nearly half of the apps in the Marketplace and with take rates continuing to be discounted as an additional incentive, are we sort of at a tipping point, in other words, are we at a space where you're seeing app development and app usage really accelerate?

Yes, Scott here. Look we're really proud of the marketplace, I remember, the plane where Mike wrote the original code that went into the marketplace and got us got off the ground. And for us to get from there to $2 billion lifetime sales is amazing. And more importantly, that's $1.5 billion of money that's going back into the ecosystem, right, and we've got such a strong and powerful ecosystem around Atlassian. And we've long for over a decade had goals around the ecosystem outside of the Atlassian to the way larger than Atlassian itself, both in terms of the number of people working on it, and the revenue there. And so, we're really, really proud about kind of the jobs and everything we've been created around Atlassian and how we benefit, all of us benefit from that. In terms of like the cloud and tipping points, obviously, Forge our app development platform in cloud and takes care of a lot of things that developers used to have to do themselves, such as writing their own servers. And now we take care full use of that, that is lower the barrier to entry for new people to build functionality inside of applications. And as we've seen kind of in our server based applications, all of the early adopters of these new technologies are people using internally inside their own companies to integrate with different processes to automate things themselves to build, extra functionality that is unique to that particular company. And that oftentimes leads to people starting our business using those things and making them more generic or things flow to our existing marketplace partners who are building out on the Forge capabilities. So, I think like longer-term, you've seen pressure on our marketplace take rates across kind of, particularly in the consumer side of things has been downward pressure on that, and we get to play that out over the long-term, I would say that we will -- the take rate will be more pressure on the take rates have been historically, but that's also going to lead to a much, much, much larger ecosystem build around Atlassian. We're experimenting and seeing beyond our traditional partners, how we can partner with people, like it, we've made investments into Atlassian Ventures, and overall like the number we focus on is not really our take rate, like that that's nice, but that number we focus on internally is our sort of GMV or so effectively how much money is running through the marketplace, like to our third parties, and that's the number we work internally.

Thank you. And our last question comes from the line of Steve Koenig with SMBC Nikko. Your line is open.

I appreciate it. Most of my questions have been asked, but and actually, let me also congratulate you on the quarter also on the very low employee turnover metrics that we're seeing from LinkedIn, especially in sales. I just think it's remarkable. I guess what I'll ask about that a little bit in the weeds. But you know the price increases happening on February 15, you talked a little bit about the impact that could have on the coming quarter? What kind of customer behavior, could we expect in the subsequent four quarters with respect to like those customers that maybe have renewed early to take advantage of locking in the price? And then, would they be looking to convert to cloud within the next four quarters? Would there be a greater incentive to convert to cloud? How do we think about that? And I guess the larger question here really is we kind of puzzle over your trajectories here, we've talked a bit about data center, and the drivers there, we've talked qualitatively about the drivers in cloud. But we're seeing cloud continue to accelerate here. And just kind of how do we think about that, even if it's qualitative. So that's all and thanks again, and congratulations.

Yes, so thanks for the question. This is Cameron here. So two pieces on this. So every time we do some price changes, obviously, customers have the ability to make a choice. And I was actually just on a call with an executive of a very large pharmaceutical company, just this week, largely talking about his options going forward, which is one, you can renew, that's fine. We'll just, that's an option going forward, renew your data center licenses as we continue to plan for cloud. The second is, we can start planning out a few small cloud projects, maybe for some teams, or we can go all in on cloud and get it all done with it all comes down to what's your prioritization and what is your company's readiness. After a 30 minute conversation, he basically give me the all in on cloud option, like this is fine, we have a cloud mandate, we need to prioritize the work, let's just get it done now. The reality is, that's how we prefer that optionality for our customers, that we're not forcing them down any path, that's what's going to work for them and their projects, and the value that we can deliver. The second big one is even if they renew today, we have plenty of programs and practices in place that two months from now or four months from now, or six months from now, if they want to move to cloud, we will absolutely make them right from a licensing perspective. So by no means do we hold them to a 12 month cycles for these decisions based on efforts, get them cloud licenses, and dip their toe in the cloud. So a lot of this comes down to largely the customers appetite to take on the IT project that is in migration, more than anything. For most of our customers, they are more than ready to go cloud. Almost all of them have the cloud mandates, and just comes down to timing of budgets, prioritization and IT projects.

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

Thanks very much. It is Joey Marincek on for Pat, appreciate the question. Can you just give us some more color on the Percept.AI acquisition and then sort of how you're going about M&A going forward? And then separately, what are you looking for in your next EPS? Thank you so much.

Great, squeezing with three questions at the end. Well done, look let me take Percept.AI first. Fantastic team focused on AI and smarts in specifically in a service management and customer service manner. Again, AI and smarts is relatively domain specific to make a huge impact at the moment. And so I would see this as a part of our continual improvement in the ITSM space, both organic and inorganic, to make sure that we have the best set of ITSM tools around. And also an investment in machine learning and smarts as we keep putting at the core of our platform. I always say that our customers shouldn't need to know that we care about AI and machine learning and smarts, but we bake it deeply into the platform. And this is about continuing to improve that in the area of service management and for IT teams in any service driven enterprise out there. I can pass to Scott on M&A philosophy, if that.

Sounds great, Mark like we're lucky the company, we have a track record of building new products is that our track record of partnering in our ecosystem, which we talked about on the call, long track record of successful M&A, both really small tuck-ins and medium sized companies like Trello, which we brought as an extension and so I don't dwell on all three. Now we'll get acquire over time that the number one thing we will get is out what's rolling machine alignment, so they often miss the potential where everything like that's got to be the most important thing is do they align with our mission. And then they fit culturally with Atlassian. And then everything else after that, you kind of go to market and technology and other things are [Technical Difficulty] there is you evaluate the life of the two, the most important thing and so there's been no change to our M&A philosophy over a long decade on time horizon, we'll continue to look for assets that fit really well alongside Atlassian as well as kind of small tuck-in technology acquisitions that help us where we'll be quicker to acquire something then build it ourselves.

[Technical Difficulty] of Cowen. Sir, your line is open.

Great, thanks James. Question for you on operating margins. You guys are targeting that it's 17% to 18% in Q3 That's down from 26% to 27% in the first half, could you just talk about what's driving that that margin step down where you guys are looking to step up investments and kind of where you see hitting the low watermark and margin starting to rebound? Thanks.

Yes, sure, Derek, we very much feel as though we've been saying this for a while, the company across the three markets that we really want to push to continue to build on the momentum that we're seeing, hiring, bringing excellent talent in wherever they are around the world. I think the team anywhere approach we have is really important in terms of differentiating our ability to attract the best talent, obviously, in a very competitive field. And it's with those additional folks that we'll be able to get after these very significant opportunities that lie right in front of us. And so we're really enthusiastic about that, we're positive about that opportunity and more tactically, if you think about the fact that we're increasingly becoming a cloud company quarter-by-quarter, 53% of revenue is now cloud, that all costs have an impact on gross margins. We've talked about that for a number of years, as we take on the work resources to help our customers make that migration journey very much along the lines of what Cameron was just talking about with the large customer that he was talking with this week, do the migrations work. In terms of operating margin, the significant bulk of the additional investment would be and that in our businesses, really comes down to having Atlassian. And so that's why it's really we describe it in the letter as our top priority. So that's what we'll be focusing just on opportunities across the three markets, that the platform I think is a really important accelerant of our business. You've seen that showing up in our ability to quickly get new products, developed point A, we've talked about those new products under that program will continue to be important. So you will continue to be very focused on the quality of our investing and the returns that all for Atlassian will be strong.

Thank you. I will now turn the call back to Scott. Sir, please go ahead.

I just wanted to thank everyone for joining the call today. And I thank you our customers and to all of the fantastic Atlassian representatives. We appreciate your ongoing support and remain safe and healthy these times. I will see some of you in person and for the rest of you tune in virtually to Team '22 coming up in April. Have a good day.

Thank you. This concludes our today's conference call. Thank you for participating. You may now disconnect.[0