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's 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 Relations section of Atlassian's 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 the 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 have taken the time to read the shareholder letter. This quarter, we focused on three themes tied to Atlassian's long-term focus. First, 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 total addressable markets through products like Jira Service Management, which launched in Q2. And third, we will continue to use the cloud to deliver innovation to customers small and large in our ultimate goal to serve the Fortune 500,000. Our business results reflect steady execution against our goals. In Q2, we generated $501 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 our 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 next speaker.

Your first question comes from Alex Kurtz with KeyBanc Capital Markets. Your line is open.

Yeah. 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 certain verticals that stood out? Just a little bit of context around that?

Great question. Well, 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 in Q1, and of course, 11,500 now, and it's not a number we guide towards or really manage into at Atlassian. It's always been a pretty small driver of immediate revenue being the smallest of our customers. What's changed this quarter are a lot of the funnel changes we've made around free trials and monetization. We're really proud of what we've achieved, and it's put us in a strong position for long-term growth. We do have a larger mix with smaller customers this quarter than we've had before, which I think is a great testament to how much demand there is for our products. However, I hesitate 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 churned in the first half of 2020, and they're back? I don't know if you categorize them differently if they didn’t churn?

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

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 across the board, from small and medium-sized businesses through to the largest corporations and governments. We are pleased by that churn, as Scott was saying that they've improved nicely over recent quarters. You are right; we did see some challenges back in Q4 of fiscal 2020. However, as we've seen our churn improve and our customer count go up in this past Q2, we have really seen those improvements across all verticals and customer sizes that we serve. We are pleased with all of these themes.

Thank you.

Your next question comes from the line of Keith Weiss with Morgan Stanley. Your line is open.

Thank you guys for taking the question and nice quarter. If I could squeeze in two questions. First, just on the overall spending environment, if you have an idea of where we are on that recovery. You talked about improving renewal rates that seem to be getting better, but just your take on the situation. Second, regarding the ITSM product, now that we've integrated Mindville, is that enabling the solution to go further up market? Have you seen any evidence of that traction yet?

Okay, Keith, it's Mike here. Let me address that, and James can provide some insight on the spending environment, and then I can return to the ITSM topic.

On the spending environment, obviously, we are pleased with what we see as nice gradual improvements. Now it's hard to parse that out because I feel as though our products are serving many critical needs of our customers. There's an increasing movement towards agile frameworks. The work-from-home process is now a normal part of business life and our tools help support that. We are pleased with the themes we've seen in the last year and recent weeks and months.

Regarding the ITSM question, as you mentioned, Jira Service Management launched about a quarter ago now, and we've been very pleased with the results so far, including customer reaction, customer adoption, and the acceleration of purchasing interest. The integration of Mindville allows us to have a deeper ITSM offering, as we are able to address a wide range of needs for our customers, from small to large enterprises.

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, and large have transitioned? And then second, how would you think about churn in this group? I'm sure a lot of people are probably not that happy about, while recognizing and appreciating the benefits of the cloud and the capabilities that come along with that pricing could be materially different, especially for a large customer. So, help me think about how you would think about churn in this transition over the next couple of years?

Thanks for that good question. Firstly, just to remind everyone we have 30,000 server customers, and they will move over a multi-year period with the end-of-life of the server product. Our customers have three years to make a decision to move across before they hit our end-of-maintenance period. It's very early in the process. Our internal metrics indicate that we're doing exactly what we said we would do, with a new high in customers moving across this quarter. The majority of our new customers today choose the cloud, with over 95% of new customers opting for it. So we are very happy with these leading indicators. As for churn, I believe our larger customers have plans to migrate to the cloud, which saves them money and hassle whilst providing higher reliability.

Just to add to that, at Investor Day in November, we stated our expectation that around half of our 30,000 server customers would migrate in FY 2023 and beyond. Indeed, for our medium or larger customers, we would expect that ratio to be about two-thirds migrating in FY 2023 and beyond. 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. You've talked about how it gets collapsed all the way through fiscal 3Q next year. Do you suspect upgrade activity is going to be robust in the same way that perpetual license sales in this quarter were robust just because we're heading into a deadline of expiration? And many are going likely to upgrade in the near term to give them more time to complete the transition to the cloud?

Let me take that one. In terms of license revenue, yes, we have both new licensing activity and upgrade licensing activity. Just to remind everyone, we’ll be curtailing new license sales in a few days' time, February the 2nd. We will continue to allow customers to upgrade their licenses for another year. In Q2, we did see more upgrading and new activity than we were previously forecasting. As we've almost finished a month of Q3, that type of activity has continued into Q3. We expect that to mean less activity downstream but anticipate some upgrade activity over the next year. However, it's difficult to determine the scopes of this pull-forward activity on the upgrade side.

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 line is open.

Hey, there. Thank you. First off, congrats to Mike and Jazz on that 10 game win streak. It's impressive. James, maybe one on margin. You've consistently noted that 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 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.

A couple of thoughts here. First of all, we've been investing purposely, and that continues. You saw strong headcount growth in the last quarter, good execution by our teams in that regard. We see significant opportunities ahead of us and wanted to capitalize on those. Scott and Mike's experiences back through 2008, 2009 during the macroeconomic downturn suggest it's right to invest through tough periods, and that's exactly what we're doing again. We've also noted some short-term revenue headwinds, such as the introduction of free editions and fewer pricing actions on the cloud side of our business this year versus earlier years. While the impact of COVID is decreasing nicely, we expect the server business lines, the license line, and the maintenance line to continue to contract in terms of their rates of change. We have also offered substantial loyalty discounts to encourage larger customers to migrate to the cloud, which brings about some transitory headwinds. So while we have seasonal factors to consider, we have taken all those factors into account in the Q3 margin guidance.

I appreciate all the detail. Thank you.

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

Hey, guys. Thanks for taking the questions. One of the things that stuck out to me in the shareholder letter was the cloud enterprise adoption is coming in ahead of expectations. I was hoping you could unpack that a little. Is that migration that's driving that, or are customers naturally upgrading once they've started using your cloud solutions for Jira and Confluence and JSM? Also, 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?

On the enterprise side, we have two phenomena happening, so I’m not sure which you're asking about. With our general enterprise customer base, we are pleased with our continued cloud adoption across all editions. Over the last three years, we’ve made significant improvements related to access, performance, reliability, and compliance standards, which have led to better traction with large enterprise customers. Secondly, we did GA our enterprise edition so customers can segment their business as they often need to do. Again, it’s very early days, and I don't see any immediate changes in terms of forecasts. Regarding R&D, we're hiring across the board and aim to continue investing in product management, engineering, design, and all engineering functions.

Perfect. Thank you very much.

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

Thanks. On the enterprise cloud, Scott, you noted higher than expected initial demand for Jira software, Confluence and Jira Service Management. Can you provide more color on customer feedback you’re getting? Is this dynamic enough to potentially change the timetable for large customer migrations?

Thanks, Robert. We have seen demand higher than we initially thought, but it’s still very early days in terms of demand for larger customers. At this stage, there is nothing that suggests a change to our forecasts; things are playing out as we expected in terms of migrations.

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 if outlining those plans and implementing them has caused any change in terms of how data center customers think about moving to cloud.

The migration to cloud, whether it’s from server or data center, most of our customers have already made plans to move to the cloud. Where there is hesitation, it’s usually because of specific compliance requirements or waiting for us to meet certain needs. The overwhelming demand is there, as many of them realize the benefits of the cloud, like higher reliability and lower ongoing costs.

In terms of gross margin impacts, we would expect, particularly as the largest server and data center customers migrate to the cloud, to see increased hosting costs. While I’m pleased with how gross margin has stayed level, we do expect some downward pressure on margins as we continue with cloud migrations.

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 compared to prior years? And just, out of curiosity for Scott, how was the momentum for data center subscriptions this quarter? Thank you.

In terms of maintenance pull-forward activity in Q2, I would describe that as quite modest. Last year, that was a much larger effect compared to the previous year. I would expect more maintenance revenue pull-forward activity in Q3 and into the month of January, but it appears some of that upgrade activity has been pulled in advance of the impending pricing increases.

In terms of data center demand, it was a relatively strong quarter overall. Particularly in Europe, there is encouragement from partners to customers to move to the data center ahead of these price increases. Cloud business remains 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. 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 confidence in the economics of those customers, right? Is it just a lower tack or are you seeing expansion activity that's outperforming your expectations? Any color there would be helpful.

We study very closely each cohort of free customers that join us monthly, tracking their progression, whether they add to the user accounts beyond the free limit or switch to a paid version before they do that. The trend lines are clear, and that gives us confidence about this initiative. I believe in a long-term viewpoint, we are taking a short-term headwind for long-term benefits.

I just want to add a couple of small points. We've had a lot of questions on free. I would think of free as much more of a long-term investment that builds a big base of small customers that will mature over the years. Our focus is on active usage, ensuring that customers receive value from their free editions.

Yeah. That makes perfect sense. Thank you.

Your next question comes from the line of Derrick Wood with Cowen and Company. Your line is open.

Thank you for taking my questions. My first question is regarding the revenue applications when customers transition from server to cloud. I understand that small customers may experience a slight decline in revenue capture, while the mid-market could see some improvement. Do you have any early insights on revenue conversion, including the opportunities for upselling and cross-selling during this migration? My second question is about ThoughtWorks and their 8,000 users on Trello. Is this one of your largest customers in terms of user counts? Can you explain why they chose your solution over others?

In terms of revenue results from the server to cloud migrations, this is tracking along with our expectations. Small customers may see initial headwinds while mid-market customers may experience modest tailwinds. Overall, I wouldn't describe it as a material driver of revenue in Q2.

Trello continues to be early in its monetization journey. The user base for Trello recently reached over 50 million accounts. While the 8,000 users is a good win for us, it's not sizable in comparison. Companies like ThoughtWorks value Trello's flexibility and adaptability to handle various workloads across the organization.

Great. Helpful color. Thanks.

Your next question comes from the line of Rob Oliver with Baird. Your line is open.

Thank you for taking my question. Happy New Year to everyone. My question is about Jira Service Management, followed by a quick follow-up. As you observe customers migrating from Jira Service Desk to Jira Service Management in the cloud, this product seems to address more areas within the IT department, including Agile, DevOps, and ITSM work management. Can you provide any insight into the expansion you're witnessing as users make this transition? Additionally, I have a quick question for James regarding the partner network. You are accustomed to a light-touch selling approach, but many of your partners are not. How are your partners adjusting to the current environment?

On ITSM, it’s too early to see massive differences with JSD as the product is newer. We are ambitious regarding seat expansion whether it's small or large customers going from 50 to 80 seats or 10,000 to 15,000 seats. JSM gives us the possibility to achieve that expansion. Also, a lot of ongoing improvements are in the pipeline.

Regarding our partners, we incentivize our network with margins and provide training to direct them towards our cloud offerings. Our partner network is immense, and they play a crucial role in the migration to cloud.

Thanks a lot, guys.

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

Hey, thanks for taking my questions. It's great to see the ongoing improvement in business momentum. I have two quick questions. First, regarding the server customers, I find it surprising that you don't expect a significant portion of mid to large customers to migrate until fiscal year 2023 and beyond, especially considering the incentives in place. What kind of pushback are you seeing from customers regarding the migration? Is it due to the investment needed, insufficient incentives, pricing concerns, or just inertia? Secondly, could you provide an update on the cloud net expansion rates? At the Analyst Day, you mentioned a 121% cloud net expansion rate and 130% for medium and large customers. How have those numbers been trending?

In terms of large customers migrating from server to cloud, it's primarily due to the mission-critical nature of these applications. Companies don't want to rush. They need to plan and budget while minimizing downtime for their employees. Thus, inertia plays a big role. Additionally, we continue to work on compliance and certifications. As for cloud net expansion rates, you can expect that we will periodically update those statistics.

Great. Thank you.

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 on the nice quarter. Just two quick questions. Firstly, did the server to cloud migration impact billings or revenue? And secondly, regarding the momentum you've seen from the free cloud versions, last quarter, you spoke of a 175% increase; has that momentum continued?

In terms of server to cloud migration impact on billings, I wouldn't describe it as material in Q2. Regarding free versions, we are pleased with our progress but won’t speak to specifics beyond what we've shared earlier.

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 on Align. You previously mentioned that Align is one of your fastest-growing revenue products. I was curious where the growth is coming from and how it’s growing through organic means or cross-selling.

Align is primarily sold to our existing customers. It helps scale Agile processes throughout the organization, which is why we see strong customer adoption among those seeking to transform digitally. It's an upsell to our existing customer base, enhancing the digital transformation journey.

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. Throughout the pandemic, we've seen employees adopting new ways of communicating with their teams. Have you seen any acceleration in the adoption of Atlassian products from non-technical users compared to prior years? How are you viewing competition in the non-technical world?

As more people work from home and change work habits, we see increased activity in our products. While it's not a step change, it's a steady improvement as customers use our tools more frequently. The competition in the work management space is fierce, but we are confident in our capabilities and momentum.

Got it. Thank you.

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

Great. Thank you. So, in August, you announced that employees could work from home permanently, and I know your solutions help with that. But I've found that full-day Zoom meetings are exhausting. How has your thinking on that topic evolved over the last six months?

We call it Team Anywhere, allowing our employees to work from wherever they want. While it provides more flexibility and taps into diverse talent, the nature of remote work during a pandemic is different from what life will be like once we return to normal. We need to continually adapt our policies and listen to our employees' feedback.

Great. Thanks for that perspective.

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

Thank you very much for taking my question. I'm curious about your perspective on how businesses are planning for their remote work, what companies are looking for in software to support Agile work cycles in remote environments.

We’ve seen many companies embrace digital tools long before the pandemic, and the pandemic has simply accelerated the need. Organizations value asynchronous communication tools to facilitate collaboration. Our products like Jira and Confluence provide the infrastructure customers need to adapt to a hybrid work environment, and we're continuously enhancing them.

Thank you.

Your next question comes from 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 a couple of months ago, you talked about strength in large deals. I was wondering if you could double click on that and how recent performance has been there in this quarter. Also, what would you say is the biggest surprise you’ve seen in customer behavior since the October announcement of server end-of-sale?

We continue to execute on our substantial growth in large deals, consistent with the trends we discussed at the Analyst Day. Regarding customer behavior post server EOL announcement, our team's preparation has really paid off, and customers are thoughtfully considering their options as planned.

Indeed, we aim for long-term growth, focusing on improving our product offerings and maintaining strong relationships with our customers. This strategic approach helps us navigate through changes in the market effectively.

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 your thoughtful questions. I hope you and your families stay safe during this challenging time. We look forward to talking to you next quarter. And a reminder that Team 21, our annual conference, is just before the next earnings call. Thank you very much for being here. Hope you have a great weekend.

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