Atlassian Corporation Plc  (NASDAQ: TEAM) Q3 2020 Earnings Call Transcript

Atlassian Corporation Plc  (TEAM) Q3 2020 earnings call dated Apr. 30, 2020

Corporate Participants:

Matt Sonefeldt — Head of Investor Relations

Mike Cannon-Brookes — Co-founder and Chief Executive Officer

Scott Farquhar — Co-founder and Chief Executive Officer

James Beer — Chief Financial Officer

Jay Simons — President

Analysts:

Jack Andrews — Needham & Company — Analyst

Michael Turits — Raymond James — Analyst

Arjun Bhatia — William Blair — Analyst

Rishi Jaluria — D.A. Davidson & Co. — Analyst

Michael Turrin — Wells Fargo — Analyst

Ittai Kidron — Oppenheimer — Analyst

Nikolay Beliov — Bank of America — Analyst

Keith Weiss — Morgan Stanley — Analyst

Heather Bellini — Goldman Sachs — Analyst

Gregg Moskowitz — Mizuho — Analyst

Analyst — — Analyst

Keith Bachman — BMO Capital Markets — Analyst

Ari Terjanian — Cleveland Research. — Analyst

Derrick Wood — Cowen — Analyst

Presentation:

Operator

Good afternoon. Thank you for joining Atlassian’s Earnings Conference call for the Third Quarter of Fiscal 2020. 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 would now hand the conference over to Matt Sonefeldt, Atlassian’s Head of Investor Relations.

Matt Sonefeldt — Head of Investor Relations

Thank you. Good afternoon and welcome to Atlassian third quarter of fiscal 2020 earnings conference call. Thank you for joining and supporting us. 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 President, Jay Simons.

Earlier today we issued a press release and a shareholder letter with our financial results and commentary for our third quarter of fiscal 2020. These items were also posted on the Investor Relations section of Atlassian’s website. On our IR site, we also posted a supplemental presentation and data sheet.

During the call, we’ll make brief opening remarks and then spend the remainder of time on Q&A. Statements made on this call include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management’s beliefs and assumptions only as of the date such statements are made. We disclaim any obligation to update or revise them should they change or seems to be updated.

Further information on these and other factors that could affect the company’s financial results are included in filings we make with the Securities and Exchange Commission from time to time, including in the section titled Risk Factors in our most recent 20-F and quarterly report on Form 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. Reconciliation between IFRS and non-IFRS financial measures is available in our earnings release, our shareholder letter and in our updated investor data sheet on our IR website.

During Q&A, please ask your full question upfront, so that we can more easily move through to the next speaker. Also, please be patient if you encounter any disruption with sounds or logistics given we are individually dialing in from our homes across the world.

With that, I’ll now turn the call over to Mike for opening remarks.

Mike Cannon-Brookes — Co-founder and Chief Executive Officer

Thanks everyone for joining today and for your continued support. We want to start by saying we hope you and your loved ones are safe and healthy. We are in unprecedented times. It’s more important than ever that we embrace our mission to unleash the potential of every team and support our staff, customers, and community. I think hopefully you read in our shareholder letter, we are confronting this crisis head on. Rapid economic change shakes up industry leader boards and we will continue to position Atlassian to drive long-term growth in the coming quarters and years.

We will leverage our resilient culture and the strength of our business model to take share in the massive markets that we serve. Over nearly two decades, we’ve learned to navigate and adapt to macro change. While we plan to play offense in this cycle, we also acknowledge that the macro economy presents some serious headwinds. Yet in Q3, our performance was unscathed. We posted strong results with 33% year-over-year revenue growth, 6,200 net new customer additions, and solid profitability. At the same time the reality of serving over 170,000 customers means we have exposure to the small business economy and COVID impacted industries.

We provided much more detail and many other updates in our shareholder letter that was issued earlier today. We are committed to emerging stronger from this storm and our culture will help us set our direction.

Before we move to questions, we want to thank our employees for demonstrating incredible resilience and adaptability in becoming a fully remote team under pressure. It has been difficult and your hard work has never been more important as we support millions of teams across the world.

With that, I’ll pass the call to the operator for Q&A.

Questions and Answers:

Operator

[Operator Instructions] Your first question is from the line of Michael Turrin with Wells Fargo. Michael your line is open.

Mike Cannon-Brookes — Co-founder and Chief Executive Officer

Clearly everyone is speechless with the results we’ve delivered this quarter. Operator, maybe we will come back to Michael.

Operator

Your next question comes from line of Arjun Bhatia with William Blair. Mr. Bhatia, your line is open. Mr. Bhatia.

And your next question comes from the line of [Indecipherable] your next question comes from the line of Jack Andrews.

Jack Andrews — Needham & Company — Analyst

Hey, good afternoon. Can you hear me okay?

Mike Cannon-Brookes — Co-founder and Chief Executive Officer

We can.

Jack Andrews — Needham & Company — Analyst

Great, Thank you. Thank you for taking the question and glad to hear everyone is doing well in this environment. Yeah, I want to ask something about the something in your shareholder letter, you mentioned that I think 23% of your attendees from your recent Remote Summit came from your business teams, which was essentially double from 2019. I was wondering if you could just talk about what is really accounting for that increase there, whether there is something that’s happening organically or whether you pivoted your marketing message?

And then the second question would just be any early feedback on the new cloud enterprise product. Thank you.

Scott Farquhar — Co-founder and Chief Executive Officer

Okay, I’ll take the first one, I think it’s just an indication of the continued interest and how broad our products can be deployed and the diversity of audiences they serve. I mean, Remote Summit lowered the barrier to entry to summit. So it could be that there’s a lot of interest from line of business. Participants in our product and users of our product, if they don’t want to travel all the way to San Francisco for an event, but we made it far easier for them to join an event and meet — and I think that’s something that we’ll continue to explore going forward. And I think Mike will take the enterprise cloud question?

Mike Cannon-Brookes — Co-founder and Chief Executive Officer

Sure mate. Look cloud enterprise to those who don’t know was our latest addition of our cloud products that was launched at summit a few weeks ago. It’s had been one of our most important and challenging initiatives in R&D over the last few years. It does give us a full ladder now of cloud additions to meet any customer size. If you count three standard premium and now enterprise with of course access for identity and content management across the set that enterprise addition helps us meet the needs of the obviously the largest and most complex enterprises that want unlimited scalability, data residency, the complex security needs that come with that etc. was obviously extremely hard to build to meet those requirements and those requirements are incredibly important for the largest enterprises in the world as they move to the cloud. We obviously had a very good reception to that announcement of the early access program at Summit. We don’t expect it to be a material contributor in FY ’20 or even in FY ’21 as we get those larger customers ramped up, but obviously in the long-term, it’s an incredibly important initiative.

In terms of existing feedback from those large enterprises that have joined the early access program, it’s been very good. Obviously we spent a lot of time with them before that making sure that we were building what it was that they wanted, and it was just a validation that we’re on the right track with that — with that addition.

Operator

And your next question comes from the line of Michael Turits with Raymond James.

Michael Turits — Raymond James — Analyst

Hey, good afternoon everybody. You guided slightly below the Street for next quarter and commented that COVID would impact fourth quarter more than the current quarter, because it is a good quarter. I was wondering if you could speak a little bit more specifically about where COVID and the emerging recession will specifically impact the business? You mentioned SMB for example, you mentioned COVID impacted industries. So I was wondering if you could just talk a little bit more about that calculation. And my follow-up question would be, what you think the impact of all of this will be on the pace of software development projects being rolled out and a developer hiring and how that might impact you guys the next 12 months?

Scott Farquhar — Co-founder and Chief Executive Officer

Michael, it’s Scott here. I will talk to the broader thing and James can talked about the fiscal impact. As you will know, we have 171,000 customers around the world. Everything from Fortune 10 to most of the Fortune 500 and 10s of thousands. We talked about the Fortune 500,000 in our markets that we do and we have no strategic customer concentration. No one customer makes up more than 1% of our revenue. So there is not sort of a specific area there, but of course, as you expect from such a broad market that we’re exposed in the same way that you would be kind of across all the different geographies and industries that we’re in. I do think there is a sort of short-term benefit of people using our products. In terms of the work from home aspect, they are using collaboration tools. More in the short term, I think the long-term aspect is that people are going to work remotely more than they have to-date. That’s going to require more collaboration tools, whether that is collaborating on work product in Confluence, whether that is managing more workflow in Jira versus talking to the person next to them at a desk. So we see that there is some benefits of that are over the long term.

And in terms of price of software development and hiring, I think we are six weeks into this, it will be too hard to talk about that as a broad industry trend. We haven’t seen anything that makes us significantly change what we believe internally about that. James, do you want to talk to any of the sort of specific financial impacts there?

James Beer — Chief Financial Officer

Sure. Thanks, Scott. Yes, as we said pleased that really a negligible impact from COVID related factors in Q3. We have seen some impact in April. And please, the fact that we serve such a highly diverse set of customers, really across all business sizes, geographies, and industries is really one of our major business model advantages and the reality of that is when you’re serving that many customers we are going to have exposure to the small business economy and to those particular sector, so that’s been particularly impacted by COVID now. Of course this is reflected in the guide and yeah, I would particularly emphasize that guide underpins some very beneficial aspects of our revenue model. Recall that over 90% of our revenue comes from existing customers. And indeed, over 85% of our revenue is recurring in nature. So overall, we’re pleased with how the business performed in Q3. We feel like the guide reflects the impact of the coming quarter.

Michael Turits — Raymond James — Analyst

Okay, thanks guys.

Operator

And your next question comes from the line of Arjun Bhatia with William Blair.

Arjun Bhatia — William Blair — Analyst

Hey guys, thanks for taking my question. You mentioned in the shareholder letter that cloud migrations were up 60% this year. How do you think the pace of those migration plays out over the rest of the year given we’re in a bit more of an uncertain environment and maybe IT departments are little busier, just trying to keep the lights on and sort of related to that, we just like to hear some early feedback that you’re hearing from the cloud enterprise program that you launched.

Mike Cannon-Brookes — Co-founder and Chief Executive Officer

Sure, I can certainly take that. Look in terms of migrations, let me start there we continue to monitor obviously how that will be affected. I wouldn’t say we’ve seen much of an effect other than the normal growth in migration so far. It’s probably worth noting the larger you are as a company. It’s obviously a large IT transformation projects, but once you move to the cloud. You have reduced impact in terms of the operational load on your own team. Effectively Atlassian takes care of a lot of things than you would have taken care of yourself. So depending on your increased workload in a COVID environment, it can actually reduce your workload quite significantly as an IT department to let us handle a lot of the bits and pieces, and that obviously as you get smaller down the chain that can be more pronounced. If you are 500 user customer or 100 user customer, so we remain vigilant as to how that will affect the growth we’ve seen in migrations, which has been really good so far. It’s worth noting that has been increased by the release of the Jira Cloud Migration Assistant, which is at all we ship during the last quarter that allows Jira users predominantly, Jira software, but through service desk to pick up and move their data to the cloud much more easily. And so it helps you through a lot of the more complex transition work and that’s obviously increased both the pace and the accuracy of those migrations, which is — which has been really good.

From a cloud enterprise perspective, don’t have a lot of to add to what I’ve said before, obviously the early reaction to the EIP from customers who joint I of joined it has been very good largely along the lines of this is the addition we’re looking for. This checks a lot of the boxes that we made from the highest and most demanding customers with big scale performance and security requirements. We will move into assessment mode and have a look at this and we’re working together with those early access program customers to make sure that cloud enterprise continue to evolve to meet their needs.

Arjun Bhatia — William Blair — Analyst

Perfect. Thank you. And James, a quick follow-up if I may.

James Beer — Chief Financial Officer

Sorry, I lost you there.

Arjun Bhatia — William Blair — Analyst

Can you hear me now?

James Beer — Chief Financial Officer

Yeah, it is crystal clear now.

Arjun Bhatia — William Blair — Analyst

Okay. Sorry about that. Yes, I was asking about, how are you thinking about price increases this year relative to what you planned and whether those plans have changed at all given the increased uncertainty?

James Beer — Chief Financial Officer

Well, as you know, we have a very thoughtful and rigorous process to considering pricing moves and we’ve been doing that for some years now. When you think about what we’ve done in years past, it’s been a balance between lowering prices and in some instances raising prices. And to layer on top of that have as well, it’s important to think about the additions strategy that we’ve been pursuing in recent times. So now with the rollout fully of the free additions of Jira software, Confluence and Jira Service test that complements the standard additions, the premium additions. And as Mike was speaking earlier now beginning to rollout the enterprise additions as well. So the additions represent not the way in which we can be paid for the incremental value that we’re offering a particular customer and our customer is able to align their needs with the right addition and so that will be an ongoing part of our strategy in the years ahead. And then in terms of specific price, we’ll always obviously be thinking through all of the different relevant factors both competitively and relevant to our customers. So we’ll always be looking to find the right balance between being compensated for the value that we offer to our customers, while being cognizant of doing the right thing for our customer set as well. So we’ll keep having that perspective around pricing and we’ll update you in the months ahead.

Arjun Bhatia — William Blair — Analyst

Okay, thank you.

Operator

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

Rishi Jaluria — D.A. Davidson & Co. — Analyst

All right, thanks. That’s a new way to pronounce name. This is Rishi Jaluria from D.A. Davidson. Thanks for taking my questions guys. So two, first, I wanted to — I appreciate the commentary that more resilient model because 90% of revenue comes from existing customers. I just wanted to drill down a little bit more in back, if we were to kind of take a snapshot of any given year, how do we think directionally of new business within a year. How much comes from existing versus new? And following up on that, if you were to think about your penetration within your existing customer base. I’m sure you’re pretty under penetrated right now. But directionally, what do you think that opportunity just within the existing customer side looks like? And then I’ve got a follow-up.

Mike Cannon-Brookes — Co-founder and Chief Executive Officer

Well, certainly we’ve noted that 90% of our activity of our revenue each quarter comes from our current customers. So we tend to add a lot of new customers, each quarter, Q3 was another example of very nice number of additional customers. But those tend to represent a relatively small proportion of the dollars that we generate each quarter. So it’s a very much the bulk of the dollars coming from are expand motion, and of course we have a variety of ways in which to expand, across products, across additions that I was just recurring to in the earlier question, in terms of expanding across a broader part of that customer serving more of the Group’s at that customer and so forth and so we routinely, talk about the fact that we believe we’re early in our work to address these very large markets that we serve. So we continue to be very focused on the long-term opportunity and very confident about our ability to address that real opportunity.

Rishi Jaluria — D.A. Davidson & Co. — Analyst

Okay, great that’s helpful and then just as a follow-up, you did talk a little bit about with the guidance, the SMB side of the equation, but wanted to think about industry exposure right obviously it was very well diversified across industries. But if you were to think about just your exposure, again directionally to some of the more impacted industries like travel, hospitality, retail, energy. Just wondering if you can give us a sense for how that exposure looks? Thanks.

James Beer — Chief Financial Officer

Sure. Again, we really cover all industries, all sizes of companies in all geographies. That’s one of our terrific business model strengths. And so, yes we obviously serve some of the companies like in the travel sector that have been particularly hard hit in the last several weeks, but really the focus of where we’ve seen an impact is on the smaller size company end of the spectrum. In fact it was notable to me how one of the larger, for us deals, of March, I was with an important travel services company. The deal took a few more days to close and actually rolled into the early part of April. But at the end of the day, I was very comfortable with the terms that we settled upon and the customer was very appreciative of the fact that we had worked with them to help them through their particularly difficult time.

On the smaller end of the spectrum, obviously that’s where we have more of our cloud customers. Recall that we had spoken now couple of quarters ago about the trend that we have more than 125,000 cloud customers out of our total of most recent figure at the day reported 171,000. So we do skew in our cloud business to a smaller size of organization. Taking a step back from that more broadly, I’d say we’re holding steady across the enterprise and the large enterprise portions of our business. And on the cloud side going back there for one last thought, I’ve been pleased to gloat, while as they say, there are some customers there who are seeing an impact. I’ve been very pleased by the number of new cloud customers, who have been coming to us, both in the month of March, and thus far in April. In fact, March was the strongest month for Q3 for the addition of new cloud customers and of course that that’s lining up with a month in which we had fully rolled out our free offerings as well. So really quite encouraged by the developments there in terms of continuing to attract new cloud customers.

Rishi Jaluria — D.A. Davidson & Co. — Analyst

That’s really helpful. Thank you.

Operator

Next question is from Michael Turrin with Wells Fargo.

Michael Turrin — Wells Fargo — Analyst

Hey, there. Thanks, good afternoon. I was hoping to hear more about the decision to play offense here in this backdrop, it sounded pretty clear in the letter that you’re planning to keep pace in terms of hiring and play offense here in the coming months. Could you just spend a little more time in terms of what that means from your perspective? Are there any specific areas you see yourself maybe pushing even a bit faster behind? And are any of those impacts showing up here in the free cash flow guide, which saw somewhat of a reduction here as well. Thank you.

Mike Cannon-Brookes — Co-founder and Chief Executive Officer

Sure. Michael, let me take that from the start and Scott or James can jump in. I think we felt it was really important in line with our values. So one of our company’s values is open company no bullshit. We wanted to be very clear with investors and partners about how we were approaching the current environment, which is obviously unusual. No business as usual at the moment. And I think as a company, you have to choose our long-term strategic path with very clear thought as to why one is choosing that path, because this is going to play out over many, many quarters. When we sit down and think about it like — strengths, besides the fact that we are in very large markets. We have a capability to actually gain share through these quarters with turbulence. However they come at us. And we remain in a very adaptable and thoughtful about them. Our culture is extremely strong and adaptable. Obviously our go-to market model, presumably you are all familiar with suits, the flexibility of these type of the type of environments. You don’t have to get on a lot of plans to sell stuff and we have product innovation and we have an extremely strong obviously financial position in terms of generating free cash flow as well as obviously the cash we have on the balance sheet in the business and the stability of our revenue streams. So I think when you put all that together, it’s — hopefully show some of the background why we feel confidence to take that strategy as we sell into the coming quarters and years about how we are planning to approach that and why we have chosen to communicate that. Scott, maybe you want to go into a little bit about the actual effects of what I mean? We lifted [Indecipherable] in light of it.

Scott Farquhar — Co-founder and Chief Executive Officer

Yeah, I will just — I’ll touch on them again. The types of things that we’ve done in the past. And so Mike and I would hopefully consider still fairly young in the business senses, and we have been running last year and since we started in the.com crash in 2001 and we are in the global financial crisis in ’08, ’09 pretty clearly. Some of the things we did back then we’re doing again now is picking up great key hires and talent that’s available and that we could maybe wouldn’t be on the market. So that’s doing well. Customer acquisition we’ve — 12 years ago now we really start to licenses and reduced our products from $1000 down to $10 for many of our products. A few months ago, we launched free and those — and free effectively put that $10 down to zero to aggressively trying to acquire customers and also I think that you increased product innovation, continuing the R&D investments that we are known for and yield great value for our customers and if there’s any opportunistic M&A that turns up, we’re not necessarily going hunting for it. But like this often opportunities in this particular market environment, where you can pick up things that are very attractive. But otherwise again wouldn’t be available. So all those things that we’re considering and we discussing in a weekly basis in terms of how to be more I guess opportunistic in these times. James, can talk to how that flows into free cash flow guidance.

James Beer — Chief Financial Officer

Yeah, on the guide. I would just observe obviously we’ve laid out our revenue guide, the free cash flow guides directionally consistent with that, but then also from a working capital perspective I expect to say that we are working with a small subset of our customers who have requested help in these extremely challenging macro economic times. Now this is relatively small proportion of our total customer base, less than 0.5%, but we feel as though that’s the right thing to do and this is an illustration gain of the long-term orientation that Scott might have been talking about on this call already. Just another illustration of that mindset that will work out well for those companies and well for us.

Michael Turrin — Wells Fargo — Analyst

That’s great color. For me James, much appreciated. Thank you.

Operator

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

Ittai Kidron — Oppenheimer — Analyst

Thanks, good numbers, guys. I guess I wanted to follow up on a couple of things. First of all, with respect to the free cloud additions great to see that out. Maybe you could tell us on how many downloads you already have or any statistics that you can have there that helps us understand uptake, interest — level of interest, conversion rate anything on that front. And I know it’s early, but some color would be there would be appreciated.

And then for James on the perpetual license revenue decline, clearly, I’m assuming this is demand related, but maybe you can help me think about that in the context of how much of that was perhaps customers shifting to cloud versus true reflection of softer business activity and should I assume that also is the main area where, you know with respect to your guidance, that’s where we see most of the weakness near term?

Jay Simons — President

Yes, Mike, I can certainly take the top part of the question. It’s good to see [Indecipherable]. We are pleased — still very early. The results are incredibly encouraging. For history [Phonetic], we started rolling out our free edition back in October in a very limited centers, we told you in the shareholder letter there. So sort of looking at 5% and 10% of [Indecipherable] but the effects were as we are always very thoughtful with. The impacts of changes we make to pricing and try to keep it in the long-term benefit to that. We slowly expanded them. Obviously the COVID in the current process we decided to accelerate that somewhat and rolled it out fully in March, which is now available for Jira Software and Jira Service Desk and Confluence. Obviously that’s alongside fellow and big bucket and other products that already had free editions and that’s a large part of their model already in the cloud. The results of that have been [Indecipherable] encouraging so far. We can take the March, we’ve had 125% uplift in valuations, which is obviously actually a little bit ahead of where we expected, but it is looking really — really positive for that perspective. I will reiterate, it is extremely early. We did that I believe less it is less than four weeks ago now, little over four weeks ago. So you’d expect a part of that and then it’s settled down to number but it’s extremely in a good spot in terms of where we think it should be. And we had seen limited evidence so far, I would say but certainly some evidence that it is helping us get into to even more markets in which users, we would not otherwise have been able to get to, which is our goal of heading towards the Fortune 500,000. So it’s a great step on that — on that particular journey. Just reiterating the long-term to be patient and this is a great step on that journey. James, I don’t know if you want to take any financial impact of that.

James Beer — Chief Financial Officer

Sure. Well, I’ll speak to the license part of the question in particular. First of all, recall that in Q2, so 90 days ago, we reported quite a significant pull forward effect that was driven by the priced increases that we had announced previously. So what we saw in part in Q3 was the effect of having activity that otherwise would have occurred in Q3. Actually get pulled forward into Q2. Now, second point, that’s really important, though, is that and as we’ve been talking about the steam now for a number of quarters is that we’re very much orienting our business towards continuing to grow to subscription revenue businesses the cloud business and the data center business. So you saw subscription revenue growth, which is 7% year-over-year very much subscription. The primary driver of the revenue line for the company now and I would expect that will continue and commensurately you’ll continue to see license moderating over time. In fact recall that the licensed line now is relatively small one. It’s a small component of our overall revenue structure. So this past quarter, the absolute dollar figure is $21 million. So I would continue to expect that we’ll see less licensed activity over time and more subscription revenue growth.

Ittai Kidron — Oppenheimer — Analyst

Very good. Good luck, guys.

James Beer — Chief Financial Officer

Thank you.

Operator

And your next question is in line of Nikolay Beliov from Bank of America.

Nikolay Beliov — Bank of America — Analyst

Hi, this is Nikolay Beliov from Bank of America. Thanks for taking my question. I wanted to double click on the 60% increase in migration from server to cloud. Just wondering how do you measure that? Is that based on users, customer revenue etc. As you saw that uptick this fiscal year, what trend did you see under the cover in terms of customer sizes, moving from server to cloud, did you guys take advantage in more upsell? And lastly on what has been the partner feedback on migration tools they’ve got launched couple of months back as customers move from manual migration to more automated migration, are we talking about significant decrease in the final migration may be from months or weeks? Whatever you saying would love to — get to hear from you guys. Thank you so much.

Scott Farquhar — Co-founder and Chief Executive Officer

So Nikolay I can start off, in fact some of my colleagues will jump in as well. But in terms of your first part of the question, the migration statistics that we mentioned for service cloud activity that sort of an off use accounts. And in terms of customer size that is migrating what we are seeing is that step by step as we continue to add more capability to our cloud products, as we continue to roll out and increase the capability of the different additions that we’ve been talking about on this call. Then we are seeing more larger companies making that move. And I think we’ll continue to see this trend play out that way over the coming years. Mike spoke earlier to the rollout of enterprise additions. So now we are in a position where we can address the needs of any customer size. And I was going to refer to the helpful fullness of those migration tools before you added to your question, I think that has been an important aspect of us continuing down this pathway of making it easier for our customers of all sizes to migrate their part. James, over to you.

James Beer — Chief Financial Officer

Yeah, I’ll just jump on Nikolay with a back part of the question. I mean the migration tool that built both for customers that can migrate with our partner assistance. Also for partners to basically enable a better, more reliable migration and remember like in the partner case, there is a bunch of work that they’re going to do around the migration that doesn’t involve just moving data from server to cloud in many cases, they want to reconsider their workflow, they want to reconsider how their projects are structured. So we’ve taken the work out of basically moving data from point A to point B but in point B they have an opportunity to rethink what they really want to do or how they want to change the product. In many cases the server customers have been using the server product for five or six years and so there may be some calcification that they want to partner to help them move past. And I think you know we’re going to measure that just in terms of velocity over time, by constantly both with the partner and with the customer directly, we want to make sure that that moving is ever, ever easier.

Nikolay Beliov — Bank of America — Analyst

Got it. And just one clarification question, if I might. James, you mentioned, I believe that you saw some COVID impact in the month of April. Can you please give us some color, where in the business you saw that exactly? Thanks so much. That’s it from me.

James Beer — Chief Financial Officer

Yeah, Nikolay nothing really to add to our previous answers. The April impact really in the SMB space with more of an orientation of SMBs to our cloud products and then obviously the most heavily impacted industries in terms of the macro impact from COVID, seeing some factor there, but absent that nothing noticeable to report across industries or across geographies.

Nikolay Beliov — Bank of America — Analyst

Thanks so much.

Operator

And your next question from the line of Keith Weiss with Morgan Stanley.

Keith Weiss — Morgan Stanley — Analyst

Excellent. Thank you guys for taking the question and very nice quarter. I wanted to follow up on, I think this is a question that Mike Turits was trying to ask, maybe a little bit more direct about it, what are the things investors are trying to understand like which solutions do customers buy more strategic and most mission critical and where you are most likely to sustain demand even through difficult times and which ones are perhaps less — or deemed less mission critical? And I think the question we’re trying to ask is like, if we look across the solution portfolio, is there parts of the portfolio that people find to be more mission-critical or you expect demand to sustain better in? Like if we think about Jira Software less mission critical and Jira Service Desk more or is there any way you could kind of help us out in terms of how the customers are thinking about the mission criticality of the suite? Number one.

And number two, for James, on the — I know it’s a very small percentage of customers, but the customers that are asking for help, is the form of the help that you guys are willing to give is that just on payment terms and the like or are you guys actually kind of modifying existing contracts?

Scott Farquhar — Co-founder and Chief Executive Officer

Keith, it is Scott here. I’ll answer the question where our products are most mission critical. Now what we’ve found is that our products because they are workflow products that are embedded into customer’s workflows in almost all the cases of what we do, whether it’s Trello or it’s Confluence or it’s Bitbucket or it’s Confluence for doing collaboration or Jira Service Desk serving a customers, your internal help desk, like all those things are baked into our customer’s workflows. And so we don’t really see them as a discretionary expense that it gets turned off when you want to save money like it is key to people being productive. I mean I think we have an added benefit that we’re a relatively — compared to our peers or competitors and we will be lower cost to provide that outcome. And so we in 2008, we saw some benefit to us because people switch to low cost provider to — provide those things where it may be they had a legacy provider and they wanted to move. Now, so that’s the way I think about it, there is not an area where I would say we are particularly strong or weak there. Obviously in our customer base, that is more embedded we are in our customers, the stickier we are. And so to the extent that more — to able to customize our products more, which we’d say probably a medium or larger sized customers has customized products more and where people use our third-party marketplace. So if two companies look alike, I’d say the ones that are customized it more and have used more third-parties we know are stickier in the numbers. James, do you want to talk the next part.

James Beer — Chief Financial Officer

Yeah, sure. The bulk of where we are working with our customers are really around payment terms and I’d note that those changes to our arrangements that are temporary in nature and that’s quite clear in our dialog with those customers.

Keith Weiss — Morgan Stanley — Analyst

Excellent. Super, helpful. Thank you, guys.

Operator

And your next question from the line of Heather Bellini with Goldman Sachs.

Heather Bellini — Goldman Sachs — Analyst

Great, thank you so much. I just had a couple of follow-ups. And thank you. And the shareholder letter was longer this quarter, but it was very helpful. My two questions relate to a little bit, just looking at what you said about April, are you assuming that spending levels from those affected companies and industries stay same? In your assumptions, are you expecting business to actually get better for those affected companies and industries in May and June?

And then my follow-up is just, again, you also highlighted 90% of your revenue comes from existing customers, from the industries that aren’t impacted what assumptions are you making about net expansions, if you will versus prior periods for June. Thank you.

James Beer — Chief Financial Officer

Okay. Heather, I’ll take that one. So in terms of the guidance that we’ve offered, a few thoughts. First of all, I’d say is that the philosophy that we brought setting the guidance in terms of setting the range pleasing the range is quite consistent with what we have done historically, we have laid out a broader revenue range, clearly with this macro economic uncertainty there is a greater potential variability in our results and it’s certainly challenging to accurately estimate the current environment impacts across such a large customer base. So we have looked carefully at our experience in April and considered that and our various lead indicators and [Technical Issues] of the balance of the quarter. So hopefully that’s helpful to that part of the question.

In terms of around the 90% or so of our revenue that comes from our existing customers. Yeah, I wouldn’t add anything other than obviously we factor in what we’ve been seeing in the last few weeks and again think specifically about the relevant forward looking indicators for that type of element of the year overall revenue structure.

Heather Bellini — Goldman Sachs — Analyst

Great, thank you, James.

Operator

And your next question in the line of Gregg Moskowitz with Mizuho.

Gregg Moskowitz — Mizuho — Analyst

Okay. Thanks, Gregg Moskowitz with Mizuho. Hi guys. I guess my first question, in the shareholder letter, you mentioned that you have over 150,000 organizations on starter licenses or subscription, and clearly it’s a very large number. However, there were over 175,000 starter accounts a year ago. And just given your very strong top of funnel, I’m wondering why that has declined. In other words, have you converted a lot of these to paid accounts or are there are a bunch of them that are just gone away for one reason or another? Hello?

Scott Farquhar — Co-founder and Chief Executive Officer

Hi Gregg. I think Jay why don’t you take that one?

Jay Simons — President

Hey, Greg. So I think the natural trend is just to shift to cloud remember like starter license largely talks about the server 10 years or license for $10. And increasingly, the more attractive value proposition even at the pre-free price was to move to cloud, and that was like the macro trend, people aren’t going to install a piece of software, if you can get it — get it for effectively equivalent price of running the cloud. So that’s been putting some pressure and then free is far more attractive place to start on any Atlassian product and so that’s sort of the — I think the macro effect here on the server starter license.

Gregg Moskowitz — Mizuho — Analyst

Right, okay. Thanks, Jay. And then just as a follow-up, curious about what kind of demand you saw in the quarter for data center subscriptions as well as your premium SKU? Thanks.

Jay Simons — President

We were pleased with both. I think James mentioned this, but largely the enterprise segment, both just in terms of how we performed in the quarter and then the overall pipeline and traction that we saw through the quarter and headed into this one with positive, both across data center but directly in with our indirect global channel. [Technical Issues]

Gregg Moskowitz — Mizuho — Analyst

Great. Thanks.

Operator

And your next quarter [Technical Issues]

Analyst — — Analyst

Thank you again for squeezing me in. First of all, congrats to Jay given his last quarter and wanted to ask maybe a couple of questions, one was you know now with the release of the Atlassian Cloud Enterprise, could you maybe talk about the investment in enterprise advocates, I know you guys have a viral go to market motion. But the enterprise advocates have been helping in terms of fishing at Atlassian as solution set. So what about the investment in that team going forward? And then the second one of the M&A front, I know you guys mentioned that you would be more offensive there sort of anything in your portfolio that’s lacking right now or how would you think about the strategy going forward? Thank you.

Jay Simons — President

Yeah, I’ll take the first one. So we’ll continue to invest in enterprise advocates as we the support the data center upgrade motion in server both the migration motion from server to enterprise cloud and the upgrade notion from standard cloud to enterprise cloud is really similar. And so I think we’ll [Technical Issues] continue to expand that team to serve the opportunity that enterprise cloud presents both for existing server customers and moving in for big enterprise customers that are growing. the number that we, a lot of, we get a lot of leverage in the enterprise advocate group, both from our indirect channel that we, it is pretty large and deeply connected to our products, our customers and market and we work hand in hand with them on that bigger enterprise upgrade motion and selling motion. So we get leverage there, which is why the enterprise advocate group can grow modestly over time and we get a lot of leverage as from the flywheel we’re landing inside of these biggest customers with the high velocity starting point that I think we’re really well known for. And then we can use that as a more efficient leverage point to grow customers both as we have in data center and it certainly up the stack in cloud to enterprise cloud. I’ll hand it over to Mike, on the M&A question or Scott, on the M&A question.

Scott Farquhar — Co-founder and Chief Executive Officer

Yeah, I’ll go. May, again, I’m really proud of how we’ve done that. You can build products, you can partner, you can have the marketplace, you can acquire. And I think Atlassian was a companies that have done all of those very successfully over almost 20 years there. And when we look at acquisitions, the things we always look for is, firstly, are they aligned with our mission to unleash the potential of every team. Do they help us get to our goal of 100 million active users? Do they fit with the values of our company? Do they fit with our business model and then the sort of long tail of other things we really look for and I think we’ve been very successful with that approach and a measured approach of making sure that we bring on the companies that are really great fit for Atlassian. As Mike and being the biggest shareholders of Atlassian, we are aligned with all of you on this call and all of the shareholders listening in terms of being good stewards of capital and making sure that we invest wisely to get the returns that all of us would want.

Analyst — — Analyst

That’s great. Thank you.

Operator

And your next question in the line of Keith Bachman with Bank of Montreal.

Keith Bachman — BMO Capital Markets — Analyst

Hi, thank you very much. I wanted to ask two questions. The first one is on mix and the second is on COVID. The mix next question is probably for James, to build on something that was asked before, but Perpetual was down year-over-year and you indicated you had some pull-ins, it’s actually hasn’t been down previously despite some pricing changes. And so as when look out, you said growth would moderate, would it still be you think a positive numbers as we look out over the next couple of quarters? And the related part of that is on the maintenance side, maintenance has been steady at 20%, 21% growth for some time. If perpetual wanes should we start to think about the maintenance side also perhaps slowing. I would think that would be a long process, but I just want to hear a little bit about that? And then I’ll ask my COVID question as a follow-up?

James Beer — Chief Financial Officer

Sure. So in the perpetual license line. Yes, we have been seeing those pull forward effects in to Q2 from Q3. And I would expect other of upcoming quarters, the next couple of quarters for example, to see similar types of pull forward effects when we record those results. So that will drive the dynamic of whether it’s a lower percentage growth or whether it is in fact a strengthening of the absolute dollar figure. Again the dollar figure is a relatively small one at this point in time because so much of the new activity is taken by our customers going straight to one or more of our cloud services. Now also in terms of the maintenance line, clearly we have spoken a great deal about our efforts to migrate customers from server over to cloud, and indeed some of our server customers migrate up to data center as well. So as that continues to happen and continues to build over time, then yes, there’ll be fewer customers executing their renewal of their server contracts instead there’ll be taking on data center or cloud contracts. And so, yes, you would see that effect the maintenance line over time. But I think you’re right in characterizing that as a more gradual effect than that that you see in the license line because the license line reflects brand new activity ease up a new company coming in to buy server products or it could reflect a current customer buying additional licenses more uses for their current licenses that sort of thing. And so I would expect you to see the draw down most pronounced on the license line, but also a similar effect over time on the maintenance line.

Keith Bachman — BMO Capital Markets — Analyst

Okay, great. That’s very helpful. And then Jay, maybe in the spirit of this is your last call, I will direct this one to you, when do you think about or talk about COVID and the interactions with the customers, is there any sense about you could give us some of the dollar exposure to SMB, in other words, is that X percent of your revenues? And b, when you say that you’re having some impact, what’s the behavior there, is it less upsell? Is it not renewing the monthlies? Is there any feedback you can give on what that means in terms of behavior when you say you’re being impact? And all the best in your future endeavors.

Jay Simons — President

Thanks, Keith. I’ll start and James, you may want to tackle. I think we’ve addressed this a bunch over the course of the call. We’ve seen largely the impact that we’ve seen has been from the small to medium business segment in cloud. We saw that in March and continue a little bit in April. And mostly that is around customers either not expanding at the rate that we wanted them to or in some cases, reducing their license counts because they reduced the size of their employee population. We’re happy on the cost side by the way, we’re also happy with the rate of new cost-per-acquisition has been where we want it to be. And so I think that’s a good positive signal. And then as I mentioned, the enterprise segment, which is a growing proportion of our business remains healthy both just in terms of what we did in the quarter and pipeline that we’re building. And James, you may want to talk on some color as well.

James Beer — Chief Financial Officer

No, I think you covered it Jay.

Keith Bachman — BMO Capital Markets — Analyst

All right. Thanks, Jay.

Jay Simons — President

Thanks Keith.

Operator

And your next question is in line of Ari Terjanian with Cleveland Research.

Ari Terjanian — Cleveland Research. — Analyst

Thank you so much for having me on the call. Congrats on the results. Two questions. First, if you could just give a little bit [Technical Issues] shareholder letter, but and tie it to our collaboration any more examples of how customers may be using your tools and solutions to help address COVID. I think you guys will make more templates, more kind of pre-packaged applications to help. And then second, you talked about take up of the leader board, are there any areas where you see potential for the greatest share gains over the next six months to 12 months across your portfolio? Thank you.

Mike Cannon-Brookes — Co-founder and Chief Executive Officer

Let me take the first one. Scott mentioned a bunch of these cases. I mean we’ve become a way to coordinate project activity content. You know in the case of COVID, where everybody has gone remote, I think our products become pretty critical as a way to connect people to what they’re trying to do. And so I think there was a bunch of great used cases highlighted in the document even when you think about something as maybe that seems a little mundane as how do we get people back into our offices. I mean that is a fairly — can be fairly complicated amount of work with a whole bunch of considerations as we emerge from this and maybe people go back into an office into work and maybe we got to do things like get on an elevator, you have to consider like how desks get spaced out differently that involves the ton of human coordination and action. And that’s typically where our products get brought into help customers and help things. And maybe, who will take on the second part?

James Beer — Chief Financial Officer

Yeah, I can certainly be the second part of that. Look, the question is where do we expect share gains etc. All of the markets we operate in, whether you look at agile and devops and the software teams market, whether you look at IT and the broader sort of ITSM enterprise service management spaces or whether you just look at collaborative work management tools where the teams remote or not remote, people are going to change their work styles as a result of this. So I would say also three of our major markets, we have very small shares and all three of the markets are growing by themselves. So we expect there to be a lot of opportunities to look there. Scott mentioned talent, it’s quite likely that this is a period over the next couple of years where there is a higher availability of talent in different markets that we operate in geographically. That’s very important for us and I think what’s important is to see us just constantly optimizing our business. Again as Scott mentioned a little bit 2008-2009, when we [Technical Issues] a decade of growth across [Technical Issues] brought in tens of thousands of businesses to the Atlassian experience, but overtime grew up into different parts of our world and those are the company [Technical Issues] data center or evaluating cloud premium or cloud enterprise. So when we talk about playing a long-term [Indecipherable] that’s exactly what we have been doing. We believe this can have an opportunity in three very large markets [Technical Issues] that continued to make moves to try to it’s the opportunistic where we see that. We have seen that in Trello already, we’ve seen that in hiring. We’ll continue to evaluate acquisition opportunities as we look through that, but we’re very positive about what that means for us going forward.

Ari Terjanian — Cleveland Research. — Analyst

Great, thank you so much.

Operator

[Technical Issues] KeyBanc.

Analyst — — Analyst

[Technical Issues] for Alex. Thanks for taking the question. I just want to get a better sense of how your partners and sales teams are adjusting to work from home initiatives and [Technical Issues] expansion within your largest customers. And secondly, I want to get a better understanding of I think you mentioned that you’re looking to hire more people and focus more on the R&D side, but where the biggest opportunities for investment in the product and R&D teams now? Thank you.

Jay Simons — President

[Technical Issues] teams and so you not there working largely either from [Technical Issues] offices, engaging with the customer. So I think that hasn’t really changed. Partners are in market with customers and so I think there is an impact there for partners that can meet with customers, but we’ve been working over the past 10 years to help digitize like our solution partners, and so the way that we market and co-market with them, the way that we help generate demand in market combined both offline, which may have a little bit of a pause until you then get back to a different — the old normal, but [Technical Issues] online digital demand capability that we present, which is just in terms of building pipeline in and serve customers they don’t anticipate that we’ll have too much of an impact.

Mike Cannon-Brookes — Co-founder and Chief Executive Officer

And if I could just briefly in delve on that subject on that, Jay just to support that. I’ve been pleased with, as I said earlier, we’ve been tracking very closely all aspects of our financials in April and partner performance has been [Technical Issues] [Speech Overlap] second part of that in R&D, look, we still believe we have a massive number of opportunities to invest in R&D. Like Trello and until they’re taking advantage of the changing work style [Technical Issues] as more companies are working from home, tools like that are obviously becoming more valuable. Confluence pricing, obviously in the product set there is a lot of opportunities. Secondly, we’re in the midst of a decade long transition to [Technical Issues] that’s not a simple exercise, it’s going to be even though we’ve shown really good progress so far on you’ve seen lots of examples of that. You know the new [Indecipherable] better rolling out in Confluence, which is a huge change as well as lot of change in identity [Technical Issues] And then thirdly, would be in the enterprise segment. We’ve talked about cloud enterprise [Technical Issues] excess program is new [Technical Issues] actual and calculated changes in how we operate our products to meet the demands of our largest customers and scale. [Technical Issues] R&D investment and requires large-scale changes in our infrastructure and how we deploy products, how we work with data residency, how we work with security, how we work with our companies our networks etc. and still provide the flexible cloud products that we do. [Technical Issues] continue to invest largely all across the board [Technical Issues] for example is very well we are investing.

Analyst — — Analyst

Yeah, very helpful. Thanks guys.

Operator

Your next question in line of Derrick Wood with Cowen.

Derrick Wood — Cowen — Analyst

With respect to guidance, [Technical Issues] if I look at the midpoint, it’s high sequentially down revenue for Q4. And I guess [Technical Issues] bigger levers and driving that is an increase in dollar churn or should we think maybe there is or perhaps an acceleration of on-prem [Technical Issues] some color there and then I’ve got a follow-up.

Scott Farquhar — Co-founder and Chief Executive Officer

Really three different thoughts. First of all recall my earlier comments about [Technical Issues]. So, we benefited from in a pull forward effect [Technical Issues] that’s drawing from both Q3, Q4, two quarters of fiscal ’21. So I think that’s important to bear in mind. Yes, we have fully rolled out free [Technical Issues] as the default option for our entry level customers. So yeah, I would say that the effect, there is quite modest. We get to the impacts that we thought would occur from free during the year and it was one of the three components of a one point headwind to revenue growth. And I feel so we’re tracking well to that and then obviously we’ve been talking about the impacts of COVID generating the macro economic sort of circumstances that are impacting some of our SMB cloud customers in particular.

Derrick Wood — Cowen — Analyst

Okay. I guess the broader question then I would imagine there’s a lot of people that are looking for cost optimization right now maybe that gives you a window to attract more IT people to your platform. You’ve got low cost particularly around Jira Service Desk. So can you talk about maybe some new initiatives you guys are thinking about doing the target, the IT buyer more aggressively in this environment?

Mike Cannon-Brookes — Co-founder and Chief Executive Officer

Yeah, I mean, Derrick — it is an ongoing focus for us. IT is as we’ve talked about as an increase in place that we can land with JSD. And to your point, that we agree, we are I think a value choice and a high product quality choice. And that combination I think sets us up well in this environment. We will continue to talk about the IT service management and IT kind of broad collaboration service collaboration areas that we focus on both across JSD and with [Indecipherable] and with Confluence and Trello, I mean there is we’ve got I think a really rich portfolio that we can talk to IT about both to help serve the problems that they’re trying to solve internally for themselves, but more importantly for the problems that they are in charge of for their companies.

Derrick Wood — Cowen — Analyst

Thank you.

Operator

And I will now turn the call back over to Scott Farquhar for closing remarks.

Scott Farquhar — Co-founder and Chief Executive Officer

Thank you, everyone for joining our call today. We appreciate your ongoing support and we hope that you and your loved ones remain safe and healthy. Thank you.

Operator

[Operator Closing Remarks]