Atlassian Corporation Plc (TEAM) Q2 2021 Earnings Call Transcript

Atlassian Corporation Plc (NASDAQ: TEAM) Q2 2021 earnings call dated
Jan. 28, 2021

Corporate Participants:

Matt Sonefeldt — Vice President, Investor Relations

Scott Farquhar — Co-Founder and Chief Executive Officer

James Beer — Chief Financial Officer

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

Analysts:

Alex Kurtz — KeyBanc Capital Markets — Analyst

Keith Weiss — Morgan Stanley — Analyst

Ittai Kidron — Oppenheimer — Analyst

Michael Turrin — Wells Fargo Securities — Analyst

Arjun Bhatia — William Blair — Analyst

Robert Majek — Raymond James — Analyst

Walter Pritchard — Citigroup — Analyst

Gregg Moskowitz — Mizuho Securities — Analyst

DJ Hynes — Canaccord — Analyst

Derrick Wood — Cowen and Company — Analyst

Rob Oliver — Baird — Analyst

Rishi Jaluria — D.A. Davidson — Analyst

Luv Sodha — Jefferies — Analyst

Jack Andrews — Needham — Analyst

Quinton Gabrielli — Piper Sandler — Analyst

Pat Walravens — JMP Securities — Analyst

Fred Havemeyer — Macquarie — Analyst

Ari Terjanian — Cleveland Research — Analyst

Presentation:

Operator

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 from 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.

Matt Sonefeldt — Vice President, 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 ’21. 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 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 entitled Risk Factors in our most recent Form 20-F and quarterly 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 are 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 measures 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 datasheet 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, our virtual Annual Customer Conference, taking place April 28 and 29. We hope to see you there.

With that, I’ll turn this call to Scott for opening remarks.

Scott Farquhar — Co-Founder and Chief Executive Officer

Thank you, everyone, for joining today. We hope you and your loved ones remain safe during these challenging times. We hope you’ve taken the time to read the shareholder letter. This quarter, we focused on three themes tied to Atlassian’s long-term focus. First, that we’re off to a strong start in a multi-year initiative to migrate our server customers to the cloud. Second, we continue to deliver mission critical solutions for our customers across large TAMs 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 500000.

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’re proud of these results, there is 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 our mission the potential of all things possible.

With that, I’ll pass the call to the speaker. So I called him a speaker, they were waiting for me to say the word operator.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Alex Kurtz with KeyBanc Capital Markets. Your line is open.

Alex Kurtz — KeyBanc Capital Markets — Analyst

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 here just a little bit of context around that?

Scott Farquhar — Co-Founder and Chief Executive Officer

Yeah. Great question. Look, if you’ve been around for a while, Alex, you’ll know that the new customer number bounces around a lot. We had about 3,000 in Q4, 8,000 and a bit in Q1 and of course 11,500 now and it’s not a number we guide towards or we really manage into Atlassian. And it’s also always been a pretty small driver of immediate revenue being the smallest with our customers.

What changed this quarter is — a lot of the funnel changes. We’ve done around three in some of our products, also controller, we changed the monetization funnels. A lot of those areas, which we’re really proud of, like they’re kind of put us in the right place, so a very long-term growth. They did change sort of the mix of customer ratios and we do have a larger mix of smaller customers. And so, I’d say, more than any other quarters, we probably have a greater ratio of smaller customers than we’ve had before. So we think it’s great. I think it’s, again, a great testament to how much demand there is for our products out there. But I hesitate to try and roll any of that into some sort of revenue forecast.

Alex Kurtz — KeyBanc Capital Markets — Analyst

And just looking at these new customer adds, were any of those potentially customers that churned in the first half 2020 and they’re back, I don’t know if you’re categorizing differently that they churn their back?

Scott Farquhar — Co-Founder and Chief Executive Officer

I don’t have numbers around that at hand unfortunately. We have seen improved churn in general across most of our product base. Some of that is things we’ve done and some of it could be macro trends as well.

James, you want to comment as well on that?

James Beer — Chief Financial Officer

Yeah. Just a couple of things to add to that, Scott. I would say that I was pleased with the customer count because it illustrates the mission critical nature of the products that we serve our customers with all sizes all across the board from small, medium-sized businesses through to the largest corporations, governments and so forth. So, pleased by that churn, as Scott was saying, that has increased — improves nicely as the recent quarters have gone by. Yes, you’re right, we did see some challenges back in Q4 of fiscal ’20. But as we’ve seen, our churn improve as we’ve seen our customer count go for this past Q2, we’ve really seen those improvements right across our verticals and again right across the different sizes of customers that we serve. So we’re pleased by all of those themes.

Alex Kurtz — KeyBanc Capital Markets — Analyst

Thank you.

Operator

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

Keith Weiss — Morgan Stanley — Analyst

Excellent. Thank you, guys, for taking the question. And really a nice quarter. If I could kind of squeeze in two questions, one, just on the overall spending environment. If you can give us an idea kind of where we are on that road to recovery? You talked about improving renewal rates, that sounds like that’s getting better. But just kind of your take on kind of where we are on that? And two, in particular, on the ITSM product, now that we’ve integrated Mindville and you have that CMDB component of the equation, is that enabling the solution to go further up market? Have you seen any evidence of that traction as of yet?

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

It’s Mike here. Let me take — let James take the question on the spending environment and the traffic and then I can come back on the ITSM one.

James Beer — Chief Financial Officer

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

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

Yeah. I can address the ITSM question there. Look, as you mentioned, Jira Service Management launched that a quarter ago now, and we’ve been very pleased with the results so far mostly obviously inside of quarter in our model, customer reaction and customer adoption, acceleration of purchasing and interest behavior. As you mentioned, it is a great example of Atlassian’s overall philosophy of both building and integrating smaller acquisitions, as you mentioned in CMDB facilities. Again, those are released as a plug-in at the moment, but not fully integrated into Jira Service Management yet. So those will be coming in the coming quarters.

So, as part of our long-term ITSM strategies, constant drumbeat of improvements there. At a whole level, customers have resonated with us seeing the blurring of lines between IT and software development, as we are sort of the one company that can serve their needs from software development through ops, DevOps and into their IT and technical teams on that end. So that’s really resonating with customers and we’re very excited about that. And again, focusing on the Fortune 500,000 gives us a very broad customer adoption cycle, all the way up to large customers, as you see from the ISS customer example in the shareholder letter, some very, very big customers adopting our ITSM offerings as well.</spara>

Keith Weiss — Morgan Stanley — Analyst

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

Operator

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

Ittai Kidron — Oppenheimer — Analyst

Thanks. Hi 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, three years. Can you give us some color on how much movement was there this quarter in that transition? How many of the small, medium, large have transitioned?

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

Scott Farquhar — Co-Founder and Chief Executive Officer

Thanks. Good question. Firstly, just remind everyone, we have 30,000 server customers, and I mean to move them over a multi-year period with end of life server and our customers have three years to make decision to move across before they keep our end of maintenance period. So we’ve been very friendly with our customers, and we have a pretty wide window for those customers to move across.

In terms of where we are, like it’s very early in that and when I look at all the numbers about our internal metrics, we’re doing exactly what we said we were going to do. We’ve got customers moving across at higher levels than ever before. Our numbers internally that we measure for this quarter were a new high, as you would expect, as we go through this transition. And also a reminder that the majority of our new customers today choose cloud. So, well over 95% of our customers choose cloud, many customer choose cloud today. And so we’re really happy with the leading indicators. That’s great.

In terms of churn, when I talk with our largest of customers, the companies you would all know and do business with, they all have plans to move to the cloud. They say that it saves the money, saves them the hassle doing things, get some high reliability and so they are all partnered up with us to move to the cloud. In most cases, it’s in our court to ensure that we have the size and scale and that we can help them migrate across. And so, it is hard to predict the churn on that, like because it is in our customers’ hands over a period of time. But I’m pretty pleased with the indications of what we’ve got at the moment and sort of the customer response.

And James, do you want to have anything to that?

James Beer — Chief Financial Officer

Just that, I think, at the Investor Day in November, we noted our expectation that around half of our 30,000 sort of customers would migrate in FY ’23 and beyond. And indeed for our medium or larger-sized customers, we would expect that ratio to be about two-thirds migrating in FY ’23 and beyond. And nothing has changed in our perspective there.

Ittai Kidron — Oppenheimer — Analyst

Very good, thanks. And then, maybe just one follow-up on the perpetual license revenue, which clearly were still strong. And it’s for obvious reasons, people want to do things before February. I guess next week kicks in to licensing ends. But with regards to upgrades, you’ve talked about how this collapsed all the way through fiscal 3Q next year — fiscal next year. Do you suspect that the upgrade activity is going to be robust in the same way that perpetual license sales in this quarter was robust just because we’re kind of heading into deadline of expiration? And as you said, relative to your expectations that most upgrades of medium and large customers are going to be fiscal ’23 and thereafter, many are going — likely to upgrade near-term in order to give them more time to complete the transition to the cloud?

James Beer — Chief Financial Officer

Yeah. Let me take that one. In terms of license revenue, yes, we either have new license activity booked in that line or upgraded licensing activity. And just to remind everyone, we’ll be curtailing new license sales in a few days’ time, February 2. And we’ll continue to allow customers to upgrade their licenses, expand the size in essence of their current licenses for another year or so.

So, in Q2, it is fair to say that we did see more of that upgrading and new activity than we were previously forecasting. And I would say, as we have now almost a month of Q3 behind us, that type of activity has continued into Q3. And of course, we would expect that to mean less activity downstream. I think there’ll be upgrading activity playing out over the next year or so, but it does appear that some of that upgrade activity has been pulled in advance of the price increases that will play out next week as well. So, as you say, not surprising, hard to precisely determine the scale of this pull-forward activity on the upgrade side. And of course, if you’re interested in new licenses, you really have to act very quickly here before those new sales cease.

Ittai Kidron — Oppenheimer — Analyst

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

James Beer — Chief Financial Officer

Okay. Thank you.

Operator

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

Michael Turrin — Wells Fargo Securities — Analyst

Hey there. Thank you. First off, congrats to Mike and James on that 10-game win streak, it’s impressive stuff there too. James, maybe one on margin. You’ve consistently noted margins are expected to trend down in the second half of the year. We now have the Q3 guide. So, just wondering if there’s anything else from a seasonal perspective we should be cognizant of that could maybe make the shape for 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.

James Beer — Chief Financial Officer

Well, a couple of thoughts there. First of all, just to reiterate what we’ve been now saying for two or three quarters that through this harder macro economic period, we’ve really been looking to invest purposely and that continues. You saw strong headcount growth in the last quarter, good execution by our people teams in that regard. We see very significant opportunities in front of us, and we want to get after those opportunities and I think it’s fair to say that Scott and Mike’s experience back through the ’08-’09 type downtown, macro economic downturn, was such that it was the right thing to do to invest through that period. And we’re doing exactly that, again, at this time.

Also, recall I’ve spoken in the last call or two about some shorter-term revenue headwinds, things like the introduction of free editions. The fact that we are taking less marketplace revenue as we encourage our patent system developers to emphasize putting new cloud apps on the marketplace. And we’ve also taken the decision to execute fewer pricing actions, particularly on the cloud side of our business this year versus the past year. So while the impact of COVID that we were talking quite a bit about two quarters ago, that is decreasing nicely as an impact on our financials. Clearly we will continue, as I said in an earlier answer, to expect the server business lines, the license line and the maintenance line to continue to contract in terms of their rates of change and so forth. And recall also that we have, in order to encourage our larger enterprise customers, those with over 1,000 users or so to migrate to the cloud, we are offering them quite substantial loyalty discounts.

So we have some revenue headwinds. I would describe them as transitory in nature. They are very much really favoring the long-term for a short-term headwind. So when you take those factors together, of course, we have seasonal factors like the payroll tax reset that happens at the start of every calendar year. Few different things to consider, but we’ve baked all of that into the Q3 margin guide. And as we’ve said elsewhere, we would expect second half margins to be down versus the first half margins.

Michael Turrin — Wells Fargo Securities — Analyst

I appreciate all the detail. Thank you.

Operator

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

Arjun Bhatia — William Blair — Analyst

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

James Beer — Chief Financial Officer

Thanks, Arjun. I can take back to those. Look, on the enterprise side, I have to say, we have two phenomenons going on this. So I’m not sure which one you’re asking about. But let me answer for both. On the general enterprise customers so we called that the literally enterprise big, big companies. We’re really pleased with our continued cloud adoption there across all the additions of cloud and that goes from free all the way through standard, premium and the enterprise edition, big E.

You’ve seen us over the last three years through access, through scale, through performance and reliability improvements and continued investment in all manners of compliance standards, continuing to get better and better traction with large customers with enterprise customers sort of 1,000 seats and more, no matter what edition they buy.

Secondly, we did GA, our enterprise edition, so big E during the quarter, and have been very pleased with the reaction of the customers there. So we’ve had a lot of customers in the early access program for about the last six months, testing out with us. Again, the enterprise edition has five levels of compliance and security standards, data residency and a whole lot of other features, as well as unlimited instances. So you get unlimited scale, so rather than buying one Jira Software instance and a second Jira Software instance, you get — obviously a higher price, but you get unlimited Jira Software instances. So that allows you to create and segment your business as very large companies often need to do, you might have one for Europe and one for America or you might have one for certain department and one for different department with different plug-ins, add-ons exposition to other customers of your own as a company, etc. So very pleased with that adoption so far. Again, it’s incredibly early days.

It did only GA during the quarter. And obviously we’re working with all of the early access program customers — the companies, I should say, to turn them into enterprise edition customers. There is naturally a flow upwards from standard to premium to enterprise as customers grow and deepen their usage and adoption of the live stream products. And that’s part of the ladder that we’re trying to build there.

On your second question, no specific call-outs in R&D. We continue to invest in hiring across the board and R&D across product management, engineering, design and all manner of operations and engineering functions. And that’s across largely all of our offices. I would remind you of our TEAM Anywhere program, where we have announced six months ago and continue to announce to stop about hiring in lots more countries in the world and lots of parts of the world and that opens up our R&D pipeline to get that talent hopefully largely no matter where it sits in the world to work for Atlassian. And it’s been a very successful first six months and we look to continue to deepen that in 2021.

Arjun Bhatia — William Blair — Analyst

Perfect. Thank you very much.

Operator

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

Robert Majek — Raymond James — Analyst

Great, thanks. On the enterprise cloud front, you noted higher-than-expected initial demand for Jira Software, Confluence and Jira Service Management. Can you just add some more color there on the customer feedback you’re getting? And is this dynamic enough to potentially change the timetable for large customer migrations?

Scott Farquhar — Co-Founder and Chief Executive Officer

Thanks, Robert. It’s Scott here. And I think just echo sort of the things that we’ve sort of said earlier. We’ve seen the demand higher than we thought, but it’s still very early days in terms of this pipeline demand for large customers, as Mike talked about, and also demand for specific enterprise product. And so, at this stage, there is nothing to say different like we think and we’re pretty — we’re really happy with, and I guess it’s playing out as we expected in terms of the migrations like — so there’s nothing there that I would change in our forecasts.

Robert Majek — Raymond James — Analyst

Great, thanks.

Operator

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

Walter Pritchard — Citigroup — Analyst

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

Scott Farquhar — Co-Founder and Chief Executive Officer

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

And James, you want to add to that?

James Beer — Chief Financial Officer

Yeah, sure. The first thing I’d note is that I am really pleased by how our gross margin has stayed at the level that it has as we’ve been able to build a business 45% of which is revenues coming from the cloud. So, I think that speaks a lot to the execution of the teams involved there. But as we have indicated in prior calls, we would expect, particularly as the larger customers, the largest server and data center customers move over to the cloud that we would see increased hosting costs and we’ve spoken also about how we have added to our support capabilities so that we are ready to help those customers moving over to the cloud.

In terms of the timeframe for those support costs, I would expect those to be in place for the next few years, consistent with the timeframes that we’ve talked about for our larger customers moving over to the cloud. And so I would expect some downward pressure on gross margins. But having said that, I really do also want to emphasize how we’re very focused on continuous cost improvements, whether it’s around our usage of compute and storage resources or whether it’s related to helping our support resources, people help our customers so that we can do that on the more cost efficient basis. So that gives you a little window as to how we’re thinking about and operating along the lines of the cost of goods sold part of our business.

Walter Pritchard — Citigroup — Analyst

Thank you, both.

Operator

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

Gregg Moskowitz — Mizuho Securities — Analyst

Okay. Thank you very much. I guess, first off, I’m just kind of wondering, James, how you would characterize the revenue and/or deferred revenue benefit from pull forward this quarter as compared to what you saw one year prior? And then just secondly, for Mike or Scott, just curious to hear how the demand was for datacenter subscription this quarter? Thank you.

James Beer — Chief Financial Officer

I can take the first part of that question, Gregg. So in terms of maintenance pull-forward activity, I would describe that in Q2 as really quite modest. Now remember, last year, that was the primary pull-forward quarter. And so, it was a much larger effect in Q2 of fiscal ’20. Now, what I would expect to play out in Q3 and as I indicated a little earlier, we’re already seeing this in the month of January is that we see more maintenance revenue pull-forward activity in Q3 as well.

And so what’s a little different this time around, a couple of things, really. First of all, we’ve given our customers more time, more advance warning of the price increases. And second, of course, not only is there a price increase both for the server and the data center business scheduled to be put into place next week, but at this time, we’re also end of life the server business, we’ve made that announcement. And so really what played out more so in Q2 is you can think of it as pull forward at some level, it’s a different type of pull forward so that that we’ve seen in prior years because the pull forward has been customers adding to their license count, expanding the size of their current licenses ahead of the moves that we’re making around server end of life.

Data center, relatively modest pull-forward there in Q2 as well. And again, I would expect that to be a pull-forward activity ahead of the price increases that will apply to data center just as they will apply to server as of February 2.

Gregg Moskowitz — Mizuho Securities — Analyst

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

James Beer — Chief Financial Officer

Yeah. In terms of data center demand, overall, it was a relatively strong quarter. I think part of what we’re seeing is some of our European partners encouraging some of their customers to move over to the datacenter ahead of these price increases. So that was a part of what was going on in the subscription revenue line. But as we’ve talked about before, you’ll recall that the cloud business is by far the largest part of our subscription revenue growth.

Gregg Moskowitz — Mizuho Securities — Analyst

Right, okay. Great. Thanks, James.

James Beer — Chief Financial Officer

Thanks.

Operator

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

DJ Hynes — Canaccord — Analyst

Hey, guys. Congrats on the results. James, one for you. So there was a comment in the prepared remarks that said, you’re growing increasingly confident in the economics of 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 giving you confidence in the economics of those customers, right? Is it just a lower cap or are you seeing expansion activity that’s outperforming your expectations, again, any color there would be helpful?

James Beer — Chief Financial Officer

Yeah, sure. So, what we do is study very closely each cohort of free customers that join us each month. And we track their progression, whether it be as they add to their use accounts and then go beyond the 10 user free limits or whether their progression is before they get to 10, they decide that they really need and appreciate the functionality that our standard cloud offering or even our premium cloud offering contains. And so, they make that switch from free to a paid edition in that way before they get to the 10 user level. So we watch this, as I say, very closely cohort by cohort. And so, while I noted earlier that for fiscal ’21, we would continue to see this is as a net revenue headwind. But as we watch the cohorts, we see the trend lines are quite clear. And that gives us confidence about the future of this initiative. I think it’s an excellent example of how we’ve taken a long-term view. We’ve made decision to take a short-term headwind for the long-term benefit down the track.

And Mike, are you going to add something?

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

Yeah. Thanks, James. DJ, just wanted to add a couple of small points there, I suppose. We’ve had a lot of questions on free. Firstly, I would think of free as much less thoroughbred and much more cloud style in terms of how it’s going to give us a long-term kind of diesel engine like pull up the hill for us. And the reason for that is, it builds a big base of customers and potential customers underneath that business that will mature into customers, small and large, over the next many, many years, right. It’s a multi-year impact. It’s a long-term investment that we’re aiming at with free.

But clearly we track extremely closely active usage. And I would stress that is the most important metric for us. Our people using these free edition that we’re giving life for things [Phonetic] that they’re going to use them. So we spend a lot of time trying to track active usage and looking at how we can make sure the customers are getting value out of those free editions. We firmly believe philosophically, if they’re getting value once they hit that 10 user stage, they will pay and continue to be a long-term Atlassian customer so marching up that edition here.

The second part that’s really important for the free editions for us is the reduction of friction, specifically in cross-flow and cross-sell. So where you may have, for example, a Jira Software instance it has 50 or 100 people. And someone discovers Confluence and its connections to Jira Software in that company. Previously they would have to — if they weren’t the administrator to get out a credit card and pay for a trial of the Confluence instance, if that makes sense.

Now they can start a free trial of Confluence as any of those users. So their ability to discover new products that we have as an existing customer is also encourage strike and the more users we have in products, the first products, the more that we have a potential to start trials of second products or free editions alongside with anyone in that company. So our ability to expand and go wall to wall is increased by free. Again, I would stress, it’s pretty modest revenue impact given these are all small customers, and we are aiming for that multi-year impact part of our sort of long-term thinking.

DJ Hynes — Canaccord — Analyst

Yeah. That makes perfect sense and built more like a cloud build out of thoroughbred. So I can get behind that analogy. Thank you.

Operator

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

Derrick Wood — Cowen and Company — Analyst

Great. Thanks for taking my questions. My first one, I know it’s early, but what have you seen in terms of the revenue implications when customers migrate from server to cloud? I think you talked about small customers may see a little bit of a downtick in revenue capture mid-market, maybe a little bit of uptick. Any early read on revenue conversion and including the potential to upsell, cross-sell during the migration.

And then, I’ll just throw in my second one. Pretty interesting when the ThoughtWorks and the 8,000 users on Trello. Is this one of the biggest customers you’ve had adopt Trello from a user count level and just be curious to hear maybe kind of why they picked you over the competition and anything else you can share about how you won the deal?

Scott Farquhar — Co-Founder and Chief Executive Officer

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

James Beer — Chief Financial Officer

And maybe I can take the Trello question. Look, Trello continues to be early in its monetization journey, as we say all the time. Again, a year ago, I believe we released [Indecipherable] passed 50 million accounts. So from the point of view of size and scale, the 8,000 users mentioned at ThoughtWorks is relatively small. Hey, obviously in comparison to the 50 million users of Trello and the 10 million monthly active user number that we passed that we released, I believe, at Investor Day. That’s it from Trello’s point of view.

Obviously we’re continuing to learn from the customer base and work on the monetization journeys there in Trello, working through its monetization ladder. If you think about its equivalent free, business class and Trello Enterprise, it’s sort of equivalent to the free, standard, premium, enterprise ladder of editions that we have in Jira Software and then Jira Service Management. 8,000 users is not a particularly large enterprise Trello customer, I would say. We certainly have some that are an order of magnitude or more larger than that, but it’s a very good win for us.

I think the reason you see companies like Trello using this is ultimately about Trello’s flexibility and its capabilities and potential to handle all manner of different workloads with very free form model inside an organization. So its adaptability to lots and lots of different use cases and almost anyone in a large company, it gives Trello huge advantages to solve a whole manner of workflow problems for those larger organizations.

And again, as we continue to do in business class and in Trello Enterprise give those organizations that control to manage their data, to manage their users and manage the boards, whilst keeping that flexibility and free form nature of Trello in the hands of the users, I guess. And you’ll see a lot of exciting things coming up in Trello. Again, small plug for TEAM 2021, if you go to that in a couple of months time. We continue to work on really exciting things for Trello and look forward to its future.

Derrick Wood — Cowen and Company — Analyst

Great. Helpful color. Thanks.

Operator

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

Rob Oliver — Baird — Analyst

Great. Thanks guys for taking my question. Happy New Year to everybody. My question is on Jira Service Management. And then I have a quick follow-up. As you see customers that I know it’s still early migrate from Jira Service Desk up to Jira Service Management in the cloud, obviously, that product is attacking more things within the IT department to agile DevOps, ITSM, work management. Any color around sort of the seat expansion you’re seeing as people migrate?

And then, just a question on the partner network, James, you had mentioned earlier some of the ways you’re incentivizing the partners with cloud apps and others. You guys are obviously very used to selling with a very light touch, but many of your partners are not, many of your partners are very active in physical events and stuff. So I’m just curious as your partners 600 plus play a real important role here in this migration, how they’re adapting to the current environment and whether you’re satisfied with the progress that you see? Thank you guys very much.

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

Sure. Look, on JSM, I would say, too early in the release of that particular product to see massive differences with JST having again not been in the market that long in terms of adoption and seeing expansion. Obviously, being a broader feature offering and having embedded the Opsgenie functionality and some other things to serve a lot more purposes, for JSM specifically, we are ambitious, I would say, that we will see that seat expansion over time, whether that’s a small customer going from 50 seats to 80 seats or very large customer going from 10,000 seats to 15,000 seats. I think JSM, gives us all of that possibility. And I would stress that we continue to invest very aggressively in that product set. We still have the same functionality coming out and continue to invest in automation all the other things that we’ve put into the ITSM packages over the last little while.

One thing I would broaden that though is, when we talk about our connections to IT, it is broader than just ITSM. So I think about ITSM as IT teams using JSM for IT. We gained great connection trusts, a partnership with those IT departments that we then have a lot of other offerings that they can take advantage of in terms of that IT department providing functionality to the rest of their organization. And that’s why you see the strength of the broader Jira platform so they started bringing Jira Core, they started bringing other products to provide workflow applications and solve lots of different use cases and workflows for other parts of the organization. That’s up in the IT department.

Creating networks for the legal department, the marketing department, the finance department, but all within that one Jira platform and all within the broader Atlassian platform and that applies as much to Confluence as the best of Jira Core or indeed to Trello and Trello Enterprise. That’s about our broader Atlassian seat expansion once we really gained the trust and respect of that IT department and what we can do to help them.

I’ll let Scott answer on the partner network.

Scott Farquhar — Co-Founder and Chief Executive Officer

Thanks, Mike. The partners, as many of you would, know has been peak part of a lot.

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

I think Scott’s kind of nearing out there. So, James? [Speech Overlap]

James Beer — Chief Financial Officer

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

Rob Oliver — Baird — Analyst

Thanks a lot, guys.

Operator

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

Rishi Jaluria — D.A. Davidson — Analyst

Hey, guys. Thanks so much for taking my questions. Nice to see continuing and improving business momentum. Two quick ones. First, going back to the comment that’s been made on the server customers and not expecting mid to large or two-thirds of mid to large customers to migrate until FY 2023 and beyond. I guess I’m a little surprised on that metric, James, given the incentives that you have in place to push migration. What has been the pushback from customers on migrating? Is it just the amount of investment that has to be made? Is it not enough incentive, is it pricing, is it inertia?

And then follow-up, I just wanted to ask about cloud net expansion rates. At the Analyst Day, you talked about 121% cloud net expansion rate and 130% for medium and large customers. How has that been trending and is that a metric you plan to disclose maybe annually? Or how should we be thinking about that? Thanks.

Scott Farquhar — Co-Founder and Chief Executive Officer

It’s Scott here. I’ll take the first one and James will chime in on the second one. For these service customers, the large ones migrating from server to cloud, I’m not going to realize these instances on mission critical in our organization. We had the CIO of a large technology company talk to us recently, and they said, there’s three or four mission critical applications at Atlassian — I’m sorry, this is a good company. One of them is our ERP, one of them is kind of our salesforce automation and one of them is Atlassian products, because we usually stop when these products go down.

And so, when these mission critical applications are there, these companies want to plan forward, plan the budget cycles for I didn’t say. If they could the click the thing is a move today, they appreciate all the benefits that they would get that is a practical matter, it takes a while to plan and migrate the sort of these systems where they really want to minimize the amount of downtime for their employees.

And so, there is nothing specific there. I would say, there is areas Atlassian will continue to improve on around compliance and certification in certain geographies that takes us a while to get those things and customers are working with us to move as we hit those certifications. But there is nothing specific that I look at that makes them to ally really just inertia and the mission criticality of our applications.

James Beer — Chief Financial Officer

And then, just on the second part of your question. Obviously, at the Investor Day, we wanted to dive a little deeper in terms of offerings, some cloud metrics, given the importance of the cloud business to our company in the coming years. So, yes, we talked about our 35% growth year-over-year at that point. The net expansion rate, as you say, at 121% and that being a larger 130% for our medium and larger-sized customers. And so, as we continue along our cloud migration journey, you can expect that we will periodically update those statistics.

Operator

Your next question comes from the line of Brent Thill with Jefferies. Your line is open.

Luv Sodha — Jefferies — Analyst

Hey, guys. This is Luv Sodha on for Brent Thill. Congrats again on a nice quarter. Just a couple of real quick questions from me. One was digging a little bit deeper on the migration, the server to cloud migration. I guess, did that have any impact, any negative headwinds on billings or unearned revenue per se? And then, the second question was on the momentum that you’ve seen with the free cloud versions. Last quarter, I think you noted that you saw an increase of 175%. Has that top of the funnel momentum continued in this quarter? Thank you.

James Beer — Chief Financial Officer

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

Anything to add to Scott or Mike? Okay.

Luv Sodha — Jefferies — Analyst

Thank you.

Operator

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

Jack Andrews — Needham — Analyst

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

Scott Farquhar — Co-Founder and Chief Executive Officer

All right, thank you. It’s Scott here. On Align, James, that is primarily sold to our existing customers, right. This is not something that where we go in with the sales team and have kind of long customer acquisition sales cycle. These are existing customers using our products, predominantly Jira and I’d say actually I’ve got one on many Jiras across my organization. We are doing a ideal transformation and digital transformation and we want better executive level understanding and we want to sort of scale up our agile from what was happening at the engineering level all the way through the organization.

And so, what we get is a lot of our customers going up and saying, how do we solve this problem. And of course, Align is the exact solution they’re looking for. And so I don’t think there’s anything in terms of it really is an upsell, so existing customer base. We’re very happy with the acquisition and how it works with our customers. It is one of many things that helps us within our customers’ digital transformation. And that is something we can talk with customers. It used to be that software teams were kind of do their own thing in the department, they say the software is mission critical to every company.

When you talk to companies that goes every sector and that really saying that, the thing they’re struggling with is how they’re transforming their organization and in most of these cases that transformation is coming from the software teams. They are actually adopting practices in software and rolling them out across the entire organization. And benefiting, not just here Align, but that benefits Confluence as teams need to collaborate more closely across their entire organization. It’s going to benefit some of the new products we’ve got coming out to address this may even.

So that broad trend, I think, is news in the up and whole bunch of conversations at the C level, CIOs, CTOs and even CEOs of organizations who are turning up to Atlassian asking how we can help them solve their digital transformation problem.

Jack Andrews — Needham — Analyst

Thank you very much.

Operator

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

Quinton Gabrielli — Piper Sandler — Analyst

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

James Beer — Chief Financial Officer

Good day, Quinton. Look, let me answer the pandemic question first. Obviously, as more people are working from home, working remotely, changing their work habits, as we like to say, they change where they work, but they keep how they work consistent in order to allow people to work from multi different locations. As that has happened, you naturally see increased activity in usage in our products because our products fundamentally help people working asynchronously, like they help teams collaborate to help you get on the same page where you might have used a whiteboard beforehand and in an office now you might use a Trello board or if you have a remote meetings, I live on Zoom most days.

We often start meetings with Confluence pages as a pre-rate, right. It’s a very — much more efficient asynchronous method we will often start our meetings with a 10-minute pre-rate, where someone will send the link to a Confluence page, we will read it and then comments to attend it, and then we will start the meeting. So these sort of things are driving, I think, a difference in how people think about working and structuring their day in knowledge work in broader areas and leading to activity and usage in our products. Again, it’s not a sort of a hockey stick jump or a step change jump, I would say, it’s a continued slow march of improvement for us as more companies that are already customers have more usage, more days of the week, they might use our products, etc and that will, I think, in the long-term, lead to expansion, but it’s not going to be a step change. They all sort of run online and suddenly decide to buy Trello, I guess.

In the broader work management for all space, look, we continue to be bullish. It’s a very huge market. Obviously we’re very happy with the progress of Trello. Confluence continues to do well at helping us get wall to wall with inside customers. And we continue to work in innovation areas on new products to target some of those trends that suppose. One example of that is our acquisition, we acquired a company called Halp, which is a digital version of ASN, you might say, focused on messaging platforms. So, Slack and Microsoft Teams and providing service management within the messaging construct and connecting it back, sometimes to something like a Jira Service Management in the back end and sometimes just processing all that messaging within all that service within the messaging products.

That again, as you see adoption of things like the Slack and Teams during this pandemic, people work from home, products like Halp will benefit from that because people are increasingly looking for ways to do work within those tools. And that’s the leading service provision tool, I think, in the SPAC ecosystem is now in the Atlassian stable. And we continue to work on integrating that in the rest of the things.

Quinton Gabrielli — Piper Sandler — Analyst

Got it. Thank you.

Operator

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

Pat Walravens — JMP Securities — Analyst

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

Scott Farquhar — Co-Founder and Chief Executive Officer

It’s Scott here. Obviously join me in [Phonetic] if I wanted to add anything. We think of it — we call it TEAM Anywhere is our why we’ve done this, which is really that our employees can work anywhere they want. And if they choose to come and work in one of our offices, they can do that. If they choose to work from home, they can do that. And that really opens up the talent pool for us. And if we think one of the reasons why I think it’s been successful, I think is our heritage outside of Silicon Valley. It’s allowed us to tap into an amazingly diverse and very loyal talent pool, particularly in Australia. And so, I think that’s been echoes our success, and we’re really excited about and able to tap into that around the world.

I know myself, yeah. The day full of Zoom meetings aren’t that great. But what we found is that the many employees value the lack of a community, the ability to spend more time with friends and family, the reinvigoration of local communities around where they live. I know many of our executive team has moved from the center of cities to somewhere nearby to take advantage of kind of those areas. And so two hours back from a commute gives you a lot of freedom and flexibility to spend time with family or exercise or other things there.

I’d remind our employees that we aren’t really in a steady state there that we are working from home in the middle of a pandemic. And that’s different to what the world will look like when you can, your kids are back at school, and you can travel into the office. And we are building our policies so that world and God willing like that will happen this year, we will see the vaccine rollout and hopefully we can move into a more normal state. So it is something we spend a lot of time thinking about. I don’t think we’ll get it all right like everything Atlassian. We continually try and improve that cloud [Phonetic] spirit is continuing to make relentless improvement and so you’ll see that here as well.

Pat Walravens — JMP Securities — Analyst

Great. Thanks for that perspective.

Operator

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

Fred Havemeyer — Macquarie — Analyst

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

Scott Farquhar — Co-Founder and Chief Executive Officer

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

Fred Havemeyer — Macquarie — Analyst

Thank you.

Operator

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

Ari Terjanian — Cleveland Research — Analyst

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

James Beer — Chief Financial Officer

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

Scott or Mike, would you add anything to that?

Scott Farquhar — Co-Founder and Chief Executive Officer

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

So, yeah, we can — I mean, it’s a last question, I’d say thank you to all of you for being on with the journey and I appreciate it and I think — that’s our last question?

Operator

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

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

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

Operator

[Operator Closing Remarks]