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 will now hand the conference over to Matt Sonefeldt, Atlassian's Head of Investor Relations.

Thank you. Good afternoon, and welcome to Atlassian's 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 cease 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 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, not as substitute for or superior to measures of financial performance prepared in accordance with IFRS. There are a number of limitations related to the use of these non-IFRS financial measures versus their nearest IFRS equivalents, and they may be different from non-IFRS and non-GAAP measures used by other companies. A reconciliation between IFRS and non-IFRS financial measures is available in our earnings release, our shareholder letter and in our updated investor 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 we encounter any disruptions or challenges and logistics, given we are individually dialing in from our homes across the world. With that I'll turn the call over to Mike for opening remarks.

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 embraced our mission to unleash the potential of every team and support our staffs, customers and communities. As you've hopefully read in our shareholder letter, we are confronting this crisis head on. Rapid economic change shapes 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 offerings in this cycle, we also acknowledge that the macro economy presents some serious headwinds. During 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 have 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 our 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.

Your first question – thank you for calling. [Operator Instructions] Your first question from the line of Michael Turrin with Wells Fargo. Michael, your line is open.

Everyone's speechless with the results we have delivered this quarter. Great. Maybe we'll come back for Michael.

Your next question from the line of Arjun Bhatia with William Blair. Mr. Bhatia, your line is open. Mr. Bhatia? And your next question from the line of Arjun Bhatia. And your next question from the line of Jack Andrews.

Hi, good afternoon. Can you hear me okay?

Just, fine.

Great, thank you. Thank you for taking the question and glad to hear everyone is doing well in this environment. 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 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's something that's happening organically or whether you've pivoted your marketing message. And then the second question would just be any early feedback on the new cloud enterprise product. Thank you.

Hi, 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 a diverse set 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 a line of business participants in our product and users of our product that may not want to travel all the way to San Francisco for an event, but we made it far easier for them to join an event, 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.

Sure, Matt. 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 certainly 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 in our 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 to come with that, et cetera. Those are obviously extremely hard to build to meet those requirements. And those requirements are incredibly prudent 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 2020 or even in FY 2021 as we get those larger customers ramp 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 addition.

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

Hi, 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, if this 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 industry. So I was wondering if you could 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 of developer hiring and how that might impact you guys in the next 12 months?

Michael, it's Scott here. I'll talk to the broader theme, and James can talk about the fiscal impact. As you well know, we have 171,000 customers around the world, everything from Fortune 10 to most of the Fortune 500 and tens of thousands, we talk about the Fortune 500,000 being our market that we do. We have no strategic customer concentration. No one customer makes up more than 1% of our revenue. So there's 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're using collaboration tools more in the short term. I think the long term, the 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 term at a desk. So we see that there's some benefits of that over the long term. In terms of pace of software development and hiring, I think we're 6 weeks into this, it would 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 through any test specific financial impacts there?

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 in terms of 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 that when you're serving that mainly customers, we are going to have exposure to the small business economy and to those particular sectors that have been particularly impacted by COVID. Now of course, this is reflected in the guide. And yes I would particularly emphasize that, 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.

Okay, thanks guys.

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

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 this migration plays out over the rest of the year, given we're in a bit more of an uncertain and maybe IT departments are a little busier just trying to keep the lights on. And sort of related to that, we'd just like to hear some early feedback that you're hearing from the cloud enterprise program that you launched.

Sure, Matt [ph] I can certainly crack 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 project. But once you've moved 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 and 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 a 500 user customer, or a 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's been increased by the release of the Jira Cloud Migration Assistant, which is a tool we shipped during the last quarter that allows Jira users, predominantly Jira Software, Jira 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 has been really good. From a cloud enterprise perspective, I don't have a lot to add to what I said before, obviously the early reaction to the ERP from customers who have joined it has been very good. Largely along the lines of that 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 good scale, performance and security requirements. We'll move into assessment mode and have a look at this. And we are working together with those early access program customers to make sure that cloud enterprise continues to evolve to meet their needs.

Perfect, thank you. And James as a quick follow-up if I may…

Sorry, I lost you there.

Can you hear me now?

Yes.

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

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 in a balance between lowering prices and in some instances raising prices. And to layer on top of that as well, it's important to think about the additions, the strategy that we've been pursuing in recent times. So now with the roll-outs fully of the free additions of Jira Software, confluence and Jira Service Desk, that compliments the standard additions, the premium additions and as Mike was speaking of earlier now, beginning to roll out the enterprise additions as well. So, the additions represent another way in which we can be paid for the incremental value that we are offering our particular customer. And our customers are able to align their needs with the right addition. And so that will be an ongoing part of our strategy in years ahead. And then in terms of a 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 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.

Perfect, thank you.

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

Alright, thanks for that. That's a new way to pronounce my name. This is Rishi Jaluria from Davidson. Thanks for taking my questions guys. So two, first I wanted to appreciate the commentary that more resilient model because 90% of our revenue comes from existing customers. I just want to drill down a little bit more into that. If we were to kind of take a snapshot of any given year how do we think directionally of new business with a new 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 set looks like? And then I've got a follow-up.

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 a very nice number, additional customers. But those tend to represent a relatively small proportion of the dollars that we generate each quarter. So it's very much the bulk of the dollars coming from our Expand Motion. And of course, we have a variety of ways in which to expand across products, across additions that I was just referring to in the earlier question, in terms of expanding across a broader part of that customer, serving more of the groups 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.

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 I wanted to think about industry exposure, right? Obviously you're 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 big that exposure looks. Thanks.

Sure. Again, we really cover all industries, all sizes of companies and all geographies. That's one of our terrific business model strengths. And so, yes, we obviously serve some of the companies, but like in the travel sector that would be particularly hard hit in the last several weeks. But really the focus of where we’ve seen an impact is on the smaller sized company end of the spectrum. In fact, it was notable to me how one of the larger FRS deals of March, it 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 have worked with them to help them through that particularly difficult time. On the smaller end of the spectrum, obviously that's where we have more of our cloud customers, recall, that we've spoken now or a couple of quarters ago about the fact that we have more than 125,000 cloud customers out of our total of, most recent figure today reported 171,000. So we do skew in our cloud business to a full size of organization. Taking a step back from that more broadly, I'd say we're holding steady across the enterprise and large enterprise portions of our business. And on the cloud side, going back there for one last thought I've been pleased that while they say there are some customers that 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's lining up with a month in which we had fully rolled out our three offerings as well. So, really we’re quite encouraged by the developments there in terms of continuing to attract new cloud customers.

Okay. That's really helpful. Thank you.

Next question is from the line of Michael Turrin with Wells Fargo.

Hey there. Thanks, good afternoon. I was hoping to hear more around the decision to play offense here in this backdrop. It sounded pretty clear in the letter that you are planning to keep pace in terms of hiring and play offence here in the coming months. Can 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, we saw somewhat of a reduction here as well? Thank you.

Sure let me take that from my side and Scott or James can jump in. As I think we felt it was really important in line with our values. So one of our company values is open company, no [indiscernible]. We wanted to be very clear with investors and partners about how we were approaching the current environment, which is obviously, unusual, it's not business as usual at the moment. And I think as a company, you have to choose a 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, beside 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 very adaptable and thoughtful about them. Our culture is extremely strong and adaptable. Obviously our go-to-market models, you're presumably well familiar with, suits the flexibility of these type of environments as we don't have to get on a lot of plains to sell stuff. 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 shows some of the background why we feel confident to take that strategy as we sell into the coming quarters and years about how we are planning to approach that and why we are choosing to communicate that. Scott, maybe you want to go into a little bit about the actual effects of what that means? We listed a couple in the letter.

Yes, I will touch on them again. The types of things that we've done in the past. And Mike and I would hopefully consider ourselves still fairly young in the business and we we've been running last year and since I started in the dot-com crash in 2001. And we remember the global financial crisis in 2008 and 2009, pretty clearly. And some of the things we did back then and what 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 otherwise. So that's doing well. Customer acquisition, we've – 12 years ago now, we released starter licenses and reduced our price from $1,000 down to $10 for many of our products. A few months ago, we launched free and those in free effectively to that $10 down to zero to aggressively try to acquire customers. And also, I think that 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 there's often opportunities in this particular market environment where you can pick up things that are very attractive that otherwise, again wouldn't be available. So, all those things that we're considering and we're 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.

Yes 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 don’t know if it's fair to say that we working with a small subset of our customers who requested help in these extremely challenging macroeconomic times. Now this is a relatively small proportion of our total customer base, less than half of the percent, but we feel as though that's the right thing to do. And it's an illustration gain of the long-term orientation that Scott and Mike 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.

That's a great color for me James, much appreciated. Thank you.

Your next question come the line of Ittai Kidron with Oppenheimer.

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 can 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 or conversion rate, anything on that fund. And I know it's early, but some color would – 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 that also is the main area where with respect to your guidance, that's where we see most of the weakness near term.

Yes. Ittai, I’m Mike I can certainly take the top part of that question. It could be something else as a tricky name. So that's [indiscernible]. Look, it's still very early, the results are in fact incredibly encouraging. For history, we started rolling out our free editions back in October in a very limited sense as we told you in the shareholder letter. So sort of looking at 5% and 10% of traffic and seeing what the effects were, as we are always very thoughtful with the impact of changes we made to pricing and try to consider the long-term benefit to that. We solely expanded that. Obviously, with COVID in the current crisis, we decided to accelerate that somewhat and rolled it out fully in March, which is now available for Jira Software, Jira Service Desk and Confluence. Obviously, that's alongside Trello and Bitbucket and other products that already had three editions, and that's a large part of their model already in the cloud. That have been we didn’t include any closing so far. We can say up to March we had 125% uplift in valuations, which is obviously actually a little bit ahead of where we expected, but is looking really positive for that perspective. I would reiterate, it is extremely early. We did that, I think it's less than four weeks ago now, a little over four weeks ago. So we'd expect a pop-up off of that. And then it settled down to a 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 is helping us get into even more markets and rich 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 particular journey. Just reiterating the long-term rotation, and this is a great step on that journey. James, I don't know if you want to take any financial impacts of that?

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 price 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, the second point that's really important though is that – and as we've been talking about this theme now for a number of quarters, is that we're very much orienting our business towards continuing to grow to subscription revenue business, the cloud business and the data center business. So you saw subscription revenue growth of 67% year-over-year, very much substantial, the primary driver of the revenue line for the company now. And I would expect that that will continue. And commensurately, you'll continue to see license moderating over time. In fact, recall that the license line now is a 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 license activity over time and more subscription revenue growth.

Thank you, guys.

Thank you.

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

Hi. This is Nikolay Beliov from Bank of America. Thanks for taking my question. I want to double-click on the 60% increase in migrations from server to cloud. Just wondering how do you measure that? Is that based on users, customers, revenue, et cetera? As you saw that uptick this fiscal year, what strength did you see under the covers in terms of customer sizes moving from server to cloud? Did you guys take advantage in more upsell? And lastly, what have been the partner feedback on migration tools that got launched a couple of months back, as customers move from manual migration to more automated migration, are we talking about significant decrease in the time of migration maybe from months or weeks? Just whatever you're seeing would love to get to hear from you guys. Thanks so much.

So Nikolay, in terms of – I have 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 our service cloud activity, they're driven off user count. And in terms of our 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 rollout and increase the capability of the different additions that we've been talking about on this call, then we're 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're in a position where we can address the needs of any customer size. And I was going to refer to the helpfulness of those migration tools before you added it 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 path. Jay, over to you.

Yes. I'll just jump on, Nikolay, with the back part of that question. I mean, the migration tools are built both for customers that can migrate without partner assistance, also for partners to basically enable a better, more reliable migration. And remember, like in the partner case, there's a bunch of work that we'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 classification that they want to partner to help them move past. And I think we're going to measure that just in terms of velocity over time, like constantly, both with the partner and with the customer directly, we want to make sure that moving is ever, ever easier.

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.

Yes, Nikolay, nothing really to add to our previous answers, the April impacts 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.

Thanks so much.

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

Excellent. Thank you guys for taking my question. Congrats on a very nice quarter. I wanted to follow-up on – I think this is a question that Mike Turits was trying to ask, maybe I'd be a little bit more direct about it. One of the things investors are trying to understand is like which solutions do customers find most strategic and most mission-critical and where you're 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? Do you expect the 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?

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

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

Excellent. Super helpful. Thank you, guys.

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

Great. Thank you so much. Just had a couple of follow-ups. And thank you, I know the shareholder letter was longer this quarter, but it was very helpful. My two questions relate to a little bit what other people have been asking. Just looking at what you said about April, are you assuming that spending levels from those affected companies and industries, stay the same throughout the quarter? Or 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.

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 that the philosophy that we brought to setting the guidance in terms of setting the range, placing the range is quite consistent with what we have done historically. We have laid out a broader revenue range. Clearly, with this macroeconomic uncertainty, there is a greater potential variability in our results. And it's certainly challenging to accurately estimate the current environment's impact across such a large customer base. So we have looked carefully at our experience in April and considered that and our various leading indicators are top of funnel type indicators and assumed that, that sort of situation plays out across 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. 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 overall revenue structure.

Great. Thank you, James.

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

Okay. Thanks. Gregg Moskowitz from 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 subscriptions, 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 a bunch of them that have just gone away for one reason or another? Hello?

Hi, Gregg. I think, Jay, can you take that one?

Yes. Hey, Gregg. So I think the macro trend is just the shift to cloud. Remember, like the starter license largely talks about the server end user 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 for effectively the equivalent price run in the cloud. So that's been some pressure. And then free is a 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.

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 subscription as well as your cloud premium SKU? Thanks.

Good. 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, we saw both through the quarter and headed into this one with positive, both across data center, both directly and then in with our indirect global channel, and from standard to premium as upgrade pattern in cloud.

Perfect. Thanks.

And your next question is from the line of Brent Thill with Jefferies.

Hi, this is Luv Sodha on for Brent Thill. Thank you again for squeezing me in. First of all, congrats to Jay given it’s his last quarter. And I wanted to ask maybe a couple of questions. One was 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 phishing Atlassian as a solution set. So what about the investment in that team going forward? And then the second one, on 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.

Yes, I will take the first one. So we'll continue to invest in Enterprise Advocates as we have to support the data center upgrade motion in server, both the migration motion from server to enterprise cloud and the upgrade motion from standard cloud to enterprise cloud is really similar. And so I think we'll 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. Remember that we get a lot of leverage in the Enterprise Advocates group, both from our indirect channel that we – that is pretty large and deeply connected to our products and our customers in the 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 just from the flywheel. We're landing inside of these biggest customers with a 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's 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?

Yes. I'll grab it here. I think the M&A, again, we’ve been really proud of how we've done that. You can build products, you can partner, you can have a marketplace, you can acquire. And I think Atlassian as a company has done all those very successfully over almost over 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 to help us get to our big hairy goal of 100 million active users. Do they fit with the values of our company? Do they fit with our business model? And then there's a lot of long tail a lot of 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 I've been the biggest shareholders of Atlassian, we're aligned with all of you on this call and all 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.

That’s great. Thank you.

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

Hi. Thank you very much. I want to ask two questions. The first one is on mix and the second is on COVID. The mix 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 actually hasn't been down previously despite some pricing changes. And so as we look out, you said growth would moderate. Would it still be – you think positive numbers we look out over the next couple of quarters? And the related part of that is on the maintenance side, maintenance has been steady area, call it, 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 wanted to hear a little bit about that, and then I'll ask my COVID question as a follow-up.

Sure. So in the perpetual license line, yes, we have been seeing those pull forward effects into 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 shrinking 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, they'll be taking on data center or cloud contracts. And so yes, you would see that affect the maintenance line over time. But I think you're right in characterizing that as a more gradual effect the net that you see in the license line because the license line reflects brand-new activity, either a new company coming in to buy our server products or it could reflect a current customer buying additional licenses, more users for their current licenses, that sort of thing. And so I would expect you to see the drawdown most pronounced on the license line but also a similar effect over time on the maintenance line.

Okay. Great. That’s very helpful. And then, Jay, maybe in the spirit of this is your last call, direct this one to you. When you think about or talk about COVID and the interactions with the customers, is there any sense about you could give us some 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 monthly? Is there any feedback you can give on what that means in terms of behavior when you say you're being impacted. And all the best in your future endeavors.

Thanks, Keith. I'll start, and James maybe want to tack on. I think we've addressed this a bunch over the course of the call, like we've seen largely – the impact that we've seen has been from the small to medium business segment in cloud, and we saw that in March and continued 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 customer 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 tack on some color as well.

No, I think you covered it, Jay.

All right. Thanks, gentlemen.

Thanks, Keith.

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

Thank you so much for having me on the call. Congrats on the results. Two questions. First, you guys just give a little bit more impact. You touched upon it on the shareholder letter, but – and talked about collaboration. But any more examples of how customers may be using your tools and solutions to help address COVID and you think you guys will make more templates, more kind of prepackaged applications to help. And then second, you talked about take-up of the leaderboard. Are there any areas where you see potential for the greatest share gains over the next 6 to 12 months across your portfolio? Thank you.

Let me take the first one. Scott mentioned a bunch of these use cases, but I mean, we become a way to coordinate project activity content. In the case of COVID where everybody's 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's a bunch of great use cases highlighted in the document, even when you think about something as maybe that seems little mundane is how do we get people back into our offices. I mean, that is a fairly – can be a fairly complicated amount of work with a whole bunch of considerations as we emerge from this and maybe people go back into an office and to work, and they've got to do things like get on an elevator, you have to consider like how desks get spaced out differently. That involves a ton of human coordination and action. And that's typically where our products get brought in to help customers and help teams. And maybe who is taking the second part, maybe Mike?

Yes. I can certainly take the second part of that. Look, the question is where do we expect share gains, et cetera. Look, all of the markets we operate in, whether you look at Agile and DevOps in 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 whether teams are remote or not remote, right, people are going to change their work styles as a result of this. So I would say all sort of 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's 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 in 2008, 2009 when we introduced the starter program, which is a little bit of an analogy to what we've done in free and cloud. That really sets the platform to drive a decade of growth across a lot of different markets that brought in tens of thousands of businesses to the Atlassian experience that over time grow up into different parts of our world. And those are companies you see at the moment moving from server to data center or evaluating cloud premium or cloud enterprise. So when we talk about playing in the long-term game, that's exactly what we mean. We believe this can have an opportunity in three very large markets that we serve, and you'll see us continue to make moves to try to be opportunistic where we see that. You've seen that in free already. You've seen that in hiring. We'll continue to evaluate our acquisition opportunities as we look through that. But we're very positive about what that means to us going forward.

Great. Thank you so much.

And your next question is from the line of Alex Kurtz with KeyBanc.

Hi, this is Steve Enders on 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 their ability to drive 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 are the biggest opportunities for investment in the product and R&D teams now? Thank you.

Hey, Steve, I’ll take the first part. I mean, our sales teams – our direct sales teams are all largely inside, and so – inside teams. And so – they're working largely either from home. They've did work from home in the past or they work in offices, engaging with the customers. So I think that rhythm hasn't really changed. Partners are in market with customers. And so I think there's an impact there for our partners that can't 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, co-market with them, the way that we help generate demand in market combines both offline, which may have a little bit of a pause until we can get back to a different – the old normal. But we complemented that with a whole bunch of online digital demand capability that we will open to them. Just in terms of building pipeline and letting them serve customers, I don't anticipate that we'll have too much of an impact.

Yes. And if I could just briefly interject 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 tracking well. And one of – I guess I can comment on the second part of that in R&D.

I’m sorry, I can jump in and take the second part of that in R&D. Look, we still believe we have a massive number of opportunities to invest in R&D. The highlights are certainly things like Trello and Toggl advantage of the change in work style. As more companies are working from home, tools like that are obviously becoming more valuable, Confluence for a synchronous communication, things like this. So obviously, in the product set, there's a lot of opportunities. Secondly, we're in the midst of a decade-long transition to our singular Atlassian platform, the Teamwork Platform. That's not a simple exercise. It's going to continue to take us years to build out, even though we’ve done really good progress so far. You've seen lots of examples about the new collaborative editor rolling out in Confluence, which is a huge change, involves a lot of changes in identity and other key parts of our platform as they roll through different products. And then thirdly would be in the enterprise segment, right? We've talked about cloud enterprise, the new addition that we put into early access program this year. That's a massive amount of infrastructural and calculated changes in how we operate our products to meet the demands of our largest customers and scale them in the cloud. That's not a one-and-done exercise. That's a continued 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 company's own networks, et cetera, and still provide the flexible cloud products that we do and scaling for those needs. So you'll see us continue to invest largely all across the board, but hopefully those are the three useful examples of areas where we are investing.

Yes, very helpful. Thanks guys.

Your next question is from the line of Derrick Wood with Cowen.

Great. Thanks for squeezing me in. First question, James, with respect to guidance. If I look at the midpoint, it does imply sequentially down revenue for Q4. And I guess I'm just trying to understand the kind of bigger levers in driving that. Does it increase the dollar churn? Or should we think maybe there's more trade down to pre SKUs or perhaps an acceleration of on-prem to cloud? If you could give some color there, and then I've got a follow-up.

So it just points to really three different thoughts. First of all, recall my earlier comments about pull forward activity, so I would expect what we benefited from in Q2 in terms of a pull forward effect. That's drawing from both Q3, Q4 and probably the next two quarters of fiscal 2021. So I think that's important to bear in mind. Yes, as Mike talked about earlier. We have fully rolled out free as the default option for our entry-level customers. So I would say that the effect there is quite modest. We guided at the start of this year to the impacts that we thought would occur from free during the year, and it was one of three components of a one-point headwind to revenue growth. And I feel as though we're tracking well to that. And then obviously, we've been talking about the impacts of COVID generating the macroeconomic sort of circumstances that are impacting some of our SMB cloud customers in particular.

Okay. I guess a broader question. I mean, 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 to target the IT buyer more aggressively in this environment.

Yes. I mean, Derrick, we believe it's an ongoing focus for us. IT is, as we've talked about, is an increasing place that we can land with JSD. And to your point, like 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'll 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 Opsgenie, and with Confluence and Trello. I mean, there's 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're in charge of for their companies.

Thank you.

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

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.

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