Atlassian (TEAM) Q2 2022 Earnings Call Transcript

Atlassian (TEAM -2.95%)
Q2 2022 Earnings Call
Jan 27, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon. Thank you for joining Atlassian's earnings conference call for the second quarter of fiscal year 2022. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Atlassian's website following this call. I will now hand the call over to Martin Lam, Atlassian's head of investor relations.

Martin Lam -- Head of Investor Relations

Welcome to Atlassian's second quarter of fiscal year 2022 earnings call. Thank you for joining us today. On the call today, we have Atlassian's co-founders and co-CEOs, Scott Farquhar and Mike Cannon-Brookes; our chief financial officer, James Beer; and our chief revenue officer, Cameron Deatsch. Earlier today, we published a shareholder letter and press release with our financial results and commentary for our second quarter fiscal year 2022.

The shareholder letter is available on Atlassian's Work Life blog and the Investor Relations section of our website, where you'll also find other earnings-related materials, including the earnings press release and supplemental investor data sheet. As always, our shareholder letter contains management's insight and commentary for the quarter. So, during the call today, we'll have brief opening remarks and then focus the rest of our time on Q&A. This call will include forward-looking statements.

Forward-looking statements include known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management's beliefs and assumptions only as of the date such statements are made, and we assume no obligation to update or revise such statements should they change or cease to be current. Further information on these and other factors that could affect the company's financial results is included in filings we make with the Securities and Exchange Commission from time to time, including the section titled Risk Factors in our most recent Form 20-F and quarterly Form 6-K.

During today's call, we will also discuss non-IFRS financial measures. These non-IFRS financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with IFRS. A reconciliation between IFRS and non-IFRS financial measures is available in our shareholder letter, earnings release, and investor data sheet on our IR website. During Q&A, please ask your full question upfront so that we can be fair and be able to accommodate the next speaker.

With that, I'll turn the call over to Scott for opening remarks.

Scott Farquhar -- Co-Founder and Chief Executive Officer

Thank you for joining us today. Happy new year to everyone. Q2 is another strong quarter as we continue to see great momentum. It's extremely encouraging to see many of our past long-term investments reflected in our Q2 results.

The Atlassian Marketplace, which we started in 2012, recently surpassed $2 billion in lifetime sales. Cloud apps now make up nearly half of all marketplace apps, and the rate at which customers are adopting cloud apps is outpacing our own cloud products. It's exciting to see our ecosystem grow with such a rapid pace and for us to be able to expand the economy around Atlassian. IT was an area we were committed to doubling down on three years ago.

Recently, Jira Service Management was recognized as a leader in the Forrester Enterprise Service Management Wave, with our strategy for ESM receiving the highest possible score. We also recently added Percept.ai to bring AI-powered virtual agent technology to expand JSM's front-line support capabilities. Our continued investment and innovation at cloud platform are driving great results. This quarter, we added more than 10,000 net new customers, nearly all landing in cloud; and quarterly cloud revenue grew 58% year over year.

As you've already read in our shareholder letter, we're looking forward and laser-focused on investing in the future. Hiring is our top priority. We deeply believe in a massive market opportunity in front of us, and investing in people is our path to seize these opportunities. Lastly, we hope you can join us for Team '22 in April.

We are cautiously optimistic to be back in person with our customers and partners. We hope to see many of you there. But we're thrilled to also be able to host viewing parties around the globe and offer virtual options as well. With that, I'll pass the call to the operator for Q&A.

Questions & Answers:

Operator

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

Alex Zukin -- Wolfe Research -- Analyst

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

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

Well, thanks for the question. You know, I start off by saying I was really pleased with the performance against our plans, really, right across the board. You see very strong performance in both the cloud and data center businesses. You know, if I were to pick out one product, it would be JSM.

I think that's just really hitting the mark with customers, a big opportunity for us going forward. That has, of course, given us the confidence to raise our full year subscription revenue guidance to around 50%. That's up from the mid-40s percent that we were talking about 90 days ago. And the other thing I would really highlight is I feel we are very much on track with our migrations timeline.

So, you know, pleased by that. In terms of the last part of your question, you know, I see demand continuing to be strong for both the cloud and data center businesses. I don't see bottlenecks there in the future. You know, one of the other things I'm sure we'll talk more about this is the continued progress we have with -- in increasing the capabilities of our cloud quarter by quarter.

And as we do that, obviously, more and more of our currently behind-the-firewall customers are able to move over to the cloud. It's clear that they want to go in that direction. And increasingly, each quarter, we're making that possible. So, we feel good about the opportunities in front of us.

Operator

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

Nikolay Beliov -- Goldman Sachs -- Analyst

Hi, thanks for taking my question. James, one for you. When will we start seeing the migration impact from server and data center to cloud in the numbers of the loyalty discounts online over time? Are we talking maybe a year from now, two years from now? And as a follow-up to the team, in general, as you move to the cloud, your pricing really is changing, and you started the company probably 20-plus years ago with a business model already around very low price compared to your competitors. And now, for example, Jira premium is 15 bucks, and the enterprise is probably a little bit higher, approaching the pricing of competitors.

So, I would think that's kind of a major shift in strategy here. And how is that reflecting in the business model in the part of the company going forward in light of that context? Thank you.

James Beer -- Chief Financial Officer

Well, Nikolay, let me start the answer there. In terms of the impact from migrations, what we're seeing is that for fiscal '22, so for the full year, we would expect migrations to be driving mid to high single-digit growth in our revenue year over year. So, you can contrast that, of course, to what I was just pointing out there in terms of our expectation of around 50% growth for subscription revenue in fiscal '22. And then I would add that in the quarter just past, Q2, it was a very similar sort of figure, mid to high single-digit-type contribution to the growth rate that we recorded in Q2, so that 64% subscription revenue growth of Q2 about mid to high single-digit is coming from migrations.

Just a couple of other things I would add. You referenced in your question the loyalty discounts. So, today and until the end of June, somebody moving over to the cloud from either server or data center, they would receive a 40% discount. Now, once we get into July in a few months' time here, that discount will halve down to 20%.

So, that's important to remember. The other thing I'd say is that when a customer migrates over to the cloud, of course, in the period that they make that migration, that's a very modest impact on our revenue. Obviously, the cloud business is recognized reasonably in terms of the accounting. So, those are the three points to keep in mind.

Scott Farquhar -- Co-Founder and Chief Executive Officer

And I'll add just on the back of James' around sort of our price philosophy that we've talked about, you know. And sometimes, there's no change to our pricing philosophy, and hasn't really over the 20 years we've been running Atlassian, we've always priced the volume. And we talked about reaching the Fortune 500,000 and, you know, reaching millions of people around the world. And that's what we've always priced for.

And so, you know, what you've seen in sort of in terms of how that's manifested in our current list prices over the years is we've made it cheaper at the low end consistently by making it more free over time. And we've also captured more value at the higher end where we're providing, you know, more and more value for our largest customers. And of course, as you know, the cloud provides more value for customers, we take a lot of the management overhead away from customers by providing the hardware. And so, our customers are happy for -- you know, to give us those responsibilities.

And so, I don't see there being any real change to our pricing philosophy, and I'd continue to see us do more free at the low end and more optimization at the high end as we deliver more value over time.

Operator

Thank you. The next question comes from the line of Michael Turrin from Wells Fargo. Sir, your line is open.

Michael Turrin -- Wells Fargo Securities -- Analyst

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

Scott Farquhar -- Co-Founder and Chief Executive Officer

Yeah, it's Scott here. I'll take that one. Look, Jira Service Management is like uniquely positioned to handle the convergence of developers and IT, and seeing in the market these days that IT is no longer an island overbought and sold, it's no longer upgrading things that were handed on a CD over a weekend and taking people down. Developers and IT are working hand in hand to, you know, transform their organizations.

And there's no other vendor out there that has that sort of unique position of bringing Devs and IT together. And the second aspect is we're the only company that allows us to -- you know, that can handle the Fortune 500 all the way to, you know, Fortune 500,000, as we've talked about. And that comes from a, you know, deep focus on the end-user experience like which is, you know, which we've delivered on, you know, across our product range for multidecades at the moment on bringing that to IT and start seeing a lot of value there. And, you know, you've seen us say we're going to invest in ITSM, you know, three years ago when we've seen a consistent drumbeat of innovation.

You know, we've done some acquisitions to add functionality, but most of it has been our in-house innovation and building out the features across our entire product range. And so, we're, you know, super excited that that's been recognized by, you know, analysts out there, which is great. But more importantly, being recognized by our customers who are adopting it in droves. And so, I'm pleasantly surprised.

I mean, it was our plan three years ago to do this. And, you know -- and because we've got a great platform, we've been able to move relatively quickly in delivering all the value to our customers. And so, we expect the ITSM to continue to grow into the future.

Operator

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

Keith Weiss -- Morgan Stanley -- Analyst

Excellent. Thank you, guys, for taking the question, and congratulations on another really, really nice quarter. I wanted to ask you about two of probably, in that quarter, full of a lot of eye-popping numbers, two numbers that really stood out to me. One was data center seeing another acceleration in growth, the 83%.

Anything kind of one-time in nature we should be aware of in that number? I know there's a tough comp coming in Q3, so [Inaudible] because we've seen that growth, but actually think about what drove that acceleration? And two, there was a comment about channel partner revenue growth accelerating to 130% growth year on year. Anything, in particular, changing in that program that caused that acceleration? And if you can give us some type of sense as that become a more material channel, that -- is that starting to move the needle a little bit more for the broader Atlassian distribution strategy?

Cameron Deatsch -- Chief Revenue Officer

Yup, there's no question. So, it's Cameron here. And as far as the data center demand, the best way to look at that is it's just showing further commitment from our customer base into the Atlassian ecosystem and also the highlights, the mission criticality of our applications. As we continue to say that migration to cloud is a multiyear journey.

Different customers are on different stages of that journey. And in that path, the data center for many of them is a step toward the cloud. All of them are well aware that cloud -- you know, our investments in cloud, our strategy around cloud, and that cloud is in their future, but they're at all different levels of maturity of when they're able to move over. But the reality is, if you look at the last quarter, one-third of our cloud migrations came from data center customers.

So, we have proven that we can take the data center customer base to the cloud. The second one is around our solution partners and our channel, which are just absolutely critical to our overall efficient go-to-market model that we have. Everything we do directly with my teams in marketing and sales and customer success gets amplified with our hundreds of solution partners out there in the market. And obviously, as you see in the numbers, the solution partners have been increasingly critical to our cloud migration process.

The reality is that we provide a variety of incredible self-serve migration tooling for customers to move to the cloud. Many of our customers want help from, you know, planning out the migration to managing the migration and partnering with Atlassian. And that has allowed for us to continue to show great growth. In general, for large customers, when I'm talking to them, the first thing I say is, hey, which partners are you working with? Who can we partner with to build this plan out hand in hand going forward?

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

And let me just add on to the first part of Cameron's answer there. In terms of data center growth, a couple of things also to remember in terms of, Keith, you referred to something like a one-time nature. I think about the rev rec. Remember that a portion of the data center activity that we would contract with a customer is taken upfront.

That's quite different to our cloud revenue accounting, which is fully reasonable. And then the other thing I'd just point out, recall, we raised prices around this time last year on the data center. The full effect of that is now flowing through. And so, both those things give a little extra fuel to the inherent demand that Cameron is referring to to data center.

Operator

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

Fred Havemeyer -- Macquarie Group -- Analyst

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

Scott Farquhar -- Co-Founder and Chief Executive Officer

Thanks, Fred. It's Scott here. Look, we've been really happy with our TEAM Anywhere policy, like that's to allow people to, you know, work wherever they want, with us in an office, that's great. Although, that's been a little harder through the pandemic.

And, you know, or wherever we have the legal right to employ them. So, we have seen a lot of our employees -- you know, our new employees are working remote from existing offices, and we've seen, you know, existing employees move as well. So, that's really great. We think that's going to be a long-term differentiator for Atlassian.

And, you know, I think that's going to be difficult for companies that don't have similar policies to attract and retain the best talent. In terms of, you know, compensation, you know, we have seen, you know, some minor upticks in compensation. We were early to that, I guess, ahead of many -- of sort of peer companies who, I guess, have waited to see attrition tick up before they address the thing. And so, we're really proud with that we've worked on that with our employees.

And now, there's been talk of a great resignation across -- you know, particularly North America. But we haven't seen an uptick in a similar way that our peers have seen an uptick around that. Now, on the back of all that, you know, we are setting aggressive goals for hiring into the future. Like we think and see we have such great opportunities across all three of the markets that we have talked at QA at length about.

And, you know, the way of going about that is building out our, you know, largely R&D functions to build out the products that are needed to go after these large markets. And, you know -- so we're -- you know, you'll see an uptick in our investment over, you know, the coming quarters and years, and we think that's, you know, going to pay off really well for us.

Operator

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

Steve Enders -- KeyBanc Capital Markets -- Analyst

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

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

You know, hi, Steve, it's Mike, I can take that one. Look, Sri is, obviously, has been an absolutely fantastic leader in technology over the last six years. He's taken us into the cloud and then continued to build a truly world-class cloud platform, so we couldn't be happier with where we sit. I will say, his superpower has been building high-performance teams, building a great leadership team.

So, we're in an incredibly good situation in terms of engineering broadly. Obviously, we'll be very sad to lose him as he moves on to another phase in his life, which is understandable. But we will have no doubt we'll be able to find more talent internally, externally. We're in an incredibly good position, with over the long term had a clear philosophy on culture and building a sustainable company.

And a part of that is about leadership transition and continuing to move forward in all of our departments. And I feel incredibly confident about where we are in technology and engineering functions.

Steve Enders -- KeyBanc Capital Markets -- Analyst

Perfect. Thanks for taking the question.

Operator

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

Keith Bachman -- BMO Capital Markets -- Analyst

Many thanks. James, I want to put this one to you, if I could. You announced pricing changes that would be effective on Feb. 15th for data center and server.

And I wonder if you could characterize what you think the impact has been or will be prior to the 15th for those pricing changes? Do you see some pull-in of demand and/or any characterization of post -- for those two particular areas, on data center and server? Thank you.

James Beer -- Chief Financial Officer

Yeah, sure, Keith. At the end of the day, it is obviously the customer that makes the decision as to whether or not they're going to early renew, add to that their investment was -- at last year and ahead of these price changes. So, we really can't predict, you know, given the volume of customers that potentially have this offer available to them. So, when you look at the price changes themselves that we announced a few weeks back, they vary by product, by user tier, which is very normal for us.

I would generally think of those as approximately mid-teens percent-type growth in price across the server and data center. And so, you know, I would expect that to, you know, begin flowing into our P&L in the fourth quarter in a more meaningful way. So, there may well be some event-driven customer purchasing ahead of those price increases, as we saw in Q3 of the last fiscal year. But again, at the end of the day, the customer really decides.

And so, this is why we've been talking for some time now about a certain amount of variability in our financial model as our customers go on this journey from service to cloud.

Operator

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

Fatima Boolani -- Citi -- Analyst

Thank you. Good afternoon, and thank you for taking my questions and get to telephonically meet you. James, the question for you with respect to the concurrent acceleration that we've seen in the cloud and data center business. Now, I was hoping you could put into context how, you know, both those businesses can sort of enjoy this degree of concurrent acceleration, especially considering you had mentioned that about a third of the cloud performance being attributable to data center migration.

So, I'm just curious as to, you know, if you can walk through some of the dynamics there and if you can also give us a frame of reference for, you know, how much of that cloud performance in the prior quarters, how much of that was driven by migrations from data center just to give a frame of that context? Thank you.

James Beer -- Chief Financial Officer

Sure. Happy to tell you that one. Let's start with migrations. I mentioned a little earlier that what we would expect and, in fact, what we saw in Q2 was about mid to high single-digit impact on our subscription revenue growth from migrations.

Now, important, though, to note that when we think about cloud migrations, then about a third of that activity is coming from data center. So, again, put in context, when you think about the growth rate of the businesses that we're recording, both cloud and data center, migrations are important but relatively small part of the overall picture. So, let's take a step back and really think about what are the key drivers for the cloud. And I'd really point to a handful of items beyond migrations.

First of all, I think, most importantly, we continue to do an excellent job of expanding our user accounts at our current cloud customers. You saw also in the data, we brought 10,000 new customers to the company. They're all effectively going to cloud. You know, we talked about the percentage.

And once they're at the cloud, we're doing a very nice job of expanding user accounts. The second thing I'd really also highlight, the growing impact that we're making with our customers on premium and enterprise editions. You know, this really goes to our overall addition strategy that starts with free, standard, then premium, then enterprise. And we've really got those four editions now pretty much right across our portfolio -- broad portfolio of products.

And I think that's a tremendously important driver. We're seeing customers really get incremental value as they step up that ladder, if you will, of additions. And then we've spoken now for several quarters about how pleased we've been at the relatively low-churn levels and how we've really put effort into minimizing that type of activity. So, that's working nicely.

And of course, you saw us roll out a mid-single-digit pricing increase a few months ago now. And so, that relatively quickly layers into the P&L when you think that the majority of our customers are on a monthly subscription. So, those are really the important drivers that are driving the cloud business. Yes, migrations are a part of the story, but essentially, I wanted to put that in context.

Operator

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

Quinton Gabrielli -- Piper Sandler -- Analyst

Hey, guys. This is Quinton on for Jim. Thanks for taking our questions. You know, customer additions this quarter were really strong again.

Is this kind of 10,000 that adds the right level moving forward, or do we move back to more fiscal '20, fiscal '21 levels? And then just as a quick follow-up, what inning would you say that the education of channel partners is at with selling the cloud products? Are we at the bottom of the ninth inning, with one or two legacy partners to go, or is there significant education like within the channel? Thank you.

Scott Farquhar -- Co-Founder and Chief Executive Officer

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

Cameron Deatsch -- Chief Revenue Officer

Sure. Yeah, as far as the new -- I can speak to both the new customer numbers, as well as the innings of the channel partners. As far as the new customers, like I have to call out just how incredible this machine that we've built in go-to-market that we can routinely get 10,000-plus net new customers in the business while maintaining our efficient go-to-market spend. But in addition to that, I got to call out, you know, two years ago, we made that change to the free model.

So, in addition to 10,000 paying customers coming in with more than two years, we also have thousands of more teams and companies choosing us and using us in market for free. And that just shows like how much demand there is and why people are choosing us. Sort of the number itself, like it fluctuates quarter to quarter for a variety of reasons: changes in the funnel, seasonality, you name it. So, I less be focused on the individual quarter numbers and look at the longer-term trend.

We've added over 51,000 customers over the last 12 months, which when I started with this company, like, you know, many years ago, it was a fraction of that of our overall customer base. So, we just been able to continue to evolve and make that efficient go-to-market model work. As far as innings, being an Australian company, most of our Aussie friends don't understand what innings means. I'd hate to say which inning they're in.

The reality is we continue to train, certify, partner with, you know, and engage our partners in these migrations. It's multiyear journey. Some of the partners are well ahead, you know, and leading on migrations. Many of the other partners are going through these trainings and bringing people in.

So, plenty more to do there. But I'll tell you that they are critical to our migration story and our execution there. James.

James Beer -- Chief Financial Officer

No, I think you covered it. Thank you.

Operator

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

Arjun Bhatia -- William Blair -- Analyst

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

Scott Farquhar -- Co-Founder and Chief Executive Officer

I can take that. Hey, Arjun, it's a [Inaudible] and I don't know. I'm sure [Inaudible]. So, look, if you -- with the three markets that we're operating in, like we're lucky to operate in markets that are very, very large.

And, you know, we have different levels of maturity in each of those markets. And underpinning, you know, our ability to go after these markets is the Atlassian platform that we've spent over a decade building out. And so, when I look at the investments we're making, like you'd have to say they're in, you know, the areas of the three different markets we talked about. There's the investments, you know, required to help our customers make those migrations across the cloud and continued investments in the platform that we're -- that we've built over those years and continue to build out.

And, you know, the benefits you're saying, you know, come through, obviously, and you've got migration numbers, but there are also benefits in our ability to launch new products, as you've seen with Point A that we can bring and launch new products to the market pretty quickly. And so, I wouldn't say there being, you know, huge changes in that. So, like I think as the platform continues to mature, we'll be able to bring more functionality to the market quicker. You know, the ability across that -- because as I've mentioned earlier, ability across -- to work across, you know, Dev and ITs, you know, I guess it would be like, you know, chips and guacamole, right? They go hand in hand.

And -- you know, so that's like a unique ability that we have, you know, to do that. And of course, work management for all built on a great platform for work really unifies work across the entire organization. Again, something that we're uniquely positioned to do. So, Mike, can you add anything?

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

Yeah, I mean, I just wanted -- the question started in hiring, I guess, and ended in markets, so I'm not sure which angle you were trying to go on. I think Scott's point about the platform is really key. Our platform, we believe, is one of our strengths in executing against the large opportunities that we believe we have in all of our markets and around the business and in the U.S. and economy.

Building that platform takes a world-class engineering team and a world-class engineering team at very large scale. So, you see us making continued improvements and things like TEAM Anywhere and our culture and pressing our long-term thinking as a business, and also executing against those opportunities, right? We're being clear that we are going to invest, and we believe in those opportunities. At the core of that platform is a truly world-class engineering organization. So, if it's about where are we hiring? Look, we have a deep, long-term belief that building a world-class technology company without engineering and R&D at the core is to skills -- to steal Scott's analogy is like making guacamole without putting avocados at the core.

It just doesn't work. And you'll see that from some other companies. But we have a deep belief in engineering and R&D at the core of executing against the huge opportunities that we have in front of us. And so, that's why we try to tie those two together in your question.

Operator

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

Ittai Kidron -- Oppenheimer and Company -- Analyst

Thanks, guys, and great, great numbers. I have a couple of questions. One on work management, you haven't talked much about that. Maybe you can give us a little bit more color on the progress there, maybe number of customers.

You mentioned that on service management, maybe you can mention that on work management. And then the second question, more of a general one regarding the customers that have transitioned to the cloud. Can you talk about the -- how the expansion activity of customers that migrate to the cloud is different than expansion activity of customers who remain on-premise?

Scott Farquhar -- Co-Founder and Chief Executive Officer

Hey, Ittai. Look, I can take both of those. Firstly, on work management flow, the first thing I would say is the fact that we get this deep into the call and we talk about our huge opportunities in IT, we haven't mentioned agile DevOps and software teams, all work management. I think that's an example of just the size and scale that Atlassian operates at now and the set of opportunities we have.

We could spend an hour-plus talking about any of those things. I would say, we continue to be incredibly bullish on the work management space. We're doing an incredibly good job with Trello and continuing to make that part of our platform, part of our set of offerings while having a stand-alone flavor to it. Jiro work management continues to power along.

It's very new out of our Point A program of innovation, but adding a different flavor on project management. And, you know, we're incredibly bullish on things like Team Central and other things coming out of Point A as well at the same time. So, I feel very comfortable with where we stand. We believe there'll be lots of different ways of attacking the broad work management problem.

And that's all before we even mentioned something like Confluence. So, I'm really excited about how that happens and how that continues to evolve. I will say, we talk a lot about digital transformation, changing software teams and IT teams. A big part of that is also a cultural transformation in how the software and IT teams work with the rest of the business.

So, yes, we have three different markets. We believe in all of them very deeply. They are tied together at the core of how every company is changing as a software and technology-based, but also changing culturally to be more dynamic and more agile. And that's why we're in those three markets.

In terms of cloud expansion, it's a pretty simple story, actually. The ease of adopting a second product in the cloud, our ability to understand what customers are using, and hence, recommend other alternatives for them, either you should get more people in your team on board or you should try this other product, is -- we can just do it a lot faster and easier. But it's a single click in the cloud. Nothing to install.

Nothing to try. With free, you can quickly get 10 users started. So, our ability to help customers expand is just much higher in the cloud, and you see that in greater and quicker expansion numbers of customers. We have to have the products to deliver that value, but our ability to help customers and guide them less friction in the cloud is just higher.

Operator

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

Rob Oliver -- Baird -- Analyst

Great, thank you. Good evening, guys, thanks for taking my question. James, you alluded to this earlier in your remarks. And, Scott and Mike, I'd love to hear your view.

But you guys continue to knock down a lot of the global compliance standards that are out there that, you know, really are, I assume, are inhibitors to many large enterprises and governments really going wholesale into the cloud. So, I'd love to hear a little bit about some of what you've seen in terms of as you knock those down, how that backlog has been converting, and then maybe some of the other global standards out there that you're excited about. You guys hinted in the letter that there's more to come imminently. Appreciate it.

Thank you very much.

Scott Farquhar -- Co-Founder and Chief Executive Officer

Yeah, hi, Rob. Look, for sure, it's part of our continued momentum, right, one of the -- have -- you've all seen over time, Atlassian's just continued momentum and improvement -- incremental improvement every single quarter is something we've done for just shy of 20 years now, and we'll continue to do. The area you've asked about in terms of cloud standards and compliance and governance and the whole sort of acronym soup that comes with that in every different geography in the world, we do believe is that that will continue to be a challenge for every SaaS company going forward, if there are more companies, more geographies, more legal conditions. And so, we have to build a world-class engineering organization and a platform underneath our cloud products that allows us to quickly adapt to that market as it changes and in areas of changes, and also continue to add the standards that our customers need and ask us to support.

We've done that over time, and you continue to see us improving that every single quarter, whether it's data residency in Australia for financial companies or whether it's BaFin in Germany, we've continued to do that, and we'll continue to do that. We've seen a lot of examples of every time we add support for a different geography or standard, we unlock a portion of our customer base to move to the cloud. It's not a singular unlock, it's a whole series of ingredients, but it just increases the overall momentum of customers to the cloud. But for sure, we continue to work on, you know, performance and scale for the larger customers in the cloud.

We continue to work on compliance and regulations and standards. And we also continue to work on extensibility, which is equally important. The reason I mentioned that last one is Forge, our sort of future extensibility standard and technical framework, builds things like if there's compliance and regulatory standards at the core, which is incredibly difficult to do, but we believe in extensibility for our customers going forward. It's long been a hallmark of Atlassian, and I think in a high compliance environment, that's going to be incredibly important for us going forward in the cloud.

And we're seeing that in the adoption of Forge via those enterprise customers in the cloud where it handles the regulatory standards for them.

Operator

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

DJ Hynes -- Canaccord Genuity -- Analyst

Hey, guys. Congrats on the continued success here. I have a product question for Mike or Scott, I presume. So, there are a handful of visual collaboration tools in the market that are seeing, you know, really strong growth.

And I know you guys recently invested in Miro. What is it about visual collaboration that makes it hard for you to replicate? Like why invest or partner in that space versus doing it on your own?

Scott Farquhar -- Co-Founder and Chief Executive Officer

Yeah, hi. I can take that, DJ. Look, we -- we've long believed in having a broad spectrum of opportunities, and that's with Atlassian Ventures, we are trying to make sure that we are investing and partnering in high-quality enterprise as companies that are partners of Atlassian. You've seen us do that in the past with Zoom and Slack and others.

And more recently, we've Miro and Snyk and across our markets, as well as a whole host of smaller up-and-coming names. Visual collaboration, in general -- look, it's a very busy category, I would say, because it's such a broad option. It used to be called Whiteboards, but it's not really a whiteboard, it's a whole series of different things that you can do there. It's a bit like saying it's one way to do project management.

If you're a five-person marketing team, you do project management utterly differently than if you're 5,000 engineers building a bridge. So, project management is a very broad term. I would say it's the same thing for visual collaboration. It's a broad term.

I think that there are a lot of fantastic products in there. And obviously, we, you know, believe in the ones that we use and the ones that we've invested in. But in general, our customer philosophy is being partnered and integrated with all of the best-of-breed SaaS products that are out there and allowing our customers to make those choices, and just making sure that all the data they have in any Atlassian product is easily connected and integrated with all the data they have in any other product.

Operator

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

Brent Thill -- Jefferies -- Analyst

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

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

Brent, I can take the first part on Trello monetization. I'm sorry that I don't have much new news for you, but I can repeat our stance here. I mean, Trello, we focus first on continuing to grow the [Inaudible] the size of Trello. And going after the Fortune 500,000, we think about very, very large scale, and there's a billion dollars work that's out there, trying to do all sorts of different things that Trello is very, very useful for.

You've seen us continue to improve the product with views and smart cards to integrate third-party data, as we just talked about, and a whole series of continued product improvements. That's it. We've gotten better at monetizing Trello almost every year that we -- we've had it on the platform and continue to do so. But I will say that we put usage before monetization when it comes to Trello.

You see it getting closer to the Atlassian platform in various different ways in terms of the Atlassian account and identity and all sorts of different things. So, we are very patient in doing those things correctly and continue to make Trello a huge product that's beloved by its users, and, you know, we put that first. But it's a pretty nice business for us, and we'll continue to invest in. James, I'll leave you the second. 

James Beer -- Chief Financial Officer

Yeah. Just to follow up on that, one of the things we've done around Trello pricing has been to recently bring in a standard edition. And again, this is an example, we talked about price increases at different points on this call. So, it's a good example of where there are many an occasion where we actually lower price, again, to stimulate the sort of demand that Mike is referring to.

In terms of the Americas' result, yes, it was a strong year-over-year growth rate for the Americas. I'd just point back to one of my earlier comments about, obviously, data center had very strong growth in the quarter. And we do have this -- a portion of the customer commitment that is taken upfront in terms of rev rec in the quarter in which the customer signs with us. And of course, the U.S., the Americas, particularly the U.S., is home to, you know, a good number of our largest customers.

So, a certain amount of timing effect there that made for a very strong Americas year-over-year growth rate.

Operator

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

Gregg Moskowitz -- Mizuho Securities -- Analyst

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

Scott Farquhar -- Co-Founder and Chief Executive Officer

Yes, Scott here. Look, we're really proud of the Marketplace. I remember the plane ride where Mike wrote the original code that went into the Marketplace and, you know, got us off the ground. And for us to get from there to $2 billion lifetime sales is amazing.

And more importantly, that's, you know, $1.5 billion of money that's gone back into the ecosystem, right? And we've got such a strong and powerful ecosystem around Atlassian. And, you know, we've long -- you know, for over a decade, had goals around the ecosystem outside of Atlassian to be way larger than Atlassian itself, both in terms of the number of people working on it and the revenue there. And so, we're really, really proud of that kind of the jobs and everything we've created around Atlassian and how we benefit -- all of us benefit from that. In terms of like the cloud and tipping point, obviously, Forge, our app development platform in the cloud, takes care of a lot of things that developers used to have to do themselves such as running their own servers.

And now, you know, we take care of that for you. So, that has lowered the barrier to entry for new people to build functionality inside our applications. And now, as we've seen, you know, kind of in our server-based applications, a lot of the early adopters of these new technologies are people using internally inside their own companies to integrate with different processes, to automate things themselves, to build, you know, extra functionality that is unique to that particular company. And that, you know, often then leads to people starting their own business, you know, using those things and making them more generic or, I think, flow to our existing Marketplace partners who are, you know, building out on the Forge capability.

So, you know, I think like longer term, you know, you've seen pressure on our Marketplace take rates across, you know, kind of -- particularly in the consumer side of things. There's been downward pressure on that. And we've get to play that out over the long term. You know, I would say that we will -- you know, the take rate, there'll be more pressure on the take rates than have been historically, but that's also going to lead to a much, much, much larger ecosystem built around Atlassian like -- and, you know, we're experimenting and seeing, you know, beyond our traditional partners on how we can partner with people, you know, like that we've made investments into Atlassian Ventures.

And, you know, overall, like the number we focus on is not really our take rate. Like, you know, that's nice, but these are not -- the number we focus on internally is our sort of GMV or, you know, so effectively how much money is running through the Marketplace like to our third parties. And that's the number we optimized for internally.

Operator

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

Steve Koenig -- SMBC Nikko Securities -- Analyst

Good evening. I appreciate it. Most of my questions have been asked, but -- and actually, let me also congratulate you on the quarter, also on the very low employee turnover metrics that we're seeing from LinkedIn, especially in sales. I just think it's remarkable.

I guess what I'll ask about maybe a little bit in the weeds, but, you know, the price increase that's happening on February 15th. You've talked a little bit about, you know, the impact it could have on the coming quarter. What kind of customer behavior could we expect in the subsequent four quarters with respect to like those customers that maybe have renewed early to take advantage of locking in the price? And then, you know, would they be looking to convert to cloud within the next four quarters? Would there be a greater incentive to convert to cloud? Kind of how do we think about that? And I guess the larger question here really is as we kind of puzzle over your trajectories here. You know, we've talked a bit about data center and the drivers there.

We talked qualitatively about the drivers in cloud. But we're seeing cloud continue to accelerate here. And, you know, just kind of how do we think about that, you know, even if it's qualitative? So, that's all. And thanks again and congratulations.

Cameron Deatsch -- Chief Revenue Officer

Yeah, thanks for the question. This is Cameron here. So, two pieces on this. Every time we do some price changes, obviously, customers have the ability to make a choice.

And I was actually just on a call with an executive at a very large pharmaceutical company just this week, largely talking about his options going forward, which is one, you can renew. That's fine. That's an option going forward, renew your data center licenses as we continue to plan for cloud. The second is we can start planning out a few small cloud projects, maybe for some teams, or we can go all-in on cloud and get it all done with.

It all comes down to what's your prioritization and what your company's readiness. You know, after a 30-minute conversation, he basically said, give me the all-in on cloud option. Like this is fine. We have a cloud mandate.

We need to prioritize the work. Let's just get it done now. The reality is that's how we -- but we prefer that optionality for our customers. We're not forcing them down any path.

It's -- you know, what's going to work for them and their projects and the value that we can deliver. The second big one is, you know, even if they renew today, we have plenty of programs and practices in place that two months from now or four months from now or six months from now, if they want to move to cloud, we will absolutely make them right from a licensing perspective. So, by no means that we, you know, hold them to a 12-month cycle for these decisions. At any time, we're happy to start the migration efforts, get them cloud licenses, and dip their toe in the cloud.

So, a lot of this comes down to largely the customer's appetite to take on the IT project that is in migration more than anything. For most of our customers, they are, you know, more than ready to go cloud. Almost all of them have cloud mandates and just comes down to timing of budgets, prioritization, and IT projects.

Operator

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

Joey Marincek -- JMP Securities -- Analyst

Thank you so much. It's Joey Marincek on for Pat. Appreciate the question. Can you guys give us some more color on the Percept acquisition, and then sort of how you're thinking about M&A going forward? And then separately, you know, what are you looking for in your next [Inaudible]? Thank you so much.

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

We're squeezing three questions at the end there, well done. Look, let me Percept first. Fantastic team focused on AI and smarts in -- specifically in a service management and customer service manner. Again, AI and smarts is relatively domain-specific to make a huge impact at the moment.

And so, I would see this as a part of our continual improvement in the ITSM space, both organic and inorganic, to make sure that we have the best set of ITSM tools around, and also an investment in machine learning and smarts as we keep putting at the core of our platform. I always say that our customers shouldn't need to know that we care about AI and machine learning and smarts, but we bake it deeply into the platform, and this is about, you know, continue to improve that in the area of service management and for IT teams in any service-driven enterprise out there. I can pass to Scott on M&A philosophy if that's -- or not.

Scott Farquhar -- Co-Founder and Chief Executive Officer

Good. Sounds great. We're lucky as a company. You know, we have a track record of building new products.

We have a track record of partnering in our ecosystem, which we talked about in the call. And of course, a long track record of successful M&A, you know, both really small tuck-ins and, you know, medium-sized, you know, companies like Trello, which we brought as an extension. And so, I don't see that changing, you know, in the future. Like we continue to execute really well on all three.

You know, we'll get out -- when we look at which things we want to acquire over time, you know, the No. 1 thing we look at is our cultural and mission alignment. So, you know, are they -- do they help on reaching the potential with everything. Like that's going to be the most important thing is, you know, do they align with our mission? And then do they fit culturally with Atlassian? And then everything else after that, you know, kind of go-to-market and technology and other things are areas we evaluate.

But the first two are the most important thing. And so, there's been no change to our M&A philosophy over, you know, a long -- decade-long time horizon, we'll continue to look for assets that fit really well alongside Atlassian, as well as, you know, kind of small tuck-in technology acquisitions that help us where it would be quicker to acquire something than build it ourselves.

Operator

And the next question comes from the line of Derrick Wood of Cowen. Sir, your line is open.

Derrick Wood -- Cowen and Company -- Analyst

Great, thanks. James, question for you on operating margins. You guys are targeting, I think, 17% to 18% in Q3. That's down from 26% to 27% in the first half.

Could you just talk about what's driving that margin stepdown? Where are you guys are looking to step up investments, and kind of where you see hitting the low watermark and margins starting to rebound? Thanks.

James Beer -- Chief Financial Officer

Yeah, sure, Derrick. You know, we very much feel as -- and we've been saying this for a while, that there's such significant opportunity in front of the company across the three markets that we really want to push, to continue to build on the momentum that we're seeing, hiring, bringing excellent talent in wherever they are around the world. I think the TEAM Anywhere approach we have is really important in terms of differentiating our ability to attract the best talent, obviously, in a very competitive field. And it's with those additional folks that we'll be able to get after these very significant opportunities that lie right in front of us.

And so, we're really enthusiastic about that. We're positive about that opportunity. And more technically, you know, if you think about the fact that we are increasingly becoming a cloud company quarter by quarter. You know, 53% of revenues are in our cloud.

That will, of course, have an impact on gross margins. We've talked about that for a number of years as we take on the work of hosting the services on behalf of our customers. And we're also going to be investing in additional support resources to help our customers meet that migration journey, very much along the lines of what Cameron was just talking about with the large customer that he was talking with this week. So, those will drive some transitory impacts on the gross margin as we ramp up those support resources and do the migrations work.

In terms of operating margin, that's where the significant bulk of the additional investment would be. And that, in our businesses, as you know, really comes down to adding Atlassians. And so, that's why it's really -- and we've described it in the letter as our top priority. So, that's what we'll be focused on, opportunities across the three markets.

The platform, I think, is a really important accelerant of our business. You've seen that showing up in our ability to quickly get new products developed, Point A. We've talked about those new products under that program will continue to be important. So, you know, we'll continue to be very focused on the quality of our investing and the returns that we can generate for our shareholders.

And, you know, I'd be confident that the health of the financial model for Atlassian will be strong. 

Operator

Thank you, and that concludes our question-and-answer session. I will now turn the call back to Scott. Sir, please go ahead.

Scott Farquhar -- Co-Founder and Chief Executive Officer

I just wanted to thank everyone for joining the call today, and I thank you, our customers and to all the fantastic Atlassians out there, past, present, and future. We appreciate your ongoing support, and we hope that you and your loved ones remain safe and healthy in these times. Lastly, we hope to see some of you in person and for the rest of you to tune in virtually to Team '22 coming up in April. Have a good rest of the day.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Martin Lam -- Head of Investor Relations

Scott Farquhar -- Co-Founder and Chief Executive Officer

Alex Zukin -- Wolfe Research -- Analyst

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

Nikolay Beliov -- Goldman Sachs -- Analyst

James Beer -- Chief Financial Officer

Michael Turrin -- Wells Fargo Securities -- Analyst

Keith Weiss -- Morgan Stanley -- Analyst

Cameron Deatsch -- Chief Revenue Officer

Fred Havemeyer -- Macquarie Group -- Analyst

Steve Enders -- KeyBanc Capital Markets -- Analyst

Keith Bachman -- BMO Capital Markets -- Analyst

Fatima Boolani -- Citi -- Analyst

Quinton Gabrielli -- Piper Sandler -- Analyst

Arjun Bhatia -- William Blair -- Analyst

Ittai Kidron -- Oppenheimer and Company -- Analyst

Rob Oliver -- Baird -- Analyst

DJ Hynes -- Canaccord Genuity -- Analyst

Brent Thill -- Jefferies -- Analyst

Gregg Moskowitz -- Mizuho Securities -- Analyst

Steve Koenig -- SMBC Nikko Securities -- Analyst

Joey Marincek -- JMP Securities -- Analyst

Derrick Wood -- Cowen and Company -- Analyst

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