Ian Lee - Head, IR Scott Farquhar - Co-founder and CEO Mike Cannon-Brookes - Co-founder and CEO James Beer - CFO Jay Simons - President.

Gregg Moskowitz - Cowen & Company Ittai Kidron - Oppenheimer John DiFucci - Jefferies Heather Bellini - Goldman Sachs Sanjit Singh - Morgan Stanley Jacqueline Cheong - Bank of America Merrill Lynch Jonathan Kees - Summit Insights Group.

Good afternoon, ladies and gentlemen. Thank you for joining Atlassian’s Earnings Conference Call for the First Quarter of Fiscal 2019. 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. All participants will be in a listen-only mode.

[Operator Instructions] I will now hand the call over to Ian Lee, Atlassian’s Head of Investor Relations..

Good afternoon, and welcome to Atlassian’s first quarter fiscal 2019 earnings conference call. On the call today, we have Atlassian’s Co-founders and 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 our shareholder letter with our financial results and commentary for our first quarter fiscal 2019. These items are also posted on the Investor Relations section of Atlassian’s website at investors.atlassian.com. On our IR website, there is also an accompanying presentation and data sheet available.

We’ll make some brief opening remarks and then spend the rest of the call 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.

Further information on these and other factors that could affect the Company’s financial results is included in the filings we make with the Securities and Exchange Commission from time-to-time, including the section entitled Risk Factors in our most recent Forms 20-F and 6-K.

In addition, during today’s call, we’ll discuss non-IFRS financial measures. These non-IFRS financial measures are in addition to, and not as a substitute for or superior to, measures of financial performance prepared in accordance with IFRS.

There are a number of limitations related to the use of these non-IFRS financial measures versus their nearest IFRS equivalents and they may be different from non-IFRS measures 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. I’ll now turn the call over to Scott for his brief opening remarks before we move to Q&A..

Good afternoon and thanks everyone for joining today. We had a great start to fiscal 2019. This quarter, we grew revenue by 37% year-over-year and generated more than $74.2 million of free cash flow. We also added over 5,800 net new customers during the quarter and now have more than 131,000 customers in total.

At Atlassian Summit Europe in Barcelona last month, Mike and I were privileged to meet with many of our European customers, listen to their feedback and share our latest product and Company updates with them.

In keeping [ph] with the theme of doubling down on IT teams that we discussed last quarter, we made two significant announcements at summit that enable modern IT organizations to better manage one of their biggest challenges, preventing and responding to service disruptions.

First, we announced the acquisition of OpsGenie, a leader in incident alerting; second, we launched our newest product, Jira Ops, which is a centralized hub for IT teams to coordinate their work during an incident.

Together with our other products, OpsGenie and Jira Ops help IT operations teams resolve outages faster and incur fewer incidents over time. We’ve provided more detail on those announcements along with many other updates in our shareholder letter that was issued earlier today. And with that, I will pass the call over to the operator for Q&A..

Just to start off a question, either for James or Jay, how would you characterize the amount of pull forward this quarter as compared with what you saw a year ago?.

Gregg, this is James. In terms of the billings number generally, I was pleased with the result that we recorded in Q1, nice business trends, really right across the board, but particularly around the cloud side of our business.

And in terms of the price increase effect, recall that we announced those server price increases a couple of weeks later than we did last year. So, that was only two weeks before the end of the quarter. So, we saw some pull forward. But, really, it was quite a modest effect. And, I would expect to see more of that effect in Q2 as we move forward here.

And of course, I’d further expect that that pull forward would be, in essence, drawn, moving billings up from the second half of the fiscal year..

Right. That makes sense. And then, a question on Jira Ops. I know it’s in early access for the rest of the calendar year.

But, I’m curious how significant you think the attach opportunity is, both for OpsGenie customers as well as for your installed base more broadly, going forward?.

Thanks, Gregg. It’s Scott. I will take that one. I’ll just get back to explain how we think about the whole space, in order to answer that question. We said in previous calls that this year IT would be increased investment for us, and you’ve seen that. And there is significant changes happening in IT teams around the world.

They are investing more in software, and software is a bigger part of what they do. And they are also increasingly collaborative. And both of those changes make us very well positioned to attack the IT space. They are both strength of Atlassian. And incident management is the convergences of software and IT. It’s actually where they come together.

And then, as we said about the acquisition, about $700 billion of outages caused every year just in North America. So, it’s a very, very big opportunity, if we can reduce the cost of outages to businesses. So, we’ve got three products in the space now. OpsGenie, which is sort of call rostering and alerting.

[Ph] So, when your developers and your IT teams are on call but they manage all that through OpsGenie. We have StatusPage where we communicate out to end customers soliciting solution for that. So, when you have downtime or outages, you want to make sure, your customers are aware of that, so that they know and build trust with their customers.

And thirdly, we’ve got Jira Ops. And the reason, we built that is that many of our customers already manage -- want to manage work in Jira, all the work that they have happen to Jira. And Jira Ops is a specialization of Jira specifically for incidents. So, we have tens of thousands of customers using Jira already.

And we see that incident management is going to be a fact of life for almost every software developer out there as they will move to the cloud and they have to manage things 24x7. And that’s sort of the cultural change for every single developer.

So, we see a world where in the coming 5 or 10 years, it would be unusual for developers not to be on call and not be part of an on-call rostering system. So, the combination of OpsGenie, StatusPage and Jira Ops will be sort of something that every developer will need..

The next question comes from Bhavan Suri with William Blair. Please go ahead..

It’s actually Arjun in for Bhavan. I actually just wanted to follow up on the last question. So, you have three products addressing the IT market now.

What role do you see new product introductions play in IT growth strategy into the future? Is there anything you are hearing from customers in terms of product gaps that you can share with us?.

It’s Scott. I’ll take that again. Well, firstly, we have more than three products we see that target IT. Confluence is used actually overwhelmingly by IT teams. It maybe even our most deployed product because the IT teams use a lot of Confluence for documentation and run books and procedures.

And Jira Service Desk is used heavily to answer customer support, queries or internal queries for an IT helpdesk, in addition to the three products. And of course, many IT teams develop software. So, they’re using Jira software for that. They use Jira Core to work across the business.

So, I would view our product portfolio is largely already targeting IT teams. Now, I can’t get into specifics on gaps there. We see, it’s pretty well-placed at the moment to serve a lot of IT team needs. There is some specific things that we are looking to improve.

But, I wouldn’t say it is an overwhelmingly huge gap in our line-up, because as we get further into this market and we have larger customer base, they will be telling us [indiscernible] want us to deliver for them..

The next question comes from Ittai Kidron with Oppenheimer. Please go ahead..

James, just want to make sure, I get the billings color correctly. So, basically, you are saying that you have less impact from a time standpoint of the increase in the quarter. Therefore, the pull-through effect was not as big as expected, and a lot of it will be absorbed in 2Q before normalizing in the second-half.

Is that the way we should think about the pattern of billings in the year..

I would say, just a tad differently, because in Q1, we got relatively modest pull forward. But that is what we expected. Again, the price increases were only announced a couple of weeks before the end of the quarter. And that was a couple of weeks later than the price increases that were rolled out a year ago.

So, it’s not a surprise to us that there would be a relatively modest pull forward activity in Q1. Therefore, I would expect to see more of a pull forward in Q2. And again, that would tend to be pulled, in essence, billings moving up originally from the second half up into Q2 to some degree.

Now, I also think that it’s important because this is after all the first quarter that we’ve been reporting under IFRS 15. And so, it’s important, as you think about estimating our billings in terms of revenue, plus change in deferred that you do that calculation on a fully IFRS 15 basis.

So, if you do that, you get to a billings growth rate year-over-year for the first quarter of 33%. So, you get to a $289 million calculated billings figure. So, it’s a very different figure, if you ended up using some of the old IAS 18 accounting specifics. So, I think it’s important, just to make sure that we’re all focused on this new IFRS 15 world..

Thanks for clarifying. Sounds like a lot of fun. Help me think about the license, the perpetual license revenue. We are now down into the single digits. Would you expect that to recover or you think at this point this figure is to continue kind of fade away as your subscription revenue grows.

And maybe tying into that, you keep surprising us on the gross margin, even though you keep trying to guide us to expect lower gross margin, given your cloud ramp. Help me reconcile the two..

So, first of all, talk about perpetual license. We saw growth during the quarter of 12% year-over-year. And I think this is a good illustration of how more and more of our customers are choosing, either our cloud service offerings or our data center offerings.

Both of those of course are accounted for within the subscription revenue line, which grew very nicely at 55% year-over-year. So, this is clearly a customer choice here. In terms of what is what I’d expect for this line going forward. Remember that we have just rolled out some price increases for the service side of our business.

So, that will, over time, help support both the perpetual license and maintenance lines in the revenue part of our equation. So, in terms of license revenue, when a current customer upgrades their footprint with us, so adds more users, then we’d be adding license. And those upgrades would be subject to the new pricing as time goes by.

So, I think that will -- different points tends to support the growth rate of that line item. Moving to your question about gross margins.

Yes, we do still believe that over time, as we have more and more of mix of business move to the cloud that we would see a gradual pressure downward on gross margins; in the more short-term, a variety of other factors playing out. So, in the quarter, we just closed, pleased with the gross margin performance.

And one of the things that was going on there as we’ve had number of initiatives in-house to ensure that we are utilizing our AWS resources, we use AWS to power the delivery of our cloud services, we’ve had initiatives underway to make sure that we are utilizing those services from AWS as efficiently as we can.

So, that helped support the Q1 gross margin. If you think about gross for the rest of the year, there is also an AWS factor to think about. Because I would foresee that we’ll actually be investing further in that AWS infrastructure in order to support the performance levels of our fast-growing cloud services. So, it will be a few different factors.

But, strong gross margin in Q1; I would expect a lower gross margin over the remainder of the year..

The next question comes Michael Turits with Raymond James. Please go ahead..

This is actually Robert [ph] on for Michael. Just following up on the prior question on OpsGenie.

Can you just talk about how the customer response has been so far? And what the integration opportunity is with your service desk?.

Yes, Robert. This is Scott here. [Indiscernible] really happy, extremely happy. It’s an area, OpsGenie is a fantastic product. We are really excited by the product. It’s also great cultural fit, which is really important for us as a company as well to make sure that they fit very well with Atlassian. There have about 3,000 customers at the moment.

And the biggest thing we can do is introduce our 130,000 Atlassian customers to OpsGenie. The product itself is a fantastic product, fully featured. And we are really excited to introduce our customer base to that product. And there’s definitely a big need in the market.

So, we had a great reception at our Summit when we announced it and we continue to hear a lot of demands from customers..

And maybe just one for me.

Can you just talk about [indiscernible] on the quarter and then maybe touch on the current business and go-to-market strategy there?.

Sorry, what on the quarter?.

[Indiscernible].

[Indiscernible] Right..

Yes. It performed in the line with what we expected. So, I think no major -- it tends to be a larger quarter for [indiscernible] and we sort of delivered what we wanted to..

The next question comes from John DiFucci with Jefferies. Please go ahead..

I think, the first question is for Scott. Scott, I think in your shareholder letter, you said that almost 60% of the attendees at the Barcelona conference identified themselves as part of IT teams. And you just mentioned earlier that you’re sort of -- I’m not sure exactly how you said it, but investing in the IT world.

But, I just want to make sure, like I understand what that 60% means. Because does that mean the other 40% were mostly non-IT people? And, I guess -- I think that’s a like bigger number then -- and I know you just can -- you are not sure exactly how many people that are non-IT using your stuff that.

But, I think it’s -- I’ve always thought of it as about a third in the past. So, I guess, I’m just wondering, are you seeing adoption of Atlassian products in OpsGenie aside, because that’s pure IT product by non-IT people picking up over the last six months or so.

And how should we think about that going forward?.

Thanks, John. 60% attendees identifying as IT, that people working IT department businesses; there are other software people sort of working in other departments, businesses, and so there will be some of that. But your point around increasing beyond traditional base of software and IT, we’ll continually be happy with that.

We know Trello largely used beyond traditional technical user base and we announced this 35 million accounts or users of Trello today, and that’s a huge growth, even a very larger number that continues to be very strong for us.

Confluence, as I mentioned before is, sometimes originally deployed by IT, but most successful instances like confluence becomes wall-to-wall inside an organization and becomes the hub for how information flows around a business. And so, we continue to be very happy with how Confluence is performing inside our user base.

It’s a bit of -- something that doesn’t get as much focus as it possibly should. It’s a great product. It has a huge number of fans and does get deployed wall-to-wall inside an organization..

Okay, great. And I do have a follow-up on something else and really maybe for James on the Slack partnership. I know when you announced it last quarter, you announced it and you announced earnings, and you couldn’t really say whole a lot on any details on the financial side.

And I’m just curious if there’s anything more you can share with us at this point, now that you’re a quarter into it? Perhaps on revenue sharing, anything, like even general information because you couldn’t say whole lot last time.

And then, maybe James or Scott or Jay or somebody, anything on the status of the progression of that partnership as far as adoption within both customer bases?.

Hi, John. It’s James. In terms of the financials around developing relationship with Slack, that is proceeding along as I would have expected it to. We see obviously some of our customers, Stride and HipChat already looking to migrate over to Slack. And so, we’re helping those customers make that movement.

And Slack is paying us as we expected for those migration services. So, that is moving ahead very much according to plan. That had a very modest impact on our bookings during the quarter, but it was a factor within those results.

In terms of go-to-market activity, I think very early days in that regards and nothing material at this stage driving the bookings line in that manner. I think, just another illustration of the strength of the partnership, how it’s developing is we’re very much being at each other’s user conferences very prominently and so forth.

So, we’re pleased as to the start that we’re off to..

The next question comes from Heather Bellini with Goldman Sachs. Please go ahead..

I just wanted to do another follow-up on OpsGenie and Jira Ops. I was just wondering who are you guys replacing there.

Is anyone even using a competitive product or is this done still via Excel spreadsheets today? And how do you see that helping differentiate the Jira Ops offering? And then, the other thing I was wondering is, listening to you guys talk about this.

How do you think about this Jira Ops pulling Jira Service Desk into conversations and vice versa? Do you see these as kind of a flywheel to get both products ultimately deployed at a customer?.

It’s Scott here. OpsGenie competes with other awarding [ph] systems in the market out there, and it does well. We estimate a significant part of our new customer adds come from competition. But, this is an area that is really changing at the moment. I would say, there’s still a very small number of developers today that are on call.

But everyone we talked to, said that’s the way that it’s headed. So, this is very, very early in sort of the market adoption of the space. And we expect to play the part -- it’s helping people in that transition. Jira Ops, what we find across our customer base is that people want to manage their work in Jira in one location.

And whether that is the development work they have got to do to get stuff out or the marketing team who is working around a launch or the the IT teams who want to manage internal tickets with their internal helpdesk, having that work in one location makes a huge difference for them.

So, when we looked at whether build Jira Ops or not, one thing we found was our customers want to manage their incidents in one spot with all the other work but they also more importantly want to manage all the follow-up items from those incidents in one place.

So, the great part of that Jira Ops is, not only is useful during the incident, but it’s even more useful after the incident where you want to track all the actions that come out of that to prevent it happening in the first place.

So, the idea is about using Jira Ops, you have fewer incidents in the future and you maintain and track work in one place. So, we see Jira as a platform for work. We’ve done Jira Service Desk, we have Jira Core for the general business work flows, Jira Software for people writing software and now Jira Ops now for people handing the incidents.

And you will see more of that over time with just Ops finding ways to help our customers, track more work in Jira..

I have just a small thing. This is Mike. At a philosophical level, it’s worth zooming out slightly. Both Jira Ops and Jira Services are extremely customer led. So, in both cases, we have used what customers are already using Jira four, and then built a more specific better version for that particular workflow or use case.

Jira has thousands of different workflows and opportunities to track work inside a business. When we saw 30%, 40% of customers using it for service delivery of some kind, we built a far better service desk to handle that workflow with features tailored for that work flow. Jira Ops is very similar.

So, a lot of these customers are already using Jira to manage the work during their incidents. We’ve just built a better way for them to do that’s more tailored, more specific to that use case, which will both to get more customers using that but also the existing customers having a better experience..

The next question comes from Keith Weiss with Morgan Stanley. Please go ahead..

This is Sanjit Singh for Keith Weiss. Thank you for the question. There has been a lot of focus on the IT side of the house.

I guess, maybe for Mike or Scott, or even for Jay, as you think about the non-IT or kind of moving into the business user market, I think it’ll be probably be a little more onerous [ph] on products like Confluence, products like Trello.

So, could you give us an update on how the monetization has been progressing with Trello, now that you are up to sort of 35 million users, any sort of update there?.

It’s Mike here, I can certainly take that. Look, again, if I start at the philosophy level, both software and IT are incredible landing spots for us within an organization. There are teams that actively go out and seek solutions and seek improvements to their workflows. There are also teams that work with a lot of other companies.

So, that’s why you see us often landing Jira or Confluence in IT teams in varous different flavors for Jira but then expanding to the rest of the business. So, when we think about all teams in the business, we think about Jira and Confluence as much as we think about something like Trello.

It’s worth saying that all of those are when we consider all teams. There is a huge amount of non-IT, non-software work happening in both of those products. Trello has some of the same semantics.

So, it does land in IT teams, it does land in software teams, especially in smaller organizations, but obviously expanse much more rapidly than that and does a huge amount of landing outside of that as well. We obviously continue to be hugely excited about the Trello opportunity.

I don’t think we could have been more excited 18 months into the journey with the Trello team. We did say that Trello’s popped 35 million registered users, which is up from about 25 mill a year ago. So, obviously, continues to have great growth. No change in our workload there in Trello.

It continues to be priority number one of continuing to grow the Trello business and the Trello product as a -- so the opportunity it has by itself and secondarily, focusing on monetization and integration with the rest of the Atlassian family. We will continue to put things in that order.

Trello did, as we said last quarter, meaningfully exceed the 20 mill target for FY18 on the revenue side, which is great. But, we continue to put Trello growth and Trello monetization by itself first and cross-selling and cross-flow second..

That’s very helpful. Thank you for that. Maybe for James, just so that I’m clear. So, the customers -- if we go back to last year’s piece increases, so the customers that renewed early and maybe they signed annual contract, or in some cases multi-year contracts.

Just so that I -- given the new price increases, if they were up for renewal this year, even next year, they would be exposed to the new price increases.

Do I have this dynamic correct?.

Yes. I mean, you do, at a high level. It’s a rolling effect, if you will.

Because in that circumstance, if someone last year in essence pulled forward their renewal, say for a year and it was occurring -- the renewal was coming up right around the time in which we announced these price increases, they could once again, in essence, pull forward the next renewal.

But of course, that new renewal would be in essence at last year’s price increased rate. So, you’re just being able to defer to some portion of our customer base decide to cite to early renew and therefore, in essence, extend their old pricing for another year or so..

The next question comes from Nikolay Beliov with Bank of America Merrill Lynch. Please go ahead..

Actually Jacqueline Cheong on for Nikolay. For this year, did you see any difference in the customer behavior around the pricing changes versus last year? Could you comment on both the cloud and server additions? And if we could get an update on the home products as well..

Sure. I’m going to pass it to Mike on the home products, but really quickly on the pricing -- this is Jay, no differences. As we’ve said before, we just do a tons of analysis to support the changes that we do make around pricing.

And do keep in mind that with the changes that we announced in September, the increase for an average customer is pretty nominal, measured in hundreds of dollars. And still our prices remain incredibly affordable relative to what our customers would spend on software that they value less.

And then, maybe the only other point is that just from a philosophy perspective, we have stressed this before but it’s worth stressing again that our pricing philosophy is pretty deeply rooted. We want to provide the best value at the absolute best price in every category in which we compete, and that tends to be an Atlassian advantage.

Over to Mike for home..

I can take the home product down here in Sydney.

Again with -- perhaps to reminder, so, the teamwork platform that we have been building out for a couple of years that underpins a lot of our products, not all, obviously, not in OpsGenie, not yet in Trello really in meaningful way, continues to be something that we invest in, for a number of different reasons.

Firstly from a cost and R&D perspective, obviously, if we can get more products using a similar infrastructure, we’ve moved almost all our products now to a common identity call for example for login and sign-up and user management, and things like this. That obviously gives us cost advantages in building things.

We can invest in building better and more and leveraging that across a number of products. And secondly, it gives the customers a more consistent experience. We are constantly trying to be pragmatic about the balance between providing a great single product experience and providing a great Atlassian family experience.

It’s not an easy balance to strike and we continue to work to do that. One of the areas that we have been working now for about a year and half on is what’s normally called home. One should be careful, it’s a product, yes; it’s not a for sale product.

So, you can think about it as something you get free when you have a single Atlassian product, two Atlassian products, three Atlassian products, you get home in the box, and consist of a number of pieces.

It continues to be more and more of a default starting location for our customers, whether they are using Jira Confluence or Jira and Confluence to get, and we will continue to do that. There is an advantage obviously, your chances of choosing the second product if you are using home.

And it includes the people directory, which is now largely common in cloud, so who is using these products, what are they doing in the products, et cetera. It will just be something that we continue to work on across people, across search, across notifications and various other things.

It’s not a for sale product per se, but obviously long-term, it will drive higher customer satisfaction and better cross-flow among the product..

And maybe another follow-up. So, the cloud version was a major area of investment.

So, now that the cloud version is up and running, are we going to see some R&D leverage going forward? And also, what are the R&D priorities looking ahead?.

Look, I can take that. I would say one thing that we are cautious on, yes, the cloud version is quite up and running, but it continues to require major investment. There’s still a lot of work we’re doing on continuing to be more and more world-class cloud provider. You can see that on the enterprise side of things.

This quarter, we both raised the 2,000 user upper limit to 5,000, so obviously giving our larger customers in cloud a lot more headroom to continue to expand. And obviously, we don’t need to do that if we thought we could support those customers and give them a great experience.

And secondly, we’ve launched products like Atlassian Access which launched about three months ago for our common user provisioning, identity control and security management product for organizations that have a large number of users in our cloud offerings.

So, there continues to be a lot of work, not least also just in the infrastructure scaling at Atlassian Cloud. We’ve launched a couple of new regions. So, now we’re available in Ireland and Sydney in Australia for the Asia Pacific region, and we announced that we are bringing up two other regions as well in Singapore and in Frankfurt in Germany.

So, they all continue to be large areas of investment for the R&D infrastructure side of cloud beyond the historical movement to AWS, which is largely finished now, yes..

This is James, I’d just add to your question about leverage that we would continue to expect to record modest annual increases in our operating and free cash flow margins over time..

The next question comes from Jonathan Kees with Summit Insights Group. Please go ahead..

I just wanted to ask I guess more on the competitive picture. If I can be specific, Microsoft obviously with purchase, and investment now in GitHub and also its new version of project. Are you rubbing elbows more with that? Are you seeing any change in that dynamic.

And obviously, since your doubling down in IT, are you also now rubbing elbows more with ServiceNow and IT as well as with their version of service desk in terms like RFPs and in terms of being -- in terms of your competitive wins? Thanks..

I’ll take that. In terms of GitHub and Microsoft, we’re not seeing any change there, any material changes in what’s happening there. We -- as I said before, we believe that Microsoft’s key rational for acquiring GitHub is to encourage developers to use their Azure platform.

And that’s obviously a very different thing to what we are trying to do with our customer base [indiscernible]. In terms of ServiceNow, we’ve mentioned before, where we both play in the IT space, we don’t come across them very often. They’re largely a top-down sell to the fortune 2000; we sell to fortune 500,000.

And so, business models are very different, and the way we go to market is very different. So, we don’t see come across them very often..

Great. And last question is, with Trello, it sounds like most of the growth areas just -- especially the focus is just growing Trello first and then second will be cross-selling. It sounds like most of the Trello users are just purely Trello users, they’re not using any of the products, Atlassian products.

Just wondering if there’s been any particular strength in terms of Trello? Is it via like country wise, is it more domestic? And at one point you talked about Trello in Japan was going to be a big opportunity, they were looking forward to the inclusion of Trello in terms of the local apps there, and the market there was a very keen in terms of the Trello purchase.

Just some more color in terms of the Trello traction? Thanks..

Sure. This is Mike again. Look, Trello is a global phenomenon. And one of the things that Atlassian has been able to do since they came on board is do some country-specific launches, as you mentioned, in Japan for example; we’ve also done Sweden and the Nordics, and I believe France as well that maybe just before that came on board.

Those country-specific launches tend to have a series of local PR events, often user group events where we’ll get Trello users in the country together, as well as specific power-ups for Trello that deal with local -- popular local applications. That tends to just add topspin to Trello in that particular country.

We also should -- I should mention we do localization, although I believe we already had Japan for Trello before that. So, that’s just the way of driving some more energy in a particular geography. We have like Trello users all over the planet.

So, it is by far our most widely, geographically global product that has a huge amount of opportunity in lots of different flavors. Again, we have a huge amount of Trello work that happens in Japan, as I mentioned in Nordics, a lot of users in South America, as well as traditional users [ph] of North America and Western Europe.

So, it’s just a very, very large product that we continue to invest in growing all over the world. You’ll probably see us do some specific country launches. But I wouldn’t get too distracted by that. That’s just where we try to add little bit of topspin, usually we’re already in country when we’re doing that.

And we continue to invest all over the globe in Trello’s opportunity, as well as what people use it for, a lot of home teams, a lot of teams outside of organizations as well as teams inside of organizations.

Quite often people start using Trello to manage projects with their partner, with their construction person, whatever may be doing that their trying to mange with their families often, often people get their kids in Trello doing some family management.

If that’s successful for them, they often bring that into their workplace, as much as they do vice versa. It’s what makes Trello such a unique product..

[Operator Instructions] The next question comes from Rishi Jaluria with D.A. Davidson. Please go ahead. .

Hi, guys. This is [technical difficulty]. I was just wondering regarding OpsGenie, how much customer overlap you guys have. .

We haven’t -- it’s Scott here. We disclosed the opportunity of 3,000 customers, but we haven’t got into the overlap. That’s not something we typically disclose between the different products.

But, you could imagine, you have 130,000 that you’re going to find a reasonable overlap across the customers bases, but we don’t get any more specific than that, I’m afraid..

And then, my second question, I was just wondering how we should think about subscription growth going forward on a year-over-year basis..

Yes. We don’t break out the specific revenue lines, if you well, in terms of our guide. But, I would say that since the subscription revenue line encapsulates both our cloud business and our data center business, I would expect that to be a very robust number going forward. So, we clearly see more and more customers moving in those directions.

And I think that will be reflected in our results going forward.

So, if we don’t have any further questions, operator, let me confirm that first?.

There are no further questions in the queue. .

Okay. Let me just make a few remarks about operating margins. I thought I’d group these remarks, first of all in terms of the first half of the year, then address the second half of the year and then give some quarter-specific comments as well.

So, in terms of the first half of fiscal ‘19, I mentioned at the start of the call that we were pleased with the revenue performance in Q1 that certainly drove a strong margin result as a result of our performance right across the business, cloud, server and data center.

And it’s fair to say that during Q1, a goodly portion of our recruitment resources were very much focused on a couple of very discrete projects, the first of which was our decision to withdraw from the Stride and HipChat markets and enter into the building relationship with Slack.

And so, that drove very much focus on finding the right next career step for the material number of our team who have been developing Stride and HipChat over recent years. And I was very pleased that we were very successful in that regard in terms of finding the good next step further, a very significant majority of that team.

The second major initiative that the recruitment team was focused on of course was the acquisition of OpsGenie, which brought to the company around 200 new employees as well.

And so, I would expect that in the second quarter now with much of that work behind us that recruit recruitment team will be able to focus more of their effort around our organic hiring goals. So, that brings me to some thoughts around the second half margin story in fiscal ‘19.

I would expect organic headcount to increase and therefore the second half operating margins would be lower than those recorded in the first half of the year. Now recall, I mentioned earlier in this conversation that we also expected somewhat lower gross margins in the second half of the year, as a result of our AWS investment plans.

More specifically, I would look in the second half of the fiscal year for opportunities to really invest, getting very significant opportunities that we have in the IT team’s area. Obviously, we’ve talked a lot about that on this call in the last 45 minutes or so. And we are very excited in particular about our OpsGenie opportunity.

So, I would see hiring, marketing and product development resources all being a part of that focus in the second half of the year. So, lastly, just turning to some additional quarter-specific commentary on operating margins. First of all just building on that last thought of us really working hard in support of the OpsGenie opportunity.

We plan to initiate some targeted marketing spend in Q2. So, I would expect to see a slightly higher ratio for our Q2 marketing spend as a percentage of revenue when we get together in 90 days time.

Second, I would expect there to be a decline in margin from Q2 to Q3 as is quite typical because it’s in the start of Q3 that we roll out new salary increases for our team and also reset payroll taxes.

And I would further expect that that sequential decline from Q2 to Q3 in terms of operating margins would be pretty consistent with what we saw last year between Q2 and Q3 on an IFRS 15 basis. So, again, it is important that we be working in the new IFRS 15 accounting structures.

So, with all of that said, just again to wrap up, as I mentioned earlier that we would expect ongoing annual modest increases in both operating and free cash flow margins over time.

Mike, are you going to wrap up?.

Thanks James, and thanks to everyone for joining the call today. We really appreciate your time and look forward to keeping you updated on our progress in future quarters. Have a kickass weekend..

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