Atlassian Corp Q1 FY2022 Earnings Call

Good afternoon. Thank you for joining Atlassian's Earnings Conference Call for the First 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. Please go ahead.

Welcome to Atlassian's First Quarter of Fiscal Year 2022 Earnings Call. Thank you for being with us today. On the call, we have Atlassian's Co-Founders and Co-CEOs, Scott Farquhar and Mike Cannon-Brookes, along with our Chief Financial Officer, James Beer. Earlier today, we released a shareholder letter and press release detailing our financial results and insights for the first quarter of fiscal year 2022. You can find the shareholder letter on Atlassian's Work Life blog and in the Investor Relations section of our website, where additional earnings-related materials like the earnings press release and supplemental investor data sheet are also available. As always, the shareholder letter includes management's perspectives for the quarter. Today, we will begin with brief opening remarks followed by a Q&A session. This call contains forward-looking statements, which involve known and unknown risks, uncertainties, and factors that may cause actual results and performance to differ significantly from what is stated in those forward-looking statements. You should not view them as predictions of future events. Forward-looking statements reflect our management's beliefs and assumptions at the time they are made, and we have no obligation to update them if circumstances change. More information on these and other factors that might impact the company's financial results can be found in our filings with the Securities and Exchange Commission, particularly in the Risk Factors section of our latest Form 20-F and quarterly Form 6-K. We will also discuss non-IFRS financial measures during the call. These measures are supplementary and not a replacement for IFRS-compliant financial performance metrics. A reconciliation of IFRS and non-IFRS financial measures can be found in our shareholder letter, earnings release, and investor data sheet on our IR website. Now, I'll turn the call over to Mike for his opening remarks.

Thank you all for joining us today. When Scott and I started Atlassian almost 20 years ago, we wanted to create an amazing company where people love coming to work every day. We were recently named one of the world's Best Workplaces for 2021 by the Great Place to Work. We're thrilled and humbled to be recognized among the top 25 companies in the world in any industry, in any country. We've won a lot of trophies over the years, but this recognition is special. It's going straight to the pool room, as we say in Australia. In all seriousness, it's truly one of Scott and my proudest accomplishments. It is a testament to the true stewards of our culture, the many thousands of Atlassians we have around the world who live our values every day. Your resilience, passion, and commitment inspire us. For all of you Atlassians listening, thanks for making this possible. As you've already read in our shareholder letter, our momentum continues as we kept winning in Q1 of fiscal '22. We continue to deliver value to our customers and innovate across all three of our core markets. A great example of this innovation is Jira Service Management. In its first year in the market, Jira Service Management was named a visionary in Gartner's Magic Quadrant for IT Service Management. And its customer base grew to over 35,000, up from 25,000 just one year ago. This is the result of a steady drumbeat of innovation and R&D investment as we continually improve better and better each and every quarter. And we apply the same philosophy to our offerings in agile development and in work management for all. The continual improvement of our cloud platform is also what's driving our progress forward in the cloud. This quarter, cloud revenue was up 53% year-over-year. We signed on to the Trusted Cloud Principles, joining as initial signatories, alongside Amazon, Google, and Microsoft, making a commitment to protect our customers' rights, privacy, and data in the cloud. Underscoring this commitment to our customers, we shipped data residency in Australia this quarter, on the heels of delivering this critical capability in Europe last quarter. With that, I'll pass the call over to the operator for your questions.

And your first question comes from the line of Keith Weiss at Morgan Stanley.

Excellent. And congratulations on a great quarter. I was hoping you guys could help and dig in a little bit into the work management opportunity. From the outside, it seems like a massive expansion of the TAM for you guys that you've been working on for a while, but there's also a lot of products that you have that seem to target it. The Jira Core, you have Trello, you have Confluence. Can you help us understand kind of the solution portfolio, what specifically in work management are you trying to target? And what's the competitive dynamic in terms of where you guys are going in?

Yes. Thanks, Keith. I can take that one off the bat. Look, teamwork is very complex. We know that. There's no one correct way or one single way to work or collaborate. That's why you see us in the work management for all space in the market, taking a multiproduct approach and investing heavily in our platform. So you've seen us mention Jira Work Management continues to go from strength to strength every quarter. We added a whole bunch of great new early customers, UiPath, Avalara, SeaWorld, BEA, who are taking the Jira family well beyond the initial audiences that we had, I suppose. Again, about half of our Jira audience is non-technical teams today, and we expect that to continue to improve and fuel our growth in that area. At the same time, Trello continues to do well. Confluence continues to do extremely well. And as you've seen from our Point A program with products like Team Central, we really have a very comprehensive offering in that space, all built on our platform story. So we keep talking about world-class automation, analytics, smarts. That is our ability to invest in the R&D to make that platform amazing for every team in every company and continuing to fill out the story across the products and making sure they work well together. We're obviously extremely excited about where we are, where we sit, and how we're performing in that market.

Your next question comes from the line of Gregg Moskowitz from Mizuho.

First of all, congrats, James, on all your accomplishments and a very well-deserved retirement. And Mike, just on a personal note, I wanted to congratulate you and your wife on your green pledge and thank you for all the help that, that will provide. My question relates to the cloud and product pricing. You recently made the decision to raise cloud pricing, which isn't something, quite frankly, that we've seen recently from Atlassian. What gives you the confidence to do so given that many of your customers are still early in their journey towards the cloud?

Well, great. Thank you very much for the thoughts there. The first thing I'd say is it just really reflects the strength of the underlying growth of our cloud business. And that, of course, is all driven by the very significant value that we're delivering for our customers through these cloud services. You know that we've been putting very significant investment into our cloud products for a number of years now. And we always, from a philosophical perspective, want to be a terrific value. Nothing in that notion has changed. But nonetheless, I think there is an opportunity for us to move pricing along as we have published just a few weeks ago by the order of about 5% across Jira Software and Confluence, in particular. So I think it's just illustrative of the investment that we've put in and how that's worked out well for our customers. We have had now in a few of our shareholder letters, examples, quotes from customers talking about the savings that they enjoy when they implement our cloud products. When they look at the total cost of ownership, they're realizing that it makes sense for them from a cost equation. And, of course, oftentimes more important to these customers, they're able to, in essence, take their people and have them work on higher value-added tasks. Our software is able to do so much of the lower value-added work for them. And I just think it's a terrific example of our long-term orientation to R&D investing.

And Gregg, I was going to add some things to James there. I think you answered that really well. We've had a long-term philosophy of optimizing prices, and we've, over the years, raised prices, we've lowered prices, we've introduced new tiers and additions, both at the low end, the free at the high end, with premium and enterprise. And our philosophy has evolved over the years. It's more towards frequent, smaller price changes. And as someone that keeps our prices publicly available on a website, which is different from most enterprise software companies, you can see those changes. And it might, on the outside, look like we're making more changes than other people, but I think it's a result of that philosophy and the fact that we're public about how we interact with our customers. Our philosophy is always to be sure that we provide the best value in whatever price our customers have to pay and be a no-brainer for all our customers to engage with and buy Atlassian. And so you'll continue to see us do this as we have over the last 20 years.

Your next question comes from James Fish from Piper Sandler.

Congratulations on your upcoming retirement, James. I wanted to discuss data residency. You're currently providing it in four locations across three continents. Which areas do you expect to expand into, or where do you see the highest demand that is not being met at the moment? Have there been any delays in customer decisions regarding data center versus cloud options? Also, what is the expected mix between data center and the various product lines?

Thanks, James. I can definitely address the first part of that question, and I'll let James handle the second part about the mix shift. We successfully launched data residency in Australia this quarter. For instance, the Commonwealth Bank, one of the largest banks in Australia and globally, transitioned to our cloud with tens of thousands of users, driven not only by data residency in Australia but also by the performance and scale improvements, as well as compliance, legal, and regulatory enhancements we've made to our enterprise platform. This includes providing access to premium and enterprise options and supporting various standards. This reflects our ongoing enterprise cloud journey as we strive to meet the needs of our largest customers in the cloud. We are also expanding our infrastructure platform to enable faster rollout of new regions. Each new rollout occurs more quickly than the last, allowing more customers to migrate. We prioritize research and development to automate these processes effectively, while also being led by customer feedback to determine where the greatest needs are. We anticipate expanding data residency in more locations around the world as we collaborate with our customers.

On the cloud data center mix, I'll touch on that one. But just a bit of background. These big transitions and customer transitions, like there's always a chance if you do them wrong, you could end up in the doghouse. But that is not all happening here. We've done such a great job across our customers, across our partners. And just to get some stats, our channel partner sales were up 300% year-on-year in terms of selling the cloud compared to what they were a year ago. We're seeing great demand from new customers on top of migrations and great customer stories like Castlight Health. We moved 1,200 users, including 50 apps from server to cloud. I mean Commonwealth Bank, as we mentioned, is huge, highly regulated industry in Australia in banking, moved in tens of thousands of their users across from data center to cloud. So I'm really excited about that. On the data center to cloud mix, as we said, this is a multiyear transition for our biggest customers, and we still expect a large portion of our customers to move over the coming years. And that is as our customers build up their capability and engage with the transition. In the meantime, while that's happening, they're still buying data center. We're seeing a lot of customers expand the usage of data center as they prepare. And that speaks to the quality of our product and the demand for what we provide, that they are still purchasing kind of as they make their migrations to cloud. So to give you some comfort around people not being stuck at data center, we're really comfortable with that transition point. 30% of our cloud migrations are coming from data center customers today. And so we do see a lot of our customers maybe go from server to data center to cloud, or have been in data center for many, many years and are making that migration to cloud, or are not ready just yet and are still doubling down on their investments with Atlassian. So I think what you can take away from that is our customers are just continuing to commit themselves to Atlassian.

And if I could just pile on a little further with one other factoid to support that. When you think about the cloud business, we're obviously pleased with the 53% growth that we recorded year-over-year in Q1. As we think about migrations, yes, obviously, this is an important initiative for the company. But I'm only expecting migrations to drive approximately mid-single-digit growth for us in that cloud, in the subscription revenue line. So a relatively modest growth driver for us, and that just really illustrates how we're going nicely in terms of user expansion, selling premium additions, the free-to-pay funnel is working well, and churn is working well as well.

Your next question comes from the line of Tyler Radke from Citi.

I echo my congrats to you, James. You referenced in the shareholder letter just some tougher comps in the second half on the data center side. I'm curious how we should think about the trajectory of cloud growth from here. Obviously, there's a lot of dynamics between the cloud price increase and just some of the changes from last year. So would you expect that the cloud growth has tougher comps in the second half as well? Or do you think that can sustainably grow at the rate that we saw here in Q1?

Thank you for your question. As we mentioned about a quarter ago, for fiscal '22, we expect our cloud growth rate to accelerate year-over-year. You're correct that we had a particularly strong second half for the data center business. In Q3 of last year, we saw significant customer activity as they responded to price increases for both servers and data center products. It's important to note that last Q3 was also when we stopped new server license sales. We'll see how this impacts the upcoming Q3. We've already announced our plan to stop selling several license upgrades in the near future. The cloud business remains robust, consistent with the significant investments we've made over recent years, and we intend to continue that trajectory. We are confident in the underlying performance of the business. Regarding migrations, this is a smaller component of our growth. Looking at the timeline for migrations, we are on track with what we've been discussing for the past year. We are satisfied with our progress, and we have a substantial amount of migration work planned for fiscal '23 and beyond.

And your next question comes from Michael Turrin from Wells Fargo.

Congratulations on another impressive quarter. You're still adding nearly 12,000 net new customers, and I appreciate the updated disclosures. Can you walk us through what's driving that continued strength at the top of the funnel? How should we think about Q1 in relation to the pace you can maintain throughout the year as the environment stabilizes? It looks like Jira Service Management added 5,000 customers compared to earlier disclosures. Can you provide an update on the adoption trends or interest levels you're observing there? The upcoming world tour also looks interesting.

Well, I can start off on that one. First of all, yes, by the incremental customer count number that we've published today, Q1, that reflects, I think, again, how people are very much embracing digital transformation, embracing remote work. I think the compatibility of our product set seems clear. And so we're very encouraged by that. Certainly, Q1's number of over 11,700 was a nice contrast to last Q1, where the number was a little over 6,700. So remarkable strength year-over-year. Yes, the number will move around quarter-to-quarter. We've traditionally said that. But we're very much focused on optimizing our top-of-funnel activity. I think last quarter in Q4 was one that particularly benefited from some of our free to paid optimizations. Now that's an ongoing process. We work at that constantly, and that's another driver of how we continue to expand our customer base. Recall now that new customers drive a relatively small proportion of our in-period revenue of the order of around 10%. But it's those new customers where we continue to grow the user base quarter-over-quarter, year-over-year into the future, and we've done that very consistently.

You did an excellent job addressing the details of the numbers. I want to highlight that our Jira Service Management product has grown to 35,000 customers, up from 25,000 since its launch a year ago. We are very pleased with the market response to Jira Service Management, which is resonating with customers from small teams, who find it to be the only solution with the necessary features, to larger customers who are transitioning from other vendors because of its significantly faster time to value, lower total cost of ownership, and greater flexibility for adoption and expansion. As a result, we are seeing a substantial number of customers adopting it.

If I might just add something on a philosophical level there. Two, 2.5 years ago, I think we wrote in our shareholder letter that we were going to double down on the opportunity we saw in IT. And since then, you've seen us do what we classically do, which is deliver against those words that we told you we were going to do. Through the acquisition of Opsgenie, the integration of CMDB, the improvements in asset management, and then the launch of Jira Service Management bringing software and IT close together, that's a proof point that Scott mentioned of delivering against that opportunity in IT. We have many more opportunities in front of us that we're investing against, as we said. But hopefully, it's a proof point that we do what we tell you we're going to do.

Your next question comes from the line of Alex Zukin from Wolfe Research.

First of all, it's a pleasure to be covering you guys. Maybe just the big picture question around cloud. From the perspective of cloud migration, start thinking about your original expectations, specifically for your enterprise cohort. Can you help us understand how you feel differently or any level of incremental confidence in potentially migrating that cohort sooner than you planned, or any guidance on that progression from a timeline perspective? And separately, as we think on a broader spectrum, your offering being so much more broad-based in the cloud. What are you seeing with respect to cross-sell and upsell opportunities within that cohort and customer base versus maybe your initial plans?

I'll cover the first one. In terms of the enterprise cohort and migrations, nothing has changed from what we've outlined previously, which is it's going to take a multiyear journey. And we need to do some work on our end to accommodate different regulations in different areas and data residency and some engineering things on our side. And customers, for them, moving some of these large systems can be a multi-month-long process that they need to do to make sure that they can do the change management for their employees. And so nothing's changed along those lines. We are seeing great customer demand at all levels in terms of migrating to cloud. They all know that cloud is the destination. They're really excited by it. James has mentioned, the total cloud cost of ownership is significantly lower for them. So I would say that we're tracking as we expected, and really pleased with that progress. Mike, do you want to talk about the cross-sell and upsell?

Sure, Alex. Look, the way we think about this is cross-sell and upsell expanding the users and the penetration of the use cases within our customers is an inherent and deeply built part of our DNA, and it has been. We've been a multiproduct company for an awfully long time now. When you hear us talk about our three markets in terms of Agile DevOps, ITSM, and work management for all, there are lots of overlap opportunities, both in the customers between those and in the products. So you see obviously Jira Service Management working alongside Jira Software to get developers and IT admins closer together in delivering value. That is both a purposeful strategy on our behalf and also purposefully built into the platform and all of the shared infrastructure that we use. So things like automation, our Forge and Connect extensibility platforms, all of the user experiences, things like the editor and other things that are common across those products is an intentional part of that journey. You also see us in our Point A program continuing to innovate and deliver new offerings. You can see that in Compass, in the Agile DevOps space and Team Central, in the work management for all space, looking at goals and status updates and help and the cultural and humanistic side of teams and people and how they come together, how work is actually delivered across projects, goals, metrics, strategies, help, and the teams that actually deliver that. Our platform enables us to move our users around to where they get the most value from our product family, and we continue to get better and better at that. Every quarter, I would say we improve at how we do that.

Your next question comes from Fred Havemeyer from Macquarie.

Congratulations. Just echoing what most others have said on a very solid quarter here. And James, it's been a pleasure working with you. I'm looking forward to continuing working with you as you transition. And all the best with retirement. So I'd like to ask about cybersecurity here. During the quarter, there was that Confluence exploit related to older on-premise versions of Confluence, in which you quickly mitigated it. All software eventually will have an exploit discovered. But it was notable here that Atlassian's cloud products were immune to the exploit, those in the wild. I'm curious, did you see any customers accelerating their server to cloud migration pathways around this event? And then also more generally, how do you think about Atlassian's approach to cybersecurity across your different deployment models?

Fred, the challenge of security in software and technology is increasingly difficult. One effective strategy is having a top-notch security team, which we do, working tirelessly to protect our customers. Regarding the Confluence incident you mentioned, it had already been patched and updates were shipped in time; the issue was how quickly the customer updated their own software. The advantage of the cloud, as you noted, is that we can handle those updates instantly on behalf of all our hundreds of thousands of customers without them having to do anything. We can implement changes overnight and roll them out quickly. Additionally, we can perform extensive analysis in the cloud. This is a significant benefit of SaaS software; we excel at managing our own applications. We are the best in the world at running, securing, and scaling our products, which benefits our enterprise customers. While I don't have specific data on how this has impacted migration timelines, it's clear that customers recognize this advantage, especially larger ones, though smaller companies benefit as well. We often discuss security in large enterprises, but for smaller firms, our world-class team far exceeds what they could achieve in-house. For companies with just 10 or 20 employees, security is particularly challenging. This focus on security is ingrained in our company culture, and I believe it highlights yet another advantage of migrating to Atlassian's cloud.

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

Perfect. Congrats on a great quarter again. I want to maybe dig a little bit deeper into Jira Service Management, and you called out the strength in customer growth. Since you've launched this new offering that's bundled in Jira Service Desk and Opsgenie and other functionality, including CMDB, have you noticed a change in the type of customer that is adopting Jira Service Management versus the prior Jira Service Desk? Are you seeing more sophisticated customers, more enterprise deployments there as this offering has scaled?

Yes. Thanks, Arjun. Great question. Obviously, in the ITSM space, we think we are extremely uniquely positioned. We're the only vendor that can bring together your software teams with your IT teams in a single pane of glass, in a singular platform that's both comprehensive and modern. And that gives us a real leg up into customers managing their IT workflows, but also managing the workflow that IT is responsible for on behalf of other teams in the business. So one of the biggest changes we've seen since Jira Service Management's release is not only IT teams adopting it in ever greater numbers, with things like Forge and automation and all the other things that come in the box as well as obviously the asset management, the inclusion of Opsgenie and rostering for modern service management and paging operations, we continue to see that resonating really, really strongly with IT teams. What we're seeing is the family of products that we deliver though, increasingly are seen as visionary by, as was noted earlier, by Gartner, but others, in terms of how we play across not just Jira Service Management and even Jira Software and Jira Service Management, but in things like Confluence and how that comes together, in Jira Work Management to enable IT teams to deliver applications at very, very low cost on top of the Jira platform to the already familiar users. And obviously, in things like Compass in our Point A program for managing their software components and digital assets, which is incredibly complicated for customers to deal with at the moment. And then to things like Team Central to the more cultural aspect. So I think what's resonating with IT teams is not just Jira Service Management, although, obviously, that's doing extremely well at the moment, but the offering that we can show to an IT administrator or a CIO or a CEO about how we can help them across their digital transformation, all the things the IT team is responsible for not just their own day-to-day work.

And if I could just add on one thing to what Mike was saying there. We've spoken earlier about our pricing philosophy as always being oriented on excellent customer value. I think Jira Service Management is a classic example of where we're an exceptionally good value and our customers are recognizing that.

And your next question comes from the line of Ittai Kidron from Oppenheimer.

Congrats on a great quarter. And James, all the best and good luck. I guess I have a question regarding the data center growth this quarter, which was very strong. And I'm trying to think about whether the growth there really reflects more server customers preferring to stay on-premise and shift to data center rather than move to the cloud. So maybe you can talk about what's driving the data center growth, how do you think about the trade-off from server into cloud versus data center? And also, with regards to the transition to the cloud, in the past, you've kind of talked about the transition being likely back-end loaded. And it sounds like it going to attract. But you also talked about medium- and large-sized customers being more at the back end of this transition rather than the front of it. Does that still hold? Or are you seeing the larger customers actually move early rather than sooner rather than later?

Ittai, I got thoughts on that. Michael Cannon-Brookes: Scott, you jump. I'll start. First, I'll let James address the specific finance questions. I don't have much to add to the earlier response, which is that our customers are eager for Atlassian products. We are experiencing strong demand, but many customers are not ready to transition to our cloud offerings. They are currently investing in our data center products as a direct path to the cloud. We are noticing an uptick in demand, and our new customer and cloud revenue figures indicate robust interest in our cloud services. Our data center solutions are not a dead end; they serve as a crucial step toward cloud adoption, with 30% of our cloud migrations originating from data center products. I'm optimistic about this trend. I believe data center growth will remain strong as customers increasingly adopt Atlassian products and make the decision to switch to the cloud. James, could you provide some specifics?

Yes. Just to add on a couple of things, Ittai. Recall that we have raised prices on the data center products, around 15% that got implemented in Q3. So as the quarters go by, you see that effect coming through. The other thing I'd add is that we did see that unusual volume of data center activity in Q3. Now much of that showed up in the revenue results in Q3. But also, there was a significant deferred revenue balance that got generated in Q3. And so the subsequent quarters, Q4, now Q1, have also benefited from some of the roll-off of that deferred revenue balance as well. And as to the timetable part of your question, I would expect that we would continue to see the bigger proportion of migrating customers be the larger, medium-sized customers migrating in fiscal '23 and beyond; they have the most complex requirements and so forth. So that continues to be our expectation that we're very much tracking along to the original steer that we gave you on the migration timetable.

Your next question comes from Brent Thill from Jefferies.

This is Luv Sodha, on for Brent Thill. Congrats on a great start to the fiscal year. And congrats, James, on an amazing run. I wanted to ask a couple of questions. One was, as part of the price changes this year, you also offered some incremental pricing discounts for the enterprise customers. So I wanted to ask whether that is to incentivize more enterprise customers to move to the cloud. And will that have a bigger impact on the migration pace? Or should we expect the discounts that you have in place to have a bigger impact? And then my second question was around the opportunity from standard to premium. Could you help us think about that opportunity set? What percentage of your customers are on the cloud standard edition? And how would you move them to premium?

Well, thanks for the question. In terms of the enterprise-sized customers and pricing, we've got at least a couple of things going on in recent months. Back in July, what we published were, in essence, extensions of our pricing curves. Previously, the pricing curves had accommodated small- and medium-sized type customers. But increasingly, we're seeing larger customers looking to move to the cloud. So we extended those pricing curves to larger user levels, very much consistent with the way our pricing curves, the data center business, and the server business have been designed. And so perhaps not surprisingly, the larger number of users you commit to, the somewhat lower would be the per-user price. So what you saw us publishing in July was just reflecting the reality that larger customers are now moving over to the cloud. So we needed to update our pricing. The other theme that's relevant in terms of migrations for these larger customers, of course, are other loyalty discounts that we've had in place now for quite a while. And as of July 1 just passed, we reduced the attractiveness of those discounts. They're still very attractive, so a 40% discount for server customers moving over to the cloud, for example. And those stepped down over time. There will be another step down next July 1. And so those have worked, I think, quite nicely to encourage some of the larger enterprises to begin their movements to the cloud, consistent with how we've expanded the capabilities of our cloud offerings. In terms of the second part of your question around standard edition and so forth. We've been really pleased with the take-up of our premium edition. More recently now, enterprise edition is also off to a good start. So we're pleased with that strong premium adoption. We've noticed, perhaps not surprisingly, that our premium edition customers have lower churn rates and so forth. So we will continue with our philosophy and history of adding more functionality, more making those premium editions more attractive to our customers. And so obviously, at the end of the day, it's their decision, but we're enthused by the future for our premium and enterprise editions.

Your next question comes from Steve Koenig from SMBC Nikko.

I want to extend my congratulations on a solid quarter. Although I am relatively new to Atlassian, I haven't seen the disclosure on revenue by deployment. If that's a new addition, I commend you for including that information as it is very helpful. You've provided a lot of insight into the trends in data center, but I would like to focus my question on cloud. Are there specific products or features that will play a crucial role in encouraging customers to transition to the cloud, particularly larger customers, as well as any pricing or packaging options you might be considering?

It's Scott here. I'm sure Michael has some additional insights to share. Regarding our products and capabilities, we are genuinely enthusiastic about the cloud; over 90% of our new customers are currently opting for our cloud products. We believe this has become the standard choice for anyone looking to invest in Atlassian. For some of our existing customers, we have pointed out previously that our ecosystem is just as effective as any applications they may have behind their firewall. Our system has adapted and developed apps for the cloud, but there is a level of stickiness in encouraging transitions, which requires our cloud vendors to offer migration paths. This is an area where we are focusing our investments. As Mike mentioned earlier, we are also allocating resources to data residency and certifications in specific markets. We believe that data centers can't ever be close enough to customers due to performance and regulatory reasons, and it's a continuous effort. We are committed to these areas and to obtaining certifications for particular verticals that our customers need. We have improved our scale over time; when we began this journey, we were supporting only a few thousand users in the cloud. Now we have grown to tens of thousands and are well on our way to serving hundreds of thousands in terms of cloud scale. Our customers are collaborating with us on these investments, and we see substantial ROI from our efforts. In terms of unique packaging or capabilities, a significant advantage of being in the cloud is our unified user management system across all our cloud products. This allows us to present offers like our Point A products to new customers more easily, compared to requiring downloads, installations, and configurations. This flexibility enhances how we price and package our products. As Mike mentioned earlier about free offerings, this has created more opportunities for us to engage customers without requiring them to make a purchase decision before experiencing value. This approach is crucial for how we deliver functionality to our customers. We will continue to refine our pricing and packaging strategies to present our products effectively, whether through editions, free options, standard pricing, or unique bundles for customers interested in multiple products. You can expect us to keep innovating in this area.

I wanted to emphasize that Scott covered many important details, and we are recognized for our strong execution in various areas that he mentioned. For those new to Atlassian, I want to highlight the opportunities we have in the cloud beyond just migrating customers. I believe the prospects for Atlassian have never been better across all three markets we serve. We have made it clear that we plan to invest actively in these markets. We are continuing to invest significantly in our cloud platform, addressing critical regulatory and compliance aspects, which we believe will provide a competitive advantage over time, as they are challenging to implement at scale. Additionally, we are launching new products, as seen with Point A, while maintaining our commitment to delivering continuous innovation to meet our customers' needs. Moreover, we have noted our ongoing investment in talent. The market for talent is extremely competitive, and companies are finding it increasingly difficult to hire. However, we just had a record quarter for hiring, with people choosing to join Atlassian. We are focusing on nurturing this talent to pursue further opportunities, which is an important aspect of our current position.

Your next question comes from Ari Terjanian from Cleveland Research.

Yes. Congratulations on the results. I noticed a couple of management changes in the shareholder letter in addition to James' announcement of leaving. But yes, I was just wondering if you might be able to expand upon the promotions of Anu and Joff to Chief Operating and Product Officer, what their roles will entail, as well as bringing on Kevin Egan to head up Global Enterprise Sales. Would love any more color you could provide on those changes.

It's a great time to acknowledge James' accomplishments. As mentioned earlier, he's not in any trouble here. He's departing on a high note to pursue a lifelong dream of becoming a fighter pilot. We are grateful for the ample notice he's given us, and his achievements have been remarkable. On a broader note regarding our management team, I want to highlight that we have a very stable group. We believe that the best technology companies thrive with long-lasting management teams that grow together over the years. The consistency of our management team has been outstanding for a long time. This stability allows us to provide significant new opportunities to both Anu and Joff, who are key members of our team. Promoting internal talent is something we've always valued as a company. Regarding their roles, we have never had a Chief Operating Officer before, and our business operates in a complex landscape across various markets with diverse deployment options and globally distributed operations. Planning our business is a challenging task, especially as we undertake a large-scale transformation to better serve our enterprise customers. We're also focused on expanding what we call the Atlassian economy, which encompasses all aspects surrounding Atlassian, including Forge, our marketplace, and partnerships. There is considerable complexity in managing these transformations in a coordinated manner, and Anu is ideally equipped to enhance our operational efficiency. We are not content with our current operations and aim to continue improving. As for Joff, we have not had a Chief Product Officer before. He has successfully led the work management segment across our products in Confluence and Trello for a long time, making a significant impact. Expanding his responsibilities to include additional markets is a natural progression and an opportunity for growth, especially as we enhance integration for our customers across various areas. This involves creating unified experiences across development and IT teams, as well as ensuring our technical platform and products are interconnected. Overall, I am thrilled with our team and love coming to work every day, which I believe reflects the sentiments of our entire management team as we strive for excellence.

And your next question comes from Pat Walravens from JMP Securities.

This is Joey, standing in for Pat. I have two questions. First, congratulations to James on his retirement. What qualities are you looking for in your next CFO? Lastly, could you provide an update on Forge and your overall vision for it?

Thanks for the questions. I'll address James, and Mike can provide insights on Forge. First, James has performed exceptionally well; he is undoubtedly the best CFO we've had at Atlassian in our 20-year history. Even with our strong stability, we've had around 5 or 6 CFOs during that time. Finding someone who can work in a similar manner to James will be crucial. Specifically, as we expand capital allocation, we face numerous opportunities and must ensure that we allocate capital effectively and sustainably, focusing on long-term goals rather than short-term gains. This is vital, and beyond making decisions, it's about establishing systems that empower the entire company to make informed choices at all levels. This includes understanding how we assign value to our projects. As we transition to the cloud, it’s important that we get a clear picture of where our costs are going and the microservices we create, allowing us to make well-considered decisions in those areas. James has a great grasp of our business, which, as Mike noted, covers many domains. Therefore, we are looking for someone who is a systems thinker, similar to James, who can assist us in growing and allocating capital while addressing the significant opportunities ahead of us.

I can address the question about Forge. We have discussed Forge extensively; it is our next-generation platform for extensibility and development. It enhances features related to security and data residency, among other unique aspects in the SaaS ecosystem, particularly in how we manage enterprise compliance and regulatory requirements across various global markets, while still allowing for the extensibility of our SaaS applications. This poses a significant technical challenge, and I take great pride in how the Forge team is approaching it. It enables us to run the application, allowing for ongoing tuning and improvements. Additionally, third-party developers and customers benefit from a stable, straightforward extensibility and development platform that is both fast and secure. It is important to note that Forge is designed with our customers in mind, contributing to the vibrant marketplace, vendor ecosystem, and economy surrounding Atlassian. We are witnessing remarkable early use cases where customers are utilizing Forge to extend applications, integrate with their own services, and connect applications in innovative ways, alongside other features like Smart automation. I am very excited about the current state of Forge. We have now officially launched the platform, and we will continue to enhance it every quarter. I believe we have surpassed 500 Forge apps and are continuing to build on one of the largest app marketplaces in the industry, which has significant potential for growth moving forward.

And your last question is from Keith Bachman from Bank of Montreal.

I wanted to revisit upsell. And my specific question is, can you get any directional or specifics on the difference on cloud versus what was server and data center? And the two thought processes here are, one, you're getting a lot of information conversions. And at that time, is there a step-up in terms of total value that the customers subscribing to Atlassian in terms of either capacity or cross-sell? And then the second would just be, as you mentioned, there's a lot of customers that are going straight to the cloud. How does their upsell rate over time compare to data center and/or server?

I'll start off here, and Mike can add to it. As we know, in the cloud, we provide more value for our customers because we host it for them and manage upgrades. This allows them to redirect resources back to higher-value opportunities. We capture a portion of that value through our cloud pricing compared to data center solutions. If you look at our products behind the firewall, there’s more friction in expanding compared to many other software vendors. If you exceed your license, you still need to contact us and pay more for a new purchase order, which is more cumbersome than simply using a credit card online to add users instantly. Reducing friction throughout the product journey is something we’re enthusiastic about, whether starting for free with a click rather than a download or install or being able to invite colleagues through a single sign-on solution. There are numerous opportunities for improvement. Cross-selling is easier because we can present additional products to customers where we see potential value without overwhelming them. For instance, while using Jira in our cloud products, there’s a tab that allows users to start a trial of Confluence for specific tasks like writing specifications or requirements documents. This seamless experience is not possible behind the firewall. We are committed to investing in these improvements and believe we are already doing well, but there’s always room for growth. I’m looking forward to what our teams will continue to develop in enhancing cross-sell, upsell, and overall customer experience.

Ladies and gentlemen, that concludes our Q&A session for today. I will hand it back over to our presenter for any closing remarks.

I just want to thank everyone for joining our call today. We really appreciate your ongoing support. And we hope that you and your loved ones remain safe and healthy. Have a great week.

Thank you. Ladies and gentlemen, that concludes our call for today. Thank you for participating. You may now disconnect.