Atlassian Corp Q2 FY2023 Earnings Call

Good afternoon. And thank you for joining Atlassian’s Earnings Conference Call for the Second Quarter of Fiscal Year 2023. 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.

Welcome to Atlassian’s second fiscal year 2023 earnings call. Thank you for joining us today. Joining me on the call today, we have Atlassian’s Co-Founders and Co-CEOs, Scott Farquhar and Mike Cannon-Brookes; our Chief Revenue Officer, Cameron Deatsch; and Chief Financial Officer, Joe Binz. Earlier today, we published a shareholder letter and press release with our financial results and commentary for our second quarter fiscal year 2023. The shareholder letter is available on Atlassian’s Work Life blog and the Investor Relations section of our website, where you will also find other earnings related materials, including the earnings press release and supplemental investor data sheet. As always, our shareholder letter contains management’s insights and commentary for the quarter. So during the call today, we will have brief opening remarks and then focus our time on Q&A. This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management’s belief, assumptions only as of the date such statements we are made and we undertake 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 our 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 recently filed annual quarter and quarterly reports. During today’s call, we will also discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and are not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our shareholder letter, earnings release, and investor data sheet on the IR website. Please keep in mind, we would like to allow as many of you to participate in Q&A as possible. To facilitate that, we will take one question at a time. Please rejoin the queue if you have another question or a follow-up and we will do our best to come back to you later in the session. With that, I will turn the call over to Mike for opening remarks.

Thank you all for joining us today. As you have already read in our shareholder letter, we closed out 2022, proud of everything we have accomplished in yet another unpredictable year. Despite the current macroeconomic environment, the massive opportunities in front of us have not changed. We continue to make great strides towards our long-term goals and we are ready to execute with relentless focus in 2023. We have achieved a ton this quarter, shipping many platform enhancements and product features that deliver incredible value to delight our customers in the cloud, including delivering data residency in Germany, launching automation in Confluence, helping our customers migrate to the cloud with migrations up nearly 2x from the prior year and completing several of our largest migrations to date, showcasing our unique position in the ITSM market with impressive customer growth, multiple large swap-out stories, and recognition as a leader by industry analysts. These are just a handful of examples. We have always prioritized putting our customers first, and we are seeing customers increasingly turn to Atlassian as a trusted vendor asking how to operate their businesses better. 2023 will be all about helping our customers navigate these challenging times, absorbing the downstream impacts on our business, and setting ourselves up for continued long-term success. With that, I look forward to your questions and I will pass the call to the Operator for Q&A.

Your first question comes from Gregg Moskowitz from Mizuho Securities. Please go ahead.

Okay. Thank you very much, and good afternoon, everyone. So it sounds like the macro has had no impact on migration activity so far, even though really, you are seeing it in some other areas. You are still expecting migrations to add 10 points of cloud revenue growth this year. But in an environment where customers are clearly tightening their belts, why is it that you think migrations will continue unabated? Is the TCO advantage strong enough to compel customers even though they have to make a financial commitment? Is the end of support date having a real impact there as well? Any color would be helpful? Thank you.

Hey, Gregg, this is Cameron. I will start off with some details and then I will probably let Mike add some more from what he’s seeing. So, as you already know, more than two years ago, we announced the upcoming end of life of our server products, and ever since then, we have been on this migration journey, helping our on-premises customers move from both server and data center to our cloud offerings. And I have to say that even in the uncertain macroeconomic times, every day that goes by, I am more confident in our ability to not only attract our customers to the cloud but convince them of the additional ROI savings that come from migrating to our cloud, and the additional benefits from a feature perspective. From there, we have been able to get increasing in our ability to navigate the contractual, legal, and data privacy aspects and move our customers to the cloud. We made huge strides in actually migrating their data and their users to the cloud and then from there actually onboarding their users so they understand the new experience. This obviously can be an extremely complex exercise. But we are two years into this, and every single day that goes by, we have been getting better. I also want to recognize that we purposely built an engineered kind of this path over this three-year timeframe, using loyalty discounts, improvements in our products, so it would provide compelling events along the way for our customers to move. And this just further establishes the demand for our migrations and we continue to feel strong about that additional 10% growth that we see coming from migrations going forward. Mike, do you have anything to add?

Yeah. Thanks, Gregg. Look, I just wanted to say, it’s incredibly important in this environment to help our customers through as well and you talked about the TCO of moving to the cloud. I do think in an environment where customers are looking to get efficiency and optimize their spend, there’s increasing recognition that the cloud itself is a great ownership model for them. It’s a cheaper way for them to run and own and operate their software. And secondly, the benefits of the platform that we have built and the integration across our products, especially as they are experimenting and trying new things, allow them to consume more of Atlassian’s products, and at the same time, do so while making their businesses more efficient, which is what our job is to help them become more efficient businesses, especially in these difficult times. So, I think we are really well positioned in that way.

Okay. Very helpful. Thank you, guys.

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

Thank you for your response. In the shareholder letter, you mentioned a focus on more targeted investments moving forward and a slight increase in the operating margin target for the full year. However, it appears that this improvement mainly stems from better margin performance in the current quarter rather than a significant shift in the investment strategy for the second half. Could you elaborate on where you are scaling back investments, whether there could be some offsets, and specifically, why you aren't considering a larger scale back in light of the current environment to potentially drive margins back to the historically lower 20s?

I will begin. Keith, this is Joe. I'll start and then hand it over to Scott for further insights. You are correct; our overall outlook for H2 margin has not significantly changed from the previous quarter. We anticipate that revenue growth will slow in H2 due to macroeconomic factors we experienced in Q2. Additionally, we had some timing impacts from advancing OpEx savings into Q2 that will not occur in H2, and we will keep investing and hiring based on the excellent long-term opportunities we identify. These are the main points. Regarding the broader work we’re doing on reprioritization, I would say it involves various approaches. Sometimes it means stopping certain initiatives, adjusting the sequence of events, adopting a milestone-based funding model, or reducing investment levels based on strategic changes. As I reflect on our focused reprioritization and resource allocation efforts, it has included elements of all these strategies to achieve the best overall business outcomes. We will continue to invest in long-term opportunities while also being mindful of the macro environment and managing costs alongside revenue growth. Now, I’ll turn it over to Scott to see if he has anything to add.

At the risk of repeating you, Joe, I want to remind those who may be new to the Atlassian story. Back in April, we spoke with you, our investors, at our Investor Day and discussed a cluster of four growth opportunities we anticipated. These were focused on cloud migrations, our ITSM opportunity to gain market share, better serving enterprise customers, and launching and growing new products developed from prior investments in the Atlassian platform. What we've observed is that these four areas are delivering great returns with significant momentum. We have always approached Atlassian with a long-term perspective, choosing to invest wisely for sustainable returns. Therefore, we continue to invest in these four areas, reallocating resources from other parts of our portfolio into the promising opportunities we've identified, while also being responsive to the current macro environment and our commitments to the targets we've shared with you.

Excellent. That’s helpful. Thank you, guys.

Your next question comes from Fred Havemeyer from Macquarie. Please go ahead.

Hi there. Thank you very much. I wanted to ask in regards to just what you are talking about in terms of product innovation as you are investing during this period. Certainly is notable, the focus on ITSM, could you take a moment perhaps and talk about how you think of product innovation development and just where Atlassian can innovate and drive another leg of growth as we just navigate and think about the other side of this macroeconomic environment?

Yeah. Fred, I can take that one. Look, it may sound like a boring answer to you. I think the way we think about product innovation in the current environment doesn’t change the way we thought about it a year ago, two years ago, or three years ago, right? We have a job to unleash the potential of every team and that’s all about making our customers more efficient at running their businesses. Again, we can’t help them make cars or rockets or drugs or provide financial services; whatever it is our customers are doing, but we can make their teams more efficient and we really try to keep that as a North Star across all of our markets. At the same time, we continue to rebalance our priorities as we hear from customers and as we look at our resourcing. One of our advantages, I would say, is having a large investment in R&D, which is quite unique; we are able to move those resources around a little bit more fluidly than other companies may be. So we continue to innovate, we have a lot of new products that we have built over the last couple of years, and we continue to work with customers in testing, things like Jira Product Discovery, Encompass, and Atlas, and a couple of upcoming ones that are in alpha and beta. Those are examples of our ability to ship new things. At the same time, we continue to deepen our platform investment and one of the things as I just mentioned, to Gregg’s question earlier, when customers move to the cloud, their ability to consume multiple Atlassian products via the platform and connect them together with things like Smartlinks or analytics running across them is a huge advantage of the cloud, and that all comes from the innovation and investment in our infrastructure and the ability to manage all of that sort of thing. At the same time, the innovation doesn’t just come in new product form. So we continue to work on the big enterprise aspects of our cloud in terms of scale and performance, in terms of accessibility. As you said, this roll-out of new data residency regions this month and we continue to work with our customers on what regions they want to see us data residency remain, things like BaFin and HIPAA and all sorts of the acronym soup that comes with the enterprise. So those are all examples of where we spend our R&D dollars to continue to try to innovate on the things that our customers want and are looking for. At the same time, we are obviously responsive to the environment that we just didn’t launch.

Your next question comes from Michael Turrin from Wells Fargo Securities. Please go ahead.

Hey there. Thanks. Appreciate you taking the question. On the cloud target, can you just expand on what goes into the new range and what makes that the right range going forward? There’s some useful language in the letter, just around some assumptions that the macro worsened in the second half of the fiscal year. So maybe just what those impacts are, what gets worse and the letter calls out December as especially pronounced. I am just curious if there’s anything you can say on whether those trends how consistent in January or if things are getting worse or better? Any color there as we are just kind of sorting through everything that’s going on is helpful? Thank you.

Yeah. Thanks, Michael. This is Joe. We did take a fundamental change from our prior cloud guide in the prior quarter in that we have three months more of data points, including December, which you mentioned, and we have a much clearer picture of the trend line. Using that, our cloud guidance range assumes the macro environment gets worse in H2, and as a result, the trend lines from H1 continue into H2. You will also notice we have maintained a 5-point range on that guidance with the low end of that range not only assuming continued weakness in free-to-paid conversions and paid seat expansions that we have seen year-to-date but also some macro impact areas that have held up really well, frankly, through the first half of FY 2023, like churn, upsell, and migration. So, the rest of the picture is largely in line or better than three months ago. In terms of what we have seen in January, I’d say, we have incorporated that into the guidance and it’s consistent with the assumptions that we formulate the overall approach.

Thank you.

Your next question comes from Kash Rangan from Goldman Sachs. Please go ahead.

Hi. Thank you very much. So we have taken the right step in bringing down the cloud targets, I think, it happened a couple of quarters consecutively. What gives you the confidence, therefore, how can we get the confidence that we are at the point where we can assess what are the leading indicators for your cloud business? Kind of the rest of the business seems to be in pretty decent shape. Are you seeing any signs of stability at all? It does look like December ended on a slightly worse note than September did and hence the forecast. But what are the leading indicators that you are looking at that we should be looking at for any signs of stabilization that could help us get comfort in the cloud forecast that have moved on? Thank you so much once again.

This is Cameron. I'll address that. The two main trends we're currently observing as headwinds are the continuing free-to-paid conversions from Q1 into Q2. We are still attracting plenty of customers who visit our website, click the try button, and sign up for free versions of our products. However, they are converting to paid customers at a slower pace than we have traditionally seen. This trend has persisted from Q1 to Q2. Looking ahead, we know how many people are signing up for our products and their activation rates; they are actively using the free versions, and we're simply trying to encourage them to add their 11th user and convert to a paid subscription. The second significant headwind relates to user expansion, where existing customers go from 20 to 30 users of Jira Software. This has also slowed down between Q1 and Q2, more noticeably in Q2 among our smaller customer base. We observe this through activity rates, the number of users being added, and overall monthly billing trends. However, as we compare Q2 to Q3, we have noticed a decrease in customers downgrading from paid plans to our free plan, which involves users going from 11 or 12 down to 10 or nine. This has shown signs of improvement starting in January. We believe these two headwinds will continue to affect us in the second half of the year, and we have ample data across our customer segments, geographies, and industries to monitor any changes in these trends moving forward.

Got it. I mean how close are we to stability in those leading indicators you are looking at if you have a view? That’s it for me.

Listen, there’s plenty of variability in the business overall today. On the top of funnel, people coming to our site and converting, I feel they are very stable between Q1 and Q2. The end-user growth is much harder to predict and it might be hard to basically say whether that’s going to be leveling out or that we will see some change in the variability in the future.

Your next question comes from Brent Thill from Jefferies. Please go ahead.

Hi. This is Luv Sodha on for Brent Thill. Thank you for taking my question. Just wanted to ask, thank you, Scott, for laying out those top four growth priorities going forward. I guess where does Jira Work Management and Atlassian Together rank in those priorities and what traction have you seen with that product suite? Thank you.

Yeah. Luv, I can take that one. Look, we maintain incredible bullishness on our position in the Work Management space. Trello continues to be a monster. Confluence continues to grow really, really strongly. You see that with all of the enterprise improvements in the cloud, as well as automation and also other things we shipped during the quarter. So we are very confident in the overall position we have in Work Management and especially with its connection to both the software and ITSM spaces as companies increasingly get more digital; it’s a very unique position that we play. A part of that Work Management strategy, as you pointed out, is to have multiple leading vectors, in terms of Trello, Confluence, and Jira Work Management, depending on the structure people are looking for and where they are coming from and what they already have. We see great traction for Jira Work Management in terms of usage in people who are heavily into the Jira role already. If you are into the Jira family, you have Jira Software, Jira Service Management; it’s an entirely logical step for you to add Jira Work Management, and obviously, integrates with all the rest of our products very well. Thanks to the Jira platform and the Atlassian platform. It’s very early days in that product evolution. We are sort of a year and a bit in, and we continue to work with customers. It’s increasingly gratifying to see forms of standardization where people are moving off other project management vendors and collaboration vendors to standardize on Jira and Confluence and the Atlassian suite. And that’s why you see us investing in two things. One is the platform story, things like Smartlink that I have mentioned beforehand, analytics, automation, and being able to automate across our product set is a big part of what customers are turning to Atlassian for. And secondly, you mentioned Atlassian Together. For those who are new, again, Atlassian Together is a packaging offering, which allows our customers to choose to take Atlassian wall-to-wall for Work Management in exchange for getting a series of different products, being Jira Work Management, Trello, Confluence, and Atlassian Access, all in the one package. It’s extremely early days for Atlassian Together, I would say. It is still in beta testing with our customers, but the reception so far has been really good, largely for all the customer reasons that we talked about earlier in terms of the platform and the product set.

Great. Thank you.

Your next question comes from Alex Zukin from Wolfe Research. Please go ahead.

Hey, guys. Thanks for taking the question. So maybe just a two-parter. If we look into the trends around cloud revenue growth, is there any way to get a little bit deeper in terms of the exposures for how many contextualize just the customers that are coming from the SMB side versus the enterprise side and maybe parse out where the trends got worse or stable in December and January? And then similarly, we picked up some anecdotes of server customers maybe wanting to wait a little bit more closer to the end of their service support date before migrating to either cloud or data center. So I would love to just get a sense of what you guys are seeing there versus a year ago or a quarter ago in terms of your assumptions.

Great. Once again, this is Cameron. I'm happy to discuss both of those topics. First and foremost, regarding the growth of smaller customers compared to enterprise customers, the main challenge we observed in the second quarter was related to user expansion within our smaller customers. This group mostly operates on monthly contracts, and we are seeing some of them transition from monthly plans to our free tier. This was a key takeaway from Q2. In contrast, our enterprise business remains exceptionally strong, supported by migrations, cross-selling, and products like Jira Service Management and Jira Align. Our upgrades from standard to premium and premium to enterprise offerings also continue to foster steady growth within our enterprise customer base. With over 250,000 customers, we believe that having such a large and diverse customer portfolio, encompassing both SMB and enterprise across various industries and regions, is a significant long-term advantage for our business. As smaller businesses grow, or as employees transition from small to large companies bringing their preferred tools and standards, this aligns well with Atlassian’s long-term strategy. Regarding the server segment, there is positive news as well. As previously stated, migrating server customers to either data center or cloud is a multiyear process. Our focus has been primarily on moving customers to the cloud, and we have largely met our migration goals set over the past few years. However, we anticipate losing some customers during this transition whenever a product reaches its end of life. The encouraging news is that in recent years, we have noticed more customers moving to data center, which is reflected in the numbers. Additionally, many customers are remaining on server longer than we initially expected, which is a positive sign. Customers now have until February 2024 to decide whether to transition to cloud or data center. Overall, this reflects our ability to retain customers, the stickiness of our products, and their essential role going forward. Whether a Jira customer opts for server to data center or chooses between data center and cloud, it highlights future investment in Atlassian and our commitment to our products. I feel increasingly confident in our long-term ability to migrate those customers to the cloud. Thank you.

Perfect. Just a quick follow-up. Can you share if the percentage of SMB versus enterprise revenue for cloud is balanced at 50-50, or is it more heavily weighted towards SMB? Any specifics on that would be helpful.

Yeah. We do not break out the split of SMB versus enterprise. As I mentioned before, the one uptick in headwinds we saw in Q2 was the SMB user expansion. Our enterprise business continues to remain strong.

Your next question comes from Michael Turits from KeyBanc. Please go ahead.

I would like to address a question about developer headcount, especially in light of the significant layoffs in the tech sector. Generally, there's not much talk about whether this situation is affecting development engineering better or worse. Since your background is in development, what trends are you noticing in your sales to development teams? Are they facing similar challenges or experiencing a greater impact as companies may be slowing down on new development projects? That's what we seem to be observing.

We have identified one main challenge that was different in the second quarter, which is the slowdown in user expansion within our smaller customer base. There hasn't been any significant competitive change; customers are not turning to alternative options or new offerings. Instead, they are slowing down their hiring and possibly consolidating their software and licensing from the past few years. However, we believe that technology will remain a key driver of growth across various companies and industries in the long term, and this trend will continue globally. Our analysis shows that the adoption of technology is not limited to tech or engineering companies, but spans all industries and regions. We observe consistent trends across our diverse customer bases. Therefore, we are confident that in the future, there will be an increasing number of developers using our products to enhance their work and collaborate within their organizations, and we are well-prepared with our range of offerings to capitalize on this growth.

Okay. But no relative difference in the deceleration between serving teams for software developers versus for IT versus for work for enterprise for business, is that correct?

This is Scott speaking, and I want to remind everyone that we initially focused on serving developers within organizations, specifically those writing code. Currently, about a quarter of our users in software operations are developers, while the remainder includes product managers and designers. A significant advantage of our ITSM offering is that it helps coordinate work within broader software and technology teams. Although our core mission is to assist developers, the larger issue we address is how work gets done across entire organizations. This positions us strongly compared to other development products that primarily cater only to developers. Additionally, I want to echo Cameron's point: it is still early days for many companies, but I haven't heard of developers struggling to find jobs. Companies that once had trouble hiring developers are now successfully onboarding talent. This indicates that development and software as a whole are not going anywhere, and while there may be fluctuations, I don’t foresee a situation where many developers are unemployed for long, as the long-term trend points towards increasing demand for software.

Your next question comes from Arjun Bhatia from William Blair. Please go ahead.

Thank you for addressing my question. I wanted to discuss JSM and the ITSM opportunity. You mentioned it extensively in the shareholder letter, and it seems there is significant excitement among customer partners about the product. How do the capabilities you've developed with JSM stack up against larger competitors in the market? Additionally, as you expand JSM sales, how are you presenting it to larger enterprise customers who might already have an ITSM solution in place?

Thanks, Arjun. That’s a great question. We built our ITSM solution in three areas that I remain the reason customers buy it. One is it is like a consumer-like offering out there and people will choose to use something else at the back end and install JSM at the front end, because of its consumer-like offering. And so in some situations in very large organizations, we fight coexistence with existing solutions where we get put in at the front end to all systems there. I guess that’s just sort of proof point that’s a great advantage for us. The second is our time to value and that time to value means that we can target the Fortune 500 with our solutions, whereas many of our competitors taking enterprise target a much smaller subset; they are willing to pay for the financial services in the six-month to 12-month onboarding and all the stuff that goes along with that, and so that’s our second value proposition. And the third value proposition for us is that we bring IT and development closer together, and no one else can say that. And again, that’s been the history of our long association with our development work and deep integration with all of their tools. And so our approach to this market is a long-term one. We are not aiming to go take the largest customers in this IT market to start with, because if you did that, you end up with a checkbox feature delivery mechanism where you need to check every box in order to switch something out, and that’s not the product we want. We want to build a product that is loved by people long-term and serve the Fortune 500. And so, looking at the largest of instances, we find a coexistence, where people want the things that we can bring that the incumbents can’t, but they haven’t got the bandwidth or the desire to break out some of the core systems that those large incumbents provide. In other cases, where you just don’t operate in that space at all. But we are very happy with the small and mid-market sales that we make and the coexistence in those large areas, and for us, it’s a long-term game and we believe those three advantages will play out over time.

Yeah. And other…

Go ahead. Sorry.

I want to mention a few additional points related to our go-to-market strategy. We've highlighted the benefits of expanding our market share for some time now. Recently, we've recognized the macroeconomic uncertainty and the need for businesses to save money. In Jira Service Management, we've increased the free entry level from three agents to ten agents. This change allows many companies, typically around 200 employees, to start using Jira Service Management at no cost. Our plan is to encourage existing and new customers to upgrade to paid plans or premium versions over time. During this economic downturn, we're taking the opportunity to capture market share. Furthermore, our strategy focuses on starting with teams or departments and helping companies operate more efficiently without needing to overhaul their entire IT platforms. Many businesses are looking to cut costs and consolidate spending, and Jira Service Management offers significant savings compared to other industry options, making it an attractive choice for customers. We've seen various strategies succeed over the latest quarters.

Your next question comes from Ryan MacWilliams from Barclays. Please go ahead.

Thanks for taking the question. So data center continues to gain share as a percentage of your sales. Are you seeing stronger than expected migrations to data center instead of cloud at this point and what is driving the commentary for moderating data center growth in the second half? Thanks.

This is Cameron again. Data center offerings are impressive due to their scale, mission-critical capabilities, and performance that many of our largest enterprise customers require. As I mentioned earlier, we are on a multiyear journey transitioning from server to cloud and data center, with cloud becoming the primary destination for these customers. We have observed that migration rates to cloud are aligning well with our expectations. However, many customers who might have traditionally opted for server or alternative solutions are now choosing data centers. As a result, demand for data centers continues to grow among our server customers in the interim. It's also important to note that the transition from server to data center is not the final step; we are still seeing many users move from data center to cloud. In fact, half of our migrated paid seats from on-premises originate from data center customers transitioning to the cloud. Therefore, we view the shift to data centers positively. Our ongoing investment in Atlassian reflects a strong commitment to our products and prepares us for future cloud migrations in the coming years.

And then, Ryan, to take the second part of your question. In terms of the guide, we continue to expect data center revenue growth to moderate in H2. That’s primarily because we are lapping some of the event-driven growth in the prior year. I would also highlight, though, our outlook is better than we expected three months ago, driven by the strong Q2 billings performance that we saw. And then, lastly, it’s always good to remind everyone that data center revenue growth can be volatile given the portion of upfront revenue recognition in DC sales. So, as you think about the DC business performance, keep that in mind, as well as some of the pricing changes that are being implemented this month.

Appreciate the color. Thanks.

Your next question comes from Ittai Kidron from Oppenheimer. Please go ahead.

Thanks. I want to go back to Work Management. At the last Investor Day, this was one of the three key pillars of growth for you going forward and not mentioned even once in your press release, which I found quite strange. Can you, outside of Confluence, talk about the rest of the portfolio there? Would it be fair to say that growth over there is perhaps underwhelming, that competitively you are not getting the win rates that you would like to see against the Mondays of the world? Help me understand why such an important area of investment growth is not mentioned even once in your press release.

I will address that, Ittai. I'm not particularly curious about that. We are very optimistic about Work Management. In response to your question, I don’t believe that’s the case. I think it’s at a different stage of development compared to ITSM, which is why we highlighted it in the press release. There are no preferred products at Atlassian, so rest assured. Atlas is performing well, but it is a relatively new product. We always say it takes several years to develop a successful product and brand, and we are committed long-term to that process. All our efforts in Work Management are directed towards large enterprises. Both Atlas and Jira Work Management are our latest offerings in that area, and they are still in the early stages of their journey. I cannot emphasize this enough, but we are quite optimistic; both Scott and I have two decades of experience and have seen many iterations of products that illustrate how adoption cycles work among our customer base, and we are diligently focused on that. The teams are putting in significant effort. Confluence continues to perform exceptionally well; it has always been a standout in the Atlassian portfolio and remains so. The absence of specific references in the press release does not indicate disengagement. We consistently receive positive analyst feedback and recognition across various reports and indicators, along with strong support from our customers. We are recognized as the leading Work Management vendor at scale, combining technical and non-technical teams, which is increasingly important for customers managing diverse work processes. As Cameron and Scott mentioned, similar to ITSM's relationship with modern DevOps and DevSecOps practices, Work Management enables closer collaboration between marketing, finance, and business teams with engineering and operations teams. This is a significant advantage for us, and we continue to excel in this area.

Can I just mention that before we move on, we have a lot of great news at Atlassian. In our shareholder letters, we aim to focus on one of our three markets at a time. Last quarter, we concentrated entirely on Work Management, and this quarter we've selected a different market. Our goal is to delve deeper into one market at a time to help educate our investors. I want to make that clear; next quarter some people may expect additional information, but that is the intent behind our approach. We are showcasing our strengths in collaborative work in our press release and beyond. Our plan is to focus deeply on one market each quarter.

Great. Good. I appreciate it. Thank you.

Your next question comes from Cindy Frances from Citi. Please go ahead.

It’s Fatima Boolani from Citi. That’s the first time I heard that. Thank you for taking my question. Either for Joe or Cameron, I wanted to ask a broader question about your pricing strategy. So we appreciate you have been very consistent and transparent with your pricing increases in the base as it relates to the server offerings and related maintenance offerings, as well as data center and data center maintenance. But I am curious to get your perspective on what type of customer feedback you are getting clearly because we are kind of in a different state of the market environment and in the macro environment. So I wanted to assess if there’s maybe potential fatigue from customers in terms of the discussions you are having on this front as you take prices up. And as a related matter, if you raise the floor on the pricing on these predecessors or form factors relative to cloud, why is it that we are not necessarily seeing a more pronounced follow-through in cloud migration? Thank you.

This is Cameron. I'm glad to discuss our pricing strategy, which occupies a significant part of my day. You've identified one of the essential aspects: consistency. We have maintained a steady approach over the last few years regarding the size, timing, and frequency of our cloud, server, and data center price increases, which benefits us. Our customers typically anticipate and budget for these changes. From a broader pricing perspective, Atlassian continues to aim to be a value leader; our prices remain a fraction of those of competitors offering similar features. I'll be honest; as we planned for this fiscal year's price increases for cloud in October and server and data center in February, I had some concerns. I met with various customer-facing teams to discuss how we would manage potential customer feedback. I'm pleased to report that our recent price increases in October and February have not elicited any material differences in feedback from customers compared to previous years. This is a significant positive and reflects the value our products provide. Regarding the question of larger price increases on server and data center products to encourage cloud adoption, this strategy is indeed driving the expected growth in cloud migrations, contributing to the 10% growth we've mentioned repeatedly. However, with price increases on server or data center offerings, we also see customers opting to transition to data center as a proactive move before those increases take effect, which leads to a noticeable uptick. While it can be challenging to predict who will choose cloud versus data center, we've generally observed more customers remaining loyal, either renewing server, switching to data center, or migrating to cloud than we anticipated when we began this journey a few years back. Overall, we have not faced significant pushback on our pricing strategy, which is achieving its intended purpose of encouraging our customers to choose cloud.

I appreciate it. Thank you.

Your next question comes from Peter Weed from Bernstein. Please go ahead.

Thank you for addressing my question today and for the information you've provided on other inquiries. I want to summarize a few of your comments and assess if I understand them correctly along with their implications. Please correct me if I'm mistaken, but it seems that the headcount challenges you are experiencing are primarily on the non-technical side. You made a compelling point that developers are securing jobs easily, coupled with the strength in JSM and IT suggesting resilience in those areas. So, if I am correct, it seems that the headcount issues are more prevalent in non-technical roles. I'm trying to reconcile this with my understanding of the essential role non-technical employees play in product delivery. What factors do you think are contributing to the weaknesses in that workforce and how your customers are adapting? Are they changing their working methods, and how confident are you that they will return to their previous team structures for non-technical roles post-macroeconomic challenges, thus revitalizing growth in that area of the business?

Hey, it’s Scott here. I think you're asking about the strong momentum in software over the past few years and what the future holds in that area. I'm confident in Atlassian for several reasons. First, software is becoming integral in all sectors, whether it's in cards, delivery, or AI/ML, and we believe that ongoing innovations will necessitate more software developers. While companies are currently reassessing their software teams, the long-term trend remains strong, and we anticipate more demand in this space. Second, Atlassian facilitates collaboration across entire organizations, which means we are not solely relying on R&D headcount. As companies expand their technical and non-technical teams, we are there to support collaboration, which is a positive sign for our growth. Additionally, our penetration within companies is still growing, even among our largest and smallest accounts, suggesting that the number of seats per customer is likely to increase, with no sign of saturation. Lastly, when analyzing our products, the usage per customer is still relatively low compared to the opportunities ahead of us. We focus on long-term constants rather than transient changes, much like Jefferies mentioned regarding Amazon's strategy, which emphasizes investment in enduring areas. Teamwork and collaboration are timeless challenges, and that’s where we've directed our investments. While I can’t predict the macroeconomic landscape over the next 18 months, I feel very well-positioned for long-term success.

Thank you.

Your next question comes from Mark Cash from Raymond James. Please go ahead.

Thanks for the question. This is Mark on for Adam. I kind of wonder how level that the TEAM was asking, and I was wondering if you could expand upon the impact of migrating data center and server advantage pricing customers to list pricing in regards to how that’s baked into the revenue margin guidance you just provided?

This is Cameron again. I will explain our overall pricing strategy. Currently, there is a significant price difference between our server and data center or cloud options for higher-tier customers, specifically those with over 500 users within the 2,000 to 10,000 user range. At present, if a customer selects cloud instead of data center, the cloud option is less expensive. However, most of our data center clients are benefiting from pricing that is considerably lower than our current cloud list price. Over the past few years, we have been implementing incremental price increases to narrow this gap. All pricing information is available online and is transparent to our customers, ensuring that everyone pays the same price. Looking at our historical price changes, you can see that we are gradually closing the divide between old data center pricing and our cloud list price. In the coming years, all customers will be incentivized to opt for cloud solutions from a pricing standpoint. As for the growth this transition generates for our business, we anticipate that our goal of achieving 10% revenue growth in the cloud will be driven by migrations from server or data center to cloud.

And then, Mark, this is Joe. The revenue guidance incorporates what Cam just mentioned. We continue to expect that migrations will remain strong. I would also note that regarding the pricing impact on our model, we have ratable recognition on subscriptions, which account for more than 80% of our revenue. Therefore, the timing of renewals throughout the year will not be affected when we make those pricing changes. We have also factored that into the guidance.

Your next question comes from Ari Terjanian from Cleveland Research. Please go ahead.

Yes. Thank you for taking the question. Just wanted to double-click on some of the investments you are making around the enterprise strategy. Can you just give an update on what you are doing there to drive traction, maybe speak to some of the partner consolidation that’s occurred recently? And if there’s anything you are doing differently there to drive further migration, and maybe speak to some of the multiyear contracts that were called out most recently to exit this quarter? Thank you.

Yeah. Hi, Ari. Let me take the first half of that and then I will leave Cameron to do the second half on the multiyear contracts. From the point of view of what we are doing, we have been on a long and consistent journey, right? We continue to be long-term oriented and thoughtful about how we approach the enterprise space as one of our major transformations as a business over the last decade, you would argue. In terms of specifically what we are doing? Look, you have seen us continue to open performance and scale. So the scale offering we have continued to move up in the cloud. We now have 35,000 users in GA and 50,000 users is in EAP, and you can bet that we have teams continuing to work on those sorts of aspects. At the same time, our performance for individual customers has massively improved at those life scales over time. So it’s not just the ability to handle user volume, it is about the performance that those customers get, especially in lower spec to desktop environments with other Internet connections as we continue to get more and more global and have customers and users all around the world. We continue to work on governance. We are long believers that, if you look forward, you are going to have more governmental regulation in different countries, different geographies, and different industry areas, and that our platform and our infrastructure has to handle that. You saw that this quarter; we shipped data residency in Germany. We continue in testing in other regions. We continue to do things like BaFin and financial services compliance in different areas of the world, and we will continue to add more in those areas as we build them out over time. You can see all the details in the apps that we give over time. And the third part we are working on is continuing and extensibility in the cloud. The reason that, that’s an enterprise concern is, because obviously, the larger our customers are the more they customize our software for themselves. Forge is a fantastic mechanism to customize our cloud offerings for themselves. Larger customers tend to have very bespoke things they want to integrate with various internal systems. The ability to do that, have us run it for them, have us handle things like data residency and handle the server loads and everything for them is a huge benefit of the cloud, and we see customers moving for reasons like that. It simplifies their offering is one of our goals with the cloud, right? We do all the hard yards so they can just focus on their businesses. Cameron?

Yeah. And in addition to all of the R&D investments we have made to better serve our enterprise customers, I am extremely happy and proud of what we consider our enterprise transformation on the go-to-market side of our business. We have invested heavily to get closer to our largest customers and help them through this strategic transformation to the cloud, while maintaining some of the most efficient sales and marketing spend that you see in the industry and that’s the balancing act that we have had over the last couple of years. But do you think we have had much more enterprise account managers to take care of our customers. We invested in technical account managers and solution architects to have more strategic conversations about the roadmap with our products longer-term. We have things like executive advisory boards, deep dives, and CIO council. This has actually allowed us to have strategic relationships with our customers and think much more long-term about how our products will be used in the future in their businesses. You also mentioned you saw this in our channel with our partners that we have seen significant outside investment, as well as consolidation in our massive solution partner network. While we have over 700 solution partners, we see many of these customers or many of these partners starting to consolidate. I see this as a massive advantage for our customers as these companies provide more scale and more optionality for our customers and once again deliver more value, but also good for our ecosystem. Like any additional investment in our ecosystem will only drive higher, better outcomes for our business and for our customers. And lastly, on the multiyear piece, it’s simply the nature of larger, more strategic deals. If we are going to go into one of the largest banks in the world or a large pharmaceutical or telecommunications firm, we are having a conversation with the CIO about a transformation to the cloud or enabling IT service management or work manager for their organizations. They are going to want a longer-term commitment, and that’s where you see these multiyear contracts increasing in the enterprise.

Thanks.

Thank you. That’s all the questions we have time for today. I will now turn the call over to Scott for closing remarks.

Thanks everyone for joining our call today. As always, we appreciate your thoughts or questions and your continued support. And thank you to all the Atlassians all over the world for your dedication and resiliency. We hope that you are able to join us next week, either in person in Berlin or virtually at our Agile and DevOps event, Unleash.