Atlassian Corp Q1 FY2024 Earnings Call

Good afternoon, and thank you for joining Atlassian's earnings conference call for the first quarter of fiscal year 2024. As a reminder, this conference call is being recorded and will be available for replay on 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 first Quarter of Fiscal Year 2024 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; 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 first quarter of fiscal year 2024. The shareholder letter is available on Atlassian's Work Life Blog in the Investor Relations section of our website, where you will also find other earnings-related materials, including the earnings press release and supplemental investor datasheet. As always, our shareholder letter contains management's insights and commentary for the quarter. During the call today, we'll have brief opening remarks and then focus our time on Q&A. This call will include forward-looking statements including 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 beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update or revise such statements should they change or cease to be current. Further information on these or other factors that could affect our business performance and financial results included in filings we make with the Securities and Exchange Commission from time to time, including the section titled Risk Factors in our most recent filed annual 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 datasheet on the Investor Relations section of our website. We'd like to allow as many of you to participate in Q&A as possible. As a respect for others on the call, we'll take one question at a time. And with that, I'll turn the call over to Scott for opening remarks.

Thank you for joining us today. As we've already read in our shareholder letter, we've been busy. We kicked off FY '24 by executing well and playing events. We continue to push hard on our biggest bets, cloud, enterprise, and ITSM, and those bets continue to pay off. We're also shipping ever more new products and innovations to our customers. This quarter, we wanted to encompass into general availability, who's on the heels of launching Jira Product Discovery last quarter, which is off to a fantastic start with several thousand customers already. I was just at our High-velocity IT Service Management event here in Sydney when we announced the general availability of Virtual Agent in Jira Service Management and debuted a host of additional AI capabilities. We heard from some of our credible customers who shared how they migrated their legacy ITSM solutions to Jira Service Management and are now delivering exceptional service experiences faster than ever. Through our cloud platform, thousands of customers through our early access program are already realizing value from the AI capabilities introduced across our cloud products powered by Atlassian Intelligence. The early feedback has been terrific, and we're incredibly excited by the opportunity that AI presents us. Along with the organic innovation happening here at Atlassian, we also announced our acquisition of AirTrack and Loom. AirTrack builds on our previous investments in IT service management and will enable enterprises to better account for and trust all their critical assets within their organizations. Loom, which has a passionate customer base of 200,000, will bring the power of asynchronous video messaging to the Atlassian platform. We firmly believe distributed work is here to stay, and Loom will allow teams across the globe or even in the same building to collaborate seamlessly in deeply human ways. People are increasingly turning to video as a way to collaborate and consume information, and we're incredibly excited about the opportunities that video can be applied across our platform. Our customers are looking to Atlassian to provide them solutions in the collaboration space, and Loom gives us an incredible opportunity to further unleash the potential of their teams. We're also playing offense on talent. Atlassian is the cornerstone of our success, and we're focused on adding and retaining amazing talent across the company, including great senior leaders. We recently welcomed Zeynep Ozdemir as our Chief Marketing Officer and Vikram Rao as our Chief Trust Officer. We also promoted Kevin Egan to Chief Sales Officer, all of whom bring great experience to our leadership team. I also want to acknowledge Cameron, as this will be his last earnings call with us. Mike and I are incredibly grateful for his 11 years of dedication, impact, and most of all friendship. With that, I'll pass the call over to the operator for Q&A.

Your first question comes from Ryan MacWilliams from Barclays.

I appreciate you taking my question. I would like to focus on the timing of the remaining migrations. At this stage, there may be more server revenue from the model than investors anticipated. What are the expectations for when those remaining migrations will occur and what is the makeup of those remaining customers? Are they more likely to transition to a data center or to the Cloud?

This is Cameron. I'll take the first here, and then I have Joe follow up. So as many of you know, we have the server end of life coming up in the next few months, mid-February. We will cease all support for server customers after that date. Over the last few years, we've been actively and aggressively approaching all of our customers across server and data center, asking them to get to the Cloud. And this has been very positive for us. It's gone very in line with our plans over these past few years. But obviously, there are many customers out there that will wait until the last moment before they make this decision. And we see that today in our enterprise pipeline. We have a healthy pipeline with enterprise migrations going up over the next few months. As far as what I want to make sure that's very clear here is, post-February, we still will have many migrations. So many customers between now and February will be going from server to either data center or preferably Cloud. But for those customers that choose data center, we will continue to migrate those data center customers to the Cloud in the coming years. So the short answer there is, yes, we do expect to see a flurry of activity over the next few months with that big compelling event in February, but migrations will continue post the February date.

Yes. Thanks, Cameron. Ryan, really no change from what we discussed last quarter in terms of the server and the support dynamics that are baked into our guidance. As Cameron mentioned, we end support for server products in 2024. There may be significant quarter-to-quarter variability, as Cameron mentioned, based on when and how those server customers ultimately choose to migrate. We continue to assume the percentage split on migrated seats between data center and Cloud will be relatively consistent with historical trends up to that end of support moment. And then with end of support, we continue to expect most of those remaining server seats that migrate will migrate to data center, and we continue to hold prudent assumptions to account for customers who will choose not to migrate in FY '24, and that's also factored into our guidance. I hope that helps.

Your next question comes from Karl Keirstead from UBS.

I wanted to just ask about your observations about the macro. I think every investor on the line is seeing some challenges across the space with, I'd say, a bit of a skew towards some pressure in the SMB space. Could you talk about the trends you're seeing, SMB versus enterprise? And then perhaps elaborate on the seat growth comment you made in the prepared remarks.

Yes. Great question, Karl. Thanks for asking. You recall by the end of Q4, we were seeing signs of improvement and stabilization in SMB and a very healthy enterprise environment. Those trends continued into Q1 and played out largely as we expected during the quarter. Now keep in mind, Q1 is typically not a big quarter for us when it comes to large enterprise deals, and we have significant revenue mix from SMB. Now having said that, there's really nothing unusual or noteworthy to call out in the relative Q1 performance between those two customer segments. In relation to the Cloud aspect of Q1, the trends we saw in Q4 continued into Q1, and those were also largely consistent with what we expected. The Cloud business does continue to be impacted by pressure on paid seat expansion and free-to-paid conversions at the top of the funnel. Although we continue to see some signs of stabilization as the rate of deceleration in those areas continues to moderate slightly. The other parts of our Cloud business, migrations, upsells to higher-priced versions, cross-sell, customer churn, those all continue to be very healthy and perform in line with our expectations. And then from a linearity perspective, linearity in the quarter is what you'd expect to see, and the trends and impacts were fairly consistent across products, regions, and verticals. I hope that color helps.

Also just to add on there, the risk of three people answering one question. One of the tailwinds we've seen is consolidation. We are actually seeing that across the market. More and more of the conversations I'm having with customers, large and small, are that they are trying to simplify the number of tools that they are using out there. And because Atlassian is so mission-critical, we are one of the vendors that they turn to consolidate on. A good example of that was Domino's, a pizza chain that runs 4,000 stores across Asia Pac and around the world. They consolidated six tools down to one Jira Service Management installation, and we're seeing that more and more across the customer conversations.

Your next question comes from Brent Thill from Jefferies.

Just on Karl's question on the overall macro. In terms of linearity, was there anything different that you saw throughout the quarter? Or was that also pretty consistent with your comments about what you've seen in the last quarters, a few quarters between SMB and enterprise? And also, if you could just add on many of you're kind of asking about close to $1 billion for Loom. Kind of what was the magic sauce, if you will, that drove that type of price point in the desire to complete that transaction?

Thanks, Brent. I'll address the first part of your question regarding linearity in the quarter, and then Mike will pick it up on the Loom question. Linearity in the quarter was exactly what you'd expect to see. So there was nothing unusual or strange about Q1 from a linearity perspective overall. Mike?

Sure. Joe, I can handle that. Hi, everyone. Look, from a financial point of view, we think Loom is a great acquisition for Atlassian. The strategic rationale always comes first for us in this particular case. It is a product that's leaning into a lot of trends that we think are working really well from the point of view of, firstly, distributed work and the increasing desire for asynchronous collaboration across lots of different businesses. Secondly, just the shift in the way that people are sharing and consuming video in the enterprise, specifically as the younger generation become more a part of the workforce. And thirdly, AI is changing the way that video can be created and consumed in really interesting ways that I think it will make it more a part of the formats that we all collaborate on and work over time. From a financial rationale, look, the business itself and the product of Loom is going to continue as a standalone individual product, as we've said. As Scott mentioned in his remarks, over 200,000 customers now, it's got a fantastic brand, and it's the leader in that space and is a fast-growing standalone business in and of itself. Secondly, we believe for ourselves there's obviously a lot of opportunities in video and combining our video infrastructure team with Loom's video infrastructure team. We have video as a first-class citizen across our platform family of products today. But obviously, the Loom capabilities will improve that in each of our spaces, whether that's in service management, broad business collaboration, or, of course, in software teams. And lastly, there's obviously an opportunity for us to combine products, as you've seen us do a little bit already with Atlassian to cross-sell Loom as a product into our existing base of more than 265,000 customers. So, we think it's a fantastic deal. We're super excited about the product. We've been customers of it for a long time, and I know it can do great things as part of the Atlassian family.

Your next question comes from Kash Rangan from Goldman Sachs.

It’s great to see the consistency in your end markets. I'm interested in your thoughts on the data center growth rate of 42%. It appears to be surpassing the Cloud growth, which might be better reversed. I’m sure that would be preferable for you and us as well. Could you share any updated insights on your perspective regarding the data center business growth profile? Additionally, what steps are you considering to enhance the Cloud product to make it a more attractive option for customers compared to server products?

Yes, Kash, this is Joe. I'll start. You're right. It was another strong quarter for data center at 42% growth. That was slightly ahead of our expectations and was driven by really strong renewals, migrations from server and seat expansion with existing customers. It's worth noting we're growing a significant installed base on data center, which is a great stepping stone to the Cloud for those who are currently blocked from moving to the Cloud at the moment. And it's a good sign of how committed customers are to the Atlassian roadmap and platform. Having a big installed base on data center is a high-class problem to have because that will fuel future migrations to the Cloud. Cameron?

Yes. I've had dozens of conversations with many of our largest customers about this exact decision that many of them are making. And the reality is we see having both Cloud and data center as a long-term competitive advantage. For Atlassian, we provide optionality for these customers in the coming years. As far as the functionality perspective, the good part is, there are very few customers where we have not been able to handle all their scale, their data requirements, their privacy requirements, their compliance requirements, or their needs for customization to Cloud. So rarely is there a technical conversation where customers can't go to Cloud. It's really just are they ready? Can we move the migration? Where are the business? And is there the compelling functionality to move them over? In every one of those conversations, the customers understand Cloud is in their future. It just comes down to the timing to get them over. But either way, an investment in data center and an investment in Cloud is a longer-term strategic investment in Atlassian to get them further committed to Atlassian. And I know and we've shown with our track record that we can and will move data center customers to the Cloud along with their business needs.

Your next question comes from Fred Havemeyer from Macquarie.

I wanted to focus in on how you're thinking about AI overall as an overarching strategy. I can't fail but notice, of course, your new Chief Marketing Officer has a PhD in Machine Learning. A number of your product offerings you're describing, of course, including Loom, being able to integrate generate AI-related summaries. Just it seems like there's an overarching theme here. Of course, you spoke to a part of it, but from top to bottom, it seems like you're trying to become more like an AI-focused company as well. So perhaps, could you elaborate on that? And just how you think of the ongoing Atlassian branding and what value might be marked? And perhaps being more of an AI-first company.

Thanks, Fred. Look, I can take that first, and then Scott can follow on. Yes, certainly. Great observation. I'm not sure if you or ChatGPT observe that, but Zeynep does have a PhD in machine learning. She's also our CMO and fantastic that will obviously be in addition to her capabilities in AI marketing, but obviously not the singular reason for bringing her on board. Look, we couldn't be more excited by AI and live language models at Atlassian, right. We take the view that it's a huge opportunity for us for a number of different reasons. I think, in each of our markets, this technology transformation will be a huge change in the ability to deliver value to customers, which is where great software businesses are built. We have a lot of very valuable data from our customers that we are the custodians of. And a lot of that data is textual and increasingly, video and audio effectively becoming text with AI. So we have a lot of their data, which is really important in AI to provide fantastic answers or magical experiences. Secondly, we built a fantastic platform that we spent a lot of time building. So you see that in Atlassian Intelligence features that we've already shipped. Our ability to shift those features to all the products in the family simultaneously is a result of a decade of building a Cloud platform, having the customers' data centralized having singular editor and UI surfaces. So our ability to get features out to customers, we're incredibly bullish on beyond just our ability to build them. And thirdly, obviously, with our world-class engineering team and our R&D capabilities, this is a technology transformation. You need to fundamentally build new products or build additions to existing products or build features or change the way features are built. That takes a lot of internal R&D and expertise, and we have that space. So we feel incredibly excited about what AI can do for our customers fundamentally and what value we can deliver. Look, we're in the business of making amazing products and delivering to the right customers. It's like someone has given us a whole new painting set to paint with a whole new set of materials that we can create out with. And so we're extremely excited. We are certainly placing that at the center of our philosophies on building products. I think that's what software companies are doing. I'm not sure when people say, AI-first company exactly what that means, but we are certainly heavily investing in our AI capabilities, all of the governance and privacy and responsible technology principles that are required to do that well for customers and give them the right data provenance when we give them answers of any form. But also making sure that we deliver those capabilities and that we are investing in how we can do that. And this is going to take a few years to play out, but we're certainly really, really excited. Scott, anything you'd add on to that?

Yes. Just a couple of points. We all understand that AI is powered by unique data sets, which enable the creation of unique experiences. Looking at Atlassian's history, the data we possess gives us a unique advantage. First, our products are open by default, which may seem simple, but it's crucial. To train AI on organizational data, that data cannot be limited to a few individuals. With Confluence, you have decades of data available to train AI and aid decision-making. That represents a significant part of our advantage. Secondly, we have a broad range of applications that span across the organization. This enables us to create distinctive data sets for decision-making throughout the entire organization. Lastly, this also encompasses third-party products. We've discussed our open toolchain for a long time. If you're a single vendor focusing on one area, you can only provide information related to that specific aspect. However, our open toolchain covers everything within an organization, allowing us to offer experiences and AI insights that encompass the entire organization. These elements are genuinely noteworthy. While other vendors are working on their AI features, we are actively delivering them on our platform, and we are very enthusiastic about what we continuously bring to our customers. We have a steady stream of updates being rolled out to our customers regularly. Therefore, we are focused on providing value to them.

Your next question comes from Gregg Moskowitz from Mizuho.

I had a follow-up on Cloud migrations. You mentioned in the shareholder letter that the number of user migrations over the past year has risen by nearly 50%. And certainly, it's a high growth rate, but I think the increase was more like 2x a couple of quarters ago. So I'm wondering, is this change in growth just a function of law of larger numbers and tougher compares? Or is it also reflective of a much smaller opportunity set or even a slowdown in the appetite of customers to migrate to the Cloud?

Yes. This is Cameron. I'll take the first half of this, and Joe will add anything if necessary. Since we announced the end of life for our servers a little over three years ago, we've steadily increased the number of migrated seats each quarter. However, there have been significant jumps at different times along the way, influenced by our loyalty discount programs or price adjustments. Over the past few years, we've introduced compelling reasons for customers to migrate, and those who migrated earlier received financial incentives. The current numbers we are handling are substantial and continue to grow significantly each quarter. As we approach the end of life for the servers, many customers who have delayed their decision will soon be making choices about transitioning to the data center or Cloud. There will be considerable activity around this. Thankfully, all our customer-facing teams, including our partners and migration experts, are well-prepared to manage any increase in demand in the coming months as customers finalize their decisions. As I mentioned, after February, migrations will remain a significant focus for our business as we continue to transition data center customers to the Cloud in the coming years. Joe?

Yes, Cam. The only other thing I'd add, Gregg, is we do expect FY '24 to be a very big year for Cloud migrations. We've guided to 10 points of Cloud revenue growth coming from migrations for the full year. Just to reiterate what Cam said, that's really driven by two factors. We continue to invest and make terrific progress in enabling and unblocking more and more customers to the Cloud. Our tooling, our support, and our Cloud capabilities get better every day. The second point to reiterate what Cam said is we do have the server end of support moment in February 2024, and that will also contribute to migrations growth.

Your next question comes from Michael Turrin from Wells Fargo.

Joe, maybe one on margin. You raised the margin outlook fairly meaningfully. The 20% implied is now close to where you ended last year. Can you just help level set where you are from an investment perspective, how much opportunity do you see on the cost management side? And if there are priority areas for us to be focused on as the server migration end approaches and maybe some resources free up as a result. That's also useful.

Thanks, Michael. You're right. The stronger-than-expected operating margin performance in Q1 and our guide in Q2 was driven by greater operating leverage. We are seeing that primarily on the operating expense side. In terms of operating expenses, I would say it's been a team-wide effort focused on a few core principles. We're focused on maximizing the return on every dollar we spend, making disciplined prioritization and resource allocation calls, and driving operational efficiencies as we gain scale. As a result, the savings are really broad-based across all groups from developer productivity and Cloud COGS optimization to G&A and everything in between. It's happening across all teams, and we've made good progress to date. I do think it's important to note that while we do this, we continue to make the disciplined strategic investments in areas like cloud migrations, enterprise, and AI in our core markets to drive durable long-term growth and serve customers. In terms of long-term trends, you're absolutely right. We've made significant multiyear investments in building out our cloud platform and building out our enterprise-grade capabilities. We do expect that those growth rates and those investments to moderate as we make tremendous progress against that over the next year or two. That's definitely an additional area of leverage that we should see in the model over the coming two years.

Your next question comes from Peter Weed from Bernstein.

I appreciate your mention of the strength in premium and enterprise edition upsells. However, I didn't hear any discussion about cross-sells or new functionalities for products like JSM, which have recently driven substantial growth. How is the progress on cross-sells? Have there been any changes in the interest to adopt new products? Additionally, we're receiving reports from other companies about strong end-of-year performance and a robust pipeline. Are you observing any increasing interest and optimism for the end of the calendar year? How are things progressing with cross-sells, especially regarding JSM?

Yes, thanks. I'll take the first part of that question, and then Scott will chime in. Cross-sell is absolutely a key driver in our Cloud revenue growth rate model. We see a lot of opportunity to cross-sell additional products into existing customers. That continues to be very healthy. I talked earlier about the fact that that's been one of the areas of our Cloud business that has held up really well and been resilient through the macroeconomic environment that we've experienced. In terms of pipeline, I would just say, in general, our Q2 pipeline is very strong, and that's a function of everything that we've talked about that's held up well to date. It's the migrations, it's the cross-sell. It's the ability to upsell our customers to premium and enterprise additions of our products. So we're excited about that, and we're looking forward to a great Q2. Scott?

I'll take that for you, Scott. This is Cameron. I want to emphasize that the strength we see in enterprise today comes from our healthy pipeline, which includes not only migrations but also Jira Service Management. We are witnessing its expansion among our customer base, with nearly 50,000 customers using Jira Service Management across various sizes, from small customers to larger enterprises replacing legacy tools. I believe this trend will continue as we deliver new innovations like the virtual agents we discussed earlier. Our acquisitions will keep driving innovation in the ITSM space, which is a major focus for us. Additionally, I'm excited to share that many of our customers are eager to migrate to enterprise due to the new capabilities we've introduced in our existing products, such as whiteboarding in Confluence, and new automation and analytics capabilities. We've also launched new products this year, with Jira Product Discovery gaining significant attention and rapid adoption among early adopters. Overall, there's strong momentum in Jira Service Management, but we must also recognize the enthusiasm for many other products our customers are excited about. In the Cloud, it's simply much easier for them to adopt these products; they can easily activate them, integrate them into their environments, and derive value from them.

Your next question comes from Ari Terjanian from Cleveland Research.

We noticed some incremental progress sort of speaking, during the quarter around dual licensing, step-up credit, 6-month free trial for cloud. Could you speak to some of those efforts? And if they're providing any lift or also maybe potential dilutive impact on the revenue?

Yes. This is Cameron again. I'll speak broadly just to everything we've done to incentivize customers to migrate in the past few years. As I continue to say, when we announced the server end of life three years ago, we had a carefully engineered set of programs to incentivize customers to migrate to the Cloud sooner rather than later. This was a combination of pricing incentives with loyalty discounts, extended trials so that customers could start using Cloud at no cost and get used to it, understanding comfortably with the new functionality. Of course, when customers purchase Cloud to ensure that they can continue to run their on-premise environments like data center during the migration experience, knowing that migrations take different extended periods of time. We engineered all these well-planned strategies from day one and have them part of our migrations forecasts for the last few years. We continue to roll those out all the way up to the server end of life in February. The goal is really to make it as easy as possible for customers who want to get to the Cloud as quickly as possible.

Your next question comes from Jacob Roberge from William Blair.

Do you see the potential to combine work management with Atlassian in the future? It appears you're planning to offer it as a stand-alone product initially, but could Loom be integrated into that suite over time?

Jack, I think I missed the start of the question. So tell me if I'm answering the wrong question here. I think the first half didn't come through. The question is interpreted as, could Loom get integrated into some sort of a work management suite or bundle over time, like we've done with Jira Work Management, Confluence, and Atlassian together. So I hope I'm answering the right question. That certainly is a distinct possibility. As I mentioned, there are a number of ways that we're looking to continue to monetize and grow Loom as a result of the acquisition. One of those is certainly just Loom by itself as a stand-alone product. It has a significant audience already, has some really good viral properties and growth factors to it, and we think we can help continue that movement forward. Secondly, certainly monetizing video across our audiences and improving, you might think about it as a competitive position of Confluence, with better video features, right? But thirdly, you're certainly looking at different bundles and opportunities in our customer base. I think you can be sure that we will do that thoughtfully when we come to looking at work management or ITSM. Don't forget there's a significant video component in knowledge bases and helping employees to share quick things either from the customer to the agent or from the agent back to the customer. So we will continue to look at possibilities of bundling and putting it into things like Atlassian together, yes. But our upfront goal will be to focus on integration and firstly, continuing the great growth rate of Loom as a stand-alone product, which is a fantastic business.

Your next question comes from Keith Bachman from BMO.

Many thanks for the question, Cameron. I think this is for you, if I could. When you talk about the conversion help to the Cloud of 10 points, I was wondering if you could offer some commentary around what is that same metric? How much help is going to data center? And then for each of those, what happens after February 15? Any kind of guidepost on how we should be thinking about the conversion help for the customers that may be ongoing past the February 15 deadline. Any kind of commentary on how much conversion will help post February 15?

Yes. So just for clarity, the 10 points of growth we mentioned is for our Cloud business. That's just where that growth is coming from. Of course, as Joe already mentioned, a large portion of the data center growth today is simply server-to-data center conversions. All of that pricing is actually available on our website. You can see across all tiers. You can see what existing server renewals are and what the existing data center list prices are going forward. Now that's the...

Sorry, Cameron, that wasn't my question. My question is how much is the same metric for data center? So of the growth, how much contribution are you getting from conversions?

Yes, it's about 15 to 20 points.

What happens to those two metrics after the end of life server? Do you have any directional barometers you would like to share?

I would say, in general, what you should expect post-server end of support is, obviously, the server to data center migrations will start to decline. That's going to be a big driver of why we expect to see the deceleration in data center in the second half of the year. We haven't quantified specifically what that curve looks like, and a lot of it will depend on the customer purchasing behavior around that server end of support moment. How many of those seats move to data center, and how many of those seats move to Cloud and the timing on that.

Your next question comes from Fatima Boolani from Citi.

I wanted to talk about the Cloud SKUs and the pricing increases that you've undertaken in the Cloud suite of products and solutions. Additionally, it seems that every October, like clockwork, pricing goes up by 5%. So, Joe, maybe the question is for you. How is that being contemplated in your guidance for the year? And as an added layer, can you speak to customers who migrated to Cloud in the recent past who are perhaps on loyalty discounts? And what that cadence of getting these customers on loyalty discounts up to MSRP, if you will, how that's being considered in your Cloud guidance? And then a quick follow-up, if I may, please.

This is Cameron. Let me directly address pricing on the Cloud. We implemented Cloud price increases this October, consistent with prior increases in October. For our customer base, while no one enjoys price hikes, this is largely a nonissue. Customers recognize that these are standard increases from Atlassian and are relatively modest, around 5% moving forward. We aim to migrate our existing on-premises customers to Cloud, and we've always been mindful of the pricing dynamics between our Cloud list prices and on-premises customers. Additionally, over the past few years, we've offered loyalty discounts, which reduce the list price for Cloud. Many customers are on one-year or two-year contracts, and when those contracts expire, they will renew at the current list price.

And then thanks, Cam. The question in terms of the guidance. As Cam mentioned, the effective price increase is roughly 5% blended. That's a good rule of thumb to use as you think about the impact that is built into the guidance. Do keep in mind, whenever we make these price changes, it takes a while for it to layer into the model simply because they're effective when the agreements are signed and that happens over the course of time for our annual multiyear agreements.

Your next question comes from Derrick Wood from Cowen.

In the shareholder letter, you guys mentioned that Cloud sales from your channel was up nearly 2x year-over-year. When I look at your total Cloud growth of 27%, that suggests that your partners are really generating a tremendous amount of your Cloud growth and perhaps your own channels are a bit softer. Has there been a shift in go-to-market strategy to call out that's causing a higher mix of growth coming from your channel partners?

Yes, I'll take that one. This is Cameron. First off, we see that as very, very good news. As all of you know, Atlassian's channel, our solution partner network is a critical part of our overall go-to-market and has been for all 11 years I've been here and even longer than that. The dynamic you're seeing with the partners' Cloud growth in recent months largely comes down to our enterprise business. We have many of our enterprise customers that have large enterprise migration needs. All of them usually when they take on a large migration are looking for some sort of technical or consulting help. This is where our solution partners can provide direct access, plenty of expertise, and honestly de-risk the migration when it happens. We have very much tied our enterprise go-to-market, not just with our direct sales, but joint sales with our solution partners to make those migrations happen. That’s why you’re seeing the outperformance in our channel Cloud sales over the last couple of years. I want to add, it's not just the channel. The reality is we've unlocked a ton of new capability in Cloud, as well as unblocked many customers because of the scale, data privacy, and compliance capabilities that we've released in the last few years, which only opens up our channel partners and the biggest customers that they are serving to continue to open up those doors to have them sign up for new migrations contracts.

Your next question comes from Mark Cash from Raymond James.

This is Mark on for Adam. I wanted to circle back to the consolidation trend and Atlassian together. We're now a couple of quarters after announcing the offering. So could you first comment on the adoption if it's helping drive Cloud adoption? And if the plan of seeing organizations expand seats across buying centers is actually playing out so far.

Yes. This is Cameron here. Apologies for the confusion there. Listen, Atlassian together is a key strategy to address what we see out there in the market of a variety of project management tools used by different departments and teams across the board. We went to meet many of our customers. Many of them are looking to try and standardize and consolidate on a single vendor to manage their teamwork needs. When we looked out to the competitive offerings and what our customers are looking for, we realized we had a massive advantage with the broad suite of Atlassian products, not just Jira Work Management, including Confluence and new products like Atlas to allow for customers to have a broad set of use cases supported by a variety of tools versus having it from a single vendor at a significantly lower cost. We come out with many of those customers over the last year who have made those decisions and are very happy migrating off of the other federated sets of tools to the Atlassian Work Management Solutions. Now that said, we are still, as you mentioned, a few quarters into this. It's still relatively early days in that offering, but we're definitely resonating with the overall demand for consolidating on teamwork tools and platforms, and Atlassian has been a massive advantage there.

Your next question comes from Keith Weiss from Morgan Stanley.

I wanted to ask two questions on different topics. First, regarding the overall customer count, it seems like this quarter's customer additions are relatively smaller compared to historical trends. Can you discuss the trends you're observing with customer accounts and the transition from free to paid? Also, I've noticed that you removed the specific number of customers you disclosed previously. Atlassian's model has always been about increasing the number of customers and then expanding those accounts over time. I'm curious about the reasoning behind removing that disclosure. You're only halfway to your goal of 500,000 customers, so why not provide more specific information moving forward?

This is Cameron. I'll address the first half of that and then hand off to Joe. As you mentioned, over the last year or so, we saw the number of new customers declining, largely as we saw free-to-paid conversion rates slow down. Now that said, we still continue to get plenty of customers coming to our website, and many are signing up for free instances and using free versions of our products. That only continues to grow year-on-year, but we just saw them being slower to get out their credit card or hit their 11-user mark into that paid cohort. Good news, as Joe had already mentioned earlier, we are starting to see stabilization in that overall impact. Actually, we saw an increase from Q4 to Q1 in that net new customer number, largely due to improvements that we have made in our funnel, specifically around the commerce and conversion experience, just simply making it easier for these free customers to purchase our Cloud products. Now that said, there's still plenty of uncertainty out there in the market, but seeing that stabilization and slight improvement quarter-on-quarter, we see as largely positive in Q1. Joe, do you want to speak more to the numbers of those?

Yes. Thanks, Cam. Keith, we will continue to provide the total customer number on a directional basis. So, that will continue to be provided. We are also adding a new KPI that really goes to our strategy, and we believe this will help investors track progress against that strategy. We are increasingly focused on moving existing customers to the Cloud and driving expansion within that massive base. As we pointed out in the shareholder letter, this goes hand-in-hand with our strategy of driving breadth and that total customer number. We are introducing an additional customer KPI for investors that we will report on a regular basis to track our progress against this. That specifically is the number of customers with over $10,000 in cloud ARR. At the end of Q1, as you read in the shareholder letter, we had over 40,000 customers that met that profile, growing 18%. The reason we think this is a valuable metric is because this represents over 75% of our Cloud revenue.

Your next question comes from Michael Turits from KeyBanc.

Maybe we can talk about JSM a little bit. One of the things that I thought was interesting at Team '23 was that movement to templates as a way of taking JSM beyond just the IT department into the other areas of enterprise. Perhaps you can talk a little bit about the success there and how much non-IT take rate you're starting to get with JSM?

This is Scott here. That's something we're very excited by is the fact that we get really excited thinking about how collaboration happens across an organization. It's typically a frustrating experience for sort of no matter where you sit in the organization, getting help from another team can be quite a frustrating experience. It's often mediated in Slack or emails, and you have to search for that information to actually get something done. While we see IT teams being sort of the forefront of making that a better experience, the more forward of our customers are saying, why is that not the case also for our legal department to get a contract reviewed? Why is that not the case for my HR department? As a result of that, and building the features there, as you mentioned, with templates, 60% of our JSM customers now use JSM outside of IT. I think you can see more and more of that. We're particularly excited because at a price point and with our usability, I think we have a better opportunity than any other vendors in this space to go beyond the traditional IT help desk. So yes, we're really excited about that, and I'm glad you've recognized it.

Your next question comes from Ittai Kidron from Oppenheimer.

A couple of questions for me. First, can you give us an update on work management and your progress there in the field? And whether that part of the business is affected more by slower freight to paid conversions? And the second question relates to the migration. It seemed like as part of your prepared remarks, you suggested maybe I got this wrong, that you expect some customers not to migrate? Can you give a little bit more color on that? Have you already heard from customers that they intend to not migrate at all and just move elsewhere or leave without support? If you can give us more color on the magnitude of that cohort will be greatly appreciated.

This is Cameron. I'll speak to the work management side of this and slightly to the migration piece, then hand off to Joe. So yes, listen, work management is a key part of our overall offerings. Remember, the products that we put in there are Confluence, our second largest product, and we have massive adoption across our customer base, and massive usage. It has been a key part of our SMB as well as our enterprise business. Many of the new functionalities we drive in Confluence, whether that's the whiteboarding capabilities, automation capabilities, you name it, have been key compelling drivers for migrations themselves. Adding our other offerings like Jira Work Management allows for much simpler business-friendly projects tied to your Jira usage, and we’ve seen significant adoption of those Jira Work Management project templates. We have a new product called Atlas allowing you to communicate the status and updates on who is working on projects and the status of those projects and the goals and OKRs associated with them, regardless of where the work is happening. As we’ve already mentioned, Atlassian together, bringing all those products together in a single offering at a competitive price, allowing customers who are looking to consolidate their work management tools onto a single platform for Atlassian is absolutely a critical part of our go-to-market going forward and part of our overall financial picture over the last year. As far as the migrations themselves, the server customers, there is a significant portion of server customers who have yet to decide to move to data center or Cloud. We are working with every single one, and I'll tell you right now that they are definitely aware of this February date. Hopefully, we can ensure that we guide them to either a Cloud or data center decision post-February. As far as going to alternatives or so on, we haven't had many of those conversations or seen any spike. The migration process has been very much in line with our plans and continues to be month-on-month. Joe, Mike, do you have anything to add?

Yes, thanks, Cam. In terms of the question on guidance, there is, as Cam mentioned, a server cohort that will not migrate to data center or server in FY '24. We've factored that into our guidance. We based that on an analysis of our server customer base, the trends we're seeing, the customer profile, and the surveys that Cam mentioned. So we've accounted for that. We have a prudent assumption to account for that, and that is in the guidance itself.

I can just add one or two more points on work management. Ittai. Firstly, I think we continue to see value in being quite unique in the market in bridging technical and nontechnical teams across the work management space. It's important to note that our three markets don't exist in isolation. They each have unique sales motions and unique target personas, but they are intimately connected in many different ways. For example, you might have marketing teams in Trello that need to connect to engineering teams and operations teams that live in Jira Software, for example. That uniqueness is a really good differentiator for us at the moment in the market. Secondly, with things like Atlassian Together, as mentioned earlier in the call, consolidation in those spaces is a big part of things, and you've seen that with execution and, of course, with the Loom. And with the other things that we are delivering and adding into that space. Again, Loom will sit in the work management area as far as Atlassian is concerned. I just wanted to be clear that we are pretty steadfast in our commitment to work management. We think it's a huge opportunity for us, and we're not wavering at all.

Your next question comes from DJ Hynes from Canaccord Genuity.

This is Luke on for DJ. So I'm going to dovetail off of the other questions around migrations after the end of life. I'm wondering if you can comment just sort of how much flexibility do your customers have to extend beyond that deadline? How difficult is it for them to continue using those products once they're no longer supported? And then how long could it take for those remaining migrations to actually play out?

This is Cameron here. There are a couple of different aspects to your question. First, regarding whether we will extend support to server customers after the server end of life, the answer is no. We have given those customers about 3.5 years' notice to make their decisions, and we plan to stick to that. That being said, if a server customer contacts us, it's important to note that server licenses are perpetual, meaning their software will continue to function. However, they will not receive maintenance patches, new functionality, or support from our teams. While their systems will still operate, eventually those customers will likely need new capabilities or support, and they will reach out to us. If a customer calls a few months after the server end of life seeking assistance migrating to the Cloud, we will certainly help them transition to the Cloud, provided they choose to purchase a Cloud license. We are willing to engage in technical discussions to assist them in this migration, but this will only occur if they have opted to buy Cloud services.

I'd add on to that, stepping back at the macro level. We've had a couple of years now where we've been focused on migrating our customers with a compelling event of server end of life. At a macro level, half of the migrations we're getting are from data center, and that figure doesn't turn off come February next year or it's going to continue to be there. We're continuing to invest in migrating customers across and we continue to invest in making our Cloud platform better and better. That's attracting new customers to Cloud and, of course, continuing the migrations from data center. These are investments that over time will plateau, and we will start getting our peak migration investments will sometimes start decreasing. And we are at a stage where more and more of our customers are in the Cloud. If you think about the innovation that we can bring in Cloud because of the platform we've built there, that's what I get really excited about. Our ability to bring new products to market is way, way, way faster in the Cloud. You've seen that with Jira Product Discovery, you've seen that with Atlas, with Compass, and with Jira Work Management, which is easy for us to get our customers to migrate from Jira Software and give that end platform to user in the HR department or in the marketing department to track their work. It's easy to put Jira Service Management into these customers and cross-sell there. The ability for us to build new innovation in Cloud is way higher, particularly because we built this Cloud platform that we've talked about and you've seen. The reason we can bring AI to all of our customers and all of our products so quickly is the investments we've made in this Cloud platform. As we hit peak migration, we'll be out of it more and more asset behind building new things in this platform. Of course, acquisitions work really well as well. The fact that we've got new customers in Cloud is way easier to introduce them to Loom than it is for a behind-the-firewall customer out there. I'm super excited. I know we've focused a lot on migration historically, and I know it's really important and it drives a lot of kind of people spreadsheets about how they think about the business. More customers we have in Cloud, the more innovation we can deliver, the better we can cross-sell our customers, the easier it is for us to get more incremental users inside our products then go wall to wall. I'm really excited about the more I look around the opportunities we have, particularly in this moment when customers are coming up for consolidation and they're talking to us and saying, 'Hey, I've got to get rid of plenty of other vendors out there because you're mission-critical and you do things that no one else can.' You’ve got a lot of analytics that allow me to show how work moves across my entire organization. They are great conversations to have. Migration is great, but the real benefits are going to come on the far side of those migrations. I think that's worthwhile pointing out.

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

Thank you all for joining the call today. I appreciate your insightful questions and ongoing support. I want to take a moment to express my gratitude to Cameron for his 11 years of dedicated support, friendship, and everything else, especially during his time as our Chief Revenue Officer in recent years. On behalf of the entire team, thank you, Cameron, as you prepare for your well-deserved retirement. We hope you enjoy it. Additionally, following our high-velocity event that Scott previously discussed, we have Unleash, our agile and DevOps market event, coming up next month in Amsterdam. We will also be hosting a virtual ESG Forum later this month, and both events are open to investors. We look forward to seeing you there. Have a wonderful rest of your day, and thank you for being here.