Earnings Call Transcript - TEAM Q2 2025

Operator, Operator

Good afternoon, and thank you for joining Atlassian's Earnings Conference Call for the Second Quarter of Fiscal Year 2025. 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.

Martin Lam, Head of Investor Relations

Welcome to Atlassian's second quarter of fiscal year 2025 earnings call. Thank you for joining us today. On the call with me today, we have Atlassian’s CEO and Co-Founder, Mike Cannon-Brookes; and Chief Financial Officer, Joe Binz. Earlier today we published the shareholder letter and press release with our financial results and commentary for our second quarter of fiscal year 2025. 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 investment data sheet. As always, our shareholder letter contains management’s insight and commentary for the quarter. So, during the call today, we'll have brief opening remarks and then focus 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. We should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management's beliefs and assumptions only as of the date such statements are made, and we 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 business performance and 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 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, learnings release, and investor data sheet on the investor relations section of our website. We'd like to allow as many of you to participate in Q&A as possible. So, out of respect for others on the call, we'll take one question at a time. With that, I'll turn the call over to Mike for opening remarks.

Mike Cannon-Brookes, CEO

Thank you all for joining us today. As you've already read in our shareholder letter, we executed well in Q2, as we scaled past $5 billion in annual run rate revenue, driven by subscription revenue, which grew 30% year-over-year. Our investments in our key strategic priorities of serving enterprise customers, delivering rapid innovation in AI, and breaking down knowledge silos with our system of work, are driving momentum across the business and increasing customer commitment to the Atlassian platform. Companies like Cisco, DHL, and Reddit are turning to Atlassian to help solve their toughest team collaboration challenges, bridging the gap between their technology and business teams. And our world-class cloud platform with AI threaded throughout is delivering. With more than 20 years of data and insights on how software, IT, and business teams plan, track, and deliver work, we're uniquely positioned to help teams across every organization on the planet work better together. Today, more than 1 million monthly active users are utilizing our Atlassian Intelligence features to unlock enterprise knowledge, supercharge workflows, and accelerate their team collaboration. These features are clearly delivering value as we're seeing a number of AI interactions increase more than 25x year-over-year. These powerful AI capabilities along with automation and analytics are also driving increasing adoption of premium and enterprise editions, with sales to higher value SKUs up over 40% year-over-year. With the breadth of our offering, the pace of innovation, and the recognition of our product leadership across all the markets we play in, the Atlassian platform is incredibly well positioned to further connect technology and business teams across the Fortune 500,000. We had some incredible customer wins in Q2, including a record number of deals greater than $1 million in annual contract value signed during the quarter, with some of the largest companies in the world committing to the Atlassian cloud and embracing the Atlassian system of work. If you're interested in hearing more about the ongoing evolution of our go-to-market motion, check out the Loom that I just posted to our IR website. The progress we're making across our business and the signals we're getting from our customers reinforces our conviction that we're making the right investments to help us scale to $10 billion in revenue and beyond. We're eager to get after it and build on this momentum, pushing ahead on our mission to unleash the potential of every team. With that, I'll pass the call to the operator for Q&A.

Operator, Operator

We will now start the question-and-answer session. Your first question comes from Keith Bachman from BMO Capital Markets. Please go ahead.

Keith Bachman, Analyst

Hi, thank you very much and congratulations on the solid results. Mike and Joe and Martin, I wanted to ask you about the goals with really the larger enterprise accounts. Mike, in the shareholder letter, you reiterated the sort of 10% of your revenues are being driven by the large customers. And I really wanted to hear a little bit now about how you increase that penetration? Now, certainly part of it is go-to-market. In your Loom, you referenced that you now have hundreds of sales reps versus virtually none previously. Where does that go to, you think, over the next 12 to 18 months as you continue to try to penetrate the larger accounts? And secondly, from a technology perspective, where do you think you have the most opportunities to harness the situation in terms of what product areas. I would think JSM would be the largest opportunity, but I wanted to hear a little bit more about it because I'm not sure that would be Jira's seat specifically on the software development side, but love to hear any color on those two areas? Thank you.

Mike Cannon-Brookes, CEO

Thanks, Keith. It's a broad question to start with, but I want to highlight that we had a great Q2 in the enterprise segment, with fantastic execution by our sales and success team. When discussing markets or products, one of our advantages is our broad scale growth profile. Jira is still expanding its user base significantly in both business and technology teams. We merged Jira Work Management and Jira Software based on customer demand to better connect these teams, which enhances our growth potential among larger enterprises. There are many users and employees within those larger customers that we have yet to engage, presenting a significant growth opportunity for us moving forward. In terms of our go-to-market strategy in the enterprise, we have an effective approach that works well for both small and large customers. We are continuously evolving our strategy to make our customers more successful, focusing on increasing the size of our initial engagements and expanding our impact. Currently, we have over 500 customers spending a million dollars, and we achieved a record number of million-dollar deals this past quarter. This momentum spans across all our products and markets, as customers increasingly seek to work with us. The CIOs and CEOs I talk to want to establish a deeper strategic relationship with Atlassian, not because of any one product, but due to our rapid R&D pace and the innovations we deliver. AI is just one example, along with the overall breadth of our platform and its effectiveness in helping them achieve their goals, from high-level objectives to everyday tasks. This is all very positive and gives us a strong sense of momentum.

Operator, Operator

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

Ryan MacWilliams, Analyst

Hey, thanks for taking the question. One for Mike. It was great to see Rovo at the Team Barcelona conference. We'd love to hear about how Rovo adoption and progress has been so far and how you think features of Rovo like AutoDev can change the daily workflow process for developers? Thanks.

Mike Cannon-Brookes, CEO

Thanks, Ryan. Look, Rovo, as all of the AI world, it's pretty early days, there's no doubt about that, in what's a massive change in the technology industry, which is a very positive change. I would say right now we are very pleased with the feedback we're getting from customers about what we are trying to build. And the reception from customers, those who have proof of concepts running, those who've deployed and those who have purchased, continues to be incredibly positive. Interest evaluations, all at really high levels as customers are realizing the value and also playing with these technologies in their own businesses and seeing how they can adapt and work. We, obviously at the broader level, as we've talked about with Atlassian Intelligence passing a million now is a major milestone for us, right, across all the Atlassian Intelligence features which includes Rovo, a huge milestone in the breadth of the usage that we have which is always our number one thing that we try to do with Atlassian as a result of R&D. 25x improvement in the number of features used over the last year. And it is driving monetization at those premium enterprise editions as we talked about with growth over 40% in those editions. In terms of Rovo and how it’s trending in AutoDev, we continue to invest heavily, I would say, in the R&D around all things AI. We continue to believe in our strategic advantages that we have there. With Rovo specifically, that's around the quality of search, the depth and density of the teamwork graphs to enable better answers for customers that are unique and differentiated, and the amount of data that we connect to. We shipped a whole lot of new connectors this quarter, and there's even more coming in the quarter ahead to allow customers to really unlock all of the value and the knowledge that they have and enable them with agents to automate a series of different tasks as you mentioned. That saves their users hours per week. In terms of AutoDev and the development features, continues to be an area we work on, it's right on the cutting edge. We are delivering a great number of completed pieces of software to customers and to ourselves and an area that we will continue to invest in but obviously feel incredibly bullish, building on the Atlassian Intelligence stack and then the Rovo Agent platform. So, it's all a stack that continues to go there, but great progress mode so far, a lot of work still to do to continue to go and chase that customer value. We're excited to get after each quarter.

Operator, Operator

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

Michael Turrin, Analyst

Hey, great. Appreciate you taking the question. Impressive fiscal Q2 results, Joe. I think given its midyear, just an update to the risk-adjusted framing at the start of the year, any commentary you can add on how things like expansion or tracking relative to what you're expecting and how to think about things like transition risk with Brian now starting alongside, just any commentary on the second half guide assuming assumptions are still somewhat similar but your update on the pulse of everything is certainly useful. Thanks.

Mike Cannon-Brookes, CEO

Yeah, thanks for the question. It's a good one. So I'll start with the Q2 trends that we see and I'll put in the context of the guide for the second half. As we mentioned, we really benefited this quarter from a stable macro environment and trends in the business were very consistent in Q2 to Q1. We saw continued signs of stabilization in our SMB customer segment and low-touch sales channel. Paid seat expansion rates in SMB were stable to Q1 and top of funnel health remains healthy. So, both of those feel like they're in a very good place having been stable for two plus quarters now. And then Mike's talked a lot about the enterprise trends, overall very healthy and consistent with Q1 and excellent results on annual multi-year deals, migrations and upsell to premium and enterprise editions of our SKUs. In terms of the guidance philosophy for H2, we highlighted at the start of the year that we had taken a different approach to our guidance this year in that it was more conservative and risk adjusted than in the past. And we reiterated that approach on the call in October. We continue to believe this is the prudent approach given the two factors we previously discussed. The first is the uncertainty in the macro environment and the second is execution risk related to the evolution and transformation of our enterprise go-to-market motion. Nothing has changed with respect to that approach in our updated guidance for Q3 and the rest of FY ‘25 and we believe the risks we've previously highlighted are still relevant to the operating environment we face in the second half of the year. So, I hope that helps give you a sense of how we're thinking about the H2 guide relative to where we are in Q2.

Operator, Operator

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

Keith Weiss, Analyst

Excellent, thank you guys for taking the question and congratulations on a really fantastic quarter. I want to go back to Rovo, but more broadly, agentic computing. And, Mike, you were talking about this being a really exciting and important transformation for the industry on a go-forward basis, something that we definitely agree with. But we're also hearing about agents from a lot of companies, application companies and productivity companies. And it seems like we're getting bombarded with agents from every direction. I'd love to hear your perspective on how agents are going to proliferate into organizations, what the competitive dynamic, if you will, like, who's going to be well positioned for that? And what's the Atlassian right to win in this ever increasingly crowded field for agents?

Mike Cannon-Brookes, CEO

It's good to hear from you, Keith. We've certainly experienced technology transformations before, and during such times, we often witness the hype cycle play out with certain terms gaining and losing meaning. I believe the term "agents" falls into that category. It is currently being used widely, often for things that I would argue do not qualify as agents. However, we cannot control language use in the world. At Atlassian, we take a straightforward approach and clearly communicate what we believe constitutes an agent and how we are developing them. For us, agents need to have goals, focus on outcomes, possess a personality and character, and have knowledge and action capabilities, along with control parameters. This leads them to function very much like virtual teammates, represented accordingly in our software. Atlassian agents are distinct in that they can operate anywhere a human can within our software, allowing them to handle assignments, access specific knowledge, and have permissions for certain actions. This sets us apart from others who may simply be building chatbots or mislabeling their products as agents. What distinguishes us is our significant investment in R&D and our advantage in deploying it effectively. In the realm of AI and agents, this R&D speed is critical. Our ability to develop, deploy, gather customer feedback, and adapt rapidly is vital in navigating these changes. Anyone claiming to have a crystal ball about where this technology will be in three years is mistaken. We need to learn and act swiftly to incorporate the latest innovations and provide value over time, and I believe our R&D team is excelling in this area. Additionally, the quality of models underpinning these agents is essential. We follow a comprehensive multi-model strategy, believing that models will continuously improve, becoming faster, cheaper, and more capable. Our Atlassian Intelligence must adapt to these modern models as quickly as possible. Currently, we operate over 30 models from more than seven vendors and are continuously assessing new models, especially with recent developments in this field. Another crucial aspect is the data—its quality, access, and the ability to search and connect it. Our investments in enterprise search and the teamwork graph have significantly enhanced our capabilities, improving access speed, graph density, and connections supported. This foundational knowledge layer empowers our agents to deliver meaningful outcomes to users. We feel uniquely positioned regarding data and will keep investing in this area. Finally, the user interface is vital, not only in terms of design but also for customer access. We have over 1 million users interacting with Atlassian Intelligence, and we are focused on expanding this user base quickly while introducing features that enhance our learning through these interfaces. Ultimately, customers interact with software, not AI models, which means it's our responsibility to manage the underlying data, models, and R&D. We are confident in our unique position and will continue to invest in this direction.

Operator, Operator

Your next question comes from Fatima Boolani from Citi. Please go ahead.

Fatima Boolani, Analyst

Good afternoon. Thank you for taking my questions. Mike, you extolled kind of the virtues of the Loom capabilities. It's been a home run. It's really getting really strong adoption in your base, and you really did share some remarkable statistics on engagement and adoption in the base. I was hoping you could spend a little bit of time quantifying the monetization and the uplift that you're potentially seeing to your cloud performance as Loom is being infused in some of your strongest and largest flagship products. And I don't believe Loom is included in your premium editions, but I would love some clarification on how that's actually moving the needle for you on the cloud side. Thank you.

Joe Binz, CFO

Hi, Fatima. This is Joe. And I'll pass it over to Mike for color on this. We don't provide the specifics on Loom's revenue or growth rate on a quarterly basis. You're right that we are pleased with the growth we're seeing and we're excited by the customer reaction to the recent AI innovations we've been introducing into the Loom product line. In terms of performance in the quarter, Loom revenue in Q2 was in line to slightly better than our expectations. And you may recall, we did give some guidance on the size of the Loom business when we provided FY ‘25 guidance, in that we said it would be about 1.5 points of impact to FY ‘25 cloud revenue growth for the year. And so you should be able to use that to back into a rough size of magnitude of that business. Mike?

Mike Cannon-Brookes, CEO

Sure, Fatima. Look, Loom is doing very well. There's no doubt about that. And we continue to invest in the opportunity that we see there. I would probably break that answer into three parts for me. Firstly, the observations at the acquisition and the reason that we as a company fell in love with Loom and use it so heavily and then brought it into the Atlassian family. The ability to communicate and collaborate through video in a rapid form, bringing a really human element to the workplace and is certainly resonating with customers, right? In a more distributed work environment, in lots of different areas, that's a really powerful device. And it is a unique capability. It's very different to just, quote unquote, video, per se. It's very collaborative. It's very rapid to create and move. Secondly, AI is playing out well in the video space, both on the creation side. You see that in Loom AI, we had more than 38 million videos last year using Loom AI features, which is a huge number, if you think about it in terms of the amount of communication and the density of information contained in a video. AI is helping us on the creation side, lots of editing tweaks, titling, these sorts of things, chaptering is doing really well, but also on increasingly the actual modification of the video in terms of removal of stop words or allowing people to edit the video like they edit a text document. This is a really important innovation area for us that we continue to invest in, and I think are doing some really good work at a practical application of AI video in the workplace. On the consumption side also, AI obviously helps you to consume large amounts of video in various ways, giving you summaries and chapters. We're seeing that with the Rewatch acquisition that's moving into meeting summaries and other areas, and generally Loom’s ability to be a search archive for lots of types of video in the enterprise, AI and the teamwork graphs and integration in Atlassian are really bringing that to the fore. So, we feel really strongly about the Loom roadmap. It's not included at the moment in any of the premium or enterprise editions of, I think you mentioned Confluence or Jira. It's a standalone SKU in and of itself.

Operator, Operator

Your next question comes from DJ Hynes from Canaccord. Please go ahead.

DJ Hynes, Analyst

Hey, thank you guys. Congrats on a nice quarter. Joe, we obviously have your guidance for data center growth in Q3, but can you just unpack a bit of what underpins those assumptions? There are a number of moving parts here in Q3 with the pricing changes, the potential for early renewals to lock in pricing. I think you've made changes to partner commissions. Just help us kind of wrap our arms around that and what you're factoring into the growth rate for Q3?

Joe Binz, CFO

Yeah, great question. Thanks for asking. Our Q3 data center guidance for revenue is approximately 7% year-over-year growth. That reflects growth driven by pricing, seat expansion and cross-sell, which we believe will remain healthy but somewhat impacted by macro uncertainty and execution in our high-touch sales channel that I mentioned earlier, as well as continued momentum in migrations to cloud as we continue to deliver significant improvements in the enterprise-grade capabilities and the value to our cloud platform. And as we continue to help our data center customers migrate. And then lastly, recall that we had significant growth in the prior year Q3 related to server end of support and pricing changes, and that creates a very challenging growth comparable this year. In terms of the pricing change, we haven't seen any significant or unexpected change in customer behavior from the recently announced data center price changes. Historically, there have always been fairly predictable changes in customer purchasing patterns whenever we implement those price changes. And so when we have those in the plans, we model out the expected impact and we incorporate that into our guidance which is what we've done this year for the February data center price increases. The increases this year are slightly higher than in the past and we've tried to take a prudent and conservative approach of incorporating that into our guidance. And with respect to those price increases, we haven't seen anything unusual to date relative to historical experience or our expectations in terms of deal pull forward. So, we feel like we've captured that in the guidance.

Operator, Operator

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

Brent Thill, Analyst

Thanks, Joe. Good upside on margin relative to the Street. I guess for the guidance, you're not really flowing that magnitude of margin beat forward into the guide and maybe if you can just discuss where those investments are going. Is there some one-time investment that you still need to clean up? Just give us a sense of what's happening in the back half of the fiscal year.

Joe Binz, CFO

Yeah, thanks for the question, Brent. It's a good one. In terms of the rest of the year, we are expecting operating margins in H2 to be slightly lower than H1. This is a primarily by two factors on the cost side as you point out. The first is spending we expected to occur in Q2 that actually pushed to H2, but that’s the timing issue and then the second related something might talk about earlier on the call in that we are going to slightly increase sales and marketing and R&D investments in the enterprise space and H2. And that's given the strong positive signal we're getting there on the progress and the momentum and the returns on our existing investments. We believe we can accelerate progress in that strategically important area of our business. So, we're going to invest against that. And so when you add all that together for the full year, we expect our non-GAAP operating margin to be roughly flat year-over-year at 23.5%. And that's despite the challenging prior year comps related to server end of support. So, overall, I feel very good about the expected trajectory of operating margins through FY ‘25 and how that lays a good foundation heading into FY ‘26. And then lastly, I would just continue to expect we will deliver greater than 25% non-GAAP operating margins in FY ’27, consistent with our guidance at Investor Day in May.

Mike Cannon-Brookes, CEO

Just wanted to add on one thing. We, from a broader color perspective, we're incredibly excited about those go-to-market investments that Joe talked about. There'll be more in a little bit of time as we drive that part of the business further forward. And to reiterate that the long-term targets we gave at the Analyst Day last year, probably about nine months ago, in terms of the general moderated increase in go-to-market investments as a proportion of total revenue and the moderated decrease in R&D, while those two still maintaining sort of historical levels, those long-term targets are still applicable in all the guidance that Joe's talked about.

Operator, Operator

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

Kash Rangan, Analyst

Sure, thank you very much. There's been a lot of discussion of consumption models with subscription. I'm curious to get your thoughts, Mike, and also with respect to the price increase, are you going to be offering certain things that will justify the price increase because you've had one series of price increases that we went through a couple of years ago? And I'm curious, what has been the customer feedback? Is it because the trade-off is that, okay, we're going to get something more, by features, maybe there's a consumption overlay on top of the future product roadmap. How do we rationalize the price increase in return for the value that the customer is getting from Atlassian? Thank you so much.

Mike Cannon-Brookes, CEO

Thanks, Kash. Let me take those in a reverse order. Firstly, on the price increases, look, we have a long history of continuing to optimize price across our portfolio and in line with the value that customers are getting. Whenever I talk to customers, I remind them of the heavy R&D investment we have, which ultimately results in product improvement and we have a great history and track record of delivering continued product improvement. If our product gets 25%, 30% better every year, as we continue to build out the feature set, customers do realize that that is worth a moderately increasing price. And as always philosophically, we keep the value delivered vastly ahead of any pricing as a philosophy. So, that tends to resonate really well with customers and is very clear to them. They see our investments, they see the results of those investments and they're generally happy with it broadly. On the consumption side, look, a very hot topic it seemed suddenly. We have quite a good history in this area, I would say. Obviously we have a lot of elements of consumption based pricing already across the portfolio that are already in our results that you see today from Bitbucket pipelines through Jira Service Management with both virtual agents and assets in Rovo and Atlassian Intelligence spaces, automation, storage and now with Forge. So, consumption based pricing is something we are very familiar with. I think over time, it probably will feather in to be a broader piece of the overall mix, but again we continue to learn and adapt as that grows, something we are quite familiar with over time in terms of pricing. There are definitely areas of enterprise SaaS broadly or our business, where within some sort of subscription offering, you get a certain amount of usage of a given facility, let's say, and then at some point, you pay for more of that facility, which is orthogonal to your usage of say users or whatever the core billing unit is. That's very familiar. Bitbucket pipelines is a great example. You might have 50 developers on Bitbucket. How many builds you run and how much CPU time you use is kind of up to you. You can use millions of minutes or you can use tens of minutes because of the scalable nature of computing. Customers tend to understand if they use more minutes, they'll pay us for those pipelines. And again, as long as we keep that value delivery ratio right, it's a good deal for everybody concerned. So, with AI, I don't think it's particularly different to the broader consumption-based philosophies we have. Something that we continue to work on and deepen again. It's all about us learning and adapting with customers and making sure that they see the value they're getting before that price comes in or the bill comes in and they feel comfortable about what they're paying for.

Operator, Operator

Your next question comes from Rob Owens from Piper Sandler. Please go ahead.

Rob Owens, Analyst

Great. Thank you very much for taking my question. And, Joe, just wanted to drill down on the gross margin performance. And you did, I think, speak to in the letter, higher gross margins on the cloud side. So, just how sustainable is that moving forward? Is that a moving target if some of these new subscription services get rolled out? And as you look at achieving that target operating margin, where should gross margins be in that time frame? Thanks.

Joe Binz, CFO

Thanks for the question, Rob. Gross margins for this quarter were 85%, which is significantly above our target range of 84%. This improvement was primarily driven by higher revenue and lower-than-anticipated cloud costs. Additionally, we saw an increase of about 100 basis points year-over-year. The rise in cloud gross margins was somewhat offset by a shift in our revenue mix towards cloud services. In the cloud segment, we continue to see benefits from price increases, upgrades to premium offerings, and investments in engineering to enhance our cloud infrastructure and support costs. Effectively managing cloud costs is crucial, especially with the expected growth in that area of our business. This also underscores one of the advantages of our engineering investment strategy that Mike discussed earlier, allowing us to deploy engineering talent for various initiatives such as addressing complex technical issues, realizing cost savings, enhancing cloud services, and fostering product innovation. Our engineering and support teams have done exceptional work in this domain, and we anticipate more advancements ahead. Overall, we are pleased with the performance related to gross margins. Regarding our long-term operating margin guidance, we mentioned at the Investor Day that we expect gross margins to decrease over the next three years due to the revenue mix shifting toward cloud services. We will continue to focus on reducing cloud costs and optimizing margins, but we believe that the structural decrease in gross margins from the shift to cloud will outweigh any improvements we can achieve in that space. Therefore, the guidance we provided during Investor Day remains valid.

Operator, Operator

Your next question comes from Adam Tindle from Raymond James. Please go ahead.

Adam Tindle, Analyst

Okay, thanks, good afternoon. I wanted to start on cloud growth maybe with Joe. Paid seat expansion was above your expectation again this quarter. Just maybe level set and remind us where we are on seats. I know it's been kind of stable along the bottom sequentially, but not really growing. Has that metric returned to growth yet? And if not, maybe the timing or expectation of when that might return to growth? And, Mike, on this topic, it's relevant because investors are paying attention to the potential for AI and all this innovation to cannibalize seats. I think you understand kind of that fear or structural fear. Now that you're deploying AI yourself and seeing it in practice, I wonder if you might revisit that structural fear of AI eating seats? Thanks.

Joe Binz, CFO

Yeah, thanks for the question. On the paid seat expansion in the cloud specifically we are seeing absolute growth in the expansion, but the rate has been stable quarter-to-quarter, Q2 versus Q1. That has been stable for several quarters. Within that overall paid seat expansion rate, we've discussed weakness in SMB. The good news that we see is that paid seat expansion rate in SMB has stabilized over the last two quarters. So, from our perspective, we feel like we've stabilized there. We don't have a timeline on when to expect that to turn around. A lot of that is driven by macroeconomics. We talked about the approach to guidance. We continue to assume that macroeconomic uncertainty will have an impact in future quarters on that paid seat expansion rate, and that's baked into the guidance. But beyond that, we don't have a very specific view on when we expect that to turn around and start to expand again.

Mike Cannon-Brookes, CEO

And, Adam, I can talk to this second one on cannibalization. Look, we take a pragmatic view on this, I would say. I understand the concerns that people have that float around. I don't think we're seeing any signs of that at the moment. We're going to continue to be watchful. The reason I believe we're not seeing those signs is, Jevons paradox has floated around a lot in the last week or two. Very familiar with that from the energy space. But fundamentally, it does apply here, right? We don't have a shortage of ideas of things that we want to bring into reality that software help us with. Technology is great at turning ideas into actual services or products. We are not constrained by a supply of ideas and human creativity. So anything that gains these efficiencies, with all the short-term bumps that we can have, generally, we will refill with conservation of profits and other things in the longer term, right? Most of the tasks that we're removing are generally not things that people want to do. They're not the creative part of the job. And so we're allowing people to have higher fundamental efficiency in doing that job. Whether that means lots of parts of the economy will suddenly be done with magically smaller numbers of people, I'm not sure I believe that. I think they'll come up with many more things to do, right? But it does make users far more productive and that's generally a broadly good thing for us all. We are seeing with customers increased productivity in the, one, two, three hours a week per person broadly across a set of knowledge workers. This is fantastic. I don't know if those people are going home three hours early. I think they're probably ticking off the next things on their task list to do. So as an example of sort of, most people don't end the week in a knowledge work job with an empty list of tasks. This just helps them get through more stuff more quickly and helps those firms survive and thrive in whatever competitive industries wherever they are competing against someone else that's also trying to gain those efficiencies. From a thoughtful point of view, again as we mentioned, we do have consumption based pricing kind of make sure that that's there at lots of different areas of the business, certainly in the Atlassian Intelligence area and we'll continue to learn and evolve. Whether that turns into task-based pricing or job-based pricing, we would be ready to adapt for that if that seems like an area that's going that way. We don't have a lot of customer signals that that's what's desired yet, but from an Atlassian point of view, we maintain that flexibility to be able to capture that value as we get there. The first thing for us to do is to build fantastic products that people really want and will consume in volume. And secondly, we have a still a relatively small seat penetration within most of our largest enterprise customers. So the upside there is very hard for us we feel, and that's what we continue to chase.

Operator, Operator

Your next question comes from Gregg Moskowitz from Mizuho. Please go ahead.

Gregg Moskowitz, Analyst

Great, thank you. I'd like to follow up on Bachman's question from earlier because it is fascinating that you have 85% of the Fortune 500 and yet they only make up 10% of your revenue. Mike, can you touch on how challenging you think the path is or may be for Atlassian to get in front of C-level executives a lot more frequently? And how does Brian and the rest of the team plan to materially go after this?

Mike Cannon-Brookes, CEO

All right, Gregg. Not challenging, I'm trying to work out how to answer this question. Is it hard for me to get in front of C-level executives or Brian or the Atlassian sales team or Atlassian broadly? No, I would say it's not hard for us to do that. I've met with tens, probably almost into hundreds now in the last 12 months of C-level executives across massive organizations all over the world. They're all Atlassian customers. They are all looking to increase their Atlassian spend. They have very high demands of Atlassian. That's great. We love customers that are demanding, right? That have high requirements and high needs and it's up to us to deliver those. They see our continued delivery of value, whether that's scale and performance and compliance in cloud, FedRAMP, all the facilities that Joe talked about in terms of enterprise requirements is a long list and it's going to continue to get longer as we get to lots more global regulation and different rules. We're all up for delivering that for customers and at the same time delivering them fantastic products that actually make a big impact on their business. Getting in front of them is not the problem. Continue to be pulled in as they want to have us be a larger strategic partner. I love customers. I met with a large telco in Europe that explained to me, they wanted us to be one of their top four strategic vendors. The other three are dauntingly large technology companies that we are increasingly put in a list with, which is very humbling. And then they presented us with a list of things that we'd need to get there. And we're probably in their top 20 vendors, top 10 maybe today, and they wanted us to be in the top four. I was like, give me the list, let's go. And, we're working on a lot of things on that list already. We're delivering for that particular vendor. What they saw was the power of the Atlassian platform, the very insightful CIO that saw the breadth of what we're doing across what we call the system of work, so connecting the technical and business teams together as one of their biggest problems. Strategy and planning, AI, the depth and breadth of the teamwork graphing, a truly unique data asset for them that they don't have, a big problem connecting all their data together. So, we love those most complex and demanding businesses. We don't have problems getting in touch with them or getting to talk to them. We are continuing to improve the way that we tell the Atlassian story to explain to them how we can help and continuing to help them get that value faster. One of the things we pride ourselves on is on speed of deployment, speed of getting access to that. Again, in enterprise search, it's no different. You can get our enterprise search engine set up very, very quickly. You can connect to lots of enterprise data very, very fast and get results. And if we keep that philosophy in mind and deliver on all their requirements in terms of compliance, regulation, scale, performance, et cetera, I think we stand in a really good stead. I think Brian and the sales and success team just continue to deepen our capabilities in those areas. So, we feel very bullish about that part of the business.

Operator, Operator

Your next question comes from Jason Celino from KeyBanc Capital Markets. Please go ahead.

Jason Celino, Analyst

Great, thank you for fitting me in. In the shareholder letter, it looks like data center is on some strong large deal activity. I don't know if this is referring to renewals or net new lands, but I know it's going to be a multi-year journey on migrations. But for this cohort of customers that are renewing these multi-year data center contracts today, what is holding them back from the cloud at the moment? Thank you.

Mike Cannon-Brookes, CEO

Jason, I can take the first part of that and Joe might want to follow on from a financial perspective. Look, I think the first thing I would say is I don't run into any data center customers nowadays who are, if they're moving to cloud, they're all when. They're all making plans to move. They are not questioning our abilities. And that's credit to the engineering team broadly over the last few years, delivering on a lot of those compliance and regulation and needs of those businesses as we talked about. For a lot of these very large and complicated enterprises though, they might have 10, 30, 50, even 100 data center instances around their enterprise. They are often smartly looking to do some cleanup on the way through about the workflows they're using or the data. Some of those instances are 20 years old plus and have a lot of legacy content in them that they may not need, etc. So that's a process. Fundamentally, it can take some of those businesses some time to move. Certainly, often a lot of time, multiple years to move holistically, maybe all of those 50 or 100 instances, right? That doesn't mean they're not moving into hybrid states. We increasingly see the hybrid ELA offering as a powerful thing for those customers to learn about cloud, test cloud, use cloud, and maybe their more forward-thinking parts of the business or their more fast-moving parts of the business. A lot of people are moving their AI initiatives, for example, to the cloud. It's something I've talked to a number of customers about, and some of their slower-moving, more legacy parts of their business may move later on. So we want to make sure that we give the customers that flexibility to be customer-led in how they manage that migration journey for themselves. It's very unique for a lot of those bigger customers. At the same time, making clear to them about where we are headed as a business, demonstrating a value of cloud. And again, we continue to have large customers. We had the financial institution that we talked about last quarter in the shareholder letter that had signed a very large cloud deal on the basis of Atlassian Intelligence and analytics to fundamental capabilities that they saw as powerful in the cloud and was moving their migration upfront. So, sales and success team doing a fantastic job across the customer base, especially in that largest area, to explain to customers what the value is and help them on those movements. So, an area we feel pretty bullish on. Joe, do you want to follow on the finance part?

Joe Binz, CFO

Yeah, Mike. Jason, the only point I'd make is to reinforce Mike's point that the vast majority of these deals in data center were hybrid ELAs which give the customer rights to the cloud and we continue to see really strong interest in these hybrid deals given the value and the flexibility they provide specifically to our largest customers and Mike talked about all the benefits that brings and our ability to migrate them in a way that makes the most sense for them. And these deals were a significant driver of the billings outperformance in the quarter that you see even though they were less of a driver of revenue performance just given the revenue recognition on these deals. So, hopefully that color helps as well on the big deals in the data center space.

Operator, Operator

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

Mike Cannon-Brookes, CEO

Thank you, everyone, for attending today. And thanks to all of the Atlassian team for a fantastic quarter and huge progress across R&D and customer delivery, across marketing, across sales and success, and all of the G&A functions that support us also. Another quarter in the books. Thank you everyone for attending and we look forward to talking to you all in three months and also seeing you in Anaheim, hopefully a lot of you at Team '25 in Anaheim in April. Thank you very much. Have a good day.